LAS Seminar

1. LAS Seminar

2. LISTING OF LATIN AMERICAN COUNTRIES Argentina Belize Bolivia Brazil Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru Suriname Uruguay Venezuela (other) French Guiana… a colony LISTING OF CARIBBEAN ISLAND NATIONS Anguilla - Antigua and Barbuda - Aruba - Bahamas - Barbados - Bermuda - Cayman Islands - Cuba - Dominica - Dominican Republic - Grenada - Guadeloupe (French) - Guyana - Haiti - Jamaica - Martinique (French) - Montserrat - Netherlands Antilles - Puerto Rico - Saint Kitts & Nevis - Saint Lucia - Saint Vincent & Grenadines - Trinidad and Tobago - Turks and Caicos Islands - Virgin Islands

4. Latin America Update (2009) • In the five years from 2004 Latin America’s economies grew at an annual average rate of over 5%. • Inflation remained generally low. • Credit expanded and exports boomed. • Proportion of people living in poverty fell from 44% in 2002 to 33% in 2008. • Until September Latin Americans could still hope that they would escape the worst of the downturn. • But in the last three months of ‘08, Latin America has seen its stock markets crash, currencies wobble and credit start to dry up. That comes on top of falling exports and the plunge in the prices of the commodities it sells to the world.

5. Remittances (money being sent home by Latin Americans working abroad) has fallen sharply over the past year. • In October, the IMF expected growth in the region next year of 3.2%. • In mid-December the World Bank forecast 2.1%. • The same day Morgan Stanley cut its forecast for the seven largest economies in 2009 from growth of 1.5% to a contraction of 0.4% (pessimistic). • While 2009 will see a slowdown throughout Latin America, there will be significant variation. • Brazil’s government still expects growth of 4% next year (optimistic). • Mexico may manage growth of 0.4%. • Peru will continue to outperform in its rate of GDP growth. • What is driving this deceleration? Growth forecasts from early September 2008.

6. Continuing steep fall in commodity prices… from Venezuelan oil to Peruvian minerals, Chilean copper, Argentine soya and Brazilian iron ore and orange juice (exports have been a main driver over the past several years). • Knock on effects from the global credit crisis (investors fleeing risk): banks in Latin America have turned cautious…financing conditions for governments have tightened as well as for the private sector. • Many of the larger economies are entering the slowdown with stronger fiscal and balance-of-payments positions than in the past . • Unlike the aggressive credit easing that took place in rich countries early in 2008, many of the region’s central banks raised their benchmark interest rates as higher food and fuel prices caused inflation to spike. • Still, policy makers must act cautiously due to Latin America’s economic legacy (capital flight, indebtedness, hyperinflation, etc.). • Chile is a notable exception, having saved $21 billion derived mainly from windfall copper revenues in reserve funds. • Worse off are countries such as Venezuela and to a lesser extent Argentina that have squandered much of their commodity boom.

7. Many fear that Latin America will revert to it’s dictatorial and populist past that was often characterized by the seizing of foreign assets along with fiscal and monetary irresponsibility. • This may be a concern for Venezuela, Bolivia and Ecuador, but throughout the region democracy has quickly formed deep roots. • Results from a November 2008 Latinobarómetro poll (left) indicates that the countries of Latin America may not only be diverging economically in the coming years, but we may witness political divergence as well. • Most Latin Americans see themselves as politically moderate, but they retain a yearning for strong leaders and expect the state to solve their problems.

8. Latin Americans generally support democracy and its institutions, although many remain frustrated by the way their political systems work in practice (weak rule of law, widespread corruption and cronyism). • General risks… • Biggest risk in the region is of abandoning the recent commitment to fiscal and monetary prudence. • While most of the poorest are nowadays covered by government cash-transfer programs, those in the third to the fifth deciles of income distribution are now at risk of falling back into, or going deeper into, poverty. • Corruption is still a major obstacle…and may worsen in the short run. • Update on the Caribbean… • On October 15th, in Barbados, 13 Caribbean countries approved a new Economic Partnership Agreement (EPA) with the European Union. • The EPA involves only gradual changes to a trading relationship which goes back to colonial days. It grants almost all Caribbean exports duty-free and quota-free access to Europe. In return, the Caribbean will phase out duties on 87% of European imports by 2033.

