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Rodolfo H. Terragno Present and Future of the Latin American Economy

Rodolfo H. Terragno Present and Future of the Latin American Economy. Yale University March 7 th , 2007. Weisbrot and Rosnick November 13, 2003 ̏ “ Another Lost Decade? Latin America's Growth Failure Continues into the 21st Century˝.

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Rodolfo H. Terragno Present and Future of the Latin American Economy

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  1. Rodolfo H. TerragnoPresent and Future of theLatin American Economy Yale University March 7th, 2007

  2. Weisbrot and RosnickNovember 13, 2003 ̏“Another Lost Decade?Latin America's Growth Failure Continues into the 21st Century˝ 1980s. The lost decade for Latin America; income p.c. shrunk. 1990s.Slow growth. The current decade…“… will not be a success by any reasonable measure”.

  3. Growth – Latin America – 1951/2004PER CÁPITA .

  4. “The region should grow for the reminder of the decade at…” • 5.9% p.a. to match its 1960-70 performance.“Nearly impossible”. • 2.5%p.a. to equal its 1990s performance.“Unlikely”.

  5. What actually happenedin the latest two years1

  6. What actually happenedin the latest two years2 .

  7. Short term analyses are often deceiving A Latin American economy may enjoy periods of sunshine… … until tidal waves wash ashore. –a Tsunami effect.

  8. DECEMBER “Largest default in world history” (US$95bn). Severe devaluation (A$ lost more than 66% of its value vis-a-vis the US$) “The worst crisis Argentina had ever suffered” SEPTEMBER IMF Anne Krueger praises“the liquidity defenses of the Argentine banking system”. Argentine “virtuous” economic policy “deserves the strong support of the international community.” Stand-by credit raised to US$21.6bn. Argentina, 2001

  9. The roller-coaster track Every economy shifts over time between growth and decline. But L.A. shows unusually steep rises and falls. Both neo-liberalism and economic interventionism claim full responsibility for periods of bonanza, and blame each other for every crisis. But neither boom nor collapse is definitely related to one particular set of general policies. In the long run, the roller-coaster motion prevents development.

  10. ORIGIN OF CRISES Low institutional quality. Legal instability. Political disarray. Stubborn opposition. Political machines based on patronage. Diffuse leadership. Faulty administration. _______________________________ At the most these are concurrent causes RECIPE FOR SUCCESS High institutional quality. Legal stability. Political consensus. Moderate opposition. Government in the hands of the most proficient. Clear leadership. Good administration _____________________ Not enough Conventional wisdom

  11. Attempts to identify the underlying causes of recurrent crises in L.A.20th Century .

  12. Asymmetric international trade system Terms of trade (Singer, Prebisch, 1950). Commodities prices fall faster than manufactures over time. In the industrial world, big corps and burly unions translate productivity gains into higher profits/wages rather than lower prices. Unbalanced Productive Structures (Diamand, 1968). In semi-industrialized countries, the industrial sector does no generate dollars, but it swallows up them to import capital goods. Evolutive Dutch “disease”. Asymmetry can affect even a central economy (Netherlands, after the disconvery of gas, 60s). An inflow of extra money leads to currency appreciation.Local costs increase while international prices do not change.The manufacturing sector loses labor, investments, productivity. If this affect an industrial country, let alone one which is in evolution.

  13. 21stcentury Asymmetries under a different light

  14. ToT, UPSs: models that claim for correction COMMODITIES • OPEC, wars, limited reserves, poor substitutes make energy commodities prices to grow faster than manufactures. • Asiatic export-oriented industrial policy created NICs that now demand more commodities. • Fall of the USSR, end of COMECON and rise of near-Capitalist China expanded the world market for metals and food. • Change of market size. Increase of volumes is as important as an increase in prices. • Biosciences. Genetic engineering has multiplied productivity of crops (soybean). MANUFACTURES • Digital Revolution is dramatically reducing per-unit cost of manufactures. Productivity gains are translated into prices.

  15. Latin American IMPORTS What to look at

  16. 1. High-tech dependency Many L.A. countries can produce cars or tractors, but all of them depend upon technology-added imports

  17. 2. The bulk of imports Productivity turns down the unit prices of imports, but innovation multiplies the amount of goods to be imported

  18. 3. Non-fuel commodities Hikes no longer rise prices of industrial goods; direct impact of fuel is limited

  19. Oil intensity, US, 1970-2002 drop 50% (same GDP with ½ oil). Cause: energy efficiency, high-tech intensive industries IT, telecom is making productivity surge. Greater margins to absorb extra costs Globalization and more competition restrict ability to pass costs increases on to customers High after-tax gasoline prices have restrained oil consumption in Europe European labor flexibility has put an end to automatic indexation of salaries, wage-price spirals Monetary policy authorities now promptly respond to rising oil prices by adjusting short-term interest rates Why oil hikes are not sparking inflation

  20. Oil bill doesn´t affect the region

  21. Latin AmericanEXPORTS What to look at

  22. 1. Low-tech exports ≈ commodities The key of current international trade is technological intensity –slightly processed commodities make little difference

