Foro de Análisis LatinoamericanoMadrid, 13 June 2013Estimation of potential GDP.Comments about Latin Americaand a focus on...
Foro de Análisis LatinoamericanoContentsPage 21. Potential GDP estimation : results, revisions and somecomments on Latin A...
Foro de Análisis LatinoamericanoPage 3Potential GDP: downward revision,yet acceleration throughout the current decadeActua...
Foro de Análisis LatinoamericanoPage 4Potential growth using alternative filters (H-P andfinancial neutral approach)Source...
Foro de Análisis LatinoamericanoPage 5Growth potential in Latin America: positive but nothomogeneous perspectives within t...
Foro de Análisis LatinoamericanoPage 6The relative contribution of reforms and external shockshave been different across L...
Foro de Análisis LatinoamericanoPage 7Latin America: structural reformsIndex of Structural Reforms, higher levels are asso...
Foro de Análisis LatinoamericanoPage 8Latin America: Productivity and structural reforms, 1985-2009Source: BBVA Research f...
Foro de Análisis LatinoamericanoTFP contribution to growth potential in 2001-2010, % of potential growthSource: BBVA Resea...
Foro de Análisis LatinoamericanoContentsPage 101. Potential GDP estimation : results, revisions and somecomments on Latin ...
Foro de Análisis LatinoamericanoPage 11Y = Potential GDP = A L( ) K(1– )Energy Sector reform KHigher investmentFiscal Syst...
Foro de Análisis LatinoamericanoEnergy Sector reform KHigher investmentIt is assumed that the energy reform will increasei...
Foro de Análisis LatinoamericanoY = Potential GDP = A L( ) K(1– )Fiscal SystemLabour marketFinancial SystemHigher Formal e...
Foro de Análisis LatinoamericanoMexico, potential growth: base and reformscenario (%)Source: BBVA Research0,00,51,01,.52,0...
Foro de Análisis LatinoamericanoMore formality is associated with higher productivityAround 60% of Mexican workers are inf...
Foro de Análisis LatinoamericanoEducation performance, PISA Report% of 15-year students in each level of resultssource: BB...
Foro de Análisis LatinoamericanoMain messages1. Despite the last global recession, potential GDP is expected toaccelerate ...
Foro de Análisis LatinoamericanoMadrid, 13 June 2013Estimation of potential GDP.Comments about Latin Americaand a focus on...
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BBVA Research estimation of potential GDP. Comments about Latin America and a focus on Mexico by Jorge Sicilia

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1. Despite the last global recession, potential GDP is expected to
accelerate in Latin America countries. But, be careful always with
potential, as GDP forecast is key in its estimation
2. Growth improvement in Latin America has been the consequence
of a virtuous combination of external shocks and appropriate
policies. External shocks could be assigned to “potential” if they are
“permanent”
3. Pacto por México consists of several reforms. If executed, they
would increase growth potential in Mexico through higher
formality

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BBVA Research estimation of potential GDP. Comments about Latin America and a focus on Mexico by Jorge Sicilia

  1. 1. Foro de Análisis LatinoamericanoMadrid, 13 June 2013Estimation of potential GDP.Comments about Latin Americaand a focus on MexicoPreliminary workBanco de España & SEGIBJorge Sicilia SerranoChief Economist BBVA
  2. 2. Foro de Análisis LatinoamericanoContentsPage 21. Potential GDP estimation : results, revisions and somecomments on Latin America2. Dealing with reforms and their effects on potential GDPestimations: the case of Mexico
  3. 3. Foro de Análisis LatinoamericanoPage 3Potential GDP: downward revision,yet acceleration throughout the current decadeActual and Potential growth (%)Source: BBVA Research02468101202468101201-0813-2001-0813-2001-0813-2001-0813-2001-0813-20Latam USA Eurozone China Eagles ex-Latam ex-ChinaPotential Actual/forecasts… even without the impact of the recentrecovery after the Great Recession, thepositive view of Latin America remainsfor the next decade91-00 01-10 11-20 91-00 01-10 11-20US 3.3 1.9 2.1 0.0 -0.2 -0.1EZ 2.2 1.4 1.2 -0.1 -0.4 -0.3China 8.7 9.3 7.9 0.1 0.2 -0.6LatAm 2.7 3.3 3.6 0.0 -0.2 -0.1Potential GDP growthSource: BBVA Research2013 estimation 2013 vs prev. est
