To decouple or to couple? A question for Latin AmericaJuan Carlos Moreno Brid Matthew HammillDeputy Director Economic Affairs OfficerECLAC - Mexico ESCAP – New Delhi

IDEAS, Chennai, January 2012

One lens: the BPC growth model• Harrod, Prebisch, Thirlwall, Gap models• Long term growth must not generate an unsustainable balance of payments• (vs Corden at al Does the Current Account matter?)

• BPC Specifications: levels or ratios, trade and factor payments from abroad

• X – M = 0, (X – M) / Y ≤ k, interests, remittances

Thirlwall’s model of BPC growth

Income elasticity of imports

External demand

Effect of real exchange rate cum price elasticities of trade

Income elasticity of imports

To overcome BPC Diversify external demand,Ratio of income elasticities, internal market

industrial/trade policy, induce investment public infrastructure, income

redistributionReal exchange rate: avoid persistent appreciation

4

Watch capital flows and key stock-flow ratios: Public, Private -bank and non bank- balance sheets!

Data: Latin America’s growth linked to the US economy, 1970-05

5

LA ‘s recent growth … to decoupling?

6

Source: ECLAC Preliminary Overview of the Economies of Latin America and the Caribbean, 2012

Some opinions… pre 2010• “When the USA sneezes, Latin America catches a cold” Popular saying

• “What crisis? Go ask Bush?”Lula de Silva, President of Brazil, mid-Sep 2008 few weeks before stock market plunged 20%.

• Now the US caught the flu, Mexico a mild coldMexico’s Central Bank late 2008

• It is going to be an economic tsunami for us Same source, some months later

7

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•Some aggregate data and country evidence

LA’s exports grew faster than GDP

-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0

10.012.014.016.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Exportaciones PIB

Export-led

growth 2.0?

Tasas de crecimiento anual 1990-2010

Concentrated in USA and EU

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Source: ECLAC Preliminary Overview of the Economies of Latin America and the Caribbean, 2012

Latin America: Geographical distribution of exports, 2007-2010 (Percentage of total exports)

And rising share of primary inputs

Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de datos COMTRADE de Naciones Unidas.

LA’s imports grew faster than exports

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Argentina Brasil Chile Costa Rica El Salvador México Rep.Dominicana

ALyeCExportaciones Importaciones

Annual average rates of growth,1990-2010

Income elasticity of imports rose, in some cases it doubled

The current account deficit widens (% GDP)

2006 2007 2008 2009 2010 2011 2012-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Goods balance Services balance Income balance Current transfers balance

Current account balance

Investment ratio peaked in 2011, but is still low

LATIN AMERICA: GROSS FIXED CAPITAL FORMATION(Dollars at constant 2005 prices as a percentage of GDP)

The BPC, decoupling, catching-up in 1980-2011?Some evidence for selected Latin American countries

15

16

GDP per capita (% of USA), Mind the gap: don’t stand so close to me

0

5

10

15

20

25

30

35

40

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Argentina Brasil Chile México Uruguay

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Mexico’s Trade balance and growth

-1

0

1

2

3

4

5

6

7

8

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

GD

P a

vg a

nnua

l gro

wth

(%)

Trade balance goods and services (% GDP), average

1970-81

1982-87

1995-2000

2001-11

1988-94

1960-69

Argentina, Trade balance and economic growth 1960-2011

0

1

2

3

4

5

6

7

8

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

Balanza comercial del ByS (% PIB), promedio

PIB,

cre

cim

ient

o pr

omed

io a

nual

(%)

1970-81 1982-87

1995-2000

2001-10

1988-941960-69

Fuente: Elaboración con base en los indicadores del WDI.

Chile, Trade balance and growth

0

1

2

3

4

5

6

7

8

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

Balanza comercial del ByS (% PIB), promedio

PIB,

cre

cim

ient

o pr

omed

io a

nual

(%)

1970-81

1982-871995-2000

2001-10

1988-94

1960-69

Fuente: Elaboración con base en los indicadores del WDI.

To decouple or to couple? To overcome the BPC?

A Latin American answer:

Mañana, mañana, mañana…

Thank You

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Juan Carlos Moreno-Brid Matthew HammillDeputy Director Economic Affairs OfficerECLAC - Mexico ESCAP – New Delhi

IDEAS, Chennai, January 2012