9. Until last year these countries have had one-way access to European market (since 1975 under the Lomé Convention, and its successor, the Cotonou agreement). • Pattern of trade relations between Europe and the Caribbean was no longer in synch with the rules of the WTO. • The agreement will help the Caribbean to develop new exports, and to rely less on old staples like bananas and sugar. • US is still the largest trading partner with, and investor in, the region. • Still, the most dynamic business opportunities in the coming decade will be between countries in the region and the EU. • The big story for 2009 may be Cuba.

10. Each year, Transparency International draws on surveys of businessmen and country experts to gauge perceptions of corruption in 180 countries around the world. It defines corruption as the abuse of public office for private gain. This year, Chad shared the bottom slot with Bangladesh. Corruption has declined significantly over the past year in a number of countries, including France, Hong Kong, Taiwan and Nigeria. Transparency International

12. Course Outline (For the Economics section): Latin America from a Global Perspective 1. Origin and Development of the International Economic Order 2. Important concepts to define & understand 3. General Economic Survey of the Region - 20th Century [a] The import substitution trade policy [b] The debt crisis of the 1980s 4. Reforming Latin America in the 1990s 5. Longer-term prospects: the early 21st century

13. Origin and Development of the International Eco. Order (IEO) 1) Began with the industrial revolution of the latter 18th century. 2) As the industrial revolution unfolded, nations other than those in Europe had two challenges: To imitate or to trade. - Opportunity to imitate was immediate (N. America and other European nations) - Opportunity to trade was delayed - Reaction to there two challenges was the cleaver which began to divide the world into industrial and non-industrial countries. 3) Why didn't the whole world immediately adopt the techniques of the industrial revolution?

14. - The most important is the dependence of an industrial revolution on a prior or simultaneous agricultural revolution. - A second constraint on industrialization was the absence of an investment climate. - Period of high colonialism: Import and export trade in many LDCs were controlled by foreign hands (profits were in the business complex of wholesaling, banking, shipping and insurance). - Participation in foreign trade whets the appetite for foreign goods, in the process destroying local industry. - Imperial power was of course an obstacle in the colonial countries (India: British salt monopoly, Spain: consulados) or taxation (siphon off funds).

15. The increase in exports creates a vested, domestic interest of those who lived by primary production - small farmers as well as wealthy landowners - who after the initial economic pattern is set oppose measures for industrialization. • In any given LDC, the development progress made between 1850-1929 depended on the relative political power of the industrial and agricultural interests. • …for example: Argentina & Australia • 5) And so the world divided: countries that industrialized and exported manufactures, and the other countries that exported agricultural and primary products.

16. Concepts to Define & Understand 1. Comparative advantage - def: A nation has a comparative advantage over a trading partner in the production of an item if it can produce that item at a lower unit cost than its partner. Implications... a. Any country can increase its income by trading, because the world market provides an opportunity to buy some goods at relative prices that are lower than those which would prevail at home in the absence of trade. b. The smaller the country the greater this potential gain from trade, but all countries benefit to some extent.

17. c. A country will gain most by exporting commodities that it produces using its abundant factors of production most intensively, while importing those goods whose production would require more of the scarcer factors of production. • Exchange rates - def: the price of one nation's monetary unit in terms of the monetary unit of another country. • a. Foreign exchange market: a market in which buyers and sellers of bank deposits denominated in the monetary unit of many nations exchange their funds. • - Exchange rates can be allowed to fluctuate freely, can be "managed" or can be pegged to the currency of a major trading partner. • Graph

