The Shifting Wealth of Nations: A Latin American Perspective

The Shifting Wealth of Nations A Latin American Perspective Javier Santiso Director and Chief Economist OECD Development Centre Centre d’Analyse Stratégique – Premier Ministre  23 September – Paris, France

Overview 1 Decoupling or Rebalancing? 2 The Macroeconomic Anchoring in Latin America 3 A Key Partnership: Latin America and Asia 4 Looking to the Future 2

A fundamental shift • Emerging economies are returning to their historical position in the global economy - a rebalancing of the wealth of nations. • “Decoupling” is not an appropriate concept, since the Centre is no longer the Centre, and the Periphery no longer Periphery. • What impacts does this rebalancing have on current economic events?

The perspective is shifting 4

The perspective is shifting Joaquín Torres García - América Invertida, 1943 8

Emerging countries’ increased presence in the world economy • China’s economy is estimated to overtake the US by 2015, even accounting for a slow-down in growth as the technological frontier is reached (Maddison 2007/ OECD Development Centre) Comparative Chinese and US GDP Comparative Levels of GDP log 1990 $ China, United States and Latin America 8 25 Trillions USD 7 China 20 6 5 15 4 USA 3 10 2 5 1 Latin America 0 0 1790 1700 1715 1730 1745 1760 1775 1805 1820 1835 1850 1865 1880 1895 1910 1925 1940 1955 1970 1985 2000 2015 2030 1960 1990 1900 1930 2020 log US log US China 9 Source: OECD Development Centre, 2008; based on Maddison (2003 and 2007).

A Global Rebalancing effect… China and India Developed world Share of world GDP, % share of world GDP, % 60 60 50 50 China India 40 40 30 30 20 20 10 10 0 0 1700 1820 1952 1978 2003 2030 1700 1820 1952 1978 2003 2030 Source: OECD Development Centre, 2008; based on Maddison 2007. 10

…with emerging countries increasingly driving growth • The composition of growth and output is changing High contribution of Emerging countries is driving world growth. Contribution to global GDP growth 90% 80% Developed countries 70% Emerging and developing countries 60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 11 Source: OECD Development Centre, based on IMF

Emerging economies have become major actors in mobilising capital Note: Emerging countries refer to Latin American and Asian only. Source: OECD Development Centre 2007, based on Thomson Datastream (Economist Intelligence Unit). 12

Trade patterns have evolved substantially after BRICs entry Shift in World Merchandise Trade 1996 2006 Low and middle income to 3% 5% 2% 8% low and middle income 14% Low and middle income to 21% high income High income to low and 16% middle income 51% High income to high income 62% 17% Unspecified Source: OECD Development Centre, based on World Development Indicators, 2008. 13

Emerging Market Multinationals are growing in presence Global Fortune 500 Top non-financial EMNCs Companies by country, 2007 by country (ranked by foreign assets, 2007) 40 180 160 35 140 30 120 25 100 20 80 15 60 10 40 5 20 0 0 Source: OECD Development Centre, based on Fortune Source: OECD Development Centre, based on 500, 2007 UNCTAD, World Investment Report, 2007 14

Traditional partners are becoming less important Emerging Countries Exports to US and Europe share of total 30% 25% 20% 15% 10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Europe 25 USA Source: OECD Development Centre, based on WITS/Comtrade 15

Emerging economies have accumulated foreign reserves… International reserves, International reserves, selected emerging countries selected developed countries 2,000,000 2,000,000 1,800,000 1,800,000 1,600,000 1,600,000 m i 1,400,000 1,400,000 l Brazil Germany 1,200,000 1,200,000 l China France i 1,000,000 1,000,000 India Netherlands o 800,000 Mexico 800,000 Switzerland n 600,000 Russia 600,000 UK $ 400,000 South Africa 400,000 US 200,000 200,000 0 0 1992 1998 1988 1994 1990 1996 2000 2004 2006 2002 Source: OECD Development Centre, based on Economist Intelligence Unit 16

