Promosalons Paris  20 February 2006

1. LATIN AMERICA:The political economy of the possible Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre Promosalons Paris 20 February 2006

2. LATIN AMERICA: IN THE GARDEN OF DELIGHTS?

3. THE FLOOD OF PARADIGMS IN LATIN AMERICA Utopia in Latin America: from a spacial search to a temporal search. A search which has impregnated the history of Latin American political economy: from structuralism to monetarism, from Marxism to Liberalism. In the 20th Century the whole Continent was dancing a waltz of paradigms. The famous decalogue of the Washington Consensus: yet another variation on this waltz.

4. FROM MARXISM TO LIBERALISM: MODELS TO BE CREATED “The great ideological storms” (Isaiah Berlin). A few decades ago one of the key words in the entire continent was “Revolution”; a projective concept which denotes a temporal Beyond. Whether Cuban or Chilean, Marxist or Liberal, the Revolution will feed the time of tomorrows and the sacrifices of the immediate present. The flood, as Albert Hirschman describes it, brought with it an “angry desire to conclude”, where rigid economic models constituted numerous invitations to design alternatives with no chiaroscuro; either all or nothing.

5. DEMOCRACY AND THE MARKET: THE NEW ALPHABET The transormations of the Latin American continent are now obvious. In the region as a whole, the conceptual and practical framework of political economies have been transformed. Democracy and the Market have taken over from Revolution and the State on the altar of references. To sum up, a complete vocabulary and grammar have disappeared from the political and economic repertoire allowing a new ideology to emerge.

6. THE GREAT TRANSFORMATION OF LATIN AMERICA The great transformation which took place in Latin America at the end of this century does not herald the arrival of the Good Liberal. There was no transfer from one paradigm to another, instead a new cognitive style emerged. We witness the failure of the whole idea of political utopia and the politicial economy of the impossible. The failure of a cognitive style of macroeconomy of populism, similar to the purist monetarism of the Chicago Boys has only been the defense and illustration of the same concept.

7. A BLESSING IN DISGUISE FOR LATIN AMERICA? Perhaps we should not spend too much time mourning the passing away of the great reforming impulses. A detailed study carried out by Hausmann and Rodrik in 2004, proves that most economic accelerations were not preceded by reforming big-bangs, or by marked politicial or economic ruptures. This empirical study covers a wide range of 83 sustained world growth patterms between 1957 and 1992 (above two percentage points over a period of at least eight years).

8. THE EMERGENCE OF THE POLITICAL ECONOMY OF THE POSSIBLE The strategy used by Ulysses: leaders know that they could be in danger of succumbing to the temptation of the sirens chanting the economic politics of the impossible. They are cautious and they tie themselves to the masts of the fiscal and monetary institutions they have contribute to build. Two strategies of development are being outlined – and sometimes combined- in the region: one is an anchor of endogenous credibility, coming from within, and the other isan anchor of exognous credibility, getting its inspiration from external factors.

9. THE POLITICAL ECONOMY OF THE POSSIBLE:THE LATAM SILENT TRANSFORMATION

10. 1 1 Latin America’s Crusade 2 The Great Latin American Transformation Conclusion 3

11. THE BIG CHALLENGE: THE LIFE AFTER THE “WASHINGTON CONSENSUS” Index of Structural Reforms in Latin America 1.00 0.90 CEPAL 0.80 0.70 0.60 IDB 0.50 0.40 0.30 0.20 0.10 0.00 1970 1974 1976 1980 1982 1986 1988 1992 1994 1996 1998 2000 1972 1978 1984 1990 CEPAL: Latin American Economic Commission IDB: Inter American Development Bank Source: Based on CEPAL and IDB

12. A DISAPPOINTING PERFORMANCE IN THE REGION… Not only was growth poor but it was also very volatile. Source: Based on World Bank Source: Based on World Bank

13. … during succeeding decades the income per capita gap between the developped regions widened. • 29700 • 8600 …THE CONSEQUENCE HAS BEEN A DIVERGENCE IN THE EVOLUTION OF INCOME PER CAPITA With the exception of the 70s when Latin America attained an average growth rate of 6% ...

14. HOWEVER, 2003 BROUGHT A CHANGE IN TENDENCY... During the second half of the 90’s, the tendency in regional growth broke down and suffered a deceleration. Since 2003, the region is booming in a synchronised way. Source: BBVA The indicator for the change in tendency is an index of measurement for changes in the cycle. It marks the beginning of expansive and recessive stages of the economic cycles.

