1 IN SEARCH OF A BETTER WORLD IN SEARCH OF A BETTER WORLD Stabilization Policies in Developing Stabilization Policies in Developing Countries Countries Ministry of Economy & Finance Madrid February 2-3 2006 Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre
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1 IN SEARCH OF A BETTER WORLD Stabilization Policies in Developing Countries Ministry of Economy & Finance Madrid February 2-3 2006 Javier Santiso Chief.
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IN SEARCH OF A BETTER IN SEARCH OF A BETTER WORLDWORLDStabilization Policies in Developing Stabilization Policies in Developing CountriesCountries
Ministry of Economy & Finance
Madrid February 2-3 2006
Javier SantisoChief Development Economist & Deputy Director
OECD Development Centre
2
11 Catching up versus falling downCatching up versus falling down
The quest for efficient stabilizationThe quest for efficient stabilization22
(c) Remittances: a new holy grail?(c) Remittances: a new holy grail?
While Latin American countries While Latin American countries experienced a decline…experienced a decline…
1950
1960
1970
1980
1990
2000/06
2000/06
1990
1980 1970
1960
1950
1950
1960
1970
1980
1990
2000/06
-4
-3
-2
-1
0
1
2
3
-30 -10 10 30 50 70 90deviation (%) of GDP per capita with respect to world average
($ 1990)
GD
P p
er c
apita
gro
wth
min
us w
orld
per
cap
ita g
row
th
(% a
nnua
lized
)
Mexico Chile Brazil
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
9
While Latin American countries While Latin American countries experienced a decline…experienced a decline…
2000/06
1990
1980
1970 1960
1950
1950
19601970
1980
1990
2000/06
1980
1970
1960
1950
1990
2000/06
-6
-5
-4
-3
-2
-1
0
1
2
-50 0 50 100 150 200 250 300deviation (%) of GDP per capita with respect to world average
($ 1990)
GD
P p
er c
apita
gro
wth
min
us w
orld
per
cap
ita g
row
th
(% a
nnua
lized
)
Venezuela ArgentinaColombia
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
10
……the Asian countries experienced the Asian countries experienced an historical jumpan historical jump
1950
1960
1970
1980
1990
2000/06
1950
19601970
1980
19802000/06
-2,5
-1,5
-0,5
0,5
1,5
2,5
3,5
4,5
5,5
-85 -75 -65 -55 -45deviation (%) of GDP per capita with respect to world average
($ 1990)
GD
P p
er c
apita
gro
wth
min
us w
orld
per
cap
ita g
row
th
(% a
nnua
lized
)
China India
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
11
11 Catching up versus falling downCatching up versus falling down
The quest for efficient The quest for efficient stabilizationstabilization22
(c) Remittances: a new holy grail?(c) Remittances: a new holy grail?
(b) Stabilization funds: the lost paradise?(b) Stabilization funds: the lost paradise?
12
Stabilization through fiscal Stabilization through fiscal mechanisms is difficult…mechanisms is difficult…
* without taxes on hydrocarbonsSource: Lora (2006)
Tax Revenue as GDP percentages (2004)simple averages; including social security
05
10152025303540
per
cen
t
13
……so is stabilization through reserves…so is stabilization through reserves…
Reserves in % GDP
0%
20%
40%
60%
80%
100%
120%
Source: Economist Intelligence Unit (2006) and World Bank (GDP 2004)
Reserves in bn US$818.9
0
50
100
150
200
250
300
China SouthKorea
India Singapore Malaysia Thailand Poland CzechRepublic
SaudiArabia
Venezuela SouthAfrica
Chile Colombia Pakistan
14
Developing countries following this Developing countries following this strategy face social costs and economic strategy face social costs and economic
arbitragearbitrage
According to Guidotti-Greenspan rule, liquid reserves should equal a country’s foreign liabilities.
This strategy implies costs arising from spread between private sector’s cost of short-term borrowing abroad and the yield Central Banks earn on liquid foreign assets.
According to Rodrik (2005), social costs of holding reserves can amount to 1% of developing countries’ GDP (assuming spread of 5%).
This amount is roughly the same as the projected gains for developing nations from successful conclusion of the Doha negotiations.
“Insurance premium” to stabilise a country through reserves may therefore outweigh expected benefits.
Contrary to what has happened, strategy should be to increase reserves AND simultaneously reduce short-term liabilities.
15
Stabilization through financial market Stabilization through financial market access in local currencies is for a lucky access in local currencies is for a lucky
few…few…
Country Date Issued MaturityAmount issued
(mill. US$)
Argentina Dec-96 Dec-98 250
Argentina Feb-97 Feb-07 500
Argentina Jun-97 Jul-49 500
Argentina Jul-97 Jul-49 500
Argentina Jun-01 Sep-08 931
Uruguay Oct-03 Oct-06 290
Uruguay Aug-04 Feb-06 250
Colombia Feb-05 Oct-15 325
Brazil Sep-05 Jan-16 1479
Colombia Nov-05 Mar-10 500
Source: BIS (2005)
16
11 Catching up versus falling downCatching up versus falling down
The quest for efficient stabilizationThe quest for efficient stabilization22
(c) Remittances: a new holy grail?(c) Remittances: a new holy grail?
