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NS4053 Winter Term 2013 Latin America: Country Briefs. Country Briefing Overview. Latin America: Country Briefs Mexico – New Wave of Reforms Nicaragua – Increasingly Pragmatic Cuba – Uncertainty over Reforms Argentina – Unstable Expansion Brazil – Uncertain Future.
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Country Briefing Overview • Latin America: Country Briefs • Mexico – New Wave of Reforms • Nicaragua – Increasingly Pragmatic • Cuba – Uncertainty over Reforms • Argentina – Unstable Expansion • Brazil – Uncertain Future
Mexico: New Wave of Reforms I Mexico’s proximity to the U.S. should have allowed it to be much more wealthy than it is: • Country has been characterized by slow growth: • On average annual GDP growth increased 3.4% from 1971-2010 • Slowing to 2.4% from 1981-2010 • Average annual GDP per capita increased only 0.5% between 1981-2010 • Global recession hit hard with GDP contracting by 6.5% in 2009 -- country will not recover to 2008 levels until later this year • If country had maintained average growth during 1950s and 1960s • GDP per capita would be at least twice the current level • Above South Korea and similar to Portugal
Mexico: New Wave of Reforms II Causes of decline • Numerous policy errors • Populist policies in early 1970s – inflationary pressures • Mismanagement of oil wealth – use of oil revenues for social programs, not reinvestment in exploration and production • Massive external debt • Dysfunctional political system • No new institutions since the demise of the PRI in 2000 • One term for politicians reduces accountability • Severe Structural Impediments • Poor education system – teachers’ union blocking reforms • Rigid labor market – high costs of hiring and firing • Restrictions on investments make it hard to attract sufficient foreign direct investment into key sectors -- energy
Mexico: New Wave of Reforms III Political elites fail to agree of structural reforms because various macroeconomic indicators give mistaken impression that the economy is doing relatively well: • Low inflation has been the norm since mid-1990s • U.S. Slowdowns, not domestic factors explain recessions in 2001-02 and 2009 • Public finances posted small deficits and even surplus since the 1990s • Balance of payments shows small and manageable balances • Economy grew around 5.1% in 2010 when 3.0% was forecast – mainly just catch-up after the severe recession.
Mexico: New Wave of Reforms IV At the start of 2012 Mexico faced a number of challenges: • Economy appeared to be developing a vicious cycle of slower growth, stagnant reforms, instability, and declining growth: • Faster than expected declining oil production was setting in, • Low tax base, over dependence on oil revenues could possibly lead to a fiscal crisis • Political deadlock might make needed reforms impossible • Likely slow recovery of the U.S economy – increased competition from China put additional stress on the economy • Further loss of export markets due to limited competition -- creating a chronic productivity gap with other emerging countries • Problems compounded with deteriorating security situation • Increased violence likely to take a heavy toll on investment and tourism, further suppressing economic recovery.
Mexico: New Wave of Reforms V • With the election of the PRI’s Enrique Pena Nieto, the country is experiencing a new sense of optimism • On December 2 Pena Nieto signed a pact with the leading political parties to achieve major changes: • Focused on reducing high levels of drug-related violence • Increasing social spending to benefit the poorest and promising reforms of the fiscal and energy sectors • Also important: reforms in labor markets and education • The President’s Position: • after years of relative stagnation, Mexico can surge as an important economy • actions must be taken immediately to boost the country’s long-term growth potential.