…with the successive creation of Sovereign Wealth Funds • Increasingly important in the financial world, Sovereign Wealth Funds are predominantly an emerging world phenomenon. 70 Asset size, 2007 63.5 60 B 50 i 45 42 l l 40 36.3 i o 30 n 23.4 21 20 17.9 16 $ 10 3.2 4.2 1.4 0 Hedge funds SWF Reserves Insurance Pension Investment Public debt Private debt Stock market World GDP Bank assets ex gold companies funds funds securities securities capitalisation Source: OECD Development Centre, based on Deutsche Bank 17

A predominantly emerging-world phenomenon Sovereign Wealth Funds (SWFs) by origin , 2008 Total assets Number (USD bn) Middle East 7 1533 Asia 9 867 OECD 10 489 Russia & Central Asia 4 177 Africa 7 109 Latin America 4 23 Pacific islands 6 1.2 Total 47 3,194 Source: OECD Development Centre, based on Deutsche Bank 18

Latin America has managed to anchor its macroeconomic stance Primary Fiscal Balance (% GDP) Source: OECD Development Centre, based on Thompson DataStream and EUI, 2008. 20

GDP growth comes in hand with credible economic policies Inflation (% change) 100% Argentina 80% Ecuador Venezuela 60% Peru 40% 20% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -20% Source: OECD Development Centre, based on ECLAC database 2008 21

External position in the region has been reinforced Current Account Balance (% GDP) Source: OECD Development Centre, based on Thompson DataStream and EUI, 2008. 22

Public debt has come down… • Favourable external conditions have been exploited to accomplish remarkably good public debt management. • Buybacks of external debt, international bonds in local currency… Total Emerging Markets External Debt (% of GDP) 20 18 16 14 12 10 8 6 4 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F Source: OECD Development Centre, based on JP Morgan 23

… coupled with a reduction of the debt service • Excellent debt management has improved public solvency and challenged the “original sin”. Sovereign Debt Service, % of GDP Sovereign Debt Service, % of GDP Source: OECD Development Centre, based on JP Morgan 24

A third pillar of growth: Asia 70000 Chinese and Indian Trade with Latin America Chinese Exports to LAC • Trade with China and India is 60000 Indian Exports to LAC increasing all over the Chinese Imports from LAC emerging world. 50000 Indian Imports from LAC USD Thousands 40000 • For the first time, Latin American is faced with three 30000 centres of growth: The US, Europe and China. 20000 10000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: OECD Development Centre, Latin American Economic Outlook 2008 26

China - an increasingly important destination for EM exports Exports to US Exports to China % of total 1995 and 2006 % of total, 1995 and 2006 90 25 80 70 20 60 15 50 40 10 30 20 5 10 0 0 1995 2006 1995 2006 Source: OECD Development Centre, 2008 based on WITS Comtrade 27

China and Commodity Prices • Chinese and Indian demand for commodities as well as commodity prices are on the increase. • This is good news in the short term, both for Latin American and African exporters. It could be bad news in the long run. China’s demand for Latin American commodities (1998-2005) 12 Billions 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 Petroleum and products Metal ores/metal scrap Food and live animals Source: OECD Development Centre, Latin American Economic Outlook 2008 28

China and Commodity Prices Increasing commodity prices are benefiting a number of emerging country exports, though there is also a downside in terms of increasing food prices. 500 500 Petroleum Cocoa 450 450 Copper Tea 400 400 Coffee (robusta) Aluminium 350 Gold 350 Coffee (arabica) 300 300 250 250 200 200 150 150 100 100 50 50 0 0 Source: OECD Development Centre, based on World Bank, 2008 29