18. - Demand side - People who want to import Chilean goods, or travel in Chile, or others who just want to hold pesos. • When North Americans demand more Chilean vegetables, copper, wine, or whatever, (D curve shifts right) the price of the peso will rise in terms of dollars. • - Supply side - those who want to import goods into Chile from the United States or hold $. • When Chileans demand more US cars or computers (S curve shifts right) the price (in $) of the Chilean peso will tend to decline (S of peso shifts r). • c. Appreciation and depreciation of a currency …

19. When country A's currency becomes more valuable relative to country B's, country A's currency is said to appreciate relative to that of country B - and country B's currency is said to depreciate relative to that of country A. • 3. Balance of payments - Exports (X) & Imports (M) • BP = PxX - PmM • Px - vector of prices of exports • Pm - vector of prices of imports • Surplus = excess of exports over imports • Deficit = excess of imports over exports • 4. Import oriented trade policy: (inward-looking trade policy... import substitution foreign trade policy) • - The substitution of domestic production for imports of foreign manufactures.

20. - Was first explored by Latin American countries when their primary exports markets were severely disrupted, first by the Great Depression of the 1930s and subsequently by the breakdown of commercial shipping during World War II. • - Emerging from the war with fledgling industries, countries like Argentina, Brazil, Columbia, and Mexico began systematically to sustain these manufactures by erecting tariffs and other barriers to trade-competing imports from the US. • Latin America developed import substitution regimes with a multitude of protective techniques that were later emulated by other developing countries.

21. 6. Export oriented trade policy: (outward • looking trade strategy) • - Allows a nation to realize, as fully as possible, the inherent gains from their comparative advantage through free markets. • Often means primary-export-led growth (drawbacks: vulnerability due to volatile price swings) • Hyperinflation - inflation (absolute increase in price level) at a very high rates of usually 200 percent or more prevailing for at least one year. • Caused by one thing … government creating too much money relative to economic growth (seniorage). • Inflation tax. • Capital flight.

22. General Economic Survey - “The Golden Age” … 1870s to 1914. - Latin America's economy grew consistently from 1900 to 1980, except for a brief period during the 1930s. a. The growth rate was slow until the 1950s (at which time it began to increase). Import-substituting Industrialization … - Until 1929, economic growth in most of Latin America was almost entirely linked to the fortunes of export production. - The “Great Depression” => falling export volume and prices => created a severe recession throughout the region in the 1930s. => Marked change in national economic policy:

23. (1) Certain governments introduced policies to maintain the level of internal demand. (2) WWII: demand for Latin America's agricultural and mineral products rose but imported manufactures were scarce. Some of the unsatisfied demand began to be filled by homemade products. (3) Following the end of the war, most Latin American governments formulated clear policies to foster "import-substituting industrialization“ (ISI). - Governments improved the region's transport system and expanded the supply for electricity and water. - They helped finance local industry and welcomed foreign corporations willing to establish factories in certain industries.

24. Export-Oriented Industrialization - Starting in the 1960s there was the beginnings of an intellectual return to free trade thinking and attempts were made to encourage Latin American countries to export more to the developed countries. - Stimulus here was the budding success of the Asian Tigers or NICs (Hong Kong, Korea, Singapore and Taiwan) who were successfully penetrating MDNs markets. - Encouraged by the advice of the World Bank, several governments including those of Brazil and Colombia began to reduce levels of domestic protection and to give incentives to export producers. [1] By 1970 this had become an accepted way of sustaining industrial expansion.

25. The Economic Crisis of the 1980s - No sooner had export-oriented industrialization become a solid plank in Latin America's development strategy, that the debt crisis struck: (1) Latin America's path was externally chosen by the international debt crises: OPEC => $ to Eurodollar market => to Latin America (to help finance the new investments necessary to increase their export capacity) => tight monetary policy by US Federal Reserve => global slowdown => LA exports fell => international banks would not renew loans or extend additional credit => nations could not service debt => technical default on debt (Debt Crisis) - officially began with Mexico in 1982.

