shifting wealth, china and the latin american … seminario alc-china... · 0.8 0.9 argentina...

SHIFTING WEALTH,

CHINA AND THE LATIN AMERICAN CHALLENGE

An OECD Perspective

Rolando Avendano

OECD Development Centre

Universidad Autónoma de Mexico

Mexico City – May 29 2012

2

Outline

1 Shifting Wealth: continuing despite hurdles

2 China and Latin America: recent dynamics

3 Overcoming the middle income trap

4 After the diagnostic: public policies to overcome the challenge

4

New Geography of Growth: The Four-speed World in the 1990s

Source: OECD Development Centre, Perspectives on Global Development 2012

The disappointing reality

5

A New Geography of Growth: The Four-speed World in the 2000s

Goodbye divergence, hello convergence?

Source: OECD Development Centre, Perspectives on Global Development 2012

6

Global middle class consumption: catching up in the developing world

Note: Global middle class consumption is defined here as household consumption between USD 10 and USD 100 PPP/day. Projections hold most recent distribution

constant (from PovcalNet database) and assume consumption equals income growth (projected by a Cobb-Douglas production function, a model of RER convergence

based on the Balassa-Samuelson model, and UN population projections).

Source: OECD (2011) calculations based on Kharas (2010).

Global middle class consumption 2000-2050

(% of total)

7

China and the middle income trap: What comes next?

Note: Global middle class consumption is defined here as household consumption between USD 10 and USD 100 PPP/day. Projections hold most recent distribution

constant (from PovcalNet database) and assume consumption equals income growth (projected by a Cobb-Douglas production function, a model of RER convergence

based on the Balassa-Samuelson model, and UN population projections).

Source: OECD (2011) calculations based on Kharas (2010).

1995 1994 2000 1988 1995 19881986

1993 1993 19991994 1997 1989 1998

19911987

2004

20042007 2000

20041996 1997

19982005

2005

20042008

19942005 2001 1998

13

15

17

19

21

23

25

27

Ch

ine

se

Ta

ipe

i

Cyp

rus

Cze

ch

Re

pu

blic

Fin

lan

d

Gre

ec

e

Ho

ng

Ko

ng

, C

hin

a

Ice

lan

d

Ire

lan

d

Isra

el

Ko

rea

Ne

w Z

ea

lan

d

Po

rtu

ga

l

Sin

ga

po

re

Slo

ve

nia

Sp

ain

Sw

ed

en

GD

P/c

ap

_P

PP

, a

t c

urr

en

t in

tern

atio

na

l d

olla

rs, th

ou

sa

nd

s

Transitions from Middle-Income to Advanced-Country Levels

Start of transition period End of transition period

Ever growing trade surplus? Middle income trap

8

History matters: Chinese economy in the long run

0 100

1 000

10 000

100 000

1 000 000

10 000 000

100 000 000

170

0

173

0

176

0

179

0

182

0

185

0

188

0

191

0

194

0

197

0

200

0

203

0

Comparative Levels of GDP, China and the United States, 1700-2030

(million 1990 International dollars)

USA

China

Source: OECD (2010), and Maddison (2007).

Gross Value Added and Labour Productivity in

Agriculture, 1952-2003 (Index 1952=1)

Value

added

Labour

productivity

9

Myth: The main source of China’s competitive advantage is cheap labour

0

10

20

30

40

50

60

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Pe

rce

nt

of

GD

P

Investment in China

Investment in Fixed Assets

Gross fixed capital formation

0

10

20

30

40

50

60

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Pe

rce

nt

a ye

ar

Return to Capital before and after taxes

Base case

Excluding urban residential housing, including inventories, before taxes

Excluding urban residential housing, including inventories, after taxes

Fixed Capital Investments in China as % of GDP

and Return to Capital (1980-2006)

Source: Bai, Chong-En. C. Hsieh and Y. Qian. “The Return to Capital in China”. NBER Working Paper 12775. National Bureau of Economic Research. December 2006. Based on China Statistical Yearbook.

10

Shifting Wealth and World Development

Shifting wealth and world

development

• Analogy: Compare the world

economy with a high jump event in

track and field athletics. With the

sustained growth of large emerging

economies, the world economy has

been moving from Straddle to Fosbury

technique. World economy is more

complex, but it can jump higher – grow

faster – than before.