(b) Stabilization funds: the lost paradise?(b) Stabilization funds: the lost paradise?
17
Latin American growth is linked to the Latin American growth is linked to the performance of primary products…performance of primary products…
Source: BBVAbased on national statistics
2004
Venezuela 83%
Peru 71%
Chile 60%
Colombia 46%
Argentina 38%
Brazil 30%
Mexico 14%
Latam 31%
Total exports
Export of commodities/
-1%
0%
1%
2%
3%
4%
5%
6%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-30%
-20%
-10%
0%
10%
20%
30%GDP and BBVA-MAP Latam
GDP growth rate
BBVA-MAP growth rate
Correlation = 0,65
Source: BBVA; BBVA-MAP Latam index monitors the trading prices of commodities in the region
18
5%
10%
15%
20%
25%
30%
35%
40%
45%
Cap
ital G
oods
(U
SA
)C
apita
l Goo
ds (
US
A)
Oil
Oil
Gas
(U
SA
)G
as (
US
A)
Cof
fee
Cof
fee
Tin
Tin
Alu
min
ium
Alu
min
ium
Cop
per
Cop
per
Ban
anas
Ban
anas
Silv
erS
ilver
Zin
cZ
inc
Shr
imp
Shr
imp
Soy
Soy
Sug
arS
ugar
Gol
dG
old
Con
sum
er G
oods
(U
SA
)C
onsu
mer
Goo
ds (
US
A)
Pro
duct
ion
Goo
ds (
US
A)
Pro
duct
ion
Goo
ds (
US
A)
Est
imat
ed d
evia
tio
n o
f th
e an
nu
al c
han
ge
rate
Source: CAF (2004)
……where price volatility where price volatility is particularly highis particularly high
19
Changes in commodity prices have a Changes in commodity prices have a large impact on the public budget…large impact on the public budget…
Source: Based on J.P. Morgan (2005)* using average WTI forecast of crude oil price of US$ 56.25
Impact of higher oil prices for net oil exporters in 2006
0
2
4
6
8
10
12
14
Venezuela Russia Ecuador Colombia Mexico
% o
f G
DP
Impact of US$ 1 change in fiscalaccounts
Estimated fiscal windfall* relativeto budget assumption of 2006
20
……but countries have varying success in but countries have varying success in using this revenue for macroeconomic using this revenue for macroeconomic
stabilizationstabilization
Colombia, Mexico, Russia (4.5)Colombia, Mexico, Russia (4.5)
Source: Own estimates and J.P. Morgan (2006)Scale runs from 0 (bad) to 5 (very good)
Oil revenues are captured in stabilization funds while money is spent on debt repayment, investment projects, or stabilization programmes
Oil revenues above budget assumption are channelled into stabilization fund while some portion is used to finance larger public budget
Newly set-up stabilization fund has so far financed deficits rather than being used to build up savings
Stabilization funds are either not utilised (Venezuela) or financial resources are used to support the budget rather than to repay debt
Chad has defied The World Bank by changing in 2006 its laws on managing petroleum revenues, to gain more freedom on spending it.
