1 Columbia University February 6th 2007 Javier Santiso Chief Economist & Deputy Director OECD Development Centre LATIN AMERICA’S POLITICAL ECONOMY OF THE.

1

Columbia University February 6th 2007

Javier SantisoChief Economist & Deputy Director

OECD Development Centre

LATIN AMERICA’S POLITICAL LATIN AMERICA’S POLITICAL ECONOMY OF THE POSSIBLE:ECONOMY OF THE POSSIBLE:Beyond Good Revolutionaries and Free MarketeersBeyond Good Revolutionaries and Free Marketeers

2

LATIN AMERICA: IN THE GARDEN OF LATIN AMERICA: IN THE GARDEN OF DELIGHTS?DELIGHTS?

3

Utopia in Latin America: from a spacial search to a temporal search.

A search which has impregnated the history of Latin American political economy: from structuralism to monetarism, from Marxism to Liberalism.

In the 20th Century the whole Continent was dancing a waltz of paradigms.

THE FLOOD OF PARADIGMS IN LATIN AMERICATHE FLOOD OF PARADIGMS IN LATIN AMERICA

4

FROM MARXISM TO LIBERALISM: FROM MARXISM TO LIBERALISM: THE WALTZ OF PARADIGMSTHE WALTZ OF PARADIGMS

“The great ideological storms” (Isaiah Berlin).

A few decades ago one of the key words in the entire continent was “Revolution”; a projective concept which denotes a temporal Beyond.

Whether Cuban or Chilean, Marxist or Liberal, the Revolution will feed the time of tomorrows and the sacrifices of the immediate present.

The flood, as Albert Hirschman describes it, brought with it an “angry desire to conclude”, where rigid economic models constituted numerous invitations to design alternatives with no chiaroscuro; either all or nothing.

5

The transformations of the Latin American continent are now obvious.

In the region as a whole, the conceptual and practical framework of political economies have been transformed.

Democracy and the Market have taken over from Revolution and the State on the altar of references.

To sum up, a complete vocabulary and grammar have disappeared from the political and economic repertoire allowing a new ideology to emerge.

DEMOCRACY AND THE MARKET: DEMOCRACY AND THE MARKET: THE NEW ALPHABETTHE NEW ALPHABET

6

The great transformation which took place in Latin America at the end of this century does not herald the arrival of the Good Liberal.

There was no transfer from one paradigm to another, instead a new cognitive style emerged.

We witness the failure of the whole idea of political utopia and the politicial economy of the impossible.

The failure of a cognitive style of macroeconomy of populism, similar to the purist monetarism of the Chicago Boys has only been the defense and illustration of the same concept.

THE GREAT TRANSFORMATION OF LATIN THE GREAT TRANSFORMATION OF LATIN AMERICAAMERICA

7

Perhaps we should not spend too much time mourning the passing away of the great reforming impulses.

Hausmann and Rodrik in 2004: most economic accelerations were not preceded by reforming big-bangs, or by marked politicial or economic ruptures.

This empirical study covers 83 sustained world growth patterns between 1957 and 1992 (above two percentage points over a period of at least eight years).

A BLESSING IN DISGUISE FOR LATIN AMERICA?A BLESSING IN DISGUISE FOR LATIN AMERICA?

8

THE EMERGENCE OF THE POLITICAL ECONOMY THE EMERGENCE OF THE POLITICAL ECONOMY OF THE POSSIBLEOF THE POSSIBLE

The strategy used by Ulysses: leaders know that they could be in danger of succumbing to the temptation of the sirens chanting the economic politics of the impossible.

They are cautious and they tie themselves to the masts of the fiscal and monetary institutions they have contribute to build.

Two strategies of development are being outlined – and sometimes combined-: one is an anchor of endogenous credibility, coming from within, and the other is an anchor of exognous credibility, coming from outside.

9

THE POLITICAL ECONOMY OF THE POSSIBLE:THE POLITICAL ECONOMY OF THE POSSIBLE:THE SILENT TRANSFORMATIONTHE SILENT TRANSFORMATION

Javier Santiso, Latin America's Political Economy of the PossibleBeyond Good Revolutionaries and Free-Marketeers, Cambridge, Mass., MIT Press, 2006.

10

THE GREAT TRANSFORMATION: THE MONETARY MAST

0

50

100

150

200

250

Latin America Total Emerging Markets

Inflation (%)

Source: Based on IMF

11

*Central Government

By Country (2005)

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-3.0*%

+0.3%

-4% -2% 0% 2% 4% 6%

Brasil

Colombia

Peru*

México

Venezuela*

Argentina*

Chile*

LAC-7: FISCAL BALANCE(SPNF, in % of GDP)

THE GREAT TRANSFORMATION: THE FISCAL ANCHOR

12

THE GREAT TRANSFORMATION: THE EXTERNAL ANCHOR

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

(e)

Trade openness in Latin America

Source: Based on BBVA

0% 10% 20% 30% 40% 50% 60% 70%

Mexico

Chile

Venezuela

Uruguay

Argentina

Colombia

Peru

Brazil

Trade openness in 2005

Source: OECD Development Centre

13

EXTERNAL ANCHORING: MEXICO NOW EXTERNAL ANCHORING: MEXICO NOW DEPENDS A LOT LESS ON RAW MATERIALESDEPENDS A LOT LESS ON RAW MATERIALES

The export of manufactured goods grew on average between 1990 and 2000, about 28% per year and now accounts for 90% of total exports.

