Economic Survey of Latin America and the Caribbean 2005-2006

Economic Survey OF" L A T I N A M E R I C A A N D THE C A R I B B E A N

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The E~wno~nir S u n q qf Lntirz Awrriccr rltd h, Cnribbean is issued annually by the ECLAC Economic Development Division. The 2005-2006 cdition was prepared under the supervision of Osvaldo Kaccf, Officer-in-Charge of the Division; Jiirgcn Wcller and Sandra Manuelito were responsible for its ovcrall coordination. In thc preparation of this edition. the Economic Dcvclopinent Division was assisted by the Statistics and Economic Projections Division, thc Latin American and Caribbean Institute for Economic and Social Planning (ILPES). the Division of Intcr~lationalTradc and Integration, the ECLAC subregional headquarters in Mexico arid Port of Spain and the country offices of the Commission in BogotB, Brasilia. Buenos Aires and Montevideo. Thc regional analyses werc prcparcd by the following experts (listed in order of presenti~tionin the Srlnlql): Osvaldo Kacef (introduction), Omar Bello and Rafiicl L6pcz Monti (intcl-national situation), Juan P;~hluJiminez (fiscal policy), Rodrigo Ckcarno (exchange-rate policy). Herniin Cortks (~nonetarypolicy), Sandra Manuelito (economic ;~clivityand investment arid domestic prices). Jiirgen Weller (ernploymcnt and wages), Omar Bello and Filipa Correia (external sector) arid Roberto Iglcsias (special chapter on the role of the real cxchange rate imd investment in export diversification). The Ecorlonlic Projections Ccntrc of thc Statistics and Economic Projections Division provided inputs on the outlook for economic growth and inHatlon in 2006 and 2007, The country rcports are based on studies conducted by thc following cxpcrts: Omar Rcllo (Bolivia), Adri6n Bratescu (Costa Rica and Nicaragua), Kudolf Buitelaar (Surinamc). Rodrigo Chrcarno (Ecuador), Filipa Correia (Paraguay), ~ l v a r oFuentes and Jorgc Hcrnhnde7 (Uruguay), Jesus Garcia (Cuba), Randolph Gilhert (Haiti), Victor Gotlinez (Dominican Republic), Michael Hendrickson (Barbados and Guyana). Daniel Heymann (Argentina). Luis Fclipc Ji~ndncz(Chilc). Sandra Manuclito (Bolivarian Republic of Venezucla), Jorge Mattar (Mexico), Claudia Meza (Colombia). Guillemio Mundt (,Guatemala and Honduras). Carlos Mussi (Brazil). Oliver Paddison (Bahamas and Belize), Igor Paunovic (Panama). Esteban Perez (Turks and Caicos Islands, Jamaica and OECS). Juan Carlos Rivas (El Salvador) and Jiirgen Weller (Peru). The note on Trinidad and Tobago was prepared by ECLAC Subregional Headquarters for the Caribbean. Jazmin Chiu, Alejandr;~Acevedo and Vianka Aliaga wcrc rcsponsihlc for thc proccssinp and prcscntation of the statistical data. Gloria Bcns:m was responsible for ensuring thc consistcncy of texts, data and stntisticnl material. Jkssica Cuadros and Juan Josk Pereira revised different chaptcrs of thc publication, while the secretarial work was carried out by Maritza Agar.

The following symbols have been used in the tables shown in thc Slrrvey: Three dots ( . ..) indicate that data are not available or arc not separately rcportctl. A dash (-) indicatcs that thc amount is nil or negligible. A 1-ull stop (.) is uscd to indicate decimals. Thc word "dollars" refers t o United States dollars unless otherwise specified.

United Nations Puhlicatiun ISUN: 92-1-121593-5 ISSN printed version: 0257-21 84 ISSN onlinc version: 1681 -0384 LClG.23 14-P Salcs No.: E.06.II.G.2 Copyright Q United Nations. Decenlbcr 2006. All rights reserved Printed in Sar~tiago.Chilc - United Nations

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Economic Survey of Latin America and the Caribbean 2005-2006

Contents

Foreword .............................................................................................................................................................................. Executive Summary............................... ............................................................................................................................... Chapter l Introduction ............................................................................................................................................................................. A . Highlights o f rccent trends ............................................................................................................................................... B . International nirtrket trends and their probable impact on Latin America and the Caribbean ......................................... 1 . Thc international situation ......................................................................................................................................... 2 . Effects on L. atin America and the Caribbean ............................................................................................................. C . The outlook for thc economies of Latin Amcrica and thc Caribbean .............................................................................. D . Imtin America arid the Caribbean: growth and inflation in 2006 and 2007 ..................................................................... Chapter II International economy .......................................................................................................................................................... A . World growth .................................................................................................................................................................... B . Intlr~tionand economic slowdown in the United States: A global conccrn ................................................................... C . Invcst~nentin production declines amid increasing uncertainty .................................................................................... I . Commodity prices ...................................................................................................................................................... Chapter Ill Macroeconomic policy .................................. .,..................................................................................................................... Fiscal policy ..................................................................................................................................................................... 1. Introduction ............................................................................................................................................................... ........................................................................................ 2 . 2003-2005 in comparative t e r m ..................................... 3. The year 2005 in aggregate tcmls .............................................................................................................................. 4 . 2005 in disnggrcgatecl tcrms .................................................................................................................................... 5. Subreginnal overvicw ........................... ................................................................................................................ h . Conclusions ............................................................................................................................................................. Exchange-mte policy ........................................................................................................................................................ 1. Exchange-rate movements in 2005 ............................................................................................................................ 2 . Exchange-rate movements in early 2006................................................................................................................... 3 . Equilibl-ium cxchangc rates and ctnigrant remittances .............................................................................................. 4 . lntervcntion in thc exchangc market .........................................................................................................................

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Economic Commission for Latin America and the Caribbean (ECLAC)

C.

Monetary policy ............................................................................................................................................................... 1. Monetary policy in thc rcgion ................................................................................................................................... . . 2 . Nomtnal lnterest rates ................................................................................................................................................ 3 . Monetary policy of the Caribbean countrics ............................................................................................................. 4 . Countries whose currency is tied to the dollar .......................................................................................................... 5 . Real interest rates ....................................................................................................................................................... h . Bank credit ................................................................................................................................................................. 7 . Monetary aggregate\ ............................ ....................................................................................................................