  23. 2.Limits to labor-intensive sectors WTO; China, India (38% of world population, low GDP p.c.) do not leave room for becoming competitive through subsidies, tariffs

  24. 3. Purchasing power of dollars earned Apart from “Dutch disease”. Governments often try to halt inflation or alleviate debt burden by overvaluing local currency: a self-inflicted deterioration of terms of trade

  25. . . Current growth is linked to non-fuel commodities

  26. Integration into the global economy of 1/3 of the world population. Latin America total population: 25% of China + India. China’s GDP raised 10 folds since 1978. The ascent of such giants means unparalleled demand for commodities. China’s compliance with WTO rules will demolish import barriers Classical criteria are incapable to assess the current situation When the bubble will burst?a) Confident view

  27. When the bubble will burst?b) Cautious view • Future-prices-based models: current commodities prices are unsustainable. • Speculation has magnified changes in the supply/demand relation. • Feb. 27th, Shangai gave a yellow light to speculators –the Composite Index dropped 8.8%. It was its steepest fall in a decade. • Prices of most non-fuel commodities are below historical peaks in real terms. • There are doubts on the reliability of China’s statistics.

  28. o • China, India: population ≠ effective demand (purchasing power). • India ≠ China. Acute poverty (± $1/day): China, 17%; India, 35%. Relative poverty (±$2/day): China 47%; India, 80%. • Foreign Direct Investment (FDI), 2004-06. China (without Hong Kong): US$203bn; Latin America, US$303.2bn. • Too many barriers to M&A. • State-owned banking with too many non-performing loans • Inflation may force to take measures that would slow GDP. • Last month Alan Greenspan warned that US economy may slip into recession by the end of year.

  29. Getting ready Sooner or later, ToT will deteriorate Imports substitution is no longer a solution L.A. needs export-oriented economies That requires competitive advantages in knowledge-intensive industries

  30. Current income windfall invested in education, R&D Company training Goverment+business partnership; science-technology-industry links Hi-tech clusters Detection of hi-tech niches in biosciences, electronics, software Incentives for higher growing productivity Facilities for start-ups, SMS business in industrial sectors with high value added Elements for a strategy

  31. Success stories

  32. References • UNCTAD Investment Brief, 2007-1, www.unctad.org • International Energy Agency, Key World Energy Statistics 2006 (Paris, 2007). • UN Economic Commission for Latin America (ECLAC), Preliminary Overview of the Economies of Latin America and the Caribbean, 2006 (Santiago de Chile, 2007). • Omar Bello, Latin American Countries´Oil Import Bill, ECLAC, Geneva, October 2006. • Martin Sommer, Christopher Gilbert, “The Boom in Nonfuel Commodity Prices: Can it Last?”, inWorld Economic Outlook: Globalization and Inflation, International Monetary Fund, Washington D.C., April, 2006 • Andrés Solimano, Economic Growth and Macro Management in Latin America: Past, Present and Future Perspectives. ECLAC, United Nations, June 21, 2005. • Augusto de la Torre, Norbert Fiess, Growth in Latin America: Short-Run Issues, Long-Run Challenges, World Bank, EuroFinance Conference, Miami, Florida, April 26th, 2005. • Claudio M. Loser,Latin America: Economic Developments and Prospects –Ten bullets, five charts and one table. Inter-American Dialogue, Sol M. Linowitz Forum, May 16th, 2004. • Mark Weisbrot and David Rosnick, Another Lost Decade? Latin America's Growth FailureContinues Into the 21st Century, Center for Economic and Policy Research (Washington, November, 2003)

  33. . • José Antonio Ocampo, María Ángela Parra, Returning to an Eternal Debate –The Terms of Trade for Commodities in the 20th Century (Santiago de Chile, February, 2003). • Thomas G. Rawski, “What´s Happening to China´s GDP Statistics?”, in China Economic Review (Shangai, December 2001). • McKinsey Global Institute, Productivity – The Key to an Accelerated Development Path for Brazil (São Paulo, 1998) • Rodolfo H. Terragno, The Challenge of Real Development(Boulder, 1988). • Hans Singer, “Trade Policy and Growth of Developing Countries”, in Elsevier (Montreal, 1988). • Edmar Bacha, El Milagro y la Crisis (Buenos Aires, 1986). • Hans Singer, The Terms of Trade Controversy and the Evolution of Soft Financing (Washington, 1984). • Raúl Prebisch,Capitalismo periférico: crisis y transformación (Buenos Aires, 1981). • Marcelo Diamand, Doctrinas Económicas, Desarrollo e Independencia, Buenos Aires, 1973. • Raúl Prebisch, Crecimiento, desequilibrio y disparidades: interpretación del proceso de desarrollo económico (Buenos Aires, 1950). • Raúl Prebisch, The Economic Development of Latin America and its Principal Problems (New York, 1950).

  34. . terragno@netizen.com.ar The author is indebted to Daniel Montamat, Marta Barros, Guillermo Locane for their cooperation

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