Globalisation, development financing and Chindia in Latin America Latin American Economic Outlook 28 Javier Santiso Director & Chief Development Economist OECD Development Centre Bern, 11th March 28 Swiss Agency for Development Cooperation
The OECD and Latin America: An emerging commitment Latin American market democracies matter for the OECD and its member countries The Latin American dimension at the OECD: Mexico: Member since 1994; Chile: candidate since May 27; Brazil: enhanced cooperation, May 27 Economic Surveys: 1992, 1995, 1997, 1998, 1999 2, 22, 23, 25, 27 23, 25, 27 2, 25, 26 Latin American Economic Outlook 28
The Development Centre: A bridge between the OECD and emerging regions Membership of the Development Centre With a Governing Board open to OECD non-member countries, the Development Centre provides a framework for dialogue and experience sharing with emerging regions all over the world. Three Latin American countries are members of the Centre: Mexico Chile Brazil
Latin American Economic Outlook: The key tools Informal Advisory Board: Scholars and policy makers from Latin America and OECD countries enrich the analytical work of the project. Research and Publications: The Development Centre collaborates with OECD experts, international organisations and various Latin American think-tanks. Dialogue Forum: Key government officials from OECD and Latin American countries share experiences about the design and implementation of public policies.
I Fiscal Policy and Legitimacy II Pensions, Capital Markets and Corporate Governance III China, India and the Challenge of Specialisation
GDP per capita by quintile GDP per capita by quintile Economic growth is slower than in other regions and it has left out the poor 25 25 2 Sub-Saharan Africa 15 1994 22 growth 1 5 7 6 5 4 3 2 1 Quintile annual growth in GDP per capita GDP per capita by quintile 2 Latin America 15 1 1993 23 change 5 7 6 5 4 3 2 1-1 Quintile annual growth in GDP per capita Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 8 OECD* 25 Developing Asia 6 2 199 2 growth 4 15 1 2 1992 22 change 5 7 6 5 4 3 2 1 Quintile annual growth in GDP per capita GDP per capita by quintile 7 6 5 4 3 2 1 Quintile annual growth in GDP per capita Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Source: OECD Development Centre, 27. Based on IMF, Globalization and Inequality, 27. OECD* includes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain, Sweden, UK, US.
Improvements in inequality are slight or non existent Gini coefficient (early 25 or closest year) 65% Changes in inequality during the last decade deteriorations 6% 55% Paraguay Ecuador Argentina 5% Venezuela 45% Costa Rica Uruguay 4% Bolivia Brazil Honduras Dominican, R. Colombia Nicaragua Panama Chile Guatemala Mexico Peru El Salvador improvements 4% 45% 5% 55% 6% 65% Gini coefficient (early 199s) Source: OECD Development Centre, 27. Based on CEPALSTAT y ECLAC s Panorama Social de América Latina 26.
Fiscal policy plays a very limited redistributive role, especially taxation Public spending is a key instrument for tackling inequality Inequality before and after taxes and transfers The effects of taxes and transfers Gini coefficient Points of Gini change (% change in inequality) Source: OECD Development Centre, 27. Based on data by Goñi, López, and Servén (26)
And also in many cases social spending is regressive Total spending (=1) and percentages 3 25 2 15 1 5 Social Security Health Education 16. 16.3 17.9 2.5 3.4 5. 2.7 7.5 29.1 16.8 5.2 5. 5.1 5.2 4.3 8.2 7.9 7.8 8. 8. Poorest quintile (q1) q2 q3 q4 Richest quintile (q5) Source: OECD Development Centre, 27. Based on ECLAC s Panorama Social. Source: OECD Development Centre, 27. Based on Latinobarómetro (23) and ECLAC s Panorama Social.
The result is very limited political capital to work with fiscal legitimacy is low % of citizens who trust tax revenue is well spent (23-5) Firms assessment of the neutrality/composition of government decisions/spending (23-26) Fairer/ Wiser Unfair/ Wasteful Source: OECD Development Centre, 27. Based on Latinobarómetro (23, 25) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 23-26.
There is no Latin curse: Quality of fiscal policy is not a matter of DNA Fiscal policy is more efficient in Europe (even in its Latin countries) in reducing inequalities and stimulating social cohesion Inequality before and after taxes and transfers Gini coefficient Source: OECD Development Centre, 27. Based on data by Goñi, López, and Servén (26).
