Lessons From the 1990s Experience in Latin America. Hong Kong Institute for Monetary Research November 28, 2003

Transcription

1 Lessons From the 199s Experience in Latin America Hong Kong Institute for Monetary Research November 8, 3

2 Reform programs...! Monetary stabilization either exchange rate- or inflation-based objectives! Privatization; deregulation! Financial liberalization! Debt restructuring (Brady plan) normalized relations with external creditors

3 Growth picked up in early 199s, but only temporarily Figure.5.In ter n a tio n a l C om parison: G row th P erform ance (Annual percent change in real per capita GDP) Latin America Developing A sia Source: IM F, World Economic Outlook

4 Irrational exuberance about reforms Figure.6. Latin America: Contribution of Reforms to Economic Growth (In percentage points) Early evidence in Lora and Berrera (1997) More recent evidence in Lora and Panizza () Sources: Lora and Berrera (1997); and Lora and Panizza ()..

5 But some fundamental measures were not taken... International Comparison: Index of Labor Market Rigidity (=low, 1=high) 1 English-speaking developed East Asia and the Pacific Continental Europe Middle East and North Africa Eastern Europe and Central Asia Latin America and Caribbean Chile Argentina Bolivia Colombia Venezuela Ecuador Brazil Peru Mexico Source: Botero and others (3). 1 The higher the index, the higher the level of labor market rigidities.

6 Followed by financial crises Figure.7. Consequences of Crisis: Real GDP Growth 1 (Annual percent change) Brazil Mexico Ecuador t-1 t t+1 Source: Kochhar and others (3). 1 The year t refers to the onset of crises which were as follows: Mexico (1995), Brazil (1999), and Ecuador (1999)

7 Different choices of stabilization plans had different endings... Exchange rate-based Inflation-based Argentina Brazil Mexico Uruguay Chile Colombia Peru => financial crisis finale => no crisis

8 Cyclical boom under ERBS Percent L atin A m erica: A verage R eal G D P G row th D uring E xchange -R ate B ased Stabilization P lans Y ears before and after program introduction -

9 Led by private consumption Real Private Consumption Growth

10 With a deteriorating external balance Trade Balance/GDP

11 Different paths for REERs... Figure.. Latin America: Real Effective Exchange Rates 1 (Index=1 at start of stabilization) Exchange Rate-based Plans Inflation-based Plans 1 Uruguay Brazil Mexico Chile Peru Argentina Colombia 9 8 t+1 t+ Years 8 8 t+1 t+ Years 8 Source: IMF, International Financial Statistics; and staff estimates. 1 See text Table.1 for a discussion of stabilization periods.

12 Capital inflows... 5 Net Priv ate Capital Inflows /GDP

13 And rising external debt/exports S hort-term External Debt/Exports

14 Public debt ratios drifted up no feedback mechanism... (In percent of GD P) Mexico Argentina 6 5 Brazil Uruguay

15 Compounded by fiscal accounting problems... 6 Figure 3.8. Argentina: "Fiscal Skeletons" and Primary Balance (in percent of GDP) 6 75 Figure 3.9. Argentina: "Fiscal Skeletons" and Public Debt Paths (in percent of GDP) Debt, actual Debt, excluding "fiscal skeletons" Primary balance including recognition of "fiscal skeletons" Primary balance Size of "fiscal skeletons" Source: IMF staff estimates from authorities' data. Source: National authorities; and IMF staff estimates. 1 Simulated debt path excluding bond issuances for the recognition of "fiscal skeletons."

16 And undervaluation of foreigncurrency debt Argentina Uruguay Ecuador Pre-crisis REER appreciation FX debt/gdp

17 Where Was the Fund? Argentina Fiscal Balance, Actual vs.projected 1 (% GDP) Actual

18 Informal dollarization also created vulnerabilities... Gross reserves as a share of foreign currency deposits Figure 6.6. Reserve Coverage of Foreign Currency Deposits for Latin American Countries (Average ) Honduras Ecuador Costa Rica Paraguay Peru Argentina Nicaragua Bolivia Uruguay Foreign exchange deposits as a share of total deposits Source: National authorities; and IMF, International Financial Statistics

19 While trade integration remained weak... 5 Figure 7.3. International Comparison: Exports of Goods and Services (In percent of GDP) 5 35 Eastern Europe Africa Asia Latin America Source: IMF World Economic Outlook

20 Verdict on ERBS?...! Did bring inflation down quickly and durably.! Wasn t supported by other policies especially fiscal -- but the lack of support was endogenous. Who s to blame?! Choice of ERBS should be based on objective assessment of implementation of other policies.! But an early exit strategy would have helped minimize costs.

21 General lessons...! Take time to do reforms right! Debt has not played a useful role in these countries fiscal policy needs to be anchored by conservative debt limits! Fixed exchange rates don t discipline other policies! Don t count on markets to force ex ante discipline on policies either! Or on IFIs, for that matter!! Hope for the best, but plan for the worst

22 Lessons for the Fund...! Less forebearance of slippages...! Combined with a credible exit strategy from programs that are off track! Don t oversell our role, and avoid moral hazard! Clearer identification of responsibility for going ahead with or stopping a program! Feasibility of international system without an SDRM?

23 Lessons for Hong Kong?! Avoid balance sheet mismatches! No room for complacency! Don t count on the peg to discipline other policies

24 End of presentation