Mexico: New Wave of Reforms VI Reform process off to a very good start • Labor Reforms • Intended to transform the massive informal labor market that has grown at the fringes of the law • First attempt to overhaul the labor code since 1970 • Also a departure from previous PRI stance of not making any legal change that would show a “pro-business” bias and diminish worker rights • Reform a necessity – World Economic Forum has ranked Mexico’s labor market as highly inefficient (rank 102 out of 144) Reasons included: • rigidities in hiring and firing (113th) • relatively low participation of females (121st)
Mexico: New Wave of Reforms VII • Mexico’s labor market is for all practical purposes dual: • A formal sector, with cumbersome regulations and where hiring and firing is costly; and • An informal sector, mostly populated by small and limited businesses (usually with 1-2 employees) that do not stick to the labor code • The informal market allows quick turnaround for many people seeking work (particularly as there is no unemployment insurance) • It may account for one half of the country’s labor force • Major change in the labor code is that it will admit several types of new contracts • Trial periods allowed – employers can terminate without paying severance fees • Initial training contracts – allow workers to acquire necessary knowledge and skills can also be terminated without severence pay
Mexico: New Wave of Reforms VIII • Labor reforms also extend to some union activities • Surprise because PRI traditionally seen as closer to labor unions • Labor reform is expected to improve Mexico’s competitiveness in a number of ways • It will transfer jobs previously in informal sector to the formal sector • It will create new jobs, particularly among the youngest, oldest and women, due to the new allowable contracts • More people will be allowed to hold more than one job and therefore increase the length of time worked per day • Speedier resolutions between businesses and unions arising from mass firings are expected.
Mexico: New Wave of Reforms IX • Education Reforms • Mexico’s education system is highly deficient • UNESCO – in 2009 at 5.3% of GDP Mexico’s spending on education is above the regional average – Cuba spends 13.1% • Does not translate into student achievement • OECD’s achievement tests, Mexico 48 out of 56 countries and the worst among OECD countries • Although expenditures above regional average, not led o investment in school infrastructure and maintenance • Only 3.34% Ministry of Education’s 2011 allocated for fixed assets – more than 96% to teachers’ salaries and pensions • Main beneficiaries teachers affiliated to the powerful teachers unions
Mexico: New Wave of Reforms X • Reforms main goal is to weaken the influence of the teacher union • Reforms aims to create professional career structure free from union interference • Access to teaching positions often political • Promotions not based on merit • Also the reforms aim to increase the autonomy of schools regarding their own infrastructure and operations. • Still a long way to go in reforming eduation, but a very promising start. • Energy Reforms • Reform of Mexico’s energy sector will be debated during the first half of 2013 • The oil sector requires major reforms to guarantee its long-term sustainability
Mexico: New Wave of Reforms XI • Petroleos Mexicanos (Pemex) holds a monopoly in the oil production sector and contributes 30-35% of Mexican public budget revenues • The dependence of government finances on Pemex’s performance has hampered the company’s ability to invest in exploration and exploitation of new oil fields • Underinvestment is reflected in declining production • Gasoline imports currently represent around 50% of domestic demand • Lack of sufficient financial resources has also raised concerns over Pemex’s safety record • Limited reforms in 2008 opened up a few areas to private participation – constructing gas pipes and exploration in mature oil fields – impact has been limited
Mexico: New Wave of Reforms XII • President has said he will promote a second energy reform given the negative long-term outlook for proved oil reserves • However many obstacles • PRI still divided between those that are more incined to stay with a resource nationalization party and those closer to a free market position • Ambitious energy reform requires changing Mexican constitution – but this also requires state-level congresses to approve it. • The company’s workers union one of the most powerful in the country and will likely oppose any substantive reform • Opposition parties, PRD, and PAN will not support reform without major political concessions
Mexico: New Wave of Reforms XIII • Competition Policy – Anti-Monopoly • The “Pact of Mexico” includes proposals to boost economic competition and end monopolistic practices • Idea is that increased competition will promote investment growth, job creation and technological innovation • Although mexico has become a flly integrated member of global economyover last two decades: • It is still beset by institutions and laws that were at the heart of the country’s earlier closed economy • Situation has prevented a level paly in felds from developing across different sectors • Has created market distortions and inefficiencies athat affect both consumers and producers
