1. A Decade of Development Thinking: What Have we learned? IDB, September 2004 Guillermo Perry Chief Economist, Latin America and the Caribbean Region The World Bank

2. Relative Per Capita Economic Growth in LAC Moderate in the 60s, 70s and 90/98; negative during 80s and 99/03. HIGH SENSITIVITY TO CAPITAL FLOWS REVERSALS Latin America vs World Source: World Bank

3. Reducing vulnerabilities Limit currency and maturity mismatches in Government and corporate balance sheets: –Overcome fear of floating –Long term capital markets in domestic currency –Public debt management and composition –Hedging markets –Prudential Regulation (or Market Based Capital Controls) Reducing deficit and pro cyclicality biases: –Pro cyclicality leads to deficit biases and poor quality of expenditures –Reasonable fiscal rules (a la Chile or a la Brasil)

4. Growth and Reforms: How Disappointing? Reforms did pay, but we oversold them Impact of Different Factors on Growth: 1980s vs 1990s Source: Loayza, Fajnzylber and Calderon (2002)

5. LAC countries deficient performance in TFP growth -2 -1.5 -0.5 0 0.5 1 1.5 OECD 1970-79 1980-89 1990-99 LAC East Asia Anual TFP growth

6. Innovation: the major driver behind high growth episodes LAC countries not among the superstars

7. : Higher social returns to R&D than to physical investment at any level of development Source: Lederman and Maloney (2002)

8. Innovation requires active policies Technological change depends on the quality of the institutions and policies (macro environment, labor market flexibility, property rights and contract protection, easy entry and exit of firms, international economic integration) Technological change is skill biased: it requires improving coverage and quality of education Given non-appropriability and high externalities, technical change requires specific support: –Intellectual property rights protection –Competitive subsides for private R&D –Incentives for improved University/Firms linkages –Sectorial innovation clusters –Risk Capital –Promotion of new activities? (Rodrik, Haussman)

9. Excess inequality: Does it limit growth? Source: Authors’ calculations based on UNU/WIDER-UNDP World Income; Inequality Database, Version 1.0, September 2000. Gini coefficient: distribution of household per capita income, regions of the world, 1990s

10. Excess inequality can limit growth Lost Investment opportunities: –Unequal access to credit –Unequal access to education High levels of crime and violence Weak institutions (property rights) Weak response to external shocks

11. Summary The critical importance of balance sheet vulnerabilities The association between pro cyclical and deficit biases in fiscal policy The need for active innovation policies (and pari-passu skill improvements) The pervading importance of good institutions The (likely) negative association between high inequality and growth