Latin America's Economic Profile and Human Development Index

1. NS4540 Winter Term 2017Overview: Latin America in the World Economy

2. Gross Domestic Product (GDP) I • Latin America Economic Profile – Economic Size • Economic size measured by Gross Domestic Product (GDP) • It is the output of all final goods and services • Nominal GDP is GDP in current prices • Real GDP is GDP that has been adjusted for changes in the price level • World Bank divides economies into three types: • Low • Middle and • High income economies

3. Latin America: GDP, Population

4. Gross Domestic Product (GDP) II • Output of Latin America about 8% of the world total • GDP highly concentrated with large variance • GDP of Brazil and Mexico over $trillion • Substantial drop to over $300 billion for Argentina and Venezuela • Only three other countries in region have a GDP over $100 billion, Chile, Colombia, and Peru • Latin America’s relatively small place in the world economy result of decades of growth slow by international standards • In 1960 Latin America comprised 5.9% world economy • In 2013 Latin America was up to 8.0% • Means region grew only slightly faster than the world economy overall

5. GDP Per Capita I • GDP per capita in Latin America • Approximately $10,008 • Good news most of the region is middle income by global standards and is at the upper level of world middle class • Bad news – far from levels in North America or high income countries in general • Eight of the 17 countries in the region have GDP per capita in the vicinity of $10,000 or more • For the rest the range is from a low of $1,851 to $7,831 • Here a large percentage of the population struggling to maintain basics of life

6. Human Development Index (HDI) I • Given slow rates of GDP growth and relatively high population rates of growth during latter part of 20th century, GDP per capita has not been particularly fast • Fast enough to put much of Latin America in to global middle class but • Not fast enough to bring many residents a more comfortable standard of living • Human Development Index (HDI) • Have been assuming that human welfare highly correlated with GDP per capita • For most part the case • However a number of factors could cause a divergence between welfare and GDP per capita

7. Human Development Index (HDI) II • The UNDP Human Development Index attempts to correct for this • Index has three components with equal weight • Usual GDP per capita • Life expectancy at birth – longer life is associated with human welfare • Education – adult literacy makes up a third of this component. The other two-thirds are the ratio of students enrolled in primary, second and tertiary schools as a percentage of school-age population • Resulting index number varies from 0 to 1 • Highest score Norway at 0.944, lowest Niger at 0.337 • Regional average for Latin America is 0.74

8. Human Development Index (HDI) III

9. Human Development Index (HDI) IV • For Latin America the index ranges from 0.614 for Nicaragua to 0.833 for Chile • All the countries in the region fall into the high to medium categories for he index • Latin America performs better on this index than for GDP per capita • In no country is life expectancy less than 70 years and adult literacy rates are high. • Still a gap between much of Latin America and the high income countries • These differences driven primarily by differences in GDP per capita and the gross enrollment ratio

10. Trade Patterns I • Latin America and International Trade • International trade has always been an important part of economies of Latin America

11. Trade Patterns II • Latin America’s exports are 5.3% of world exports and 5.5% of imports below share of global GDP • In 2014 Latin America as a whole exported slightly more than it imported • A small trade surplus was offset by a deficit in services • Pattern fairly normal for middle income countries a whole • However the importance of trade to Latin America different picture • Degree to which country is open to international trade is exports plus imports divided by GDP • Ratio for Latin America is 0.43 • Global average much higher at 0.61 and is very similar to the average for high and middle income countries • Normally the more open an economy is to international trade the faster its rate of economic growth

12. Capital Flows I • Capital Flows and Latin America • Mirror image of trade in goods and services has to be matched in some way by capital flows • In Latin America capital flows critically important • Since the first part of the nineteenth century capital flows to Latin America have been both a blessing and curse • Latin American history marked with periods of rapid inflows of foreign capital coupled with sometimes disastrous outflows

13. Capital Flows II • Capital flows various types • With globalized financial markets an important capital flow is portfolio capital • Crosses borders to buy financial assets such as stocks and bonds • Critical because often financial markets in Latin America are small • However small markets often have great volatility • Large outflows can be devastating to equity prices in local markets as well as exchange rates

14. Capital Flows III • Another important form of capital flow is foreign direct investment (FDI) • FDI is the purchase of real assets such as production facilities in a foreign country • Adding to domestic investment critical part of the process of economic development.