15. 1980 1997 1987 1983 2003 1991 8 años 8 años 11 años Average Length Expansions: 5,3 years Decelerations: 4 years AN UPWARD TURN BEGAN WITH A NEW CYCLE IN 2004-2006.... Latin American Cycles The last cycle in the region was very long (11 years), especially compared to previous ones which lasted 8 years. Source : BBVA

16. 8 años 8 años 11 años ARE WE REACHING A NEW CYCLE? Cycles in Latin America Moreover, there were two “sharp interruptions” (the Tequila crisis in 1995 and the Russian crisis in 1998). 2004 Source: BBVA

17. THE SCENARIO OF US AND WORLD ACTIVITY IS KEY In spite of the fact that variable factors such as the cost of raw materials cause the opposite economic effect in Latin America as opposed to developped countries, regional growth is closely linked to the growth patterns of USA. Cyclical Situation in USA and Latin America USA Tendency Latin America Correlation = 0,80 Source: Based on ECLAC and IMF

18. THE WORLD OUTLOOK FOR THE FOLLOWING YEARS IS GOOD % World growth exLatam Growth in USA remained strong in 2005 and will keep growing in 2006. China will continue to boost world demand in 2006 having grown 9,9% in 2005 and 9,6% on average over the last 25 years. 6 5 4 3 2 1 0 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 Source: OECD Evolution of income percapita (constant dollars in 1996) 9000 Brazil 8000 7000 6000 China 5000 4000 3000 2000 1000 0

19. CHINA CONTRIBUTE TO GROWTH IN LATIN AMERICA Growth of GDP in China (Annual percentage variation) Exports to China in 2003 (Percentage of total) Source: Based on domestic sources, before the revised figures released in Jnauary 2006.

20. COMMODITY BOOM HAS BEEN A BONANZA Exports of commodities BBVA-MAP Index of Latin America commodity prices (100 =jan03) over total exports (2004) 170 160 Venezuela 83.1% 150 Peru 70.7% 140 Without oil 130 Chile 59.1% 120 Colombia 46.3% 110 TOTAL 100 Argentina 38.0% 90 Brazil 29.6% 80 70 Mexico 14.6% 60 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Latam 31.2% Source: BBVA Source: BBVA

21. … BOOSTING GROWTH The higher volatility in the price of these products is reflected in the cycle. GDP and BBVA MAP Latam 6% 30% GDP growth 5% 20% 4% 10% 3% 0% 2% -10% 1% Crecim BBVA-MAP -20% 0% • Correlación = 0,65 -1% -30% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: BBVA The BBVA-MAP Latin America is a price indicator for net exports of raw materials in the region.

22. 1 1 Latin America’s Crusade The Great Latin American Transformation 2 Conclusion 3

23. THE GREAT TRANSFORMATION: THE MONETARY MAST Inflation (%) 250 200 150 100 50 0 Latin America Total Emerging Markets Source: Based on IMF

24. With the sole exception of Venezuela, significant advances are being achieved in the reduction of fiscal deficit.In the last recessive phase the consensus in fiscal discipline became apparent. THE GREAT TRANSFORMATION: THE FISCAL MAST Public deficit (% over GDP) 4% 2% 0% -2% -4% -6% 2004p -8% 1999 -10% -12% Source : BBVA

25. THE GREAT TRANSFORMATION: THE EXTERNAL ANCHOR Commercial Openings in Latin America Commercial Openings in 2004 50% 45% Brazil 40% Peru 35% Colombia 30% Argentina 25% Uruguay 20% 15% Venezuela 10% Chile 5% Mexico 0% 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 0% 10% 20% 30% 40% 50% 60% 70% 2004 (e) Source: BBVA en base a fuentes nacionales Source: BBVA Current Account Latam 2 1,3 0,7 1 0,1 % sobre PIB 0 -1 -0,5 -2 -2,3 -2,5 -3 -3,1 -3,2 -4 -4,3 -5 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source BBVA

26. The political economy of the possible: Chile

27. CHILE HAS INNOVATED IN ECONOMIC POLICY ... Year Goal Adopted and Initial Inflation 45 Peru 40 35 30 Chile 25 Tasa de Inflación (%) 20 Israel Mexico 15 10 Rep. Czechj Colombia Island Poland UK S.Africa 5 Canada Spain Korea Norway Suiza N. Zealand Finland Brazil Thailand Australia 0 Suecia 1990 1992 1994 1996 1998 2000 2002 Source: Central Bank of Chile

28. … FAVOURING GRADUAL ADJUSTMENTS … Anual Inflation (%) 35 30 25 20 15 10 5 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: BBVA