Chapter lV Domestic performance ................... . . ................................................................................................................................. A . Economic activity and investment ................................................................................................................................... B . Domestic prices ................................................................................................................................................................ C . Employment and wages ................................................................................................................................................... 1. A considerable drop in unernploymcnt ...................................................................................................................... 2 . Reduction in thc labour-forcc participation rate ........................................................................................................ 3. Expansion of employment ......................................................................................................................................... 4 . Little variation in wagcs ............................................................................................................................................ 5 . Prospects for 2006 ..................................................................................................................................................... Chapter V External sector........................................................................................................................................................................ ........................................................................................................... A . Balance-of-pyments current account ........*..... . . l . Thc currcnt account ................................................................................................................................................... 2 . Trade in goods and services ....................................................................................................................................... 3. Tern~sof trade ............................................................................................................................................................ B . Capital flows and exlernal debt ........................................................................................................................................ 1 . Capital and financial account balance .................................................................................................................... ... 2 . Management of external liabll~tles............................................................................................................................ 3 . The region's international reserves ............................................................................................................................ 4 . International bond issucs ........................................................................................................................................... S . External debt to GDP ratio ........................................................................................................................................ 6. Outlook for 2006 ....................................................................................................................................................... Chapter VI The role of the real exchange rate and investment in export diversification in Latin America and the Caribbean ...................... ,. ................................................................................................ Introduction .............................................................................................................................................................................. A . Dctcrmiiiants of export diversification ................... ........................................................................................................ 1. Real devaluation as m instrument for the diversification of production ................................................................ 2 . Volatility of the real exchnngc mte and the reaction of exportable supply ........................................................... 3. Devaluntion of the real exchange rate . macmeconomic instability and investment in exportable goods ................. B . Observations on export diversification i n the region ....................................................................................................... C . Econolnctric analysis of the determinants of export diversification ............................................................................ ... . . ............................................................................................................................... l . The data ....................... . . ...................................................................................................................................... 2. Results ........................ .

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Stat~st~cal Annex .................................................................................................................................................................... ECLAC publications ..............................................................................................................................................................

Economic trends in the countries of the region (See enclosed CD-ROM)

Economic Survey of Latin America and the Caribbean r 2005-2006

Tables Gross domestic product ........................................................................................................................................ Terms of trade: Variation rclativc to the average for the 1990s .......................................................................... Latin America and the Caribbean: GDP growth . 2004-2007 .............................................................................. Latin America and thc Caribbean: Inflation. 2004-2006 .................................................................................... World GDP growth ratcs . 2002-2005 ................................................................................................................... Latin America and the Caribbean: Ccntral government fiscal indicators ........................................................... Latin America and the Caribbean: Variation of fiscal aggregates, 2004-2005 ..................................................... Latin America (selcctcd countries): Bank crcdit ................................................................................................. Latin America and thc Caribbean: Variation in M1 ............................................................................................ Latin Amcrica and the Caribbcan: GDP and per capita GDP, average annual growth ratcs ................................ Latin Amcrica: Components of aggregate supply and demand . average annual growth rates ............................. Latin America: Components of gross domestic investment, average mnual rate of variation ............................ Latin America and the Caribbean: Consumer price indcx . 2004. 2005 and 2006 ............... .......................... Latin Amcrica and the Canbbcan: Nominal exchange rate, local currency per United States dollar. 2004, 2005 and 2006 .................................................................................................... Table 1V.A Latin America and the Caribbean: Wholesale price indcx. 2004 . 2005 arid 200h ............................................... Latin America and the Caribbean: Labour market indicators, 199 1-2005 ........................................................... Table IV.7 Latin America and the Chribbcan: Labonr market indicators, by country. 2004 and 2005 .................................. T~ablcIV.8 Table IV.9 Latin America and the Caribbean: Formal employlnerit indicators. 1998-2005 .................................................. Table IV.10 Latin Amcrica: Unernployinent rates, employment rates and real average wagcs, first hdvcs of 2005 and 2006 ............................................................................................................................... Tablr VI. 1 Exports of durablcs and diffusers of technical progress as a percentage of total exports to the rest of world (XDUTI'IXT) . sclccted periods ................................................................... Table V1.2 Rcsults of the estiinatcs for all the countries in the sample ................................................................................. Table V 1 3 Rcsults for the s:~inplcwhen Mexico and Costa Hica arc cxcluded ..................................................................... Tablc VI.4 Summary of clasticities ........................................................................................................................................

Table I .1 Tablc 1.2 Table 1.3 Table 1.4 Table I1. I F ~ b l e111.1 Table 111.2 Table 111.3 Table 111.4 Tdbk IV.1 Tablc IV.2 Table IV.3 Table IV.4 Tablc IV.5

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Statistical Annex Table A- l Table A-2 Tablr A-3 Table A-4 Table A-S Tablc A-6 T~lblcA-7 Table A-X Table A-9 Tablc A- 10 Table A- l I Tablc A- 12 Table A- 13 Table A-14 Table A- 15 Table A- I h Tnble A- 17 Table A- 18 Tddc A- 19 Table A-20 Tahlc A-2 1 Table A-22 Table A-23 Tablc A-24 Table A-25

Latin America and the Caribbean: Main econon~icindicatoss ............................................................................. Latin America and the Caribbean: Gross domestic producr ............................................................................... Latin America and thc Caribbean: Pcr capita gross domcstic product ................................................................. Latin America and thc Caribbean: Gross fixed capital formation ........................................................................ Latin America and thc Caribbean: Financing of gross domestic investment ..................................................... Latin Arncrica and the Caribbcan: Balance of payments ..................................................................................... Latin A~ncricaand the Claribbcan: Cu~rentaccount of the balance of paymcnts ................................................. Latin America and the Caribbean: Exports and imports of goods . f.o.b. ............................................................. L+tin America and the Caribbean: Exports of goods, f.o.b. ................................................................................. Latin Anlcrica and the Caribbean: Imports of goods .f.o.b. ................................................................................. Latin America and the Caribbean: T r m s of trade for goods . f.o.b.1f.o.b. ........................................................... I.,:~tin America and the Caribbean: Net resourcc transfers .................................................................................... Liltin A~nericaand the Caribbean: Total net capital inflows and net resource transfers ...................................... Latin America and the Caribbean: Ratio of total accrued interest to exports of goods and services ................... Latin America and thc Caribbean: Katio of profit paymcnts to exports of goods and scrvices ........................... Latin America and the Caribbean: Net forcign direct investment ........................................................................ Latin America and thc Caribbean: International bond issues ............................................................................... (.,atin America and the Caribbean: Total gross external dcbt ............................................................................... L:ltin America arid the Caribbean: Ratio of total gross external debt to exports of goods and scrvices .............. Latin America and the Caribbean: Stock exchange indices in dollars ................................................................. Latin America arid the Caribhcan: Real effective cxchange rates ...................................................................... Latin America and the Caribbean: Urban uneinploy~nent.................................................................................... Latin America and the Caribbean: Consumcr prices ............................................................................................ Latin America and the Caribbean: Avcragc rcal wages ....................................................................................... Latin America and the Caribbean: Public-sector deficit (-) or surplus ................................................................

