216/FDM2/3 Session 1 The Big Switch in Latin America: Restoring Growth Through Trade Purpose: Information Submitted by: World Bank Group Finance and Central Bank Deputies Meeting Lima, Peru 14 October 216
Semiannual Report - Office of the Regional Chief Economist - October 216 The great Latin American slowdown seems to be ending, with regional growth expected to turn positive in 217 Real GDP Growth: International Comparison Notes: Weighted averages. 1
MCC in the US cycle; SA in the China cycle but with a much more accentuated slowdown MCC: Actual and Predicted Growth vs US Growth SA: Actual and Predicted Growth vs China Growth Notes: Actual and predicted growth rates are simple averages. Predicted growth for a country is the fitted value of a regression of GDP growth on G-7 growth, China s growth, the CRB commodity index growth, and the U.S. 1 year yield. Sources: LCRCE based on data from Bloomberg and national sources. Unlike growth, poverty is expected to flat-line 215 likely the first year in a decade where regional poverty did not fall 45 though only Brazil and Ecuador likely to have seen poverty increases 2 Poverty rate 4 35 3 25 2 4 23 23 24 5 6 7 8 9 1 11 12 13 214 215 Actual Poverty data "Nowcast" Poverty change 214-215 (p.p.) -2-4 -6 DOM NIC BOL SLV COL PAN HND GTM PRY PER ARG CRI MEX URY CHL ECU BRA Note: Venezuela not included due to data limitations. 2
Although with different achievements in poverty reduction within the region 7 6 5 4 Moderate poverty rate, 2-214 (percent) 7 6 5 4 3 2 MCC 3 2 South America 1 1 Note: MCC stands for Mexico, Central America, and the Caribbean. Poverty reduction through 213 was fueled by high wage growth, especially for unskilled labor 6% 23-213 Annualized growth rate 4% 2% % -2% -4% Tradables Non-tradables low-wage Non-Tradables high-wage Countries without commodity boom Tradables Non-tradables low-wage Non-Tradables high-wage Countries with commodity boom Unskilled Low-skilled Skilled Source: World Bank, 215. Working to end poverty in Latin America and the Caribbean: Workers, Jobs, and Wages 3
How are wages adjusting? 214-215 6 3-3 -6-9 Tradables Non-tradables low-wage No commodity boom (Mexico) Non-Tradables high-wage Tradables Non-tradables Non-Tradables low-wage high-wage Commodity boom (Arg, Bra, Chl, Ecu, Per) Unskilled Low-skilled Skilled Employment, formality, and unemployment have been affected, especially in 216 Employment Informality Unemployment 62 55 1 61 45 8 6 35 6 59 25 4 Note: All rates (percent). Projection for 216 based on data through Q2 based on LABLAC. 4
But large differences in labor market outcomes are emerging across the region Employment Unemployment 64 12 Rate (percent) 62 6 9 6 Brazil Rest of South America MCC 58 3 56 26 29 212 215 26 29 212 215 Restoring GDP and labor income growth will be critical, but how? Annual poverty change (ppts.) -1-2 -3 Boom Slowdown 23-28 212-214 Distributional changes Growth -1-2 -3 Boom Slowdown 23-28 212-214 Non-labor income Labor income -4-4 5
How to raise what otherwise would be a mediocre potential growth? i. Complete the macroeconomic adjustment in the countries that still require it i. Such agenda has three dimension: (i) realigning real exchange rates; (ii) addressing fiscal imbalances; and (iii) increasing aggregate savings rates (after discounting for windfalls). ii. In SA the macroeconomic management agenda is most pressing for Venezuela. At the other end of the spectrum is worth mentioning Chile, Peru (our host today), and Paraguay. ii. Stage a big switch from non-tradablesto tradables i. Now that the boom is over, future growth in the region won t be able to depend on domestic demand countries will need to lean on external demand ii. Such a shift can progress along several paths Importables vs exportables Existing exports (intensive margin) vs new (extensive margin) Diversification (away from commodities) Fiscal: deficits have widened in many cases SA: Fiscal Deficit and the Origin of its Increase The expansion of expenditure is the main culprit in the cases of Venezuela, Brazil, Uruguay, and Paraguay The contraction of revenue plays a key role for Bolivia, Ecuador, Colombia, and Peru Interest payments contribute significantly to the deficit in Brazil, Colombia, and Uruguay Primary expenditure is dominant in the deficit for Venezuela, Bolivia, Argentina, and Ecuador Notes: Changes are between the last observation and the point in time after 29 when the lowest fiscal balance was recorded. If the lowest balance was the latest, the difference shown is with respect to the point in time when fiscal accounts were closest to zero. Sources: LCRCE based on World Bank staff estimates. 6
Real exchange rate: it has adjusted in flexible regimes; it has become overvalued in less flexible ones, except for Peru SA: Real Effective Exchange Rate More Flexible Peru Ecuador Bolivia Notes: Index base: January 211=1. An increase implies a real depreciation. More flexible includes Brazil, Chile, Colombia, Paraguay, and Uruguay. Sources: IFS (IMF). Restoring growth through trade 7
A big switch is needed for the short-term rebound to lead the region to a higher, sustainable growth path A big switch from non-tradables to tradables is necessary to restore external equilibrium with full employment Now that the boom is over, future growth in the region won t be able to depend on domestic demand countries will need to lean on external demand and to raise what otherwise would be a mediocre potential growth But the big switch faces a treacherous world environment Weak and uncertain world demand that could frustrate export recovery Intensifying anti-globalization attitudes in developed countries Such a shift can progress along several paths Importables vs exportables Existing exports (intensive margin) vs new (extensive margin) Diversification (away from commodities) Reform priorities Measures to promote open regional economic integration (consistent with the strengthening of the integration with international markets outside the region) Beyond trade agreements towards regional public goods and the integration of input, labor and FDI markets Reforms that promote/increase the ease of resource reallocation towards the tradables sector Saving mobilization reforms starting on the fiscal side But the big switch faces a treacherous world environment: (i) Weak and uncertain world demand that could frustrate export recovery; and (ii) Intensifying anti-globalization attitudes in developed countries. 8
The big switch is constrained by the flat global trade volume, driven mainly by China World: Import Volume Index Index Base 25q1=1 Selected Economies: Import Volume Indices Index Base 25q1=1 Sources: UNCTAD. 17 Thanks 9