Globalisation, development financing and “Chindia” in

Latin AmericaLatin American Economic Outlook 2008

Bern, 11th March 2008

Javier SantisoDirector & Chief Development Economist

OECD Development Centre

Swiss Agency for Development Cooperation

The OECD and Latin America: An emerging commitment

• Latin American market democracies matter for the OECD and its member countries

• The Latin American dimension at the OECD:

Mexico: Member since 1994; Chile: candidate since May 2007; Brazil: enhanced cooperation, May 2007

Economic Surveys:

Latin American Economic Outlook 2008

1992, 1995, 1997, 1998, 19992000, 2002, 2003, 2005, 2007

2003, 2005, 2007

2000, 2005, 2006

The Development Centre: A bridge between the OECD and emerging regions

• Membership of the Development CentreWith a Governing Board open to OECD non-membercountries, the Development Centre provides a frameworkfor dialogue and experience sharing with emergingregions all over the world.

• Three Latin American countries are members ofthe Centre:

– Mexico – Chile– Brazil

Latin American Economic Outlook: The key tools

• Informal Advisory Board: Scholars and policy makers fromLatin America and OECD countries enrich the analytical work ofthe project.

• Research and Publications: The Development Centrecollaborates with OECD experts, international organisations andvarious Latin American think-tanks.

• Dialogue Forum: Key government officials from OECD andLatin American countries share experiences about the design andimplementation of public policies.

China, India and the Challenge of Specialisation

II

III

I Fiscal Policy and Legitimacy

Pensions, Capital Markets and Corporate Governance

Source: OECD Development Centre, 2007. Based on IMF , Globalization and Inequality, 2007. OECD* includes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain,Sweden, UK, US.

Economic growth is slower than in other regions and it has left out the poor

0

5

10

15

20

25

01234567

Q1 Q2 Q3 Q4 Q5

Sub-Saharan Africa

1994 2002 growth

0

5

10

15

20

25

01234567

Q1 Q2 Q3 Q4 Q5

Developing Asia

1992 2002 change

0

20

40

60

80

01234567

Q1 Q2 Q3 Q4 Q5

OECD*1990 2000 growth

0

5

10

15

20

25

-101234567

Q1 Q2 Q3 Q4 Q5

Latin America

1993 2003 change

GD

P per capita by quintile

GD

P per capita by quintile

GD

P per capita by quintile

GD

P per capita by quintile

Qui

ntile

ann

ual g

row

th

in G

DP

per c

apita

Qui

ntile

ann

ual g

row

th

in G

DP

per c

apita

Qui

ntile

ann

ual g

row

th

in G

DP

per c

apita

Qui

ntile

ann

ual g

row

th

in G

DP

per c

apita

Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.

Improvements in inequality are slight or non existent

Argentina

Bolivia Brazil

Chile

Colombia

Costa Rica

Ecuador

El Salvador

Guatemala

Honduras

Mexico

NicaraguaPanamaParaguay

Peru

Dominican, R.

Uruguay

Venezuela

40%

45%

50%

55%

60%

65%

40% 45% 50% 55% 60% 65%

Gin

i coe

ffici

ent (

early

200

5 or

clo

sest

yea

r)

Gini coefficient (early 1990s)

deteriorations

improvements

Changes in inequality during the last decade

Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006)

Fiscal policy plays a very limited redistributive role, especially taxation

Gin

i coe

ffici

ent

Inequality before and after taxes and transfers

Poi

nts

of G

ini c

hang

e

(% c

hang

e in

ineq

ualit

y)

The effects of taxes and transfers

Public spending is a key instrument for tackling inequality

Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social.

And also… in many cases social spending is regressive

Source: OECD Development Centre, 2007. Based on ECLAC’s Panorama Social .

8.2 7.9 7.8 8.0 8.0

5.2 5.0 5.1 5.2 4.3

2.5 3.4 5.07.5

16.816.0 16.3

17.920.7

29.1

0

5

10

15

20

25

30

Poorest quintile (q1)

q2 q3 q4 Richest quintile (q5)

Tota

l spe

ndin

g (=

100)

an

d pe

rcen

tage

s

Social Security Health Education

% of citizens who trusttax revenue is well spent

(2003-05)

Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.