Latin America Higher diversity in export destinations, but higher concentration in products exported. Export Concentration in Products Export Concentration by for Latin America Destination, Latin America High concen. 0.90 0.9 Herfindahl Hirschman Index Herfindahl Hirschman Index 0.80 0.8 2000 2005 2001 2006 0.70 0.7 0.60 0.6 Low concen. 0.50 0.5 0.40 0.4 0.30 0.3 0.2 0.20 0.1 0.10 0.0 0.00 Paraguay Mexico Peru Honduras Ecuador Guyana Uruguay Panama Guatemala Bolivia Chile Colombia Costa Rica Brazil Venezuela Venezuela Argentina Uruguay Ecuador Peru Panama Chile Brazil Mexico Honduras Nicaragua Paraguay Guyana Guatemala LAC average Colombia Bolivia Costa Rica Source: OECD Development Centre, Latin American Economic Outlook, 2008 30

Effect of Recessions Africa and US/EMU recessions Latin America and US/EMU recessions 7 10 6 8 5 6 GDP growth % GDP growth % 4 4 3 2 2 0 1 -2 0 -4 Source: OECD Development Centre, based on IMF 2008 32

Effect of Recessions Mexico and US/EMU recessions Brazil and US/EMU recessions 12 15 10 8 10 6 GDP growth % GDP growth % 4 5 2 0 0 -2 -4 -5 -6 -8 -10 Source: OECD Development Centre, based on IMF 2008 33

Emerging Countries and US GDP • …Emerging Countries have been performing better so far Growth rates: US and Emerging Countries, % 8 6 4 2 0 1971 1972 1998 1988 1973 1975 1977 1990 1994 1995 1996 1999 1978 1980 1983 1984 1986 1989 1982 1992 1993 1970 2000 1974 1976 1979 2002 2004 2006 1985 1991 1997 1981 1987 2001 2003 2005 2007 -2 -4 United States Emerging Source: OECD Development Centre, based on IMF. 34

Latin America and US GDP • There is however great difference in the US growth correlation between different Latin American countries. • Also, Latin America appears to be less dependent on US growth as interaction with the Asian giants increases. US and Latin American growth, % Growth Correlation 10.00 Latin America and the United States 8.00 50% 40% 6.00 30% 20% 4.00 10% Latin America 0% United States -10% 2.00 -20% -30% 0.00 -40% 1979 1991 1970 1973 1976 1982 1985 1988 1994 1997 2000 2003 2006 -2.00 -4.00 Source: OECD Development Centre, based on IMF. Source: OECD Development Centre, based on 35 Credit Suisse

The economic consensus in the region is (still) positive Real GDP Consumer Prices Current Account] % increase % increase Balance USD bn 2008 2009 2008 2009 2008 2009 Argentina 6.6 4.2 9.5 10.7 6.4 4.1 Bolivia 4.9 4.2 17.0 11.7 1.8 1.6 Brazil 4.8 3.8 6.5 4.9 -27.9 -37.0 Chile 3.9 4.1 8.0 4.6 1.0 -1.9 Colombia 4.9 4.6 6.5 4.9 -6.1 -7.9 Costa Rica 3.8 3.7 13.4 10.0 -2.3 -1.9 Dominican Republic 5.2 4.0 11.5 7.3 -2.4 -1.8 Ecuador 2.2 2.5 9.5 6.3 3.6 2.2 Mexico 2.5 2.8 5.5 4.1 -7.4 -11.7 Panama 7.5 6.4 9.2 6.8 -2.2 -2.3 Paraguay 4.8 3.6 11.1 8.8 0.2 0.1 Peru 8.3 6.6 5.4 3.8 -1.8 -2.8 Uruguay 6.1 4.1 9.3 6.5 -0.7 -0.7 Venezuela 4.9 3.5 31.5 29.4 32.1 22.6 Latin America 4.3 3.7 8.7 7.1 -5.5 -37.5 Source: OECD Development Centre, based on Latin American Consensus Forecasts, 2008. Note: The OECD is not an official provider for macroeconomic forecasts in Latin America. Data presented is based on 36 monthly surveys in financial institutions.

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The Shifting Wealth of Nations: A Latin American Perspective

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