Download Latin America Overview and Key Issues

NS4540
Winter Term 2017
Overview: Latin America in the
World Economy
Gross Domestic Product (GDP) I
• Latin America Economic Profile – Economic Size
• Economic size measured by Gross Domestic Product
(GDP)
• It is the output of all final goods and services
• Nominal GDP is GDP in current prices
• Real GDP is GDP that has been adjusted for changes in
the price level
• World Bank divides economies into three types:
• Low
• Middle and
• High income economies
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Latin America: GDP, Population
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Gross Domestic Product (GDP) II
• Output of Latin America about 8% of the world total
• GDP highly concentrated with large variance
• GDP of Brazil and Mexico over $trillion
• Substantial drop to over $300 billion for Argentina and
Venezuela
• Only three other countries in region have a GDP over $100
billion, Chile, Colombia, and Peru
• Latin America’s relatively small place in the world
economy result of decades of growth slow by
international standards
• In 1960 Latin America comprised 5.9% world economy
• In 2013 Latin America was up to 8.0%
• Means region grew only slightly faster than the world
economy overall
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GDP Per Capita I
• GDP per capita in Latin America
• Approximately $10,008
• Good news -- most of the region is middle income by
global standards and is at the upper level of world middle
class
• Bad news – far from levels in North America or high
income countries in general
• Eight of the 17 countries in the region have GDP per
capita in the vicinity of $10,000 or more
• For the rest the range is from a low of $1,851 to $7,831
• In these countries, a large percentage of the population
struggling to maintain basics of life
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Human Development Index (HDI) I
• Given slow rates of GDP growth and relatively high
population rates of growth during latter part of 20th
century, GDP per capita has not been particularly fast
• Fast enough to put much of Latin America in to global middle
class but
• Not fast enough to bring many residents a more comfortable
standard of living
• Human Development Index (HDI)
• Have been assuming that human welfare highly
correlated with GDP per capita
• For most part the case
• However a number of factors could cause a divergence
between welfare and GDP per capita
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Human Development Index (HDI) II
• The UNDP Human Development Index attempts to correct
for this
• Index has three components with equal weight
• GDP per capita
• Life expectancy at birth – longer life is associated with human
welfare
• Education – adult literacy makes up a third of this component.
The other two-thirds are the ratio of students enrolled in primary,
second and tertiary schools as a percentage of school-age
population
• Resulting index number varies from 0 to 1
• Highest score Norway at 0.944, lowest Niger at 0.337
• Regional average for Latin America is 0.74
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Human Development Index (HDI) III
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Human Development Index (HDI) IV
• For Latin America the index ranges from 0.614 for
Nicaragua to 0.833 for Chile
• All the countries in the region fall into the high to medium
categories for the index
• Latin America performs better on this index than for GDP
per capita
• In no country is life expectancy less than 70 years and
adult literacy rates are high.
• Still a gap between much of Latin America and the high
income countries
• These differences driven primarily by differences in GDP
per capita and the gross enrollment ratio
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Legatum Prosperity Index I
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Legatum Prosperity Index II
__________________________________________________________________________________________
Country
Ranking
High
Low
__________________________________________________________________________________________
Canada
5
Personal Freedom
Safety and Security
United States
17
Business Enviuronment
Safety and Security
Uruguay
28
Personal Freedom
Education
Costa Rica
29
Personal Freedom
Safety and Security
Chile
31
Natural Environment
Social Capital
Panama
39
Business Environment
Safety and Security
Argentina
49
Personal Freedom
Business Environment
Brazil
52
Natural Environment
Business Environment
Ecuador
59
Natural Environment
Business Environment
Dominican Republic
63
Natural Environment
Safety and Security
Peru
64
Natural Environment
Safety and Security
Mexico
65
Business Environment
Safety and Security
Nicaragua
69
Natural Environment
Safety and Security
Colombia
72
Business Environment
Safety and Security
Paraguay
73
Personal Freedom
Governance
Bolivia
79
Personal Freedom
Business Environment
El Salvador
83
Business Environment
Safety and Security
Guatemala
86
Social Capital
Safety and Security
Honduras
92
Business Environment
Safety and Security
Venezuela
121
Natural Environment
Governance
___________________________________________________________________________________________
Legatum Prosperity Index 2016
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Legatum Prosperity Index III
• Latin America has made great progress over the last
decade
• literacy rates higher than 90%, improved democracy
levels, large reductions in absolute poverty, and efforts
to reduce inequality through ambitious social programs
• Biggest gains in Legatum Prosperity Index since 2007:
• Health and
• Personal Freedom
• Fear is that the windfall from the commodities boom will
be lost now that
• The commodities boom has subsided and
• Demand from China is disappearing
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Legatum Prosperity Index IV
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Legatum Prosperity Index V