29. Free Trade Agreements Country Subscribed Validity Bolivia 06/04/1993 07/07/1993 Colombia 06/12/1993 01/01/1994 Ecuador 20/12/1994 01/01/1995 Mercosur 25/06/1996 01/10/1996 Perú 22/06/1998 01/07/1998 Cuba 21/08/1998 Venezuela 02/04/1993 01/07/1993 Canadá 05/12/1996 05/07/1997 Corea del Sur 15/02/2003 01/04/2004 Costa Rica 18/10/1999 14/02/2002 El Salvador 18/10/1999 03/06/2002 EEUU 06/06/2003 01/01/2004 Guatemala 18/10/1999 Honduras 18/10/1999 México 01/10/1998 01/08/1999 Nicaragua 18/10/1999 UE 18/11/2002 01/02/2003 . … AGAINST THE “RAGE DE VOULOIR CONCLURE” Average Tariff (%) 120 100 80 60 40 20 0 1960-64 1965-70 1971-73 1974-81 1982-84 1985-95 1995-00 2000-05 In the 1960s, there was already consensus in favour of an opening. The debate centred on two main issues: The spread of opening and the advantage/disadvantage of differentiated tariffs. With the return of democracy, The process of unilateral and joint reductions of tariffs was complemented with bilateral treaties.

30. Evolution of the Pension System in Latin America (in % of GDP) Return of Democracy 30% 25% 20% 15% 10% 5% 0% 1 2 3 4 5 6 7 8 9 1 11 Num. periods ARGENTINA BOLIVIA COLOMBIA COSTA RICA CHILE EL SALVADOR MEXICO PERU URUGUAY SUCCESSFUL POLICIES ARE CONTINUED: PENSION SYSTEM

31. Evolution of Pension Funds in Latin America (in % of GDP) 70% 60% Retorno a democrácia 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Num. periods ARGENTINA BOLIVIA COLOMBIA COSTA RICA CHILE EL SALVADOR MEXICO PERU URUGUAY ….. BUT WITH GRADUAL INCREASES

32. The political economy of the possible: Mexico

33. Difference between underlying inflation and Banxico goal (Percentage) 6% 5% 4% 3% 2% 1% 0% ene-99 ene-00 ene-01 ene-02 ene-03 ene-04 sep-99 sep-00 sep-01 sep-03 sep-04 sep-98 sep-02 may-98 may-99 may-00 may-01 may-02 may-03 may-04 -1% -2% MONETARY ANCHOR: THE CENTRAL BANK A KEY ACTOR FOR LOWERING INFLATION Inflation ... Perspectives are now anchored at levels around 4%. (Percentage) 140 120 100 80 60 40 20 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 As in the rest of the region inflation has been considerably reduced ... Source: Banxico

34. FISCAL ANCHOR: HEALTHY PUBLIC FINANCES Public Sector financing requirements (Percentage of GDP) .. .. however, the government still depends on oil to finance it’s expenditures. 20 15 10 5 Income from Oil As a percentage of the total) 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 50% 45% -5 40% 35% -10 30% Public debt has been considerably reduced ... 25% 20% 15% 10% 5% 0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Banxico figures

35. EXTERNAL ANCHOR: THE EMERGENCE OF A GLOBAL TRADER Total Exports ... Which has resulted in a greater degree of openness 200 180 160 140 120 100 80 Degree of Openness 60 ((X+M)/PIB) 40 60 20 55 0 1980/12 1984/12 1988/12 1992/12 1996/12 2000/12 2004/12 50 45 Mexican exports increased on average by 17% each year between 1989 and 2004 ... 40 35 30 25 20 Source: INEGIand Banxico China Chile Mex Tur Col Arg Perú Bra Ind

36. THE COUNTRY NOW DEPENDS A LOT LESS ON RAW MATERIALES Exports Herfindahl-Hirschman Index Exports by receiver countries 200 (1986-1988 y 1999-2001). 1,0 180 0,9 160 0,8 0,7 140 0,6 120 No petroleras 0,5 100 0,4 80 0,3 60 0,2 40 0,1 20 0,0 Petroleras Perú Chile Brasil 0 México Bolivia Ecuador Uruguay Paraguay Venezuela Nicaragua Argentina Colombia Honduras Guatemala Costa Rica El Salvador 1980/12 1984/12 1988/12 1992/12 1996/12 2000/12 2004/12 1986-1988 1999-2001 The export of manufactured goods grew on average between 1990 and 2000, about 28% per year and now accounts for 90% of total exports.