  4. 4. Foro de Análisis LatinoamericanoPage 4Potential growth using alternative filters (H-P andfinancial neutral approach)Source: BBVA ResearchThere is a relevant issue for the forecast of potentialGDP: GDP forecast is key, regardless how we estimate itThe estimation procedure to obtain thepotential growth is relevant for thediagnosis of the current and pastcyclical position, but regarding thefuture, the relevant issue is theforecast of the actual variables80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22Scen 0 Financial Neutral Scen 0 HP filterScen 1 Financial neutral Scen 1 HP filterScen 2 Financial neutral Esc 2 filtro HP
  5. 5. Foro de Análisis LatinoamericanoPage 5Growth potential in Latin America: positive but nothomogeneous perspectives within the areaLatin America will increase its potentialGDP throughout the next decadeThe growth improvement has been theconsequence of a virtuous combinationof external demand shocks andappropriate policiesLatin America: actual and growth potential (%)Source: BBVA Research012345670123456701-0813-2001-0813-2001-0813-2001-0813-2001-0813-2001-0813-20LatAm Bra Chi Col Mex PerPotential Actual/forecasts
  6. 6. Foro de Análisis LatinoamericanoPage 6The relative contribution of reforms and external shockshave been different across Latin AmericaExternal shocks have been more intense in economies oriented to commoditiesand to Asia. This kind of factors could be assigned to “potential” if “permanent”GDP level of the main trade partners 2003=100Source: BBVA Research and IMFTerms of Trade, 2003=100Source: BBVA Research and IMF809010011012013014015016080901001101201301401501602003200420052006200720082009201020112012Mexicos trade partners Brazils trade partners809010011012013014015016080901001101201301401501602003200420052006200720082009201020112012Mexico Brazil
  7. 7. Foro de Análisis LatinoamericanoPage 7Latin America: structural reformsIndex of Structural Reforms, higher levels are associated with economic policies more neutral for thedistribution of resourcesSource: Eduardo Lora (2012)The relative contribution of reforms and external shockshave been different across Latin AmericaStructural reforms process have beena common characteristic across LatinAmerica in the last 25 years, but moreintense in the 90’s0.000.100.200.300.400.500.600.700.800.90BR CHIL COL MEX PER1985 1990 1995 2000 2005 2009
  8. 8. Foro de Análisis LatinoamericanoPage 8Latin America: Productivity and structural reforms, 1985-2009Source: BBVA Research for TFP contributions and Eduardo Lora (2012) for Structural Reform IndexDifferences in the intensity of reforms are associatedwith differences in TFP contribution to potential growth-3.0-2.0-1.00.01.02.03.04.00.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9Structural Reform IndexTFP,contributiontopotentialgrowth,pp
  9. 9. Foro de Análisis LatinoamericanoTFP contribution to growth potential in 2001-2010, % of potential growthSource: BBVA Research and IMF for AsiaThe contribution of productivity to growth potential hasan ample margin for improvement in Latin America05101520253035404550USA EZ Asia LatAm-7Page 9
  10. 10. Foro de Análisis LatinoamericanoContentsPage 101. Potential GDP estimation : results, revisions and somecomments on Latin America2. Dealing with reforms and their effects on potential GDPestimations: the case of Mexico
  11. 11. Foro de Análisis LatinoamericanoPage 11Y = Potential GDP = A L( ) K(1– )Energy Sector reform KHigher investmentFiscal SystemLabour marketFinancial SystemHigher FormalemploymentL (in the formalsector, increasingthe capitaldeepening)Education System Higher human capital APacto por México consists of several reforms. Ifexecuted, they would bolster growth potential in Mexico