Economic Commission for Latin America and the Caribbean (ECLAC)

Figures Figurc I .l Figurc 1.2 Figurc 1.3 Figure 1.4 Figurc 1.5 Fipurc 1.6 Flgul-c 1.7 Figurc 1.8 Figurc 1.9 Figure I . l 0 Figure 11.1 Figure 11.2 Figure 11.3 Figure 11.4 Figure 11.5 Figure 11. h Figure 111.I Figure 111.2 Figure 111.3 Figure I11.4 Figure 111.5 Figure 111.6 Figure 111.7 Figurc 111.8 Fipurc 111.9 Figure I11. I0 Figure I11.I1 Figure 111.17 Figure 111.13 F~gurc117.14 Figurc 111.15 Figurc 111.16 Figurc 111.17 Figure 111. I X Figure 111.19 Figure h'.I Figure IV.2 Figure IV.3 Figure IV.4 Figure 1V.S Figure 1V.h Figure IV.7 Figurc IV.8 Figurc IV.9 Figure IV. l 0 Figure IV. I] F~gurcIV.12 Figurc IV.13 Figure IV.14 Figure IV. 1 5

Exports of goods: Average annual growth ratcs . 2004-2005 ................................................................................ Contribution to growth of gross fixed capital formation ...................................................................................... LIBOR: Quarterly average in real terms .............................................................................................................. Latin America: Basic balance, 2005 ..................................................................................................................... Latin America and the Caribbean: Total gross cxtcrnal debt ............................................................................... Latin America and the Caribbean: Short-term cxtcrnal debt ....................... . . .................................................. Latin America and the Caribbean: Revenue . expenditure and primary fiscal balancc ........................................ Latin America, emerging economies and industrialized countries: Public debt as a pcrccntage of GDP............ Economic growth in Latin Amcrica and thc Caribbean. 2000-2007 .................................................................... Latin America: lntlation . 2005-2006 ............................ ........................................................................................ Distribution of growth in developing countries ................................................................................................... United States: Petroleum prices . core inflation and the effective federal funds rate ................... . . .................. United States: Current account imbalances, by component. 1 996-2005 .............................................................. Short- and long-tern yields of United States Treasury Bonds, July 2004-July 2006 .......................................... Yicld curve of United States Treasury Bonds, 2005 and 2006............................................................................. Price indices, scries, trends and cyclical components .......................................................................................... Latin A~ncricaand the Caribbean: Primary balance .ovcrall balance and standard deviation for central government ........................................................................................................... Latin Amcrica and the Caribbean: Primary balancc for thc non-financial public sector ..................................... Latin Amcrica and the Caribbean: Variation of the main ccntral government fiscal indicators .......................... Latin America and the Caribbean: Breakdown of fiscal revenue ............... . ......,.............................................. Latin America and the Caribbean: Tax burden and composition of tax revenues ............................................. Latin America and the Caribbcan: Conlposition of central government cxpcnditure ........................................ Latin An~criricttand thc Caribbean: Central government capital cxpcnditure and physical invcstmcnt expenditure ....................... . . ....................................................................................... Latin America and the Caribbean: Social cxpcnditure ......................... ................................................................ Latin America and the Caribbcan: Public debt of the non-financial public scctor .............................................. Latin America and the Caribbcan: Loans provided by the International Monetary Fund .................................... Latin America and thc Caribbean: Public debt and central govcrnmcnt primary balance . 2005 ......................... Latin America and thc Caribbean: Real effective exchange rate in rclation to the rest of thc world ................... Peru and Chile: Total real effcctivc cxchangc rate ............................................................................................... Brazil and Mexico: Total real effective exchangc ratc .................................... ..................................................... Latin America: Total real effective cxchangc ratc. June 2006 ............................................................................. Latin America and the Carihbam: Net current transfers to the region, 2005 ....................................................... Latin America: Variation in net reserves othcr than gold or IMF resrrves, 2004-2005 ..................................... Latin America and thc Caribbean: Real interest rates .......................................................................................... Latin America and the Caribbean: Nominal interest rates ................................................................................... Latin Amcrica: GDP and per capita GDP............................................................................................................ Latin Amcrica: Year-on-year quarterly CJDP growth rates ................................................................................... Latin Amcrica (14 countries): Year-on-year quarterly GDP growth rates ........................................................... Latin Amcrica: Scasonally adjusted quarterly GDP growth rates in relation to thc immediately preceding quarter ................................................................................................................... Latin America: GDP and gross national disposable inconic .2004-2005, ....................................................................... average annual growth rates for the biennium .................... . . . Latin America: Componcnts of gross national disposable incomc ...................................................................... Latin America: Saving-investment ratio .............................................................................................................. Latin America: Gross fixed capital formation ...................................................................................................... Latin America: National saving in current dollars and its purchasing power in terms of imported capital goods ..................................................................................................................... Latin America: vari;ition in consumer . goods and services price indices ............................................................ Latin Amcrica: Variation in the consumer price index and the corc inflation index .......................................... South America and Mexico: Consumer price index and gasolinc prices, cuniulative variation, 2003-200S....... Economic growth and labour participation .......................................................................................................... Latin America and the Caribbean: Economic growth and employment, 2004-2005 ........................................... Latin America and the Caribbcan: Variation in employment, by brunch of activity and occupational category. 2005 ..........................................................................................................

Economic Survey of Latin America and the Caribbean 2005-2006

Figure V. I Figure V.2 Figure V.3 Figurc V.4 Figure V.5 Figure V.h Figure V.7 Figure V.8 Figure V.9 Figure V.10 Figure V 11 Figure V. 12 Figure V. 13 Figure V.14 F~gurcVI.1 Figure V1.2

Figure VI.3

Latin America m d the Caribbean: Current account balar~ue.............................................................................. Caribbean countries: Current account balance ................................................................................................... Latin Alncrica and the Caribbean: TI-endof the cu~rcntaccount balance ............................................................ Latin Amcrica and the Caribbean: Percentage variations in merchandise exports f.o.b., by unit price and volumc . 2005 ..................................................................................................... Latin America and thc Caribbean: Terms of tndc ................................ ..,,........................................................... Tcr~nsof trade ......................... ..,........................................................................................................................... Latin Americii and the Caribbean: Breakdown of basic balance . 2000-2005 ..................................................... Latin America and the Caribbean: B]-eakdownof basic balance by rcgion, 2000-2005 ..................................... Latin America and thc Caribbean: International reserves .................................................................................... Latin America and the Caribbean: International bond issucs ............................................................................... Latin America: Interest rate sprcads, measured by EMBT+ ............................................................................... Latin America: Country risk as measured by EMBI+ in 2005 and 200h ............................................................. Morgan Stanley Capital International Index (MSCI) for emcrging markets ....................................................... Latin America: Morgan Stmlcy Capital lntcrnational lndcx (MSCI)................................................................ Averagc annual rates of variation in thc proportion of cxports of durables and diffusers of technical progrcss relative to total exports to thc rest of world and in the real exchangc rate ............................................ Annual growth rate of the proportion of exports of durablcs and diffuscrs of technical progress relative to total exports to the rest of world (XDDTPIXT) and annual volatility of thc real exchange rate ........................................................................................................................................................ Annual growth rate of the proportion of exports of durables and diffusers of technical progress relative to total exports to the rest of world (XDDTPIXT) and red imports of capital goods ............................