• What will be the consequences of

Fosbury for low and middle-income

developing countries, the feet in the

metaphor?

11

Herfindahl-Hirschman Index of concentration

by Product

Note: Herfindahl-Hirschman index estimated as the squared sum of market shares of exports of country i to country j on all 4-digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 2012.

Source: OECD Development Centre, based on Comtrade (2012).

The rise of China still poses the risk of overspecialisation for the region

12

Herfindahl-Hirschman Index of concentration

by destination

Note: Herfindahl-Hirschman index estimated as the squared sum of market shares of exports of country i to country j on all destinations, corrected by the number of country parrtners. Nomenclature SITC Revision 3, 2012.

Source: OECD Development Centre, based on Comtrade (2012).

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Argentina Brazil Chile Costa Rica Colombia Dominican Republic

Mexico Peru

Latin America and Caribbean

1990 1995 2000 2005 2010

0

0.05

0.1

0.15

0.2

0.25

China Indonesia India Korea Malaysia

East Asia

1990 1995 2000 2005 2010

Latam more resilient by diversifying its export destinations

13

Export competition with China is relatively low, with some exceptions

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Thaila

nd

Hungary

Kore

a, Rep.

Mexic

o

Mala

ysi

a

United S

tate

s

Cze

ch R

epublic

Sin

gapore

Rom

ania

Indonesi

a

Turk

ey

Pola

nd

Phili

ppin

es

Bulg

aria

Cro

atia

Japan

India

Slo

vak R

epublic

Spain

Cost

a R

ica

Pakis

tan

Bra

zil

El Salv

ador

Colo

mbia

Guate

mala

Arg

entina

Peru

Uru

guay

Hondura

s

Russian…

Panam

a

Chile

Boliv

ia

Venezu

ela

Para

guayL

ow

com

pet.

H

igh c

om

pet.

Export Competition with China for selected countries (2000-09)

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China).

Source: OECD Development Centre, based on WITS Database, 2012 .

14

What about competition in regional markets?

Trade Competition in South America (2000-08)

Note: CS and CC coefficients calculated with exports of country i and exports of country j to a specific region (in this case Latin America).

Source: OECD Development Centre, based on WITS Database, 2010.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Argentina Bolivia Chile Colombia Ecuador Peru Paraguay Uruguay Venezuela

Co

ef.

Sp

eci

aliz

atio

n (

(0-1

)

Brazil vs China Coef. of Specialization

15

Outline





16

Economic growth has been relatively strong since 2003

- 6.0

- 4.0

- 2.0

0.0

2.0

4.0

6.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

LAC OECD

Source: Own calculations based on ECLAC (2011) and OECD (2011), forecast as of November 2011.

• No decoupling

LATAM is still high beta. Correlation with OECD

growth: 0.79

• But higher alpha?

Since 2004 LAC has grown 2.6 pps per annum

more than the OECD

Annual real GDP growth by region (in percent)

17

Fast recovery in LATAM with no impact so far on potential growth

Source: Own calculations based on ECLAC, OECD and World Bank data.

• Impact was strong

Peak to through: 4.6 pps in LATAM versus

5.3 in OECD

• But swift recovery in LATAM

GDP reached pre-crisis GDP:

- 6 quarters after peak in LATAM

- In the OECD it took 15 quarters.

2011 Q3 (last figure):

-LAC-7 is 8.2 pps above peak

- OECD just 2.6 pps

Average annual growth since through:

- 4.3% LAC-7

- 2.3% in OECD

Quarterly real GDP (seasonally adjusted) Peak = 100

90

92

94

96

98

100

102

104

106

108

110

t-4

t-3

t-2

t-1 t

t+1

t+2

t+3

t+4

t+5

t+6

t+7

t+8

t+9

t+1

0

t+1

1

t+1

2

LAC-7 OECD

18

The global risk cycle is a key driver of LATAM business cycle

-5

-4

-3

-2

-1

0

1

2

3

0

10

20

30

40

50

60

70

80

98 99 00 01 02 03 04 05 06 07 08 09 10 11

Common Factor LAC-7 growth (LHS)

VIX (RHS)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Argentina Brazil Chile Colombia Mexico Peru Venezuela

Common factor VIX

Source: Own calculations based on Datastream.