Social cohesion is becoming an increasingly important issue in the region 35 Fiscal legitimacy (% trust taxes well spent) 3 25 2 15 1 5 Uruguay Venezuela El Salvador Dominican Republic Chile Honduras Argentina Nicaragua Colombia Paraguay Brazil Costa Rica Panama Mexico Guatemala Peru Ecuador Bolivia.4.45.5.55.6.65.7 Inequality (Gini coefficient 2s) Source: OECD Development Centre, 27. Based on Latinobarómetro (23, 25) and ECLAC s Panorama Social
Development financing: The importance of the link between fiscal policy, democratic governance and development Fiscal Legitimacy Democratic Governance Generation of tax revenue & effectiveness of public expenditure Economic Development Quality of fiscal policy
Fiscal policy can help democratic consolidation in Latin America It is not simply a technical matter 5 45 Costa Rica Uruguay Democratic performance (% satisfied with democracy) 4 35 3 25 2 15 1 Ecuador Mexico Peru Venezuela Nicaragua Argentina Bolivia Brazil Panama Colombia Guatemala Paraguay El Salvador Honduras Chile 5 5 1 15 2 25 3 Fiscal legitimacy (% who trust taxes are well spent) Source: OECD Development Centre, 27. Based on Latinobarómetro (23).
Improving public spending is crucial (efficiency and progressivity) Improving the efficiency and equity of public spending is a crucial challenge for the region 6 Education Expenditures and Performance 55 Mathematics Score (PISA 23) 5 45 4 35 Indonesia Mexico Tunisia Brazil Slovak Republic Poland Thailand Uruguay Spain Norway United States 3-5, 1, 15, 2, 25, 3, Annual expenditure on educational institutions per student (21) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents Source: OECD Development Centre, 27. Based on PISA (23) and OECD Education at a Glance (25)
Traditional weaknesses of fiscal policies in Latin America Tax revenue is generally low and tax structures unbalanced Direct taxation is particularly low Tax base is narrow (some of the reasons are informality and tax exemptions) Excessive reliance on volatile revenues from natural resources Countries still rely heavily on transfers from the central government
Fiscal Reforms in Latin America Results of the 199s fiscal reforms have been mixed in part because many of the reforms were not fully implemented. Contrasting experiences of Brazil and Mexico suggest that rather than pursuing technical perfection, a wise approach to fiscal reform may involve focusing with perseverance on reforms that are feasible ( political economy of the possible)
Some recommendations Enhancing transparency and accountability in fiscal policy (role of independent third parties for auditing and evaluation Local think tanks) Better, fairer and more public spending Broadening tax base and making tax systems fairer and more balanced (elimination of special exemptions in direct and indirect taxes, increasing direct taxation) Decentralisation reinforcing the capacity, authority and accountability of sub-national government bodies, especially through their greater use of direct taxation to finance expenditure
I Fiscal Policy and Legitimacy II Pensions, Capital Markets and Corporate Governance III China, India and the Challenge of Specialisation
Pension Reform in Latin American Countries Latin America is at the forefront of pension reform. Chile launched the process in 1981 and many countries in Latin America and Eastern and Central Europe have found inspiration in the Chilean experience. More efforts are needed in refining the mechanisms in various countries to improve: 1) commercial practices 2) competence and administration of pension funds 3) investment regulations and 4) the contributions paid by members. Improving the social dimension of pension reform is also necessary to: 1) extend coverage 2) ensure timely payment of contributions 3) enhance efficiency of management of funds and 4) reduce costs to members.
Pension reform has had a mixed impact on national savings Argentina Chile Colombia Mexico Peru 32 Chile Saving / GDP (%) 28 24 2 16 Colombia Argentina Peru Mexico Colombia Argentina Mexico Peru 12 Chile 8-2 -1 1 2 3 4 5 6 7 8 Years since start of Reform Source: OECD Development Centre (27), based on World Bank Development Indicators.
But they have become a force for the development and deepening of financial markets Pension Fund Assets as percentage of GDP, 26 % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Chile Brazil Colombia Peru Argentina Mexico Hungary Czech Rep. Estonia Latvia United States UK Canada Japon Spain France Latin America Other Emerging Economies Advanced Economies Source: OECD Development Centre (27), based on Global Pension Statistics database.