Exports

0

20

40

60

80

100

120

140

160

180

200

1980/12 1984/12 1988/12 1992/12 1996/12 2000/12 2004/12

Non Oil

Oil 0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,0

14

Number of firms in Forbes 2000

0

5

10

15

20

25

30

35

India Spain China Brazil Mexico Chile

Source: Forbes 2000

EXTERNAL ANCHORING: BRAZILIAN FIRMS EXTERNAL ANCHORING: BRAZILIAN FIRMS RALLIED MEXICAN MULTILATINASRALLIED MEXICAN MULTILATINAS

The 50 more profitable firms

19

16

7

3

1 1 1 1 1

0

5

10

15

20

Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela

Source: America Economia 2005

15

Evolution of the Pension System in Latin America (in % of GDP)

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 5 6 7 8 9 1 11

Num. periods

ARGENTINA BOLIVIA COLOMBIACOSTA RICA CHILE EL SALVADORMEXICO PERU URUGUAY

Return of Democracy

GRADUALISM AND CONTINUISM: GRADUALISM AND CONTINUISM: PENSIONS REFORMS IN CHILEPENSIONS REFORMS IN CHILE

16

0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Num. periods

ARGENTINA BOLIVIA COLOMBIA COSTA RICA CHILE

EL SALVADOR MEXICO PERU URUGUAY

Retorno a democrácia

Evolution of Pension Funds in Latin America (in % of GDP)

GRADUALISM AND CONTINUISM: GRADUALISM AND CONTINUISM:

PENSIONS REFORMS IN CHILEPENSIONS REFORMS IN CHILE

17

Stability Index

0 1 2 3 4

Venezuela

Ecuador

Peru

Argentina

Honduras

Bolivia

Mexico

Uruguay

El Salvador

Brazil

Colombia

Chile

Adaptability Index

0 1 2 3 4

Venezuela

Argentina

Ecuador

Bolivia

Peru

Honduras

El Salvador

Colombia

Mexico

Brazil

Uruguay

Chile

Source: Mariano Tomassi. “The Institutional Foundations of Public Policy”. Journal of the Latin American Economic Association.

Spring 2006.

Public Policies in Latin America

INSTITUTIONAL ANCHORING: INSTITUTIONAL ANCHORING: A KEY DRIVER OF POSSIBILISM A KEY DRIVER OF POSSIBILISM

18

INSTITUTIONAL ANCHORING: INSTITUTIONAL ANCHORING: A KEY DRIVER OF POSSIBILISMA KEY DRIVER OF POSSIBILISM

Enforcement and Implementation

0 1 2 3 4

Argentina

Ecuador

Venezuela

Bolivia

Honduras

Peru

Brazil

Colombia

El Salvador

Mexico

Uruguay

Chile

Coordination and Coherence

0 1 2 3 4

Venezuela

Argentina

Ecuador

Peru

Colombia

Honduras

Uruguay

Bolivia

El Salvador

Mexico

Brazil

Chile


Spring 2006.


19

INSTITUTIONAL ANCHORING: INSTITUTIONAL ANCHORING: A KEY DRIVER OF POSSIBILISMA KEY DRIVER OF POSSIBILISM

Public Regard Index

0 1 2 3 4

Ecuador

Honduras

Argentina

Bolivia

Colombia

Venezuela

Brazil

El Salvador

Mexico

Peru

Uruguay

Chile

Efficiency Index

0 1 2 3 4

Venezuela

Argentina

Ecuador

Bolivia

Honduras

Peru

Brazil

Colombia

Uruguay

El Salvador

Mexico

Chile


Spring 2006.


20

VENEZUELA

ECUADOR

PERÚ

PARAGUAY

ARGENTINA

URUGUAY

MÉXICO

BRAZIL

COLOMBIA

CHILE

EL SALVADOR

NICARAGUA

HONDURAS

COSTA RICA

GUATEMALA

PANAMÁ

REPÚBLICA DOMINICANA

BOLIVIA

Next presidential elections

2007 - 200920062004 - 2005

LATIN AMERICA 2006: THE POLITICALCYCLEIS LATIN AMERICA 2006: THE POLITICALCYCLEIS BACKBACK

21

EMERGING DEMOCRACIES IN LATIN AMERICAEMERGING DEMOCRACIES IN LATIN AMERICA

AverageAverage

Source: Javier Santiso, “Latin America’s Political Economy of the Possible: Beyond Good Revolutionaries and Free Marketeers”.