21
IN PRACTICE:
When prices soar, funds are dropped (Zambia in 1970s with mineral fund)
When they go up or down, the orgy of domestic spending continues (Venezuela after 1974)
Institutions are key stabilisers (Lynn, 1997)
IN THEORY
When commodity prices are high revenues are set aside
When prices go down, funds are used to cushion the blow
Commodity shocks have the same impacts
……success stories are raresuccess stories are rare
22
AND THEIR CONSEQUENCES:
Sharp appreciations and loss of competitiveness
Wasteful government spending and cronyism
Civil war in an African country varies from less than 1% to nearly 25% depending on resources (Collier, 2002)
COMMODITY BONANZAS…
Sudden inflow of dollar-denominated revenues
Rent-seeking behaviour in weak institutional contexts
Military spending and conflict propensity
The paradox of plentyThe paradox of plenty
23
Beyond economics: resource rents Beyond economics: resource rents countries show lower democracy scorescountries show lower democracy scores
Period Sample High Natural
Rents Countries
1970 3.29 (4.16) 0.96 (2.56)
1974 3.08 (4.22) 0.89 (2.56)
1978 3.18 (4.28) 1.32 (3.09)
1982 3.43 (4.29) 1.76 (3.41)
1986 3.72 (4.35) 1.28 (3.08)
1990 4.52 (4.27) 1.89 (3.49)
1994 5.29 (3.96) 2.00 (3.48)
1998 5.26 (3.98) 1.92 (3.43)
1970-1998 4.03 (4.26) 1.46 (3.11)
Source: Based on Collier and Hoeffler (2005)Range: 0 (low) to 10 (high)
24
One way of fostering growth is One way of fostering growth is through cluster approaches…through cluster approaches…
Gas, Bolivia
Aluminum, Venezuela
Oil, Ecuador
Minerals , Bolivia
Flowers, Ecuador
Minerals, Peru
Wood , Bolivia
Iron, Venezuela
Shrimp, Ecuador
Soy , Bolivia
Bananas, Ecuador
Asparagus, Peru
Fruits, Colombia
Oil, Venezuela
Coffee, Colombia
Flowers, Colombia
Fish Flour, Peru
0.00.02.02.0 3.03.0 0.00.01.01.0
Average growth rate of certain regional clusters (1998)
Source: CAF (2004)
25
……but success has so far been limitedbut success has so far been limited
Country Cluster
Exploitation and Export, minimum processing
Processing and export, import substitutions and public goods delivery
Export of some of the goods and services that are substituted
Export of processed refined products, inputs, machines and services associated to the cluster. The firms of the country associated to the cluster start to invest abroad
……largely outweighing the inflow of largely outweighing the inflow of capital through development assistancecapital through development assistance
Source: Based on OECD and World Bank (2006)
Percentage change between 1995 and 2004175.9%
55.1%
33.9%
-20.0%
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
Workers remittances Foreign directinvestment
Official developmentassistance
Private debt andportfolio equity
in bn of US$
0
20
40
60
80
100
120
140
160
180
Workersremittances
Foreign directinvestment
Official developmentassistance
Private debt andportfolio equity
bn
US
$
1995
2004
29
Remittances flows are particularly Remittances flows are particularly strong towards low-income countries…strong towards low-income countries…
Source: Based on OECD and The World Bank (2006)
Share of GDP
31.1
27.1
25.8
24.8
22.5
20.4
17.4
17.2
16.2
15.5
13.5
13.2
12.4
12.4
12.1
11.9
11.7
11.7
11.3
10
0 5 10 15 20 25 30 35
Tonga
Moldova
Lesotho
Haiti
Bosnia and Herzegovina
Jordan
Jamaica
Serbia and Montenegro
EI Salvador
Honduras
Philippines
Dominican Rep.
Lebanon
Samoa
Tajikistan
Nicaragua
Albania
Nepal
Kiribati
Yemen, Rep.
Billions of Dollars
21.7
21.3
18.1
12.7
11.6
6.9
6.8
6.5
6.4
4.2
4.1
3.9
3.6
3.4
3.3
3.2
3.2
3.2
3
2.8
0 5 10 15 20 25
India
China
Mexico
France
Philippines
Spain
Belgium
Germany
United Kingdom
Morocco
Serbia
Pakistan
Brazil
Bangladesh
Egypt, Arab Rep.
Portugal
Vietnam
Colombia
United States
Nigeria
30
……having a large impact on a country’s having a large impact on a country’s indebtedness classificationindebtedness classification
Source: Based on The World Bank (2005); data: 2003
Indebtedness classification including and excluding remittances
732
257
145178
124
355
208
114 11682
0
100
200
300
400
500
600
700
800
Lebanon Ecuador Morocco El Salvador Guatemala
deb
t in
% o
f ex
po
rts
excluding remittances
including remittances
31
Although remittances seem to have a Although remittances seem to have a pro-cyclical effect in 2/3 of developing pro-cyclical effect in 2/3 of developing
countries…countries…
-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1
Lebanon
Slovak Republic
Poland
Benin
Ethiopia
Argentina
Pakistan
Nigeria
Brazil
Honduras
Indonesia
Eritrea
Dominica
Vanuatu
Oman
Mali
Togo
Kenya
Cote d Ivoire
Morocco
Maldives
Turkey
Nepal
Thailand
Papua New Guinea
Dominican Republic
Estonia
Russia
Albania
Yemen, Rep. of
Country Correlations between theCyclical Components of Remittancesand GDP (1975-2002)
Source: Giuliano/Arranz (2005)
32
……there is also evidence that remittance there is also evidence that remittance flows can act counter-cyclicalyflows can act counter-cyclicaly
Source: Based on The World Bank (2006)Note: in a 5 year interval, red denotes year of external shock
Remittances as a share of personal consumption, two years before and two years after financial crisis