Impact on capital markets On financial securities markets On the creation of new instruments Increasing the size and the depth of the local stock market Modernisation of trading systems in stock exchanges Reducing volatility of transactions Reducing costs faced by enterprises Creating greater competition between the institutional investors in the market Improving the allocation of financial resources On the development of the life insurance industry
The importance of strengthening the Governance of Pension Funds The quality of the governance of the pension funds is critically important not only for the own financial performance and the benefits they provide to their members, but also for the considerable indirect impact on the quality of corporate governance of the enterprises in which pension funds invest. Governance of Pension Funds Corporate Governance
I Fiscal Policy and Legitimacy II Pensions, Capital Markets and Corporate Governance III China, India and the Challenge of Specialisation
Emerging economies are increasingly present on the global scene When the OECD was founded, its member countries accounted for 75% of world GDP, today they represent 55% of world GDP Source: OECD Development Centre, based on Maddison (23) The World Economy Historical Statistics
China and India could be angels rather than demons for Latin America s commercial development % of exports 7 6 5 4 3 2 1 Asian countries competition * vs. Chinese exports to US, %, 25 % of exports 6% 5% 4% 3% 2% 1% % Latin American countries competition* vs. Chinese main export products, 25 Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: OECD Development Centre, 26 Based on Working Paper by Blázquez, Rodríguez and Santiso, 26
The Asian boom has had a strong impact on the trade balance of several Latin American countries China s and India s rising demand for Latin American commodities (1998-25) Increasing commodities prices (19-25) $ millions 1 2 1 8 6 4 2 Agricultural Raw Materials Food Ores & Metals 1998 21 23 25 Price index (197=1) 2 16 12 8 4 Aluminium Copper Coffee Petroleum 19 191 192 193 194 195 196 197 198 199 2 Rise in Indian imports from Latin America (1997-25) Rise in mineral exports from Latin America (1998-25) $ millions 1 8 6 4 Sugar/mollasses/honey Copper ores/concentrates Fixed veg oil/fat, soft $ millions. 12 1 8 6 4 Petroleum and products (left) Copper ores/concentrates (right) Nickel ores/concs/etc (right) 1 8 6 4 $ millions. 2 2 2 1997 1998 1999 2 21 22 23 24 25 1998 1999 2 21 22 23 24 25 Source: OECD Development Centre, based on WITS Database, 27.
The rise of China and India also represents a wake-up call: The challenges of specialisation Latin America risks to fall on an excessive raw-material specialisation Source: OECD Development Centre, 27. Based on WITS and Comtrade data.
Trade complementarities with China remain unexplored today Trade Opportunities with China for selected countries (2-5).8.7.6.5.4.3.2.1. United States Korea, Rep. Malaysia Singapore Thailand Japan Mexico Philippines Indonesia China Hungary Czech Republic Russian Federation Argentina Brazil Colombia Spain Poland Venezuela Slovak Republic Romania Bulgaria Croatia El Salvador India Turkey Costa Rica Guatemala Chile Peru Uruguay Bolivia Pakistan Panama Honduras Paraguay Low compet. High compet. Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 27.
Major economies in the region have a lot to win from increasing trade with Indian partners Trade Opportunities with India for selected countries (2-5).8.7.6.5.4.3.2.1. Low compet. High compet. Colombia Venezuela Russian Federation Indonesia Argentina Mexico Malaysia United States Peru China Korea, Rep. Thailand Guatemala Singapore Japan Spain Brazil Czech Republic Bolivia Poland Bulgaria Hungary Croatia Slovak Republic Romania Philippines Turkey Costa Rica Chile Uruguay El Salvador Honduras Pakistan Panama Paraguay Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India). Source: OECD Development Centre, based on WITS Database, 27.
Beyond commodities: Trade potential to export to China and India There are also substantial opportunities for intra-industry trade: Mexico: telecommunications equipment and electric circuit equipment Brazil: aircraft, telecommunications equipment and motor-vehicle parts Colombia: manufacturing sectors Argentina: Processed food Agriculture and agri-business are probably among the most promising areas for Latin America in terms of trade potential with India and China
Exploiting comparative advantages: The proximity to export markets Mexico benefits from its geographic proximity to its major export markets 24 Days 4 Days 11,7 Km 16 Km Shipping time Mexico is more competitive in manufacturing more sophisticated products which require short delivery times
Infrastructure is a serious drawback for Latin America s trade development 4 35 3 25 2 15 1 5 Time for exports Cost of exports 2 16 12 8 4 Colombia Venezuela India Peru Average LAC Chile China Brazil Mexico Argentina Colombia Argentina Average LAC Mexico Brazil India Peru Venezuela Chile Days $ per container China Regional performance in the infrastructure pillar 7 6 5 4 3 2 1 Infrastructure Indicator Latin America and C. India China Eastern Europe East Asian NIC's Source: Doing Business Report. World Bank, 27.
Ways to deal with Dutch disease and other challenges Introducing new mechanisms to prevent appreciation (stabilisation funds, counter cyclical fiscal rules, issuing of debt) Diversification Innovation Involving the private sector in R&D Infrastructure
Latin American Economic Outlook 29 and more Fiscal Policy and development. Migration and development. Innovation and development.
Latin American Economic Outlook 28 www.oecd.org/dev/leo Thank you Merci Obrigado Gracias