Catching up and Falling Down A Latin American Perspective

1. Catching up andFalling DownA Latin American Perspective Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre Global Convergence Scenarios Paris January 16 2006

2. 1 Latin America: Catching up versus falling down 2 Brazil and the old challenge of potential growth 3 Brazil in the new international economic order

3. While Latin American countries experienced a falling down …

4. Some, more than others, during the 1950-2005 period …

5. Deepening the gap between them and developed countries …

6. Deepening the gap with developed countries …

7. The Asian countries experienced an historical jump.

8. 1 Latin America: Catching up versus falling down 2 Brazil and the old challenge of potential growth 3 Brazil in the new international economic order

9. The lost decade of the 1980s became the lost decade of a quarter of a century. log GDP and Trend 7.3 7.1 6.9 6.7 6.5 6.3 6.1 5.9 Average growth (1961-1980) = 7,4% 5.7 Average growth (1981-2004) = 2,2% 5.5 5.3 1970 1979 1982 1991 1997 1973 1976 1985 1988 1994 2000 1961 2003 1964 1967 Source: BBVA Throughout the 30 year period previous to 1980, Brazilian real GDP grew at an average rate of 7.4% each year. Following this period, growth has been disappointingly low.

10. The fall in capital accumulation partly explains the story Net Fixed Capital Stock Capital Stock Growth (%) (billions of 1999 Reales) 4000 12% 3500 10% Average 1950-80 3000 8% 2500 6% 2000 Average 1980-03 4% 1500 2% 1000 0% 500 1955 1959 1975 1951 1963 1967 1971 1979 1983 1987 1991 1995 1999 2003 0 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 Source: IPEA Source: IPEA

11. Lower capital accumulation: investments costs grew until 1990... Investment prices over General price index 1.4 1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 1956 1962 1980 1983 1986 1989 1992 1950 1953 1959 1965 1968 1971 1974 1977 1995 1998 Source:based on Penn World Table … afterwards they stabilized at a relatively high level.

12. Lower capital accumulation: capital utilization dropped Installed Capacity Utilization (%) 90 Average 1950-80 88 86 Average 1980-04 84 82 80 78 76 74 72 70 1986 1990 1994 1998 2002 1950 1954 1958 1962 1966 1970 1974 1978 1982 Source: based in IBGE

13. Lower capital accumulation: decline in productivity of capital due to decrease in total factor productivity log log Total Productivity and Capital Productivity 4.95 0 4.9 -0.1 4.85 -0.2 4.8 -0.3 4.75 -0.4 4.7 -0.5 4.65 -0.6 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Total Productivity Capital Productivity Source: Based in IBGE

14. Lower capital accumulation: productivity fell There was a decline in terms of trade but also a series of structural inefficiencies: Lack of infrastructures, high taxes, rigid labor market…

15. Other productivity issues: Temporal costs vs financial costs Number of days needed to open a Money needed to open a business (en US$) business 2500 160 140 2000 120 100 1500 80 1000 60 40 500 20 0 0 India Perú India Perú Chile Chile Brasil China Brasil China España España México México Uruguay Uruguay Colombia Colombia Argentina Argentina Venezuela Venezuela Corea del Sur Corea del Sur Money needed to Number of days needed to enforce a contract enforce a contract 2500 600 500 2000 400 1500 300 1000 200 500 100 0 0 India Perú Chile India Perú China Brasil Chile Brasil China España México Uruguay España México Uruguay Colombia Argentina Colombia Venezuela Argentina Venezuela Corea del Sur Corea del Sur Source: Doing Business 2005

16. Other productivity issues: financial intermediation The small margin for boosting investment towards profitable projects is a delicate issue.

17. Simulation: path of Brazilian GDP with unchanged capital productivity Due to the direct effect of productivity in GDP, if the 1980s level had remained unchanged, ceteris paribus, Brazil would be twice as rich today. (Equivalent to Greece´s GDP per capita in PPPs).

18. 1 Latin America: Catching up versus falling down 2 Brazil and the old challenge of potential growth 3 Brazil in the new international economic order

19. As a result, Brazilian growth has been lagging behind other emerging giants The Chinese Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years. Real GDP pc 1980 2004 % yoy China 1069 5150 6.77% India 1159 3097 4.18% Turkey 4272 7572 2.41% Brazil 6380 7801 0.84%

20. As a result, Brazilian growth has been lagging behind other emerging giants The Chinese Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years. Brazil has also diverged with respect to the benchmark country, US. Real GDP pc 1980 2004 % yoy China 1069 5150 6.77% India 1159 3097 4.18% Turkey 4272 7572 2.41% Brazil 6380 7801 0.84% US 21336 37233 2.35%

21. Trade openness and the 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. In 2005 the trade surplus reached a record USD 45 billion, an increase of 33% yoy (in spite of a 13% appreciation of the Real).

22. A trade exposure well balanced between US, Europe and Asia… China has become one of the main destinations for Brazilian exports. Increasing in importance Decreasing in importance

23. …which underlines a process successfully implemented The structure of Brazilian exports is very similar to that of other Latin American countries. Brazil is therefore exploiting its competitive advantage. The main destination for Brazilian exports are those countries which Brazil does not compete with, and those which do not produce the goods that Brazil mainly exports.

24. Brazilian firms are beginning to increase activities 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 Source: America Economia 2005

25. Brazilian firms are beginning to increase activities overseas The 50 more profitable firms 19 20 16 15 10 7 5 3 1 1 1 1 1 0 Source: America Economia 2005 Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela Source: America Economia 2005 Within the 50 companies that had greater profits in 2004, 19 are Brazilian, with an average utility over sales of 18%. The average ratio of exports over total sales was 32%.

26. Brazilian firms are beginning to increase activities overseas Number of firms in Forbes 2000 35 30 25 20 15 10 5 0 India Spain China Brazil Mexico Chile Source: Forbes 2000 Source: Forbes 2000 In worldwide terms Brazil is the Latin American country which had most firms listed in the Forbes 2000 report.

27. Brazil is already quoted as being an example of macroeconomic pragmatism Source: BCB

28. Conclusions Some of the main challenges facing Brazil are to boost its productivity, diminish transaction costs and overcome inefficiencies. Brazil is progressively opening its economy in order to avoid lagging behind the main catching up developing countries. There is an ever expanding economic pragmatism among Brazilian policy makers, who continuously adhere to the view of “the political economy of the possible".

29. Thank youfor your attention!