The result is very limited political capital to work with… fiscal legitimacy is low

Firms’ assessment of theneutrality/composition of government

decisions/spending (2003-2006)

Fairer/Wiser

Unfair/ Wasteful

Fiscal policy is more efficient in Europe (even in its Latin countries) in reducing inequalities and stimulating social cohesion

Gin

i coe

ffici

ent

There is no Latin curse:Quality of fiscal policy is not a matter of DNA

Inequality before and after taxes and transfers

Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).

Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and ECLAC’s Panorama Social

Social cohesion is becoming an increasingly important issue in the region

Argentina

BoliviaBrazil

Chile

Colombia

Costa Rica

Dominican Republic

Ecuador

El Salvador

Guatemala

Honduras

Mexico

Nicaragua

PanamaParaguay

Peru

Uruguay

Venezuela

0

5

10

15

20

25

30

35

0.4 0.45 0.5 0.55 0.6 0.65 0.7

Inequality (Gini coefficient 2000s)

Fisc

al le

gitim

acy

(% tr

ust t

axes

wel

l spe

nt)

Development financing: The importance of the link between fiscal policy,

democratic governance and development

Fiscal Legitimacy

Democratic Governance

Quality of fiscal policy

Economic DevelopmentGeneration of

tax revenue & effectiveness of

public expenditure

Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003).

Argentina

Bolivia Brazil

Chile

Colombia

Costa Rica

Ecuador

El Salvador

Guatemala

Honduras

Mexico

Nicaragua

Panama

ParaguayPeru

Uruguay

Venezuela

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30

Fiscal legitimacy (% who trust taxes are well spent)

Dem

ocra

tic p

erfo

rman

ce

(% s

atis

fied

with

dem

ocra

cy)

Fiscal policy can help democratic consolidation in Latin America

It is not simply a technical matter

Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)

Improving public spending is crucial (efficiency and progressivity)

Improving the efficiency and equity of public spending is a crucial challenge for the region

Education Expenditures and Performance

Mexico

NorwayPolandSlovak Republic

Spain United States

Brazil

Indonesia

Thailand

Tunisia

Uruguay

300

350

400

450

500

550

600

- 5,000 10,000 15,000 20,000 25,000 30,000

Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents

Mat

hem

atic

s Sc

ore

(PIS

A 20

03)

Traditional weaknesses of fiscal policies in Latin America

• Tax revenue is generally low and tax structures unbalanced

• Direct taxation is particularly low

• Tax base is narrow (some of the reasons are informality and tax exemptions)

• Excessive reliance on volatile revenues from natural resources

• Countries still rely heavily on transfers from the central government

Fiscal Reforms in Latin America

• Results of the 1990s fiscal reforms have been mixed in part because many of the reforms were not fully implemented.

• Contrasting experiences of Brazil and Mexico suggest that rather than pursuing technical perfection, a wise approach to fiscal reform may involve focusing with perseverance on reforms that are feasible (“political economy of the possible)

Some recommendations

• Enhancing transparency and accountability in fiscal policy (role of independent third parties for auditing and evaluation – Local think tanks)

• Better, fairer and more public spending

• Broadening tax base and making tax systems fairer and more balanced (elimination of special exemptions in direct and indirect taxes, increasing direct taxation)

• Decentralisation – reinforcing the capacity, authority and accountability of sub-national government bodies, especially through their greater use of direct taxation to finance expenditure

China, India and the Challenge of Specialisation

II Pensions, Capital Markets and Corporate Governance

III

I Fiscal Policy and Legitimacy

Pension Reform in Latin American Countries

• Latin America is at the forefront of pension reform. – Chile launched the process in 1981 and many countries in Latin

America and Eastern and Central Europe have found inspiration in the Chilean experience.