Mexico: New Wave of Reforms XIV • As a result Mexico scored very low on several WEF indicators • Intensity of local competition – 4.8 where one is the lease and 7 the most desirable outcome – ranked 75th • At 3.2 score for extent of market dominance – places Mexico in 113th place • Country fares poorly with regards to effectiveness of its anti-monopoly policy with a score of 3.5 ranking it 115th • Sectors target for more competition • Transport sector – foreign companies can own only up to 25% of domestic air travel firms. Similar in maritime transport • Electronic media – television is a duopoly • Fixed line telephone sector dominated by Carlos Slim’sTelmex – 80 % of the land line market • Banking sector also in need of more competition • Problem: Powerful groups in industry and within PRI will try to prevent major reforms
Mexico: Prospects 2013 • The country’s political transition is occurring very smoothly • Provides a good foundation for new-founded optimism • Highest priority of new government -- reduction in violence • Calderon’s anti-cartel policies are blamed for the violence • The PRI led-government wants success against cartels measured mainly by a fall in violence levels rather than quantizes of drugs seized or cartel leaders captured or killed • With monetary and fiscal policies showing little room to boost growth, main economic challenge administration faces is to push through congress reforms to boost growth potential • The labor reform has been approved with some modifications • Fiscal end energy reform bills will be discussed in 2013 • If approved they are unlikely to be so far reaching as to raise the growth potential significantly • Government will be effective at over-selling them – leading too overstated growth optimism.
Mexico: Risks (2013) • Forecast Risks
Nicaragua: Increasingly Pragmatic I • Nicaragua going through a period of great change amid high uncertainty • With the return of Daniel Ortega and the Sandinistas to power in 2006 many changes have taken place • Country has become testing ground for many of the revolutionary and often contradictory economic and political trends sweeping Latin America • Ortega's increasing authoritarianism at national level while vibrant grass roots democracy at the local level • Implementation of neo-liberal, market-driven development within confides of a leftist, state centered populist agenda • Outcome of these economic and political contrasts will • Have profound effect on the country’s future development • Perhaps impact the region as a whole.
Nicaragua: Increasingly Pragmatic II • Although Ortega campaigned on a platform of Christianity, socialism and solidarity with Venezuela’s Hugo Chavez: • Regime has few similarities to other ALBA (AlianzaBolivariana) countries Cuba, Venezuela, Ecuador, Bolivia • Ortega has been politically authoritarian, pro-business, socially populist and above all pragmatic • Marxist slogans are mostly gone as is wide-spread government involvement in the economy • Ortega’s economic model retains many of the legal and regulatory underpinnings of his predecessor’s neo liberal policies • In the government’s October 2007 Agreement with the IMF was a pledge to implement free market policies linked to targets on fiscal discipline, spending on poverty and energy regulation
Nicaragua: Increasingly Pragmatic III • While originally opposed to CAFTA-DR, Ortega and Sandinistas have approached the project with pragmatism and creativity • With labor costs rising in Mexico, Nicaragua began positioning itself to capture share of rapidly expanding U.S. supply-chain, near-shoring business • The country has lowered many restrictions on trade becoming one of the most open countries in the region • To address Sandinista social concerns over “sweat-shop” labor in country’s free trade zones, government designed governance program that includes labor unions as equal partners in negotiations with foreign investors • Results have been success in creating jobs and the spectrum of products exported
Nicaragua: Increasingly Pragmatic IV • Overall the economy has done well since 2006 • Resources managed prudently • Excessive inflation has been avoided • Much of the crime and drug-related violence in the region is absent in Nicaragua • Growth rates are picking up – after declining by 1.5% in the world-wide recession year of 2009, real GDP grew at 4.5% in 2010, 4.7% in 2001 and is expected to expand at 3.7% in 2012. • According to the IMF poverty rates declined from 48.3% of population in 2005 to 42.5% in 2009 with rural areas showing the most improvement • Poverty still a major problem • 63% of the rural population still falls beneath the poverty level • 15% of the overall population still lives in extreme poverty • A sustained growth rate of 5% or greater is necessary for the country to achieve significant poverty reduction
