Sebastián Nieto Parra Economist LAC Unit Development Centre OECD October 2015 I NTEGRATING SECURITIES MARKETS TO BOOST COMPETITIVENESS The Latin American Integrated Market – MILA DAY 2015

Contents Key Challenge: Tackling the Middle Income Trap (MIT)1 Market Integration: a key asset to avoid the MIT 2 Crucial role of Capital Markets 3 Conditions and Benefits of Capital Markets Integration4

Contents Key Challenge: Tackling the Middle Income Trap (MIT)1 Market Integration: a key asset to avoid the MIT 2 Crucial role of Capital Markets 3 Conditions and Benefits of Capital Markets Integration4

The Middle Income Trap: A common challenge in the MILA countries Source: OECD-CAF-ECLAC Latin American Economic Outlook, 2014 GDP per capita (1990 USD )

A disappointing progress compared to different OECD countries Source: Author's calculation based on Felipe, Abdon and Kumar (2012). Data extracted from International Monetary Fund, World Economic Outlook Database (April 2015) and Madison (2010) Evading the middle income trap

Sources of GDP per capita differences: low level of productivity Source: OECD National Accounts Database, World Bank (2015), World Development Indicators (database), Washington, DC, ILO (International Labour Organization), Key Indicators of the Labour Market (KILM)

Economic complexity indicator, ECI ranks how diversified and complex a country’s export basket is Source: Hausmann et al. (2012), The Atlas of Economic Complexity, Puritan Press, Cambridge, MA; Simoes and Hidalgo (2012), “The Economic Complexity Observatory: An analytical tool for understanding the dynamics of economic development”, Workshop at the Twenty-Fifth AAAI Conference on Artificial Intelligence, August, 2011, Cambridge, MA.

Contents Key Challenge: Tackling the Middle Income Trap (MIT)1 Market Integration: a key asset to avoid the MIT 2 Crucial role of Capital Markets 3 Conditions and Benefits of Capital Markets Integration4

Intra-trade remains poor in the region Share of intra-regional trade in intermediate and final goods, by region, 2011 Source: OECD Latin American Economic Outlook 2016 based on United Nations (2015), United Nations Commodity Trade Statistics Database, (COMTRADE)

More can be done in the participation to Global Value Chains Backward GVC participation in selected regions and countries, 2011 (%) Source: Latin American Economic Outlook 2016 based on 2015 OECD/WTO TiVA data.

Business expenditure on research and development Number of Patent Cooperation Treaty average Source: OECD Indicators on Patent (database) Business expenditure on research and development Source: OECD (2015), Main Science and Technology Indicators Database and OECD calculations based on Red de Indicadores de Ciencia y Tecnología - Iberoamericana e Interamericana (RICYT)

Effectiveness of investment infrastructure and logistics: more important than FTAs Ratio of freight costs to tariffs, 2012 and 2014 Source: Based on data from the US Census Bureau. FT920: U.S. Merchandise Trade.

Contents Key Challenge: Tackling the Middle Income Trap (MIT)1 Market Integration: a key asset to avoid the MIT 2 Crucial role of Capital Markets 3 Conditions and Benefits of Capital Markets Integration4

Priorities for productivity and higher income (coefficients) Fuente: Izquierdo et al. (2015), In Search of Larger Per Capita Incomes: How to Prioritize Across Productivity Determinants?, IDB mimeo. Policies to escape the middle income trap

Market Capitalization (% GDP, 2012) Source: World Bank, World Development Indicators (2012) Market capitalization remains high…

Listed companies (% Market capitalization-GDP, 2012) Source: World Bank, World Development Indicators (2012) But with high market concentration

Annual growth of labor productivity per worked Source: World Bank, 2014 / The Conference Board, 2015 Productivity growth and stock markets: listed companies

Stock traded (% market capitalization, 2012) Source: World Bank, World Development Indicators (2012) Liquidity: an important challenge for market development in the region

Liquidity is associated with productivity Source: World Bank, 2014 / The Conference Board, 2015 Labor productivity per hour worked and stocks traded

Differences in terms of debt composition in MILA countries Domestic Debt Market Composition (%, 2012) Cource: BIS, 2012 Central GovernmentFinancial intermediaries Non-Financial intermediaries

Contents Key Challenge: Tackling the Middle Income Trap (MIT)1 Market Integration: a key asset to avoid the MIT 2 Crucial role of Capital Markets 3 Conditions and Benefits of Capital Markets Integration4

CDSs – Credit Default Swap Spreads 10 years (Basis Points, annual average 2015) Enhanced macroeconomic discipline Source: Bloomberg 2.287

Market integration attracts further international investors The top investors that own shares in the companies listed on the member exchanges of the CEE Stock Exchange group are primarily international investors from US, UK, Austria, France, Germany Source: CEE Stock Exchange report /Ipreo. Note: Stocks included in the CEE Stock Exchange Group are Budapest (Hungary), Ljubljana (Slovenia), Prague (Czech Republic), and Vienna (Austria). Others category includes the following countries Canada, Czech Republic, Denmark, Hungary, Slovenia, Sweden

Economies of scale: increases efficiency and new issuers Listed domestic companies, 2012 Source: World Bank, World Development Indicators (2012) Stock exchange merger and liquidity: The case of Euronext Source: Nielsson, (2012) Stock exchange merger and liquidity The case of Euronext, Journal of Financial Markets, Vo.. 12, Issue 2, 2009,

Conclusions -Pacific Alliance countries have a common challenge: to boost productivity and competitiveness  To tackle the Middle Income Trap. -A key actor to facilitate improvements in these areas: Capital Markets. -In particular MILA: to increase the number of listed companies, the liquidity, and to attract new investors. - A key pillar: credibility of macroeconomic policies. -OECD supports regional integration in Latam and in particular close work/collaboration with MILA/Pacific Alliance countries: -Chile and Mexico: OECD members -Colombia: Accession Process to join the OECD -Peru: OECD Country Programme

Sebastián Nieto Parra Development Centre OECD October 2015 I NTEGRATING SECURITIES MARKETS TO BOOST COMPETITIVENESS The Latin American Integrated Market – MILA DAY 2015