• More efforts are needed in refining the mechanisms in various countries to improve: – 1) commercial practices 2) competence and administration of

pension funds 3) investment regulations and 4) the contributions paid by members.

• Improving the social dimension of pension reform is also necessary to: – 1) extend coverage 2) ensure timely payment of contributions 3)

enhance efficiency of management of funds and 4) reduce costs to members.

Pension reform has had a mixed impact on national savings

8

12

16

20

24

28

32

-2 -1 0 1 2 3 4 5 6 7 8

Argentina Chile Colombia Mexico Peru

Savi

ng /

GD

P (%

)

Years since start of Reform

Mexico

Mexico

Chile

Chile

Colombia

Colombia

ArgentinaArgentina

Peru

Peru

Source: OECD Development Centre (2007), based on World Bank Development Indicators.

But they have become a force for the development and deepening of financial marketsPension Fund Assets as percentage of GDP, 2006

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

ChileBrazil

ColombiaPeru

ArgentinaMexico

HungaryCzech Rep.

EstoniaLatvia

United StatesUK

CanadaJaponSpain

France

Latin America

Other Emerging Economies

Advanced Economies

Source: OECD Development Centre (2007), based on Global Pension Statistics database.

Impact on capital markets

• On financial securities markets

• On the creation of new instruments

• Increasing the size and the depth of the local stock market

• Modernisation of trading systems in stock exchanges

• Reducing volatility of transactions

• Reducing costs faced by enterprises

• Creating greater competition between the institutional investors in the market

• Improving the allocation of financial resources

• On the development of the life – insurance industry

The importance of strengthening the Governance of Pension Funds

The quality of the governance of the pension funds is critically important not only for the own financial performance and the

benefits they provide to their members, but also for the considerable indirect impact on the quality of corporate governance of the

enterprises in which pension funds invest.

Governance of

Pension Funds

Corporate Governance

China, India and the Challenge of Specialisation

II Pensions, Capital Markets and Corporate Governance

III

I Fiscal Policy and Legitimacy

Emerging economies are increasingly present on the global scene

Source: OECD Development Centre, based on Maddison (2003) “The World Economy Historical Statistics”

When the OECD was founded, its member countries accounted for 75% of world GDP, today they represent 55% of world GDP

Source: C.HJ.Kwan, Nomura Institute of Capital Markets ResearchSource: OECD Development Centre, 2006

Based on Working Paper by Blázquez, Rodríguez and Santiso, 2006

China and India could be angels rather than demonsfor Latin America’s commercial development

% o

f exp

orts

% o

f exp

orts

Asian countries competition* vs. Chinese exports to US, % , 2005

010203040506070

Latin American countries competition* vs. Chinese main export products, 2005

0%

10%20%

30%40%

50%60%

The Asian boom has had a strong impact on the trade balance of several Latin American countries

Source: OECD Development Centre, based on WITS Database, 2007.

0

200

400

600

800

1 000

1 200

1998 2001 2003 2005

$ m

illio

ns

China’s and India’s rising demand for Latin American commodities (1998-2005)

Agricultural Raw Materials

Food

Ores & Metals

0

400

800

1200

1600

2000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pric

e in

dex

(197

0=10

0)

Increasing commodities prices(1900-2005)

Aluminium Coffee

Copper Petroleum

0

200

400

600

800

1000

1997 1998 1999 2000 2001 2002 2003 2004 2005

$ m

illio

ns

Rise in Indian imports from Latin America (1997-2005)

Sugar/mollasses/honey

Copper ores/concentrates

Fixed veg oil/fat, soft

0

2 000

4 000

6 000

8 000

10 000

0

20 000

40 000

60 000

80 000

100 000

120 000

1998 1999 2000 2001 2002 2003 2004 2005

$ m

illio

ns

.

$ m

illio

ns .

Rise in mineral exports from Latin America (1998-2005)

Petroleum and products (left)Copper ores/concentrates (right)Nickel ores/concs/etc (right)

The rise of China and India also represents a wake-up call: The challenges of specialisation

Source: OECD Development Centre, 2007. Based on WITS and Comtrade data.