Boxes Box 1.1 Box 1.2 Box 111.1 Box I 1 1 2 Box 111.3 Box IV.I Box IV.2 Box IV.3 Box V. 1 Box v.2 Box V1.I

Differences between GDP and gross national disposable income ....................................................................... How much should Latin Amcrica and the Caribbean invest'? ............................................................................. Rising p~iccsfor non-rcncwable resources and fiscal policy in countries specializing in such resources .......... Tax revcnuc trer~dsin Latin Aniericn ................................................................................................................... Foundations of ~nacrocconornicpolicy coordination: Fostering dialogue as a policy tool in Latin Amcrica ...... The Cricket World Cup and its expected cffcct on economic activity in English-spcaking Carihbcan countries .................................... ............................................................................. Invest~ncntand growth ......................................................................................................................................... C'hangcs in the characteristics of labour demand ...................................... .,......................................................... Thc oil bill in Central America and the Cxibhcan ............................................................................................... Capital-account volatility and cyclical fluctuations in GDP in Latin American countries .................................. Methodology ......................................................................................................................................................

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Economic Survey of Latin America and the Caribbean 2005-2006

Foreword

This year's edition of the Ecnironlic. S~trr'eyof Ltifiil America nrld the Caril?kecrrl is the fifty-eighth in the series. It is divided into two pwts: the first analyses the main features of the regional economy, while the second cxamines the situation in the individual countries of Latin America and the Caribbcan. A full statistical appendix is included, containing regional and national data. The introduction of the first part outlincs the relatively favourable perlormance af the re,gion's economy as a whole in recent years and analyses the factors which could jcopiirdize that performance. It underlines the growing uncertainties in the global economy. which could endanger the prospects for growth in the region. Nonetheless, it draws attention to improvements in a number of economic indicators, rellecting the reduced vulnerability of the region's economies to any adversc dcvclopments in the global situation. The following chapters are devoted to the international situation, macroeconornic (fiscal, exchange-rate and monetary) policy. and the region's performancc internally (level of economic activity, inflation, employment and wages) and externally (trade balance, transfers and income. capital flows and

external debt). A statistical appendix illustrates trends in the main indiciitors at the rcginnal level. One o f the principal challenges facing the rcgion is export diversification, cspeciiilly the nccd to offer more knowledge-intensive goods. The spccial chapter in this edition of thc Er.ononric Survry provides an analysis from the macroeconomic viewpoint of thc ways in which that process is affected by levels of. and trends in, investments and real cxchange rates. The second part of the document provides overvicws of tnacroeconomic policies and trends in the Latin American and Caribbcan countries in 2005 and the first half of 2006. The country reports includc tables on thc main econonlic indicators. Beginning with this edition of the Ecorroniic. S ~ i r v e y ,these reports and the statistical appendix specific to each country are includcd in the CD-ROM provided with the print version and are available on the ECLAC websitc (www.eclac.org). The tiihles contained in the statistical appendix providc rcady access to data for recent years and fiicilitate the creation of spreadsheets. The CD-ROM also contains the electronic version of the rcgional parts of the text. Thc statistical information contained in this publication has been updatcd to 30 June 2006.

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Economic Survey of Latin America and the Caribbean 2005-2006

Executive Summary

Thc econonly of the Latin Arncncan and Caribbean rcgion grew by 4.5% in 2005 and is expccted to expand by around S%, in 2006, thereby completing a fourth consecutive year of growth. If thesc projections are borne out, the averaze annuitl increasc in the region's GDP for this period will amount to approximately 4.3%, which translates into an average risc in per capita GDPof nearly 2.8% per year. In view of the moderate slowdown projected for the world economy, ECLAC estimates put the rcgion's growth rate for 2007 at about 4.5%. Although the region is growing more slowly than some other parts of the developing world, its economics' expansion is, in thc aggregate, combined with surpluscs on the countries' balance-of-paymcnts current accounts and sound public finances. This makes Latin America and the Caribbean considerably less vulnerable to external shocks. Under prevailing international conditions, which includc increasing market volatility and thc prospects of a gradual declino in world cconornic growth, the stylc (31' growth seen in the region over the past few years is providing a safety margin thitt will hclp it cope with m y changes in external conditions. The region's growth has been underpinned by the highly favourable external environment created by the world economy's steady expansion and abundant liquidity

on international capital markets. These factors have cnabled it to significantly incrcase its export volumes and have improvcd the terms of tradc for the South American countries, Mexico, and Trinidad and Tobago. In Mcxico. Central America and somc Caribbean nations, such as Grenada, Guyana and Jamaica, remittances from emigrant workers have been a major source of revenue. While the world economy may succeed in dealing with the threat of inflation and in rectifying existing global imbalances without any steep downturn in its growth rate, these factors are still a source of uncertainty. Some indicators iippear to be heralding a pcriod of greater global volatility. and the possibility cannot be ruled out that this may dampen growth somewhat and trigger a reversal in the net direction of somc capital flows back toward developcd countries. In view of the region's less vulnerable cxternal and fiscal positions, and so long as thcsc changes arc n~oderatc and occur gradually, thcre is no rciison to expect the region to make any major departures from the growth path it hits been following in rccent years. Thc world economy's growth rate slowed somcwhat in 2005, with the incrciise in global GDP amounting to 3.5%, cornparcd to 4.0% in 2004. However, China's and India's striking dynamism. with 2005 growth rates of

Economic Commission for Latin America and the Caribbean (ECLAC)

ovcr 9% and 8%, rcspcctively, has improved thc terms of trade for commodity exporters. and many emerging economies have therefore been able to sustain higher rates of expansion. In fact, Latin America's average commodity export prices continued to rise by rates of over 1 3 %with ~~ thc incrcase being led -as in 2004- by energy prices. This was reflected in a commodity pricc indcx that was 59.9% higher than its average level for the 1990s. In 2003-2005, unlike what occurred during some carlier cpisodes in the region, the countries' governments avoidcd expansionary fiscal policies and instead opted to usc the present growth phase to build up their primary surpluses and pay down their debt. The fiscal performance of the region's central governments allowed ~t to amass ii primary surplus (measured as a simple averagc) of 1.4% of GDP in 2005, compared with one of 0.6% in 2004. Calculations of the overall balance (i.e., once interest payments on public debt havc been iktorcd into the equation) show a reduction in the deficit from 1.9%)to 1.2% of GDP. Taking into account the broader nature of government accounts in the more decentralized countries of thc region, the nonfinancial public sector's primaly surplus climbed from 0.9% of GDP, on average, in 2002 to 3.1 % in 2005. The improvement seen in 2005 is attributablc to the widespread incrciisc in fiscal rcvcnucs, which outweighed a smaller increasc in expenditure. At the level of the non-financial public sector, the public debt-to-GDPratio for 2005, measured as a simple avcmgc, camc to 48.6%. down from thc 2004 figurc of 55.9%. The main factors behind this trend have been the region's large primary surpluses, debt restmcturings and the appreciation of many of the countries' currencies against thc dollar. Si~eablereductions were also made in the total public dcbts 01' countries included in the Heavily Indebted Poor Countries (HIPC) Debt Initiative. Thanks to the irnproved fiscal situation (which has reduced the countrics' borrowing requirements) and the build-up of reserves, there was less of an incentive for countries to enter into stand-by arrangements with the International Monetary Fund (IMF). One of thc major events to occur in this connection was the early repayment of IMF loans by two of the Fund's largest borrowers, Argentina and Brazil, in late 2005. As a result 01' these early repayments, which reduced the Fund's loan portfolio by ncarly half, Latin America ceased to be one of the Fund's main borrowers for the first time in many ycars. Judging from the budgets drawn up by the countries in late 2005, the fiscal information available during thc early months of 2006, and what appears to bc an upswing in expenditures during the first quarter, a smaller primary surplus is expected for 2006.