Nicaragua: Increasingly Pragmatic V • The country’s limited revenue base and close IMF budgetary scrutiny have forced government to rely heavily on international aid to finance poverty reduction programs • Hugo Chavez has provided more then $2 billion over lat five years • However much of Venezuela’s aid has simply gone to offset loss of aid from other sources – big cutbacks in U.S. and EU aid • The country faces a number of challenges and – loss of Venezuelan aid would be major problem • Venezuelan aid and trade may have added full percentage point to Nicaragua’s growth in 2010-11 • If the US suspends its annual property waver, it would jeopardize nearly $1.4 billion in development loans over next five years – economy might collapse
Nicaragua: Increasingly Pragmatic VI • While growth and poverty reduction have been good under Ortega, the economy rests on a fragile institutional base. • The economy has opened up to trade but there has been a decline in overall economic freedom • There has been a secular decline in the critical governance indicator, voice and accountable • While political stability has increased, only Guatemala ranks below Nicaragua • The country has by far the lowest level of government effectiveness, and regulatory quality in the region • On the other hand the rule of law has improved under Ortega, with only Costa Rica having a (albeit significantly) higher ranking • Unfortunately there has been little progress in combatting corruption with Nicaragua having one of the lowest scores in the region.
Nicaragua: Increasingly Pragmatic VII • Assessment • Nicaragua’s poor record in establishing a firm institutional setting helps explain why growth has not grown at ranges where significant reductions in poverty occur • The institutional setting does not foster increased productivity • The IMF has identified a declining trend in productivity starting in the 2000s. • The one bright spot has been the country’s progress in developing trade within CAFTA-DR • In early 2013 Managua was listed as one of the top 100 outsourcing destination • CAFTA-DR reinforces the idea that growth in trade correlates closely with policies that promote • economic stability, • private investment in production, • public investment in education, infrastructure, logistics and good governance
Nicaragua: Increasingly Pragmatic VIII • The pragmatic solution for Nicaragua’s future may well be to simply let a CAFTA-DAR virtuous circle of trade reform increased productivity and growth take its course.
Uncertainty in Cuba I The Cuban economy is going through a period of uncertainty • The global crisis hit Cuba hard causing very low rates of growth in the last several years. • The government does not have sufficient resources to maintain the old Communist system • Since taking over from his brother Fidel, President Raul Castro has prepared Cubans for the need for economic efficiency and cutting excessive state spending. • China has become Cuba’s top creditor – nearly $4 billion in loans, but not open ended • Raul Castro is tying the country’s fate to an economic reform process inspired by the Chinese model • One plan was to cut 500,000 state employees by March 2011 and another 800,000 later. • An expanding private sector was expected to absorb these workers.
Uncertainty in Cuba II Government’s private sector plans are vague • Small scale cooperatives are to be created, particularly in the service sector • About 250,000 new licenses for self employment will be issued – along lines during the mid-1990s crisis • Conservatives in the party see the private sector as a necessary emergency measure – a politically dangerous evil to be kept small and eliminated when state finances allow. • Reform forces see “market socialism” in which the private sector is a key driver of the economy • Most likely a continuing leadership tug-of-war over the need to control and limit the private sector is more likely than an all out move to market socialism. • In the short run, partially dismantling the paternalist state and loss of state employment will bring widespread anxiety and uncertainty which could turn into wide-spread frustration threatening to disrupt social stability
Uncertainty in Cuba III To date little progress – liberalizing reforms are advancing slowly • Reform is still very piecemeal • Private sector expansion so far has been vary limited • Plans to dismiss state employees have been largely halted until the private sector’s absorption capacity grows. • With Hugo Chavez’s health condition uncertain, country faces prospect of loosing vital Venezuelan subsidies • Production remains sluggish, inflation is up and corruption is eroding regime legitimacy. • Anti-corruption drive is only adding to popular cynicism about elites rather than generating trust for the regime • Still reform approval has convinced China to increase economic engagement in Cuba • China now key economic partner. While trade with Venezuela has stagnated in recent years trade with China now up to 1.8 $billion • China particularly involved in onshore oil drilling and offshore exploration along with several other international companies • To date there have been no significant discoveries with several firms pulling out.