Latin America risks to fall on an excessive

raw-material specialisation

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Uni

ted

Stat

esKo

rea,

Rep

.M

alay

sia

Sing

apor

eTh

aila

ndJa

pan

Mex

ico

Phili

ppin

esIn

done

sia

Chin

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unga

ryCz

ech

Rep

ublic

Rus

sian

Fed

erat

ion

Arge

ntin

aBr

azil

Colo

mbi

aSp

ain

Pola

ndVe

nezu

ela

Slov

ak R

epub

licRom

ania

Bulg

aria

Croa

tiaEl

Sal

vado

rIn

dia

Turk

eyCo

sta

Ric

aG

uate

mal

aCh

ilePe

ruU

rugu

ayBo

livia

Paki

stan

Pana

ma

Hon

dura

sPa

ragu

ay

Low

com

pet.

H

igh

com

pet.

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).

Source: OECD Development Centre, based on WITS Database, 2007.

Trade complementarities with China remain unexplored today…

Trade Opportunities with China for selected countries (2000-05)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Colo

mbi

aVe

nezu

ela

Rus

sian

Fed

erat

ion

Indo

nesi

aAr

gent

ina

Mex

ico

Mal

aysi

aU

nite

d St

ates

Peru

Chin

aKo

rea,

Rep

.Th

aila

ndG

uate

mal

aSi

ngap

ore

Japa

nSp

ain

Braz

ilCz

ech

Rep

ublic

Boliv

iaPo

land

Bulg

aria

Hun

gary

Croa

tiaSl

ovak

Rep

ublic

Rom

ania

Phili

ppin

esTu

rkey

Cost

a Ric

aCh

ileU

rugu

ayEl

Sal

vado

rH

ondu

ras

Paki

stan

Pana

ma

Para

guay

Low

com

pet.

H

igh

com

pet.

Major economies in the region have a lot to win from increasing trade with Indian partners

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).

Source: OECD Development Centre, based on WITS Database, 2007.

Trade Opportunities with India for selected countries (2000-05)

Beyond commodities: Trade potential to export to China and India

There are also substantial opportunities for intra-industry trade:

• Mexico: telecommunications equipment and electric circuit equipment

• Brazil: aircraft, telecommunications equipment and motor-vehicle parts

• Colombia: manufacturing sectors

• Argentina: Processed food

Agriculture and agri-business are probably among the most promising areas for Latin America

in terms of trade potential with India and China

11,700 Km

Mexico is more competitive in manufacturing more sophisticated products which require short delivery times

Shipping time

24 Days

160 Km

4 Days

Mexico benefits from its geographic proximity to its major export markets

Exploiting comparative advantages: The proximity to export markets

Infrastructure is a serious drawback for Latin America’s trade development

Source: Doing Business Report. World Bank, 2007.

05

10152025303540

Col

ombi

a

Ven

ezue

la

Indi

a

Peru

Ave

rage

LA

C

Chi

le

Chi

na

Bra

zil

Mex

ico

Arg

entin

a

Day

s

Time for exports

0

400

800

1200

1600

2000

Col

ombi

a

Arg

entin

a

Ave

rage

LA

C

Mex

ico

Bra

zil

Indi

a

Peru

Ven

ezue

la

Chi

le

Chi

na

$ pe

r co

ntai

ner

Cost of exports

0

1

2

3

4

5

6

7

Latin America and C.

India China Eastern Europe East Asian NIC's

Infr

astr

uctu

re In

dica

tor

Regional performance in the infrastructure pillar

Ways to deal with Dutch disease and other challenges

• Introducing new mechanisms to prevent appreciation (stabilisation funds, counter – cyclical fiscal rules, issuing of debt)

• Diversification

• Innovation

• Involving the private sector in R&D

• Infrastructure

Latin American Economic Outlook 2009and more

• Fiscal Policy and development.

•Migration and development.

• Innovation and development.

Latin American Economic Outlook 2008

www.oecd.org/dev/leo

Thank youMerciObrigadoGracias