Quarterly LAC-7 growth (y/y) and VIX Simple correlation coefficients

19

What is explains this resilience: Good policies or good luck?

Three main factors explain the new dynamics in the region:

• A lesson learnt the hard way: sustainable fiscal policy & stable monetary policy

• Exposure versus resilience: the role of trade and financial openness

• The emergence of China: differences in head and tail winds within the region

20

Real channels: more exposure to external shocks

0.0

0.5

1.0

1.5

2.0

2.5

1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007

ARG BRA CHL COL CRI DOM MEX PER VEN

Exports contribution to growth Trade openness Remittances

Source: OECD (2010).

Current account exposure index

Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure.

21

0.0

0.5

1.0

1.5

2.0

2.5

1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007

ARG BRA CHL COL CRI DOM MEX PER VEN

Current account deficit Debt/GDP Chinn and Ito index

External finance: more openness but mixed exposure


Financial exposure index

Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure.

22

Recovery in Latin America: What explains it?

Relative Importance for LAC recovery

Note: Model includes leverage, exports, trade openness, BIS foreign claims to European banks, Chin-Ito

index, financial integration index, budget balance, public debt, current account balance, asset and

liabilities over GDP, net position,

Source: Avendano and Daude (forthcoming)

23

Recovery since the crisis & trade competition with China

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

El Salvador

Guatemala

Mexico

Panama

Paraguay Peru

Venezuela

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8Re

cove

ry s

ince

pre

-cri

sis

pe

ak (

% o

f p

eak

le

vel)

Coefficient of comformity (higher values = more competition with China)

Source: Datastream.

24

Solid fiscal positions are reflected by ratings

Source: Standard and Poor’s, 2012

25

…with diverging effects across the continent

80

85

90

95

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

South America Central America


Terms of trade (2005 = 100)

26

Short-term outlook: economic growth

GDP growth in 2011 and monthly forecasts for 2012

Source: Consensus forecast.

Growth moderation for 2012

• Partly policy-induced

• Euro-area problems are responsible for 0.5

– 1.0 pps reduction.

• Mainly through lower external demand.

• Average growth forecasts:

LAC Total OECD

2012 3.7 1.6

2013 4.0 2.2

0

1

2

3

4

5

6

7

8

9

Argentina Brazil Chile Colombia Mexico Peru Venezuela

2011 growth Mar-11 Jun-11 Sep-11 Dec-11 Feb-12

27

Outline





28

The product space - introduction

•The Product Space: network that formalizes the idea of relatedness (proximity) between products traded in the global economy.

•A complementary notion is that of value embedded in the good exported.

29

1968 2002

Product Space: The “Structure” of export profiles

Bangladesh Korea

garments

Number of exported goods: Number of exported goods:

EXPY: EXPY:

Potential EXPY: Potential EXPY:

54

6728 US$

5168 US$

53

7501 US$

5425 US$

30

Diversification vs Upgrading: Asia

• Large Asian markets: “45º line trackers”.

•Very low starting levels of diversification and sophistication (except CHN).

•The size of the economy allows for developing a wide array of capabilities.

•High diversification, although a more limited record in terms of upgrading.

Source: Jankowska, A. Nagengast, A., Perea, J.R. “The Product Space and the Middle Income trap: Comparing Asia and

Latin American Experiences. OECD Development Centre Working Paper No. 311.

31

•“2-stage structural transformers” (KOR, TWN): early and –at times- intense increase in diversification, to later focus on upgrading, while maintaining or even reducing the number of sectors where they participate.

•Smaller countries (SGP, MYS) unable to reach the same level of diversification, but successfully placing themselves in high Expy industries.

Diversification vs Upgrading: Asia



32

Central America follows a roughly similar pattern, with CRI reaching a higher stage in product sophistication.

Diversification vs Upgrading: Latin America



33

The puzzling cases, no gains in Expy.

ARG engages in the “wrong” kind of diversification, at times facing decreases in Expy.

CHL, PER: Lower gains in diversification, disassociated from gains in EXPY.

Diversification vs Upgrading : Latin America



34

Motivation: Proximity matters

Brazil

• Where are the new products that countries transition into?

