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Latin American Economic
Outlook 2009:
Fiscal Policy and Latin America’s Development
Organization of American States
Javier Santiso
Director and Chief Economist
OECD Development Centre
Washington - 24 March 2009
The Development Centre: Bridging OECD and
Emerging Economies
OECD members
Non-OECD members
Future Members
2009 - 23 members
2009 - 11 members
2009 - 4 members
Chile
Israel
Morocco
South
Africa
India
Thailand
Egypt
Brazil
Costa Rica
Romania
Peru
Vietnam
Mauritius
Colombia
Indonesia
OECD Development Centre
The Development Centre: Renewed Impact
• Stronger links with the private sector cemented by an Emerging Markets Network (EmNet)
• Deepened relations with international organisations, think tanks and academia
• Institutionalisation of contacts with officials and decision makers
OECD Development Centre
The OECD and Latin America
An emerging commitment
•
•
Increasing importance of Latin American market democracies for the OECD
The Latin American dimension at the OECD:
- Mexico: Member since 1994; Chile: candidate since May 2007; Brazil: enhanced
engagement, May 2007
•
•
The Development Centre: A bridge between OECD countries and emerging
economies
The Latin American dimension at the OECD Development Centre:
- Four Latin American members of the Centre’s Governing Board: Brazil, Chile,
Colombia and Mexico
- Consolidation of Latin America and Caribbean Desk
OECD Development Centre
Fiscal Policy for Development
Latin American Economic Outlook 2009
Using the potential of fiscal policy as a development
tool...
...to boost economic growth, combat poverty and
inequality, and set a cornerstone for democratic
consolidation
Latin American Economic
Outlook 2009: Fiscal Policy
and Latin America’s
Development
OECD Development Centre
The financial crisis: Should Latin America be worried?
Historically speaking, yes: when the U.S. sneezes, Latin America catches a flu.
Effect of US Recessions on Latin American growth
(Median for Region)
2%
United States
Latin America
1%
0%
Export Exposure to the US
(change in average output gap during recessions)
0
-0,5
-1
-1%
-1,5
-2%
-3%
-2
-4%
-2,5
-5%
-3
-6%
Least exposed
Most exposed
Least exposed
Most exposed
-7%
1974-75
So urce: IM F , 2007
1980
1982
1991
2001
All
Recessions
Industrial Countries
So urce: Lane and M ilesi-Ferreti, 2006
OECD Development Centre
Emerging Markets
Initial impact has been limited...
...thanks to credible economic policies and high internal demand
GDP (% annual growth)
Advanced countries
Output gap (%)
Advanced countries
Latin America
Emerging countries
Latin America
7
5
6
5
4
3
4
2
3
1
2
0
-1
1
-2
0
-1
-3
-4
-2
-5
2000
2001
2002
2003
2004
2005
2006
2007
Source: OECD Development Centre, based on IMF (WEO October 2008)
2008
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: OECD Development Centre, based on IMF (WEO October 2008)
OECD Development Centre
The financial crisis: Should Latin America be worried?
Things could be different today: current accounts are largely positive
Current Account Balance (% GDP)
Source: OECD Development Centre, based on Thompson DataStream and EUI, 2008.
OECD Development Centre
The financial crisis: Should Latin America be worried?
Current account : Trade and remittances on the spot
Latin American Exports (by destination)
Remittances (%, annual growth)
100%
El Salvador
Guatemala
Mexico
Latin America
25
90%
80%
20
70%
15
60%
50%
10
40%
65%
30%
5
20%
0
10%
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1990
1991
1989
1988
0%
CSource:
hinaOECD Development
E U Centre US
es2008
t of the W orld
basedAon WITS R
data,
-5
2004
2005
2006
2007
Source: OECD Development Centre based on World Bank, November 2008
Source: OECD Development Centre based on WITS 2008.
OECD Development Centre
2008
1. The financial crisis: Should Latin America be worried?
Things could be different today: Credible fiscal policies have reduced fiscal deficits
Primary Fiscal Balance (% GDP)
Source: OECD Development Centre, based on ECLAC ILPES database
OECD Development Centre
1. The financial crisis: Should Latin America be worried?
Things could be different today: Perceptions of sovereign bonds are improving
Sovereign-bond Spreads vs. Global Risk Aversion
Source: OECD Development Centre calculations based on Datastream database
OECD Development Centre
The impact is worsening...
Room for monetary stimulus in some Latin American countries?