15. Capital Flows IV • In 2013 Latin America’s percentage of world FDI was 12.4% or double its percentage of world output • Since the 1990s Latin America’s inflows have been increasing relative to the historical norm for the region • These inflows are critical as a means of increasing economic growth

16. Natural Resources I • Latin America and World Resources • From the start of the colonial period in 1492 much of the interest in Latin America has stemmed from the plentiful supply of resources • Still very important today – oil, copper, tin and lithium • For crops –sugar, coffee, banaanas, soybeans, wheat and beef • Problem – commodities both a blessing and a curse • Production of commodities may earn large amounts of money combined with low production coss • If used wisely windfall can be used to develop country as a whole faster than would otherwise be the case • Might also allow the development of down-stream industries based on the use of these commodities

17. Natural Resources Ii • Downside of commodities less obvious • Must ask of the countries of the world that produce large amounts of primary commodities, how many have used windfall to become high income countries? • New Zealand and Australia are almost the exceptions that prove the rule • Unfortunately Latin America has failed to turn commodities into higher GDP Growth • Commodities and economic development are one of the themes throughout the course

18. Latin America World Economy Summary I • Two conflicting issues for Latin America • Latin America an important part of the world, large geographic area and population. • On other hand frequently sense of something missing or something wrong • Latin America is not what it could have been • Economic growth has been low relative to other parts of the world at a similar stage of development • Common place comparison is economic growth of Latin America with that in East Asia

19. Latin America World Economy Summary I • In second half of the twentieth century many countries in East Asia transformed themselves from low-income countries to middle income countries and in some cases high income countries • These “growth miracles” outside of Chile, not found in Latin America • Latin America’s GDP has doubled over the last 50 years • However if we compare with what it might have been if it had been similar to Chile or Indonesia, a very different picture

20. Latin America: Actual vs Potential

21. What has caused economic growth in Latin America to be relatively slow? • Puzzling problem because of the region’s resources • No simple answer. In general terms a mixture of • The history of the region • Its natural endowments, and • Poor economic policy • These have tended to lower the economic growth in the region • A number of recurring themes in Latin American economics that form the standard list of issues that help to understand the relative underperformance of the region.

22. Recurring Themes I Main themes in Latin American economic development • Growth – The most serious problem of modern Latin America has been that economic growth has been slow relative to much of the rest of the world • Especially the case in the last several years • Commodities – Many countries in Latin America are major producers and exporters of commodities, and this has had a substantial influence on the economic development of the region.

23. Recurring Themes II • Import substitution industrialization (ISI) -- in in the second half of the twentieth century, many countries in Latin America attempted to create industries designed to replace imports from developed countries. • ISI has had very important implications for economic development in the region • Trade Policy – From the 1930s Latin America has pursued trade policies that tended to make the markets of the region relatively closed to foreign competition • This overall policy had a tendency to make Latin America less integrated into the world economy

24. Recurring Themes III • Exchange rate policy – Countries have a choice between managing their exchange rate and allowing it to float. • In Latin America these choices at times have had serious implications in terms of economic growth • Debt – A recurring theme in Latin American economic history has been the tendency for governments in the region to borrow heavily from banks and other financial institutions • Several debt crisis have ensued involving the International Monetary Fund (IMF) • Macroeconomic instability – On average GDP growth, inflation, and unemployment have been somewhat unstable in many countries in Latin America • This instability has been so pervasive that for many it is one of the defining characteristics of the region

25. Recurring Themes I • Poverty and Inequality – GDP per capita in Latin America is low relative to the high income countries. • In addition Latin America has had one of the most unequal distributions of income in the world. • This list is not exhaustive however it does cover much of what makes Latin America distinctive in an economic sense • To a large extent the interplay of these themes helps explain both the economic history of he region and its current place in the world economy. • Should be noted, the majority of these themes are related to government policy