1.2
0.5
1.5
1.1
0.5
1.7
2.0
1.4
2.02.1
1.0
1.81.9
1.1
2.0
0
0.5
1
1.5
2
2.5
Mexico Indonesia Thailand
Remittances as a percentage of private consumption, two years before and two years after natural disaster
3.8
7.9
5.7 5.24.2
8.9 8.4
5.54.4
10.49.6
5.64.7
11.3 11.3
7.7
5.1
10.8
15.5
8.4
0
2
4
6
8
10
12
14
16
18
Bangladesh Dominican Republic Haiti Honduras
pe
rce
nt
Remittances as a share of personal consumption, two years before and two years after political conflict
16.9
0.7
16.9
2.9
12.7
3.2
17.0
1.0
12.3
0.8
0
2
4
6
8
10
12
14
16
18
Albania Sierra Leone
33
Remittances flows could even grow Remittances flows could even grow further through adequate policy further through adequate policy
measuresmeasures
Source: The World Bank (2006)* assuming reduction of transactions cost to 2-5% and elimination of dual exchange rates
Estimated increase in formal remittances through transactions cost reduction
122
99
73
55 54
0
20
40
60
80
100
120
140
Sub-Saharan Africa Latin America and theCaribbean
Eastern Europe andCentral Asia
South Asia All developingcountries
perc
ent
34
The central issue for developing The central issue for developing countries:countries:
Transaction costs but not in all Transaction costs but not in all countriescountries
Remittances costs in Mexico (%, for 200 USD)
13.0
7.37.4
9.2
8.1
2000
2001
2002
2003
2004
Source: Pew Hispanic Center
Remittances costs in Latin America * (%, 200 USD)
12.111.3
10.68.9 8.6 8.2
7.3 7.3 7.3 6.9 6.4 5.8 5.6 5.4
7.9
Cu
ba
Re
p.
Do
min
ica
na
Jam
aic
a
Ha
iti
Ve
ne
zue
la
Bo
livia
Mé
xico
Ho
nd
ura
s
Gu
ate
ma
la
Nic
ara
gu
a
Co
lom
bia
El S
alv
ad
or
Pe
ru
Ecu
ad
or
Ave
rag
e
* From USA; 2004
Source: PEW Hispanic Center
35
Uses of remittances in Mexico in 2004% of total
Source: Fomin y Pew Hispanic Center
78.0
7.0 5.0 4.0 1.0 1.0
ConsummerGoods
Education Savings Others Investment Households
The central issue for developing The central issue for developing countries: How to capitalize countries: How to capitalize
remittances’ bonanza?remittances’ bonanza?
36
More remittances channeled through formal financial systems in order to increase the potential tax base of the recipient country.
More competition, combined with appropriate legislations and institutions, in order to reduce transaction costs: -60% between USA and Mexico since 2000.
More interconnected banking systems between OECD and non OECD countries in order to facilitate the access to credit in low income countries.
Trans-national systems of guarantees in order to facilitate the access to credit for durable goods.
Banking accounts in hard currencies in recipient countries in order to transfer the exchange rate risk, and highly remunerate in order to incentive savings and capital accumulation in low income countries.
Banking accounts in sending countries highly remunerated (spread with the market covered by the State as ODA?), if the previous option is not technically feasible (second best option).
The central issue for developing The central issue for developing countries: How to capitalize countries: How to capitalize
remittances’ bonanza?remittances’ bonanza?
37
11 Catching up versus falling downCatching up versus falling down
The quest for efficient stabilizationThe quest for efficient stabilization22
(c) Remittances: a new holy grail?(c) Remittances: a new holy grail?
(b) Stabilization funds: the lost paradise?(b) Stabilization funds: the lost paradise?
38
European countries experienced an European countries experienced an impressive catching up process …impressive catching up process …
2000/06
1990
1960
1970
1980
1950
1990
2000/06
1980
1970
1960
1950
2000/06
1990
1980
1970
1960
1950
-3,5
-2,5
-1,5
-0,5
0,5
1,5
2,5
3,5
4,5
0 50 100 150 200 250deviation (%) of GDP per capita with respect to world average
($ 1990)
GD
P p
er c
apita
gro
wth
min
us w
orld
per
cap
ita g
row
th
(% a
nnua
lized
)
Spain Portugal Italy
Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005
39
… … which invite to focus on some of which invite to focus on some of the key drivers of their success the key drivers of their success
storiesstories European anchoring and sound macro-economic policies have been
major drivers of the impressive Spanish catching up.
Interestingly Spain has been a major recipient of remittances: Spanish emigrants had a positive impact in the development of Spanish financial sector.
What could be the lessons of the Made in Spain for developing countries? Highly remunerated banking accounts in hard currencies for recipient countries? A Policy Dialogue activity in order to share experiences between bankers and policy makers.
Spain is a major sending country of remittances (3,4 billons of Euros in 2004 according to the Banco de España), most of them towards 3 countries (Ecuador, Colombia and Morocco) and at the same time Spanish private institutions are major financial operators in Latin America.
A window of opportunity for innovative development finance based on public private partnerships and co-development finance?
40
Thank youThank youfor your attention!for your attention!