Growth and Structural Reforms: Stylized Facts and Findings Eduardo Lora Euro-Latin Research Network Meeting Madrid, October 2002 Research Department Inter-American

Growth and Structural Reforms:Stylized Facts and Findings

Eduardo LoraEuro-Latin Research Network Meeting

Madrid, October 2002

Research DepartmentInter-American Development Bank

Latin America’s Growth Record

The Structural Reforms

The Opinions on the Reforms

The Effects of the Reforms


Growth of GDP per capita

-4%

-2%

0%

2%

4%

6%

8%

1950s 1960s 1970s 1980s 1990s

Developed

East Asia

Middle East

East Europe

LATIN AMERICA

Rest of Asia

AfricaSource: RES-IDB Calculations, Penn World Tables (1998)

Latin America’s growth has been dissapointing

GDP per capita(1987 US$, PPP)

0

2000

4000

6000

8000

10000

12000

14000

1950s 1960s 1970s 1980s 1990s

Developed

East Asia

Middle East

East Europe

LATIN AMERICA

Rest of Asia

AfricaSource: Penn World Tables (1998)

Latin America has been left behind

Factor productivity is not increasing

TOTAL FACTOR PRODUCTIVITY, 1990s

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Total Factor Productivity

Annu

al ra

te o

f gro

wth

%

Developedcountries

East Asia

Middle East

Eastern Europe

LATIN AMERICA

Rest of Asia

Africa

-5% -4% -3% -2% -1% 0% 1% 2% 3%HaitiJamaicaHondurasVenezuelaNicaraguaColombiaMexicoEl SalvadorParaguayEcuadorPanamaTrinidad y TobagoGuatemalaBrazilBolivia

Costa RicaBarbados

PeruDominican Republic

UruguayArgentina

ChileEast Asia

LATIN AMERICADeveloped

Annual growth of Total Factor Productivity (average 90's)Source: RES-IDB Calculations

Productivity growth in the 90s

…but falling, especially in the poorest countries

Growth is influenced by a host of factors

► Public institutions► Macroeconomic stability► Financial sector depth► Infrastructure of public services► Education ► Income distribution► International environment

-0.5

0

0.5

1

1.5

2

Rule of law Corruption

Developed

Southeast Asia

Middle Eastern

Eastern Europe

LATIN AMERICA

Rest of Asia

Africa

Institutional quality

Source: Kaufman (1999a)

Latin America’s public institutions do not stand out

The rule of law is very weak

World average = 0

1998

2001

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Chile

Costa Rica

Argentina

Dominican Republic

Panama

Brazil

Mexico

Peru

El Salvador

Colombia

Nicaragua

Venezuela

Guatemala

Honduras

Source: Kaufmann et al. (2001)

Volatility of Reserve Money Growth in the 90s (Regional Medians)

0 5 10 15 20 25

South Asia

Industrial Economies

Middle East and North Africa

Other East Asia and Pacific

East Asia and Pacific 7

Latin America and Caribbean

Sub-Saharan Africa

Macro policies are very unstable

Average Private Domestic Credit in the 90s(Percent of GDP, Regional Medians)

0 20 40 60 80 100 120

Sub-Saharan Africa

South Asia






Credit markets are underdeveloped

Credit to private sector (% of GDP)

93%

14%

35%

153%

316%

172%

188%

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

Chile

Brazil

Colombia

México

Argentina

Perú

Venezuela

Expected for income levelGap

Credit markets are underdeveloped

…and infrastructure provision is lagging

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1990 1996-99

Infra

stru

ctur

e In

dex

Developed

East Asia

Middle East

East Europe

LATIN AMERICA

Rest of Asia

Normalized indices of roads, electricity and telecommunications

Infrastructure Provision Index (covers electricity, water, roads and telephones)

* Includes electricity generation, acces to improved water Fuente , paved roads and telephone mainlines.

12%

5%

39%

7%

17%

12%

2.8 3.0 3.3 3.5 3.8 4.0

Chile

México

Argentina

Brazil

Colombia

Perú

Expected for income levelGap

…and infrastructure provision is lagging

Education is not growing fast enough

0

1

2

3

4

5

6

7

8

9

10

1960 1965 1970 1975 1980 1985 1990 1995 1999

Aver

age

Year

s of

Edu

catio

n - P

op >

25

yrs

Developedcountries

East Asia

Middle East

EasternEurope

LATINAMERICA

Rest of Asia

Africa

20

25

30

35

40

45

50

55

60

1960 1970 1980 1990

Gini Coefficients

The worst income distribution worldwide

Developed

Southeast Asia

Middle Eastern

Eastern Europe

LATIN AMERICA

Rest of Asia

Africa

Volatility in Terms of Trade Growth in the 90s (Regional Medians)

0 2 4 6 8 10 12




South Asia



Sub-Saharan Africa

Terms of trade are highly volatile

-60

-40

-20

0

20

40

60

80

100

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

…not to mention financial flows

Financial Flows to Latin America= Net Portfolio Investment + Othe Ner InvestmentSource: WEO, IMF

(Billions of real US dollars of May 2002, deflated by US CPI)






Structural reforms aimed at improving growth by easing the functioning of markets

► Trade policy: – Low and flat tariffs

► Financial policy:– Market-determined interest rates– Low reserve requirements– Effective regulation and supervision

► Tax policy:– Low income tax and VAT rates– Broad and effective tax bases

► Privatizations► Labor legislation:

– Flexibility on hiring and firing – Certainty of labor costs– Payroll taxes low and linked to individual benefits.