Uncertainty in Cuba IV • Currently the country appears incapable of generating very high rates of economic growth • Unemployment is not high – at the end of 2012 3.8% up from 3.2% in 2011, and expected to reach 4.3% in 2013 • So far the process of restructuring has yielded GDP growth of only 2.7% in 2011 and 3.1% for 2012 • Figures suggest the economy requires a new stimulus to escape from stagnation. • The slack labor market is likely to erode support for the government’s cautious approach to reform and encourage more radical measures • Clearly the reforms to date have not been sufficient to revive the economy • The new non-state sector accounts for only 8% of the labor force • Due to the lack of availability of alternative employment, the government has held back on state sector rationalization
Uncertainty in Cuba V • The main constraints on the growth of the non-state sector are • The lack of finance and • Supplies of essential inputs • The government is cautious about credit because of fear of creating an unmanageable amount of bad debt and fear of fuelling inflation • The shortage of supplies stems from the inability of either the state or non-state producers to expand capacity • In turn this is mainly due to a lack of finance. • The problem of investment financing is the cause of the severe decapitalization, but no sign that the government has enacted policies to bring an upturn in capital formation • Cuba’s investment/GDP ratio has fluctuated around 11% for the past 20 years – lower than any other country in the region. • Cuba therefore seems to be stuck in a low productivity trap with little prospects for escaping without a major shift in policy to open up access to FDI.
Bolivia’s Indigenous Development I • Indigenous groups account for 66% of Bolivia’s population • Since 2005 the Bolivian government has attempted to empower these long disenfranchised and deprived groups • An experiment in democracy and poverty reduction • Requires complex policy trade-offs that carry potentially high costs • Ultimate results far from certain • Started with Evo Morales election to president • Promised democratic coexistence, social change and national unity • Quickly passed constitutional reforms that included changes in • the role of the state, • private property, and • management of natural resources and taxes. • Development strategy straight-forward – maximize resource exports and the redistribution of their rents
Bolivia’s Indigenous Development II • First step was to begin renationalizing firms that had been privatized under the neo-liberal regimes of the 1980s and 1990s. Mainly in the areas of: • Electricity, • Water • Hydrocaprons • Railways and • Telecoms • Government claims to offer “fair” compensation based on an “independent” evaluation of worth • Recently have begun to nationalize firms that were never under government ownership. • Cost – largely very low levels of FDI that the government needs to develop hydrocarbons and other resources
Bolivia’s Indigenous Development III • Second, Morales has been reluctant to end coca production – a major cash crop for indigenous groups • In response the U.S. has allowed the Andean Trade Preferences’ Act to expire • Loss of its right to export tariff-free to the U.S. has hurt Bolivia’s manufacturing sector, especially textiles • Has also reduced the profitability of developing the country’s fast lithium deposits through reducing the value added that can be created in Bolivia • In early 2013 Bolivia received an exemption from the U.N. that legalizes coca chewing and production for local consumption within the country • Concern is now that many criminal groups will step up drug manufacturing in more remote parts of the country
Bolivia’s Indigenous Development IV • Ironically, despite policies favoring indigenous groups, the government has been facing increased opposition from them in a series of protests: • Stopping highway construction linking Bolivia with Brazil and developing the vast eastern low-lands • Slowing down hydrocarbon development – despite fact that most social programs are financed from gas exports • Are also slowing down lithium development • Empirically protests are reducing the country’s rate of economic growth by over one percent per annum • Despite low levels of foreign investment, lack of favorable access to U.S. markets and the destructive effects of ongoing protests, Bolivia’s progress has been surprisingly good.