•Transitions into new products are more likely, the closer the products are to currently exported goods



35

Transition analysis – “Structural transformers”

• Countries that did not substantially diversify, but transformed their export structure towards high value exports tended to transition into relatively proximate / median products (no evidence for a particularly high effort)

“low effort”

“high effort”



36

Transition analysis – “Diversifiers”

• Countries that substantially diversified their exports profiles tended to transition into relatively distant products (“high effort”)

“low effort”

“high effort”



37

Capabilities – Asia

• China: Start already with a high value, substantial gains in relative capabilities only from 1990 onwards. • General trend for other “diversifiers” – slow and gradual increase in relative capabilities with diversification.

• Only recently countries achieve capabilities that are close / above the world average.

world average



38

Capabilities – Latin America

• In general below average performance in Latin America.

• The exception being Mexico (high starting value) and slow increase across time) and the strongly diversifying Brazil (gradual increase in capability ranking over time).

world average



39

Adaptation strategies towards Chinese competition: Looking at the firm

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World

Economic Forum Working Paper. 2009.

High value-added niche to achieve global scale Products with high volatility and customization needs

40

Latin American companies have started to adapt to new value chains


Economic Forum Working Paper. April 2008.

Upstream value chain integration

41

Outline




4 After the diagnostic: policies to overcome the challenge

42

Next fiscal steps: reducing pro-cyclicality

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

-0.30 -0.20 -0.10 0.00 0.10 0.20

Var

iati

on

of c

yclic

ally

ad

just

ed

pri

mar

y b

alan

ce

Output gap

MEX

CHL

URUARG

CRI PER

COL

BRA

-0.06

-0.05

-0.04

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

-0.10 -0.05 0.00 0.05 0.10

Var

iati

on

of c

yclic

ally

ad

just

ed

pri

mar

y b

alan

ce

Output gap

Output gap and change in structural balance 1990 - 2009 Output gap and change in structural balance in 2009

Source: Daude et al (2011).

43

Education: focus on quality and equity

100

80

60

40

20

0

20

40

60

80

100A

rge

nti

na

Bra

zil

Ch

ile

Co

lom

bia

Me

xic

o

Pan

am

a

Pe

ru

Tri

nid

ad

an

d T

ob

ago

Uru

gu

ay

Lati

n A

me

rica a

nd

th

e

Cari

bb

ean

OEC

D

Pe

rce

nta

ge

of

stu

de

nts

Level 1 Below level 1 Level 2 Level 3 Level 4 Level 5

Distribution of test score in PISA reading tests, according to socioeconomic and

cultural household background quartiles, 2009

Source: Based on data from PISA 2009. Note: The distribution by performance levels in Latin America and OECD refers to the simple mean of attainment level weighted at the national level for participating countries in PISA 2009.

44

Innovation: Increase efforts to strengthen national innovation strategies

China

India

Russian Federation

South Africa

0

1

2

3

4

5

0 10 20 30 40 50 60 70 80 90

Inve

stm

en

t in

R&

D (%

of G

DP)

Investment in R&D financed by the private sector (%)

Latin America and the Caribbean OECD Other emerging countries

R&D Investment as percentage of GDP

45

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

Value Initial Contract Value Renegotiations

Value including

renegotiations

Infrastructure: beyond resources, better regulation and coordination

Source: Bitrán E., S. Nieto-Parra and J.S. Robledo (2011). Note: Values in Millions of constant Pesos of Dic/09

Colombia: Cost increase from renegotiations

46

Summing up

• Shifting Wealth is an established phenomenon with sustained effects, and Latin

America needs to position in it.

• LATAM resilience: countries have built more buffers. Financial and trade openness

have increased exposure to external shocks.

• Adaption strategies to Chinese competition are heterogeneous, depending on the

sector and firms and country capabilities.

• Overcoming the “middle income trap” that Latin America is facing requires active

public policies in innovation, education and infrastructure.

• Breaking away from the middle income trap has, almost always, encompassed an

upgrading of the export base towards manufacturing.

47

• Not all policies are right at all moments in time for all countries. The future of SW: which policies?

• Crucial: activate both within-sector productivity and cross-sector productivity rises.

• Competitive exchange rates, industrial & innovation policies, forced savings, flow restrictions and directed finance can be helpful for specific clusters of countries.

• OECD ‘Going for Growth’ policy prescriptions can be counterproductive for countries below certain income thresholds. How do we tell Big Brother?