• Prosperity surplus
• Amount of prosperity delivered relative to wealth levels
• Has been small but relatively stable in Latin America
• Biggest gains – Costa Rica, Uruguay, Nicaragua and Chile
• Biggest deficits – Colombia, Mexico, Peru, and Venezuela
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Legatum Prosperity Index VI
• Venezuela is Latin America’s biggest disappointment
• Current oil crisis is a symbol of the Dutch Disease
• There is little hope for increased prosperity
• The economic quality sub-index has collapsed by 36 ranks
• Standards of living have plummeted by 56% and
• With 57-rank decline Social Capital is at an all time low
• Gains made in the past decade have pretty much evaporated
• Despite a few bright spots Latin America overall is
delivering far less prosperity to its citizens than countries
in Asia
• GDP growth has almost completely collapsed since 2010
• Followed by deterioration in the region’s Health, Environment,
and Governance components
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Legatum Prosperity Index VII
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Legatum Prosperity Index VIII
•
Why is Latin America particularly prone to an erosion of
prosperity when growth slows?
• Latin American growth is built on a weak foundation – primary
commodity exports
• A boom temporarily drive growth but
• Does not automatically establish the structural foundations
needed for longer-term development
• When bust comes they don’t have the Business Environment,
Education, and Economic Quality needed to provide an
alternative source of success
• Prosperity evaporates
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Legatum Prosperity Index IX
• In order to achieve greater resilience, more investment in
the workforce is essential
• Despite improvements in the Education sub-index, secondary
education per worker is only 2.7 years
• Tertiary education is still too underdeveloped
• Declining Safety & Security scores are caused by
extremely high levels of internal violence
• Driven by organized crime, drug trafficking and gangs
• These are undermining human development and the growth of
prosperity
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Legatum Prosperity Index X
• New model for Brazil
• For years, Brazil relied on the commodities boom to reduce
poverty and to transform into one of the world’s largest
economies
• Now facing the dire consequences of that complacency
• Still has the greatest potential for diversification of any Latin
American country.
• Since impeachment and removal from office of President
Dilma Rousseff in 2016 question is what model should
the country adopt to rescue the economy that has
declined steadily over the last few years
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Legatum Prosperity Index XI
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Legatum Prosperity Index XII
• Brazil indicative of wider trend
• Since commodity boom ended, left-leaning governments in the
region have lost credibility and have been ousted in Brazil,
Argentina, and Peru.
• The hard-left government in Venezuela faces considerable
opposition as the economy collapses
• Results of these political developments still unclear
• However if Latin America wants to make strides forwards,
it will have to drastically improve its worst-performing
sub-index, Governance
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Legatum Prosperity Index XIII
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Legatum Prosperity Index XIV
• Is Latin America at a turning point?
• Still great untapped potential
• Region needs to take far firmer measures to hold on to
the gains in prosperity
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Trade Patterns I
• Latin America and International Trade
• International trade has always been an important part of
economies of Latin America
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Trade Patterns II
• Latin America’s exports are 5.3% of world exports and
5.5% of imports below share of global GDP
• In 2014 Latin America as a whole exported slightly more
than it imported
• A small trade surplus was offset by a deficit in services
• Pattern fairly normal for middle income countries a whole
• However the importance of trade to Latin America
different picture
• Degree to which country is open to international trade is exports
plus imports divided by GDP
• Ratio for Latin America is 0.43
• Global average much higher at 0.61 and is very similar to the
average for high and middle income countries
• Normally the more open an economy is to international
trade the faster its rate of economic growth
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Capital Flows I
• Capital Flows and Latin America
• Mirror image of trade in goods and services has to be
matched in some way by capital flows
• In Latin America capital flows critically important
• Since the first part of the nineteenth century capital flows
to Latin America have been both a blessing and curse
• Latin American history marked with periods of rapid
inflows of foreign capital coupled with sometimes
disastrous outflows
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Capital Flows II
• Capital flows, various types
• With globalized financial markets an important capital
flow is portfolio capital
• Crosses borders to buy financial assets such as stocks and
bonds
• Critical because often financial markets in Latin America are
small
• However small markets often have great volatility
• Large outflows can be devastating to equity prices in
local markets as well as exchange rates
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Capital Flows III
• Another important form of capital flow is foreign direct
investment (FDI)
• FDI is the purchase of real assets such as production facilities in
a foreign country
• Adding to domestic investment critical part of the process of
economic development.