26. Apart from Peru, which refused to commit more than 10% of its export revenues to interest payments, most countries rescheduled their debts and accepted IMF conditions for additional loans. • The International Monetary Fund • International role of IMF is to extend emergency, short-term credit to member nations who get in trouble. • Problem: has a standard package that includes: • [1] Monetary and fiscal restraint along with devaluation. • [2] Goal: Reduce excess demand and to reorient the structure of national production away from imports and toward exports (low import content for which a domestic comparative advantage exists - often labor intensive manufactured goods or primary goods).

27. [3] Monetary restraint reduces domestic demand and reins in inflation. [4] Devaluation reduces appeal of additional capital flight. [5] Government spending reduced (get rid of government deficits). [6] Limit on wage rate increases (in countries with high inflation there are also price controls to help break inflation psychology - Argentina, Brazil and Peru). [7] Overhaul tax structure to reduce loopholes for wealthy and to make tax system more efficient. [8] Cut subsidies and controls (tariffs and quotas) => open up economy to market forces.

28. Reforming Latin America - the 1990s • Region grew from 1992 through 2008 … with few national exceptions (stalled in ’99-’02). • Three pillars of the reform process: • [1] First pillar: fiscal constraint across the region. • [2] Second pillar has been apertura: liberalization of markets. • [a] For a generation Latin economics have been biased toward autarky: high tariffs against imports + production mainly for domestic markets. • [b] Tariffs were slashed, licenses and other restrictions abolished. Regional trade accelerated: Trade among the largest 11 Latin American countries has more than doubled since 1989.

29. - Financial sectors were opened up, interest rate controls lifted, and many countries removed all restrictions on capital flows => stock markets boomed (slowdown from 1999 to 2002…booming again late 2008) [3] Third pillar has been privatization. [a] Sebastian Edwards - chief Latin American economist at the World Bank: “privatization has changed the economic landscape more than any other single policy”. [b] Sale of state owned enterprises (SOEs) had two big goals: {1} gain revenue for the budget (and so reinforce macroeconomic stabilization) and … {2} improve efficiency.

30. Cracks in the "miracle" - One important effect of reform was a huge change in Latin America's access to financial markets. Debt crisis days gone…when Latin American cut off from international capital markets. - Since 1991 fresh capital began pouring in. [1] Rich Latin Americans who had stashed their savings abroad to protect them from inflation and profligate governments, began to bring them back. [a] Size is difficult to determine, yet at its height in the late 80s Latin American's had between $150 and $300 billion held abroad. In Venezuela, the stock of flight capital was estimated to exceed the country's GDP. [b] In 1989 Latin American's had more private financial assets in the US than did the Japanese.

31. [2] The repatriation had a profound effect: it was the first wave of money to help support the "strategy" => then foreign money began to flow back in (FDI). [3] The bond and equity bonanza transformed Latin America's financial fortunes by the mid-90's…and lasted until recently. [a] Problem: a virtuous circle - inflow exaggerated the apparent success of the reforms - LA leaders proclaimed the booming markets as evidence that they had turned a corner - attracted still more capital. [b] Groundwork for another boom/bust cycle had been laid.

32. Cracks … • On Dec. 20, 1994 the Mexican government announced a devaluation of the peso - mayhem ensued with the peso plunging 35% in the last three weeks of ‘94 - continued to slide through the middle of 1995: Financial crisis unlike anything seen since 1980's. • The financial collapse due mainly to weaknesses that the earlier boom had entirely covered up.

33. c. Unique aspects: [1] Speed with which capital fled the country. [2] The "tequila effect" - ripple effects - Argentina affected the most. [3] After US bailout, talk of creating or adapting international institutions to cope with such problems in the future (didn’t happen). 2. Brazil broke its peg (of the real) to the dollar in January 1999. - Unique aspects: [1] Again, speed with which capital fled the country. [2] IMF organized bailout (42 billion dollars!). [3] The Brazilian economy went into a recession in 1999 … came out of it in 2000 (been growing since).