MIT Press. Cambridge, Massachusetts, 2006

Based on the Inter-American Development Bank

Democratic regimes in Latin America since transition (1978-2005)

0

5

10

15

20

25

30

35

40

Colombia Venezuela Peru Mexico Argentina Brazil Chile

Yea

rs

22

THE TIMING GAME: POLITICAL AND FINANCIAL THE TIMING GAME: POLITICAL AND FINANCIAL CRISISUSED TO BE SYNCHRONIZEDCRISISUSED TO BE SYNCHRONIZED

Nominal exchange rate depreciationand government change

0,94

0,96

0,98

1

1,02

1,04

1,06

1,08

1,1

1,12

1,14

1,16

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

Source: Frieden, Ghezzi y Stein, 2001

Country`s Total Elections 1 Colombia 13 1989 172 Costa Rica 11 1990 143 Guatemala 11 1991 34 Ecuador 10 1992 05 Chile 10 1993 106Peru 10 1994 187 Honduras 10 1995 68 Paraguay 9 1996 89Brazil 9 1997 7

10 El Salvador 9 1998 1511Republica Dom. 9 1999 1212 Uruguay 9 2000 1113Mexico 9 2001 414 Argentina 8 2002 1315 Nicaragua 8 2003 816Panama 8 2004 617 Venezuela 8 2005 518 Bolivia 7 2006 11

23

SOME COUNTRIES ACHIEVED TO DECOUPLE BOTH SOME COUNTRIES ACHIEVED TO DECOUPLE BOTH CYCLES: MEXICO IN 2000CYCLES: MEXICO IN 2000

-30

-20

-10

0

10

20

30

40

50

60

7001

/01/

1975

01/1

0/19

76

01/0

7/19

78

01/0

4/19

80

01/0

1/19

82

01/1

0/19

83

01/0

7/19

85

01/0

4/19

87

01/0

1/19

89

01/1

0/19

90

01/0

7/19

92

01/0

4/19

94

01/0

1/19

96

01/1

0/19

97

01/0

7/19

99

01/0

4/20

01

Source: Jorge Blázquez and Javier Santiso, 2004.

Timing of Presidential Elections and Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, Exchange Rate Depreciations in Mexico,

1975-20001975-2000 Election Year

Election Year

Election Year

24

OTHERS HAVE OVERCOME THE TEST OF FIRE OTHERS HAVE OVERCOME THE TEST OF FIRE MORE RECENTLY: BRAZIL IN 2006MORE RECENTLY: BRAZIL IN 2006

20%

25%

30%

35%

40%

45%

-180

-80

20

120

220

320

420

520

bp

Voter intention for Lula in the opinion polls

(left)

Spread Brazil-Emerging Countries and Electoral Polls1994

20%

22%

24%

26%

28%

30%

32%

-100

-50

0

50

100

150

200

pb.


(left)

Spread Brazil-Emerging Countries and Electoral Polls1998

Source: Based on Juan Martínez and Javier Santiso, 2003.

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1000

1200

1400


(left)

bp.Spread Brazil-Emerging Countries and Electoral Polls2002

Source: Datafolha, JP Morgan

25

VENEZUELA

ECUADOR

PERÚ

PARAGUAY

ARGENTINA

URUGUAY

MÉXICO

BRAZIL

COLOMBIA

CHILE

EL SALVADOR

NICARAGUA

HONDURAS

COSTA RICA

GUATEMALA

PANAMÁ

REPÚBLICA DOMINICANA

BOLIVIA

Next presidential elections

2007 - 200920062004 - 2005

LATIN AMERICA 2007: BEYOND THE POLITICAL LATIN AMERICA 2007: BEYOND THE POLITICAL CYCLECYCLE

26

Latin America: The pending challengesLatin America: The pending challenges

Fuente: The World Bank

Gini – Market Income Gini – Disposable Income

Note: Gini coefficiente calculated before and after taxes, social security and transfers.

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Latin America EuropeanUnion

USA Spain

Gin

i

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Latin America EuropeanUnion

USA SpainG

ini

27

Social Pacts and Fiscal PactsSocial Pacts and Fiscal Pacts

Fuente: The World Bank

Gini – Market Income Gini – Disposable Income

Note: Gini coefficient calculated before and after taxes, social security and transfers.

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Brazil Colombia Mexico Argentina Peru Chile

Gin

i

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Brazil Colombia Mexico Argentina Peru ChileG

ini

1 Columbia University February 6th 2007 Javier Santiso Chief Economist & Deputy Director OECD Development Centre LATIN AMERICA’S POLITICAL ECONOMY OF THE.

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