Structural Reform Index, average LAC

Reforms have not stopped

0.30

0.35

0.40

0.45

0.50

0.55

0.60

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

…but have been sharply skewed among areas

Progress of Reforms in Latin America (Margin of Reforms Put to Use)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Trade Finance

Until 1989

Until 1994

Until 1999

Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999.


0%

10%

20%

30%

40%

50%

60%

70%

80%

Commercial Financial Tax Privatization

Until 1989

Until 1994

Until 1999




0%

10%

20%

30%

40%

50%

60%

70%

80%

Commercial Financial Tax Privatization Labor

Until 1989

Until 1994

Until 1999



…and across countriesStructural Reforms Index

(countries with the highest and the lowest indexes in 1999)

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Argentina

Trinidad and Tobago

Peru

Jamaica

Bolivia

1999

1985

… …and across countries

(countries with the highest and the lowest indexes in 1999)

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Uruguay

Mexico

Venezuela

Ecuador

Costa Rica

Regional Average

Argentina

Trinidad and Tobago

Peru

Jamaica

Bolivia

1999

1985

Structural Reforms Index

…especially on privatizationPrivatizations, cumulative value 1988-99 as % of GDP

0% 5% 10% 15% 20% 25%Uruguay

Paraguay

Costa RicaEcuador

HondurasChile

Rep. Dominicana

NicaraguaColombia

T&T

VenezuelaMexico

Guatemala

El SalvadorArgentina

Brazil

PeruBolivia

As % of GDP of 1999






The public opinion is very dissatisfied with the reforms

► Privatizations have been beneficial– Strongly agree 9%– Agree 20%– Disagree 37%– Strongly disagree 26%

► The State should leave productive activities to the private sector:– Strongly agree 18%– Agree 28%– Disagree 30%– Strongly disagree 14%

Source: Latinobarómetro, 2001

Disapproval has increased...

**

40%

45%

50%

55%

60%

65%

70%

Without education

02

Completedtechnical education

4

CompletedUniversityeducation

6Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined byTOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%.

2000

1998

Negative Opinion of Privatization by Educational Level(Percentage that believes privatizations have not been beneficial)

Some secondaryeducation

Source: Lora and Panizza, 2002

…especially in the middle classes

**

*****

*********

*

40%

45%

50%

55%

60%

65%

70%

2000

1998

2001

Negative Opinion of Privatization by Educational Level(Percentage that believes privatizations have not been beneficial)

Without education

0 2

Completedtechnical education

4

CompletedUniversityeducation

6

Some secondaryeducation

Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined byTOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%.


Privatization and corruption:An explosive blend

Corruption and Opposition to Privatization

Venezuela

Uruguay

Peru

Paraguay

Nicaragua

MexicoHonduras

Guatemala

El Salvador

Ecuador

Costa Rica

Colombia

Chile

Brazil

Bolivia

Argentina

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8Opposed to Privatization (% that do not consider it beneficial)

Priv

atiz

atio

n In

dex

* Cor

rupt

ion

Inde

x







To what extent have reforms helped growth?

Authors Period Effect

Easterly, Loayza and Montiel 1991-93 vs. 86-90 2,2%*Lora and Barrera 1993-95 vs. 87-89 2,2%*Fernández-Arias and Montiel 1991-95 vs. 86-90 1,7%*

Loayza, Fajnzylber, Calderón 1996-99 vs. 86-90 1,9%*Lora and Panizza 1997-99 vs 85-87 0,7%

*Includes the effect of macro stabilization

Effect of Reforms on Growth

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1988-90 1991-93 1994-96 1997-99

To what extent have reforms helped growth?


Reforms have been advantageous for growth, but...

The effect has been small

…partly transitory

…and has depended crucially on the quality of institutions, and in particular on the rule of law

By how much did income increase?Cumulative Effect of Reforms on Income

-5% 0% 5% 10% 15% 20% 25% 30%

GuatemalaColombiaJamaicaEcuador

ParaguayEl SalvadorVenezuela

MexicoUruguay

Trinidad and TobagoPeru

Dominican Rep.ChileBrazil

BoliviaCosta RicaArgentina

Cumulative change, 1985-99Source: Lora and Panizza, 2002

Reforms have been advantageous for growth, but...

They can lead to macro instabilityFinancial liberalization and privatization without fiscal discipline or adequate regulation.

They can concentrate (even more) income

Scarce skilled laborThey can be (very) detrimental to certain groups

Summary

Growth has been disappointingGrowth foundations are still weakStructural reforms attempted to correct this……but have been incomplete and uneven…and have not received public opinion support

The reforms have been good for growth……but the effect has been small and transitory.

Basic Reading ListLoayza, N., P. Fajnzylber and C. Calderón. “Economic Growth in Latin

America and the Caribbean”, World Bank, unpublished, June 2002.Lora, E. and U. Panizza, “Structural Reforms Under Scrutiny”, IADB-

RES Working Paper 470, March 2002.Other Readings:Burki, S.J. and G.E. Perry, The Long March: A Reform Agenda for Latin

America and the Caribbean in the Next Decade, World Bank, 1997.IADB, Latin America After a Decade of Reforms, Economic and Social

Progress in Latin America, 1997.Stallings, B. and W. Peres. Crecimiento, Empleo y Equidad, Cepal,

Santiago de Chile, 2000.

Documents

Growth and Structural Reforms: Stylized Facts and Findings Eduardo Lora Euro-Latin Research Network Meeting Madrid, October 2002 Research Department Inter-American