The Future of Shifting Wealth: Policies

48

Thank you!

www.oecd.org/dev

49

ANNEX

50

Access to Finance: A priority for firms

Domestic Credit to Private Sector (share of GDP)

Source: World Bank WDI

51

Inflation remains low, stable and predictable in IT economies

-10-505

10152025303540

1/1

/20

07

6/1

/20

07

11

/1/2

00

7

4/1

/20

08

9/1

/20

08

2/1

/20

09

7/1

/20

09

12

/1/2

00

9

5/1

/20

10

10

/1/2

01

0

3/1

/20

11

8/1

/20

11

1/1

/20

12

CP

I ch

ange

(Yo

Y)

Inflation - Targeting countries

Brazil Chile ColombiaMexico Peru

-10-505

10152025303540

1/1

/20

07

6/1

/20

07

11

/1/2

00

7

4/1

/20

08

9/1

/20

08

2/1

/20

09

7/1

/20

09

12

/1/2

00

9

5/1

/20

10

10

/1/2

01

0

3/1

/20

11

8/1

/20

11

1/1

/20

12

CP

I ch

ange

(Yo

Y)

Inflation - Non targeting countries

Argentina Venezuela

Source: Datastream.

52

In inflation targeting economies monetary policy was used counter-cyclically

0

5

10

15

20

25

1/1

/20

07

6/1

/20

07

11

/1/2

00

7

4/1

/20

08

9/1

/20

08

2/1

/20

09

7/1

/20

09

12

/1/2

00

9

5/1

/20

10

10

/1/2

01

0

3/1

/20

11

8/1

/20

11

1/1

/20

12

rate

(%)

Interest rates - Targeting countries

Brazil Chile Colombia

Mexico Peru

0

5

10

15

20

25

1/1

/20

07

6/1

/20

07

11

/1/2

00

7

4/1

/20

08

9/1

/20

08

2/1

/20

09

7/1

/20

09

12

/1/2

00

9

5/1

/20

10

10

/1/2

01

0

3/1

/20

11

8/1

/20

11

1/1

/20

12

rate

(%)

Interest rates - Non targeting countries

Argentina Venezuela

Source: Datastream.

53

Source: Datastream.

…without losing credibility

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Brazil

0.0

1.0

2.0

3.0

4.0

5.0

ChileInflation (y-on-y)Expected inflation (12-months ahead)Target

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Colombia

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0Mexico

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Peru

54

The Chinese economy today: Technological upgrade


Economic Forum Working Paper. 2009.

55

Medium term objective: Macro performance and risk perception

0

500

1000

1500

2000

2500

1/1

/20

07

7/1

/20

07

1/1

/20

08

7/1

/20

08

1/1

/20

09

7/1

/20

09

1/1

/20

10

7/1

/20

10

1/1

/20

11

7/1

/20

11

1/1

/20

12

bp

s

Spreads - Non inflation targeting

countriesArgentina Venezuela

0

100

200

300

400

500

600

1/1

/20

07

7/1

/20

07

1/1

/20

08

7/1

/20

08

1/1

/20

09

7/1

/20

09

1/1

/20

10

7/1

/20

10

1/1

/20

11

7/1

/20

11

1/1

/20

12

bp

s

Spreads - Inflation targeting countriesBrazil Chile Colombia

Mexico Peru

Source: Datastream.

56

Fiscal policy does little to reduce inequalities in Latin America

• Tax revenues are biased

towards non-progressive taxes

• In particular, personal income

tax is low in the region

• Low levels of social

expenditures

• Targeting could also be

improved 0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Arg

en

tin

a

Bra

zil

Ch

ile

Co

lom

bia

Me

xico

Pe

ru

OEC

D

Market income After taxes and transfers

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Ch

ile

Me

xico

OEC

D

Market income

+ Cash transfers

- Income tax

+ Education (in-kind)

+ Health (in-kind)

Income inequality and fiscal redistribution effects of different policy instruments (GINI indices)

Source: OECD (2008a) for non-Latin American OECD countries, OECD (2008b) for Argentina, Brazil, Colombia and Peru, and estimations based on household surveys for Chile and Mexico.

57

The Product Space Map – Mexico - Hybrid

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The Product Space Map- Brazil- diversifier

shifting wealth, china and the latin american … seminario alc-china... · 0.8 0.9 argentina...

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