37. MOREOVER, TLCAN HAS MEANT THAT THE COUNTRY HAS BECOME “ANCHORED” TO THE ECONOMY OF USA Recovery of GDP (Índice=100 maximum) GDP in Mexico and Industrial Production in USA . (Percentage of Anual Exchange) 110 10 1981 1985 1994 2000 105 8 6 Mexico GDP 100 4 2 95 0 90 -2 -4 US industrial production. 85 -6 Quarters after the crisis -8 80 1996 1997 1998 1999 2000 2002 2003 2004 2001 p/ -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Source: INEGI and Banxico The new productive structure has caused the economic cycle to become more stable , and volatility has become a thing of the past.

38. The political economy of the possible: Brazil

39. EXTERNAL TRANSFORMATION Following the 1999 devaluation which give way to the floating of the real, the economy has gradually opened up, making it less vulnerable to external shocks. Commercial opening (Exports + Imports) / GDP 30% 25% 20% 15% 10% 5% 0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Based on BCB figures

40. TRADE OPENESS AND CATCHING UP PROCESS Successful Asian emerging countries were able to simultaneously combine growth with a trade openness proccess. Brazil has recently started to open up its economy. It is also obtaining record trade surpluses: nearly 45 billion dollars in 2005; up 25% from the previous year.

41. BRAZILIAN FIRMS BEGAN TO EXPAND OVERSEAS Top 100 firms in Latin-America 50 45 40 40 30 20 8 10 3 1 1 1 1 0 Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela Source: America Economia 2005

42. BRAZILIAN FIRMS RALLIED MEXICAN MULTILATINAS The 50 more profitable firms 19 20 Number of firms in Forbes 2000 16 35 15 30 25 10 20 7 15 5 10 3 1 1 1 1 1 5 0 0 Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela India Spain China Brazil Mexico Chile Source: America Economia 2005 Source: Forbes 2000

43. THE CHINESE BONANZA Brazilian products hardly compete at all with Chinese goods in international goods markets, and, moreover, the tendency is for these levels to drop. Commercial Competition with China 0.70 Tailandia 0.65 Hungría 0.60 0.55 México 0.50 Coef de conformidad Rep. Checa 0.45 EEUU 0.40 Polonia 0.35 Japón 0.30 0.25 Brazil España 0.20 Commercial competition between China and Brazil 0.25 0.35 0.45 0.55 0.65 Coef de especialización 30% 31% 30% Source: Blázquez, Rodríguez y Santiso, 2005 30% 29% 28% 28% 27% 27% 25% 25% 26% 25% 24% 23% 1998 1999 2000 2001 2002 2003 Source: Blázquez, Rodríguez y Santiso, 2005

44. 1 1 Latin America’s Crusade 2 The Great Latin American Transformation Conclusion 3

45. Latin America 2006: The political cycle is back MÉXICO REPÚBLICA DOMINICANA HONDURAS GUATEMALA VENEZUELA NICARAGUA EL SALVADOR COSTA RICA PANAMÁ COLOMBIA ECUADOR BRAZIL PERÚ BOLIVIA PARAGUAY CHILE URUGUAY ARGENTINA Next presidential elections 2007 - 2009 2006 2004 - 2005

46. The timing game: Political cycles and crises in Latin America used to be synchronized, 1970-2000 Elections Nominal exchange rate depreciation Country`s Total andgovernment change 1989 17 1 Colombia 13 1,16 1990 14 2 Costa Rica 11 1991 3 3 Guatemala 11 1,14 1992 0 4 Ecuador 10 1,12 1993 10 5 Chile 10 1994 18 6 Peru 10 1,1 1995 6 7 Honduras 10 1,08 1996 8 8 Paraguay 9 1997 7 9 Brazil 9 1,06 1998 15 10 El Salvador 9 1,04 1999 12 11 Republica Dom. 9 2000 11 1,02 12 Uruguay 9 2001 4 13 Mexico 9 1 2002 13 14 Argentina 8 2003 8 0,98 15 Nicaragua 8 2004 6 16 Panama 8 0,96 2005 5 17 Venezuela 8 Source: Frieden, Ghezzi y Stein, 2001 2006 11 0,94 18 Bolivia 7 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

47. During the period 2000-2005, some countries achieved a decoupling: The case of Mexico Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, 1975-2000 Election Year Election Year Election Year Source: Jorge Blázquez and Javier Santiso, 2004.

48. While others had overcome the test of fire more recently: The case of Brazil Source: Based on Juan Martínez and Javier Santiso, 2003.

49. Thank youfor your attention!