34. [4] But the political-economic effects of the devalued real impacted regional trade, with Argentina suffering a prolonged recession (began in 2000 and in late 2001 turned into a crisis … depression environment in 2002). 3. After a series of political and economic crises, Ecuador decided to abandon their currency and adopt the US dollar (2000). [1] For different reasons, El Salvador followed in 2001 and also adopted the US dollar as their national currency. … Reason: to access international financial markets. 4. Argentina: After a bout of hyperinflation in the early 1990s, decided to introduce the “new” peso and to peg it at par to the US dollar.

35. [1] Between the Brazilian devaluation and the strong US dollar, the Argentine economy spun into a deep recession. [2] After a series of political crises in response to public demonstrations, Argentina defaulted on $190 billion in debtin early January 2002. [3] The government announced a limited devaluation and slapped on capital and currency exchange controls. [4] Economy bottomed in early 2003 and has experienced robust growth since. 5. Nothing really new in these developments … crises of local and foreign confidence are endemic to Latin America. - Few other places in the world come near to Latin America's record of political and economic instability.

36. 6. Causes of this instability are complex and disputed: a. Exceptionally wide income inequality. b. Colonial legacy of centralized state bureaucracy that preceded rather than followed the development of civil society. c. Combination of "short-termism“ (i.e. populism) with a State directed model of development adopted after the depression of the 30s creates a volatile mixture: Too much economic meddling by governments that are too unstable. d. Add to this profligate government spending financed, in part by printing money => chronic inflation (often of the “hyper” variety). e. Too little saving: preference for consumption over saving and investment.

37. f. Because of unpredictable inflation, those who could save, the rich, have done so overseas. What saving takes place within the country is scooped up by the governments. • g. Financial markets are weak - Too many financial crises; too little trust. Domestic capital markets are not deep. • Long term prospects: • 1. Latin America's reliance on foreign capital is worrying. • Low savings, 20% of GDP, as compared to 34% for East Asia ... and it's dropping in region. • 2. Despite downsizing, remaining bureaucracies are politicized and often corrupt. Legal reform has hardly been touched.

38. 3. Too many people are still very poor: Latin America has the world's most skewed distribution of income. Gini Coefficients - The wealthiest 1/5 of the population in Mexico is 27 times richer than the poorest; in Argentina, 16 times richer (in Asia the figure is between 5 and 10). - There is little evidence that the economic turnaround of the past few years have reached the bottom of society (infrastructure in country is still primitive). - For many, the wrenching changes brought by privatization, trade liberalization and monetary and fiscal prudence has meant bankruptcy, unemployment or the loss of state handouts.

39. [b] Education is inadequate: Latin governments spend too much, relatively on higher education, and too little on primary schools (especially in poor areas). 4. Ironically, “Robin Hood” like practices that have been common in Latin America … swings in populist regimes and policies in reaction to the self-serving myopia of the traditional elite often resulted in large transfer programs … did not increase productivity and strained fiscal resources (both bad for growth…happening in Venezuela right now). - Net result is persistence of high-level inequality and an unrealized growth potential. - Recent studies indicate that, at least in Latin America, high inequality may be a constraint on growth.

40. Alongside the practical matters, Latin America badly needs to build confidence in the institutions of public life. They are attempting to combine democracy with market economics in deeply unequal societies. • Since 2002 elections have tended to tilt toward left wing politicians and political parties (socialist or communist… e.g. Lula of Brazil) • The voices of discontent have been unable to articulate more persuasive ways forward yet the fact cannot be ignored: discontent springs from huge social need. • - Rise again of populism… e.g. Hugo Chavez in Venezuela has been fanning resentment of neoliberalism and US regional policy.

41. - Deep cynicism: The immediate winners from privatization are usually the well-off (often the president's cronies). Further, police forces and law courts will seldom be popular if everyone knows that crime will go unpunished (or be committed) because their officials can be bought (they are also under funded and inefficient). • Fact: habits and institutions cannot be transformed overnight. • The fundamental outlook is favorable … • … yet the poor cannot eat "fundamentals". • - What the poor and middle class see is the region's gap between incomes widening further.

42. - El Fin -