  12. 12. Foro de Análisis LatinoamericanoEnergy Sector reform KHigher investmentIt is assumed that the energy reform will increaseinvestment in the industry (i.e. USD 5 billion a yearso that Mexico accumulates in 5 years what Brazilreceives in only 1 year)Everything else equal,higher investment inenergy sector increasesCapital trend andpotential GDPPage 12Pacto por México consists of several reforms. Ifexecuted, they would bolster growth potential in MexicoY = Potential GDP = A L( ) K(1– )
  13. 13. Foro de Análisis LatinoamericanoY = Potential GDP = A L( ) K(1– )Fiscal SystemLabour marketFinancial SystemHigher Formal employment L (in the formalsector, increasingcapital deepening)We assume that structural reforms decrease 1/3 of the non-salary formallabour costs (τ): lower administrative burden, firing costs, social securitycontributions, … or higher cost of informality (sanctions)Formal OutputInformal OutputHouseholds behaviorBusinesses behaviorYf(A,Lf,K) = A LfαK(1–α)Yi(B,Li)= B Liγ , where B<AMax U (Consump., leisure) anddistribute their labour between theformal and informal sectors, L= Lf+LiMax π= Yf (A, Lf, K)–(w+τ) Lf – rKKLower cost of formalemploymentincreases the laborin the formal sector,reducesunemployment, andraises capital tomaximize profitsPage 13Pacto por México consists of several reforms. Ifexecuted, they would bolster growth potential in Mexico
  14. 14. Foro de Análisis LatinoamericanoMexico, potential growth: base and reformscenario (%)Source: BBVA Research0,00,51,01,.52,02,.53,.03,54,0Base Intense process of reformsFiscal SystemReform onImpact onPotential growthEnergy SectorLabour marketEducation SystemFinancial SystemHIGHER CAPITALMORE FORMALEMPLOYMENTENHANCEDEFFICIENCYPage 14Any structural reform impacts on long term capability of growth throughenhancing formalityPacto por México consists of several reforms. Ifexecuted, they would bolster growth potential in Mexico
  15. 15. Foro de Análisis LatinoamericanoMore formality is associated with higher productivityAround 60% of Mexican workers are informal (no social security, no taxes) andmore formal activities have higher labour productivitySector productivity and share of informalemployment in MexicoSource: BBVA Research, INEGILabour informality and schooling ratio in MexicoSource: BBVA Research with INEGI dataPage 1501020304050607080901000102030405060708090100Total Primary notcompletedPrimarycompletedSecondary Bachelor andupperFormal Informal TotalFarmMiningManufacturingConstructionRetailRestaurantand hotelsTransportFinancialServicesSocial Serv.OtherServicesGovernment-0.20.40.60.81.01.21.41.60 20 40 60 80 100% of informal employmentProductivity:Grossaddedvaluebyemployee
  16. 16. Foro de Análisis LatinoamericanoEducation performance, PISA Report% of 15-year students in each level of resultssource: BBVA Research using OCDE data-505101520253035401 2 3 4 5 6 7 8Mexico OECD S. KoreaBetter resultsPage 16Informal economy and legal framework(% of GDP and index)Source: Schneider (2009) and Property Rights Alliance based on World BankA more robust legal framework and better results of theeducational system are key to develop Mexican productivityBrazilChinaPeruMexicoSpainUSA0102030405060702 3 4 5 6 7 8 9Legal Environment Index (max=10)Informaleconomy(%GDP)
  17. 17. Foro de Análisis LatinoamericanoMain messages1. Despite the last global recession, potential GDP is expected toaccelerate in Latin America countries. But, be careful always withpotential, as GDP forecast is key in its estimation2. Growth improvement in Latin America has been the consequenceof a virtuous combination of external shocks and appropriatepolicies. External shocks could be assigned to “potential” if they are“permanent”3. Pacto por México consists of several reforms. If executed, theywould increase growth potential in Mexico through higherformalityPage 17
  18. 18. Foro de Análisis LatinoamericanoMadrid, 13 June 2013Estimation of potential GDP.Comments about Latin Americaand a focus on MexicoPreliminary workBanco de España & SEGIBJorge Sicilia SerranoChief Economist BBVA

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