Exchange-rate policy in 2005 was quite heterogeneous and was a very influcntial factor in the build-up of reserves. One of the main reasons why it varicd so much from case to case is that the countries of the region usc different types of exchange-rate regimes. Countries that use exchange-rate targets havc to intcrvenc in thc market in order to keep their nominal parities within their target range, while counrrics with flexible exchange rates may intervene for a varicty of reasons, such as to rcducc cxchangc-rate volatility and avoid a serious currcncy misalignment or to accumulate reserves in ordcr to replenish stocks m d thuv be able to better withstand sudden changes in foreign-exchange flows (especially in thc case of countries with highly dollarized financial sectors). Between December 2004 and December 2005, thc Latin American and Caribbean region's real effective exchangc rate vis-a-vis the rest of the world appreciated by 8.3%. The extraregional effective ratc of cxchange appreciated throughout 2005, however, so a comparison of the average rates for 2004 and 2005 yields a smaller figure (4.5%). In 2005. the appreciation of the real effective exchangc ratc relative to the rest of the world was almost twice as high for South America (10.1% between December 2004 and December 2005) as, on average, for Central America, the Caribbean and Mexico (6%). In contrast. the aggregate rcal cffectivc exchange rate for the region vis-h-vis the rest of the world showed a slight depreciation (0.8%) in the first four months of 2006. Monetary policy in thc region has been adapting quitc swiftly when turning points were reached in external conditions, and particularly to dcvelopmcnts in I'inanciiil markets and shifts in the outlook for international cconomic activity. With some dilTcrcnccs in dcgrce depending on the status ofthc economy, priority has continued to be placed on keeping inllation undcr control. The central banks of the region are concerned about the nccd to prcvent the surge in oil prices from driving up price indices. Thc appreciation of almost all thc countries' currencies has helped to rein in the pace of price rises. howcver. Increases in the monetary policy rate were very slight in the great mitjority of the countries in 2005, despite the fact that real interest rates are fairly low in historical terms. The few exceptions are significant, however, since they include Brazil and Mexico, the region's largest countries. Frorn a medium-term perspective, in most of the countries real rates at the start of 2006 arc only slightly lower or higher than they werc three ycars ago. A majority of the countrics have seen a rise in rcal lending rates in recent months. This trend reflects the change ill direction of the United States Federal Reserve's interest ratc adjustmcnts in June 2004. Since that time, many of the region's central banks hiwe followed its lead. [,ending activity has rebounded from the depressed

Economic Survey of Latin America and the Caribbean 2005-2006

lcvcls observed beforc 2003. Nominal growth rates for total credit and private credit both topped 15% in the 12 months prior to the first quarter of 2006. This increase, which is a reflection of the improvement in global economic conditions. is higher than in preceding years and has brought thcse variables back up to their pre-200 1 levels. Thc Latin American and Caribbean region's economic growth rate of 4.5% in 2005 (5.9% in 2004) is attributable to the momentum provided by both domestic and extcinal demand. AlZcr having fallen steadily between 1999 and 2003, investment began to rebound in 2004 and continued to do so in 2005, thanks to the persistence of favourable external conditions, a high capacity utilization rate in many industries, the appreciation of the countries' exchange rates relative to their 2002-2003 levcls, and a larger credit supply. Meanwhile, low interest rates. the greatcr ~ivailabilityof credit and an increase in total wagcs fuelled an upswing in private consumption. In fact, total consumption was the only component of denland to rise more sharply in 2005 t l ~ in n 2004. Thc growth of the region's export volumcs in 2005 (8.4%) continued to outpacc GDP, while the expansion of imports ( 1 1.4%) attested to the strength of domestic demand (5. l %). The various sectors o f economic activity reflected the behaviour of the corresponding components of expenditure. More robust extcrnal demand continued to drive production in the mining and hydrocarbons sector (3.6%), and the cxpansion of domestic demand buoyed the manufacturing sector's performance (3.2%,) both in branches of industry catcring to the domestic market and in those that primarily expoiz their pl-odvcts to other countries within the region. Output in thc agriculturiil sector was up by 2.2Y0.The construction sector's strong growth (6.4% for the region as a wholc) i n many of the countries was reflected in an increasc in gross fixed capital fbrmation. Generally speaking. services expanded more than goods-producing sectors. The upturn in consumption spurred commerce, which posted an 5.6% incrcase regionwide. while the expansion of transport and communications (7.7% in regional tenns) was in large part a result of the strength of activity in goods-producing sectors and the growth sccn in communications, particularly mobile telephony. Tourism-related activities such as hotcls and restaurants. as well as the transport scctor, exhibited a great deal of dynamism. One of the most striking aspects of the region's performance in the last two years has becn the sharp rise in gross national disposable income, which (measurcd at constant prices) outstripped GDP growth, surging by 7.1 (% in 2004 and 5.9% in 2005. This incrcase can be attributed to the trading gains deriving from change in the terms of

trade, which, measured at 2000 prices, were equivalent to 1.7% 01' GDP in 2005 (0.4% in 2004). The region's national savings rates continued to climb, reaching a regional average. in currcnt dollars, equivalent to 22.4% of GDP -the highest since 1990. Inflation in the Latin An~cricanand Caribbean countries continued to trend downward in 2005. falling to a weighted average of 6.1% (as cornparcd to 7.4% in 2004). Measured as a simple average of national ratcs, it amounted to 7.3% (versus 8.6% ill 2004). Even though domestic demand (particularly private consumption) was significantly stronger in 2005, in v d o u s cases thc rise did not translate into steeper increases in consurner prices: as a result. core inllation was lower than the gcneral inllation ratc in almost all of thc countrics. The region's relatively high rate of economic growth in recent years has had it noticeable impact on its labour markets. In fact, 2005 was the third ycm in a rnw of marked increases in thc employment ratc. The 2005 rise of 0.5 points takes the rate up to 53.6% of the working-age population. It is inlportant to bear in mind, howcver, that thcse recent in~provementsare simply bringing the region's employment rate back up to where it stood in 1997. The reactivation of employment since 2003 has been of a markedly differcnt composition than beforc, as it is increasingly driven by the creation of wage-based jobs. 'This reflects businesses' growing confidencc in the outlock for growth and has led to an expansion of formal-sector employment in Inany economics of the rcgion. Against the backdrop of thcse favouriible economic trends, unemployment fie11 by over one percentage point to 9.1%. its lowest level sincc the mid- 1990s. This was due both to an increasc in ernploynient and a slowdown in thc growth of thc labour supply, as the labour participation rate dipped by 0.3 of a percentage point to 59.2% of the working-age population. Rccent irnprovententsnotwithstanding,unemployment remains high, with an estimated 1 X million pcople out of work. Furthermore, a sizeable percentage of new jobs nre in low-paying positions, and the number of short-tcrm employment arrangements in thc formal sector is on the rise. Thc labour market's reactivation in 2005 has not yet led to any significant risc in real wages, which were up by just 0.5%. 111the early n~onthsof 3006, the region's uncmploynlcnt rate continued to decline at ii fairly moderatc puce as thc net result of an increasc in employment and a modcst upturn in the participation rate. while real wages began to climb more quickly. For the third year in a row, thc region's balanccof-payments current account yielded a surplus. with the 2005 average amounting to US$ 35.325 billion, or the equivalent of 1.5% of its GDP. It also posted a