Industrial production (% annual growth; moving average)
Brazil
Chile
United States
Mexico
10
Inflation (% y-o-y)
Brazil
Chile
Mexico
10
9
8
5
7
6
0
5
-5
4
3
-10
2
-15
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Source: OECD Development Centre, based on Thomson Datastream, 2009
1
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Source: OECD Development Centre, based on Thomson Datastream, 2009
OECD Development Centre
GDP growth forecasts are on the downside
Slowdown is not necessarily recession
GDP forecasts for 2009 in Latam (% annual growth)
GDP forecasts for 2009 and 2010 (% annual growth)
September 08
October 08
November 08
January 09
5
5
4
3
4
2
3
1
na
0
-1
2
1
-2
Latin
America
North
America
Western
Europe
Asia/Pacific
Eastern
Europe
0
-1
2009
2010
Source: OECD Development Centre, based on Consensus Forecasts,
2009
A rgentina
M exico
Venezuela
Chile
Co lo mbia
B razil
Source: OECD Development Centre, based on Consensus
Forecasts, 2009
OECD Development Centre
Latam
In this macro context, the next step is to use…
… fiscal policy as a development tool
• Latin America has not neglected fiscal policy
• But macroeconomic stabilisation is not the sole objective of
fiscal policy:
-
Fiscal systems provide resources to tackle poverty and inequality
-
Publicly-provided goods and services of a reasonable quantity and
quality (expenditure side) financed on the basis of transparent and
progressive tax systems (revenue side) can repair the social contract
(fiscal legitimacy)
OECD Development Centre
Fiscal policy does little to reduce inequality in Latin America
Gini coefficients of income inequality, before and after taxes and transfers
Inequality before taxes and transfers
Inequality after taxes and transfers
60
While taxes and transfers reduce
the inequality by 19 Gini points
in Europe, the difference is less
than two Gini points in Latin
America
50
40
30
20
10
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Poland
Portugal
Spain
Sweden
United Kingdom
0
Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.
OECD Development Centre
Political context: democratic consolidation…
Democratic Consolidation in Latin America: Experts’ and Citizens’ Views
Democratic performance is
improving – by fits and
starts – throughout the
region, according to
political scientists and Latin
American citizens alike.
Sources: BTI Index (2008) and Latinobarómetro (2007).
OECD Development Centre
Improved Public Debt Management
External debt is falling and countries can increasingly borrow abroad in local currency
External Public Bonds in Latin America
External Public Bonds over GNP
“Original Sin Index”
External Public Bonds over Exports (right axis)
25
80
70
20
60
1,0
0,8
0,6
15
10
5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
50
0,4
40
0,2
30
0,0
2002
2003
Brazil
Source: OECD Development Centre calculations based on World
Bank, Global Development Finance database (2008).
2004
Colombia
2005
Peru
2006
2007 - June
2008
Uruguay
Source: OECD Development Centre calculations based on World Bank, Global Development
Finance database (2008).
OECD Development Centre
Capital Markets, Democracy and the Cost of Debt
The paradox of democracy and debt
Real Exchange Rates around Elections
Correlation Between Exchange Rate and
Sovereign-bond Spreads During Elections
Source: Nieto Parra and Santiso (2008), based on Datastream.
OECD Development Centre
Capital Markets, Democracy and the Cost of Debt
Are Capital-market Jitters around Elections Justified?
The market’s fears have some justification: elections are indeed associated with fiscal volatility
Impact of Elections on Fiscal Policy, 1990-2006 (% of GDP)
P rim ary balanc e
P rim ary ex penditure
0,1
0,8
0,0
0,7
-0,1
0,6
-0,2
0,5
-0,3
0,4
-0,4
0,3
-0,5
0,2
-0,6
0,1
-0,7
0,0
-0,8
OECD
Latin A merica
-0,1
OECD
Latin A merica
Note: The impact of elections on fiscal policy is calculated as the difference between the fiscal variable (as percentage of GDP) during the election year and non-election years.
Source: Nieto Parra and Santiso (2008b, forthcoming)
OECD Development Centre
Capital Markets, Democracy and the Cost of Debt
The paradox of democracy and debt: are conditions improving?
Bank recommendations are downgraded prior to elections, but tend to move positively again once
the uncertainty has passed
Investment-Bank recommendations
around elections
Brazil 2002 and 2006:
From Lula Preta to Lula de Mel
Source: Nieto Parra and Santiso (2008), based on Datastream database.