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Capital Flows IV
• In 2013 Latin America’s percentage of world FDI was
12.4% or double its percentage of world output
• Since the 1990s Latin America’s inflows have been
increasing relative to the historical norm for the region
• These inflows are critical as a means of increasing
economic growth
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Natural Resources I
• Latin America and World Resources
• From the start of the colonial period in 1492 much of the
interest in Latin America has stemmed from the plentiful
supply of resources
• Still very important today – oil, copper, tin, and lithium
• For crops –sugar, coffee, bananas, soybeans, wheat and beef
• Problem – commodities both a blessing and a curse
• Production of commodities may earn large amounts of money
combined with low production costs
• If used wisely windfall can be used to develop country as a
whole faster than would otherwise be the case
• Might also allow the development of down-stream industries
based on the use of these commodities
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Natural Resources II
• Downside of commodities less obvious
• Must ask of the countries of the world that produce large
amounts of primary commodities, how many have used windfall
to become high income countries?
• New Zealand and Australia are almost the exceptions that prove
the rule
• Unfortunately Latin America has failed to turn commodities into
higher GDP growth
• Commodities and economic development are one of the
themes throughout the course
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Latin America World Economy Summary I
• Two conflicting issues for Latin America
• Latin America an important part of the world, large geographic
area and population.
• On other hand frequently sense of something missing or
something wrong
• Latin America is not what it could have been
• Economic growth has been low relative to other parts of the
world at a similar stage of development
• Common place comparison is economic growth of Latin America
with that in East Asia
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Latin America World Economy Summary I
• In second half of the twentieth century many countries in
East Asia transformed themselves from low-income
countries to middle income countries and in some cases
high income countries
• These “growth miracles” outside of Chile, not found in Latin
America
• Latin America’s GDP has doubled over the last 50 years
• However if we compare with what it might have been if it
had been similar to Chile or Indonesia, a very different
picture
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Latin America: Actual vs Potential
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Latin America World Economy Summary II
• What has caused economic growth in Latin America to be
relatively slow?
• Puzzling problem because of the region’s resources
• No simple answer. In general terms a mixture of
• The history of the region
• Its natural endowments, and
• Poor economic policy
• These have tended to lower the economic growth in the
region
• A number of recurring themes in Latin American
economics that form the standard list of issues that help
to understand the relative underperformance of the
region.
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Recurring Themes I
Main themes in Latin American economic development
• Growth – The most serious problem of modern Latin
America has been that economic growth has been slow
relative to much of the rest of the world
• Especially the case in the last several years
• Commodities – Many countries in Latin America are
major producers and exporters of commodities, and this
has had a substantial influence on the economic
development of the region.
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Recurring Themes II
• Import substitution industrialization (ISI) -- in in the
second half of the twentieth century, many countries in
Latin America attempted to create industries designed to
replace imports from developed countries.
• ISI has had very important implications for economic
development in the region
• Trade Policy – From the 1930s Latin America has pursued
trade policies that tended to make the markets of the
region relatively closed to foreign competition
• This overall policy had a tendency to make Latin America less
integrated into the world economy
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Recurring Themes III
• Exchange rate policy – Countries have a choice between
managing their exchange rate and allowing it to float.
• In Latin America these choices at times have had serious
implications in terms of economic growth
• Debt – A recurring theme in Latin American economic
history has been the tendency for governments in the
region to borrow heavily from banks and other financial
institutions
• Several debt crisis have ensued involving the International
Monetary Fund (IMF)
• Macroeconomic instability – On average GDP growth,
inflation, and unemployment have been somewhat
unstable in many countries in Latin America
• This instability has been so pervasive that for many it is one of
the defining characteristics of the region
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Recurring Themes IV
• Poverty and Inequality – GDP per capita in Latin America
is low relative to the high income countries.
• In addition Latin America has had one of the most unequal
distributions of income in the world.
• This list is not exhaustive however it does cover
much of what makes Latin America distinctive in an
economic sense
• To a large extent the interplay of these themes helps
explain both the economic history of he region, and
its current place in the world economy.
• Should be noted, the majority of these themes are
related to government policy
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