Economic Commission for Latin America and the Caribbean (ECLAC)

surplus of US$2 1.65 billion on the capital and financial accounts (including errors and omissions), or 0.9% of regional GDP. As it result, thc global balitncc totallcd US$ 56.977 billion, or 2.4% of regional GDP. The corresponding counterpart items were a US$ 35.265 billion ( 1 .S% of the region's GDP) increase in reserve assets, US$ 26.816 billion in payments on IMF loans ( l . 1% of GDP),and US$ 5.105 billion in cxccptional financing. The region therefore became a net recipient of' capital flows while at the same time running a surplus on its current account. This was the first timc that had happened (with thc cxccption of 2003, whcn both surpluses were much smaller) sincc thc beginning of the data series in 1980. The current account included a US$80.627 billion merchitndisc tradc surplus and a US$48.7 billion surplus in currcnt transfers, which represented 3.4% and 2.1 % of the region's GDP, respectively. Exports and imports were up by 20.0% and 18.2%. respectively. The expansion of external sales was the combined effect of an 8.1% increase in thc volumc of shipmcnts and an 1 1.0% risc in prices. In the case of imports, the volume was 12.1% higher and prices were 5.5% above the preceding year's levels. In contrast, the services and income balances ran deficits of US$ 18.5 19 billion (0.8% of GDP) and US$75.476 billion (3.2% of GDP), respectively. Foreign direct investment (FDI) totalled US$47.8 billion (2% of GDP), which was 9.7% more than the year before. At USs26.2 billion (I. I % of GDP),the deficit in short-term capital flows was smaller than in 2004. This figure was the net result of two opposing flows: on the

one hand, debt paydowns and external asset formation and. on the other, sizeable capital inflows in the form of portfolio investments. Thc rcduction in the region's externid debt wits coupled with a widcsprcad restructuring or debt profilcs aimed at diminishing cxposurc to shifting cxtcrnal conditions, particularly interest-rate and exchange-rate moven~ents. Liiibility management operations focused on extending external-debt maturities. retiring the more expensive debts, diversifying cxchangc-ratc risk by issuing debt instruments in currencies other than the United States dollar, and reducing that same form of risk by shifting more debt balances into local currencies. As a result, the Latin American and Caribbean region's external debtto-GDP ratio shrank from 37% of GDP in 2004 to 27% by late 2005. In 2006, rising intercst rates in the United States have begun to make thc markct morc risk-avcrsc. Whcn the United States posted a higher-than-cxpcctcd ratc of inflation in May, financial markets slumped, particularly in emerging (including Latin American) markets. This was triggered by investors' expectations of a stecp incrcasc in interest ratcs, which could in turn lcad to a cooling of the global economy's growth. Thc continuation ofthese trends is uncertain, as are the implications of a possible adjustment of global disequilibria. Be that as it may, macroeconomic conditions in the region, particularly its primary surpluses, build-up of reserves, and improved debt profiles, givc rcason to belicvc that the region is in a better financial position to copc with any future deterioration in the external environment.

Economic Survey of Latin America and the Caribbean 2005-2006

Chapter I

Introduction

The Latin Amcncan and Caribbean region gscw by 4.5% in 3,005 and is expected to expand by around 5% in 2006, thereby completing a fourth consecutive year of growth. Tf these projwtions are borne out, the average annual increase in the region's GDP for this period will aniount to approximately 17.6% (an annual average of 4.3%). which tran4utes into an average rise in pacapita GDPof nearly 12% (2.8% per year). This is only the second time that this has occurred in the region in the last 25 years (the first was in 1991-1994). In vicw of the moderate slowdown projected Sor the world economy. ECLAC estimates put the region's growth ratc for 2007 at around 4.591. Although high in historical tcrms, the region's prcscnt growth ratcs are lower than thosc bcing observed in some other parts of the developing world. It is noteworthy, however, that this economic expansion is, in the aggrcgatc, taking place in combination with surpluses on the countries' balance-of-payments current accounts and sound public finances. This makes the region considerably less vulncrable to external shocks. In this sense, the region's current growth phase is remarkable cven when viewed from a comparative intclnational perspective, both because of its reduced reliance on extel-nal saving and because of the speed at which it is paying down its debt. Under prevailing international conditions, which include increasing market volatility and the prospccts of a gradual slowing of world ecnncnnic growth, the style of growth sccn in Latin America and the Caribbean over the past fcw years is providing the region with a safety margin that will help it cope with any changes in extcrnd conditions.

Table 1.1

GROSS DOMESTIC PRODUCT (Projected growth rates) Country

2006

2007

7.6 4.2 4.0

5.5 4.0 4.0 5.5 4.5 5.0 3.0 3.0 3.5 2.5 4.0

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico

5.6 4.8 5.5 3.5 3.5 4.0 2.5 4.8 4.0

Nicaragua

3.5

Panama Paraguay Peru Dominican Republic Uruguay Venezuela (BolivarianRep. of)

6.5

Latin America Caribbean Latin America and the Caribbean

3.5 3.5

3.5

6.5 3.5

5.8 8.0 5.0 8.0

6.0 4.0 6.0

4.9

5.5

6.3

4.3 4.3

5.0

4.3

Source: Economic Comm~ss~on for Latin Amerlca and the Caribbean (ECLAC).on the bas~sof off~cialf~gures.

Economic Commission for Latin America and the Caribbean (ECLAC)

16

A. Highlights of recent trends Thc region's growth has been underpinned by the highly favourable external environment created by tlic world economy's steady expansion and abundant liquidity on international capital markets. Thesc conditions have enabled it to significantly incrcasc its export volumes and have improved the terms of tradc for the South American countries and Mexico, and both of these factors have hclpcd thc rcgion to generate increasingly large tradc surpluses. Thc region's terms of trade in 2005 were 23.4% higher than thc iivcragc for the 1990s: if the comparison is made using their avcragc lcvel for 2003-2005, then the increase amounts to 17.7%. As shown in table 1.2, most of this improvement was attributable to commodity prices, but in thc casc of thc 2003-2005 average, a portion of it also stems from lower import prices. Towards thc cnd of this period, however, the impact of fucl pricc increases also began to be felt.