OECD Development Centre
Taxes and expenditures in Latin America
Public revenue generation and Inequality in Latin America
• Why do fiscal systems do so little?
- Lower levels of fiscal resources
- Lower use of personal income taxes (27 % of total tax revenue in OECD, 4% in LA)
- Greater dependence upon regressive indirect taxes
• This is explained by lower average incomes (small base for income
taxation) and unequal income distribution: Only one out of three
Latin Americans is subject to income taxation
• Eliminating tax evasion completely would do little to close the tax
collection gap, it might even create a net fiscal loss.
OECD Development Centre
OECD-Latin American tax gap: lower levels, different sources
Tax (and non-tax) revenues in Latin America and OECD countries
OECD
% of total revenues
Latin America
Latin America
% of total revenues
OECD
OECD America-Pacific
14
11.3
14.8
20.6
28.2
37.0
26.0
40.3
17.7
(% of GDP, 2005)
12
10
8
6
4
2
0
Nontax revenuec
Direct taxes
Indirect taxes
SSC
Other/unclassified
Nontax revenuec
Direct taxes
Indirect taxes
SSC
Other/unclassified
Source: OECD Development Centre 2008, based on the ECLAC ILPES Public Finance
database, OECD Development Centre Latin American Revenue Statistics Database, the
OECD Revenue Statistics database and OECD General Government Accounts data
Taxes on goods and
services
Social security
contributions
Taxes on payroll and
workforce
Notes:
a) Where possible, coverage corresponds to general government, otherwise the statistics are restricted to
central government.
b) The Latin American countries covered are Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador,
Guatemala, Mexico, Peru and Venezuela.
c) OECD America-Pacific comprises Australia, Canada, Japan, Korea, Mexico, New Zealand and United
States.
OECD Development Centre
Informality and the fiscal system
Living with duality
• Informality is an important indicator of a weak or broken social contract,
and has important consequences for the fiscal system
• Opting out versus forced out?
• Europe: informality largely a matter of tax evasion; Latin America: much
more complex
• Policy response:
- Special “add-ons” for taxes and social protection for informal sector…
…or simplified universal rules for all workers and firms?
OECD Development Centre
Informality and the fiscal system
Labour informality in Latin America
Productive definition (% of workers)
Legalistic definition ( % of employees)
80
70
60
50
More than half of Latin
American workers are not
entitled to pension rights
through their jobs
40
30
20
10
Chile
Costa Rica
Argentina
Uruguay
Panama
Venezuela
Mexico
Dominican
Republic
Brazil
El Salvador
Ecuador
Nicaragua
Peru
Guatemala
Paraguay
Bolivia
0
Nota: Informal employment, as defined in Gasparini and Tornarolli (2007) and Perry et al. (2007), includes unskilled self-employed
workers, workers in firms of less than five workers and unpaid workers.
Source: Gasparini and Tornarolli (2007), Perry et al. (2007) and CEDLAS, Socio-Economic Database for Latin America and the Caribbean.
OECD Development Centre
Quantity – and quality – of public spending
Improving the quality of public spending: The case of education
• Social spending –in particular, health and education – can play an
enormous role in equalising opportunities.
• Spending on education as a share of total public expenditure has been
growing in Latin America (now stands at around 4%, similar to OECD
level), but still there is room for improvement
• Latin America’s PISA results give cause for concern:
- OECD-Latin America testing gap equivalent to 3 years worth of schooling – twice the
gap for other emerging countries
• More money is needed, but how that money is spent matters as much
or more.
OECD Development Centre
Quantity – and quality – of public spending
Public spending on education and performance in PISA
600
Finland
Average performance
Macao-China
Korea
500
Lithuania
Uruguay
Spain
Portugal
Chile
Brazil
Mexico
400
Argentina
Colombia
300
0
5,000
10,000
15,000
20,000
25,000
Education spending per
pupil is still five times
lower in Latin America
than in OECD countries...
But quality is as big a
problem as quantity
Public spending per pupil in primary and secondary education in equivalent USD
Notes:
a) Public spending is calculated as average of available data since 2000.
b) Countries performance average on the PISA science scale
Source: OECD Development Centre 2008 based on PISA 2006 Science Competences for Tomorrow’s World and OECD and UNESCO World Educational
Indicators, UNESCO's Institute of Statistics database.
OECD Development Centre
Latin American Economic
Outlook 2009:
Fiscal Policy and Latin America’s Development
Organization of American States
Javier Santiso
Director and Chief Economist
OECD Development Centre
Washington - 24 March 2009