Figure 1.1

EXPORTS OF GOODS: AVERAGE ANNUAL GROWTH RATES, 2004-2005

Source: Econornlc Commlsslon for Latin America and the Carlbbean (ECLAC), on the basls of offlclal flgures.

Table 1.2 TERMS OF TRADE: VARIATION RELATIVE TO THE AVERAGE FOR THE 1990s (Percentages) 2005 Export price index Commodities Natural-resource-based, manufactures Other lmpon price lndex Variation

Average 2003-2005

27.8

16.2

24.4

16.2

1.g

1 .l

1.5 4.4 23.4

-1 .l

-1.5 17.7

Source: Econornlc Cornm~ss~on for Latm Amerca and the Carlbbean (ECLAC),on the basls of offlclal figures

Thc rise in the terms-of-trade index was accompanied, as noted earlier, by an upswing of nearly 9%, on avcragc, in export volumes over thc past two years. In the case of South America, thc increase amounted to 12% (see figure 1.1). Within this subregion. six out of eight countries posted average increases in export volumes of over 10% pcr ycar. Although they inay expand somcwhat lcss in 2006, thc fact that they have risen by an average of 7.3%) per ycar over the past decade attests to the increasing openness of thc countries' economies. Anothcr feature of this growth cycle has been the expanding flow ofrcmittanccs being sent back, especially to Central America and Mexico. by emigrant workers.

This combination of trade surpluses and hefty unrequited transfers accounts for the surplus on the balance-of-payments current account. which, for the first time ever, is occurring in conjunction with positivc cconornic growth rates. As a result of the combined effect of favourable terms of trade and thc high level of transfers, thc region's aggregate national income rose faster than its GDP (7.1 % vcrsus 5.9% in 2004 and 5.9% versus 4.5% in 2005) (see box I. 1). Consumption pickcd up spced, climbing by 4.2% in 2004 and by 5.3% in 2005. It has not. howcvcr, kept pace with the growth rates for national income, which means that national saving has been on the rise, especially in South America. Gross fixcd capital l'omlation has been the fastestgrowing component of demand (especially in countries where the terms of trade improved). with growth rates of 13% in 2004 and 10.7% in 2005 for the rcgion as a whole. Construction and additional machinery and cquipment contributed more or lcss cqually to thc expansion of investment in 2004. but in 2005 nearly two thirds of the total increase was accounted for by the growth of investment in equipment.

Economic Survey of Latin America and the Caribbean

2005-2006

Box 1.1 DIFFERENCES BETWEEN GDP AND GROSS NATIONAL DISPOSABLE INCOME The trend in gross national disposable income

Table 1

in Latin America and the Caribbean has been

LATIN AMERICA AND THE CARIBBEAN: GROSS NATIONAL DISPOSABLE INCOME AND ITS COMPONENTS, 2004-2005c (Millions of dollars at 2000 prices, growth rates in percentages)

one of the most notable aspects of the region’s economic performanceover the past two years. Measured in United States dollars at 2000 GDP, the trading gain or loss resulting from

Gross national disposable income

GDP

prices, it is calculated as the sum of the region’s

2004

2005

2004

2005

9.0 3.9 4.9 6.2 4.8 4.1 7.6 1.a 2.7 -3.5 5.0 4.2 5.1 7.6 4.1 5.2 2.7 11.a 17.9 5.9

9.2 4.1 2.3 6.3 5.1 5.9 3.9 2.8 3.2 1.a 4.1 3.0 4.0 6.4 2.9 6.4 9.2 6.6 9.3 4.5

9.5 5.6 5.3 10.4 6.6 4.4 7.9 3.4 3.6 -2.4 5.1 5.6 5.8 4.6 4.9 5.3 1.8 12.1 22.8 7.1

10.1 6.5 2.5 9.9 6.4 6.0 8.9 3.0 3.8 2.3 11.0 3.8 5.3 4.6 1.9 7.2 8.9 5.8 20.7 5.9

4.5% (5.9% in 2004). This growth differential

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruauav Vengzukla (Bolivarian Rep. of) Latin America

is attributable to the considerabletrading gain

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official prices.

changes in the terms of trade,a net payments to the rest of the world of the profits of foreign corporations operating in the region, interest payments on external debt, and net current transfers received from the rest of the world, includingemigrants’ remittances and net grants and donations.b Measured in dollars at constant 2000 prices, the regional aggregate of gross national disposable income increasedby 5.9% in 2005 (7.1% in 2004), compared with GDP growth of

resultingfrom an improvement in the terms of trade, which amountedto 1.7% of GDP for the

Table 2

region as a whole (0.4% in 2004). The higher

LATIN AMERICA AND THE CARIBBEAN COMPONENTS OF GROSS NATIONAL DISPOSABLE INCOME, 2004-2005c

increase in income was shared by most of

(Millions of dollars at 2000 prices, percentages of GDP)

the countries in the region. In 2004-2005, the averageannual rate of increase in gross national

Trading gain or loss

disposable income exceeded GDP growth in all the countries, except the Dominican Republic, Panama and Uruguay. The reasons for this greater increase in incomevatyacmsscountries.Insomecountries, the main factor was the positiveterms-of-trade effect: this was particularly true in those that saw a greater increase in the purchasing power of their exports (exporters of metals, minerals and hydrocarbons).In Argentina’s case, it was due to lower factor payments, while in some Central American and Caribbeancountries (El Salvador, Haiti, Hondurasand Nicaragua)it was

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay

Peru

Net payment of profit and interest

2004

2005

2004

-0.2 7.0 -0.3 6.5 1.1 -3.0 -3.5 -0.3 -0.7 -0.6 -5.6 0.2 -6.6 -1 .o -0.2 1.7 -2.6 0.1 3.9 0.4

-0.5 8.6 0.3 10.8 3.1 -4.3 1.2 -0.3 -0.7 -0.8 -5.1 1.o -7.0 -2.6 -2.7 3.6 -2.7 -0.9 12.8 1.7

-3.0 -4.6 -2.9 -8.8 -4.3 -2.3 -7.0 -3.1 -1.4 -0.3 -5.2 -1.5 -3.9 -7.2 -0.9 -5.0 -6.2 -2.9 -2.9 -3.0

2005 -1.9 -4.0 -3.3 -10.2 -5.0 -1.1 -8.8 -3.6 -1.3 -0.9 -4.1 -1.8 -2.2 -7.1 0.5 -8.4 -5.9 -2.5 -1.3 -3.0

Current net transfers

2004

2005

0.2 5.9 0.5 1.2 3.7 1.1 8.9 17.2 13.1 25.9 20.2 2.6 13.8 1.6 2.4 2.1 9.0 0.6 -0.1 1.9

0.2 6.2 0.5 1.7 3.7 1.3 8.7 18.0 13.6 27.3 25.9 2.9 13.6 1.5 2.5 2.3 8.8 0.5 -0.1 2.0

~~

at constant prices, of current transfers (mostly

Dominican Republic Uruguay Venezuela (Bolivarian Rep. of) Latin America

remittances from nationals living abroad).

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official prices.

accounted for by increasedinflows, measured

See United Nations, Commissionof the European Communities,Organisationfor Economic Co-operation and Development (OECD), International Monetaly Fund and World Bank, System of National Accounts 1993, 1993, New York, 1993, chapter XVI, paragraphs 16.151-16.156. According to the definition used by ECLAC, the trading gain or loss resulting from changes in the terms of trade is determined by multiplyingthe value of goods and services exports at constant prices by the variation of the terms of trade index. (See ECLAC, Product0 interno bruto de 10s paises de America Latina, E/CN.12/L.51/Add.2), Santiago, Chile, 1970, part II. The formula used is as follows: T= Qx (PxfPm -1) Where: T = the trading gain or loss resulting from changes in the terms of trade Qx =goods and services exports at constant prices Px =unit value index for goods and services exports Pm =unit value index for goods and services imports a

As an approximation for the last two aggregates, the income balance and the current transfers balance of the balance of payments, in dollars at constant 2000 prices, are used. Table 1 measures the annual variations in GDP and national income, both at dollars in 2000 prices. Table 2 measures the ratio in each year between each of the three aggregates and GDP at 2000 prices. The relationship between the two tables is as follows: the difference between the aggregates shown in table 1 in any given year (e.g., for all of Latin America in 2005: 5.9 - 4.5 = 1.4) should be equal to the sum of the differences between the three pairs of the series shown in table 2 (for all of Latin America in 2005: (1.7 - 0.4) + [-3.0-(3.0)] + (2.0 - 1.9) = 1.4).

Economic Commission for Latin America and the Caribbean (ECLAC)

18

Figure 12 CONTRIBUTION TO GROWTH OF GROSS FIXED CAPITAL FORMATION

Thc investment rate for 2005 (21.6%) was still, however, lower than it had bcen before the series o f finmcial crises that bcgan in 1997. Indeed, prcsent irivcstment coefficients are ton low to sustain a fast enough growth rate to fuel job creation in the formal sector at the levcl nccded to help alleviate the delicate social situation existing in Latin America and thc Caribbean. Thus, even though a great dcal of headway has bccn made thanks to the rebounding level of economic activity, as discussed in the chapter on the labour market, the region still has a long way to go.

Source:

Econom~cCommlss~onfor Lat~nArner~caand the Car~bbean(ECLAC), on the basls of offlclal f~gures

Box 1.2 HOW MUCH SHOULD LATIN AMERICA AND THE CARIBBEAN INVEST?

There is no simple way to determine what level of investment is needed in Latin America and the Caribbean. The answer

of around 4, and then climbed higher with the crisis of the 1980s. It then declined slowly until it rose again with the crises

depends, among other factors, on the type of investment, the sectors involved, how it is financed and a variety of factors that

of the late 1990s. If, in the absence of further shocks, the value of this coefficient

determine the effectiveness of any given investment. A shortcut which is often used, although it is not free of criticism,a is to assume that the ratio of the investment rate to the GDP growth rate [(//Y)/(AY/Y)], or the incremental capitaVoutput ratio (ICOR), is fixed, and then to use this as a basis for calculating how much investment is needed to sustain a given economic growth rate. The following figure shows the trend in this coefficient for Latin America since

(which is currently over 5) were to settle back to around 4-4.5, then the region would need to invest between 24 and 27 points of GDP in order to achieve an annual growth rate of 6%.

LATIN AMERICA INCREMENTAL CAPITAL/OUTPUT RATIO (ICOR)

10 -

9-

8-

7-

6-

5 -

1950. As the figure show, it remained fairly stable up to the 1970s, with values 3 ! 1950

a

1960

1970

1980

1990

2000

See, inter alia, William Easterly, “The Ghost of Financing Gap: Testing the Growth Model of the International Financial Institutions”, Journal of Development Economics, VOI. 60, NO. 2, 1999, pp. 423-438.

Economic Survey of Latin America and the Caribbean 2005-2006

19

B. International market trends and their probable impact on Latin America and the Caribbean

Y 1.

The international situation

The pace of world economic growth remained brisk in the early months of 2006, but most pro.icctions point to a slowdown in the second half of the ycar th:it will probably carry over into 2007. Lower growth ratcs are being predicted for the future in response to the rising levels of risks that have been prcscnt in the world economy for sornc time now and thc fact that financial markets and commodities have b c y n to exhibit heightened volatility midway through the ycar. The main risks at the global levcl are associated with the growing deficit on the United States' balanceof-payments current account. This imbalance could cnncei vabl y trigger a sudden, disorderly adjustment which could dampen demand in that country and, givcn its position as an engine of growth for the international economy, havc a magnified ripple effect in the rest of the world. The most immediate conccrn, however, is what sort of impact rising oil prices may have on infl~itionand consumcr cxpectations in the United States. Fears of a possible upswing in inflation have prompted intescst ratc hikes, with the incrcascs being steeper for shorttcrm rates than they h a w in the case of medium- and long-term rates. From a global perspective, one of the questions now being asked is to what extent a morc cnergetic pace of activity in Europe iind Japan might offset slackening growth in the United Statcs econorny. The likelihood of this occurring will be inlluenced by the position adopted by Europe's and Japan's central banks, sincc too steep iin interest-rate hike could curb a faster rate of expansion in these economics. If, against thc backdrop of the Asian and especially Chinese economies' robust expansion, Europe and Japan continuc to grow at the samc p a w iis they have in recent months, it may be possible Ihl- the world economy to accomplish an orderly adjustment that would allow it to diminish global disequilibria whilc continuing to prow at its present rate or only slightly morc shwly.

Clearly. the chances of haviny this positive outcome come to pass will dcpcnd a great deal o n the extent of thc supply shock rcprcscnted by the continued rise in oil prices and on the implications in terms ol' a tightening of monetary policy to stifle inflationary pressures. Both of these factors (supply shocks and rising interest ratcs) are usually present durlng global ~*ecessions. Either way, the low real intcrest rates sccn for most of thc last decade (see figure 1.3)are probably coming to an end. As noted carlicr, thus far increascs in short-term interest ratcs havc not fully carried over into longer-term rates. This Ihct may be a sign of confidence in the central banks' and, in particular, the United States Federal Rcsc~ve's ability to hold inflation in check. In the future, however, these higher ralcs iire likely to dampen demand and spur a flight to quality that would hurt emerging markets. In fact, as the mid-point of 2006 approached, country-risk was rising and some emerging-economy currencies wcrc beginning to dcprcciiite. Just how much of an impact this situation will have on the region's markets will dcpcnd primarily on the scale of the slowdown in world economic activity, which will surely have a negative inilusnce on commodity price\ and exports. Figure 1.3 LIBOR: QUARTERLY AVERAGE IN REAL TERMS

Source: Econorn~cCommlss~onfor Latln Arnerlca and the Car~bbean(ECLAC), on tne basis of oftic~alflgures.

.

Economic Commission for Latin America and the Caribbean (ECLAC)

2.

Effects on Latin America and the Caribbean

Judging from thc above factors, the medium-tcrrn prospects for the Latin American and Caribbean rcgion will depend, first and foremost, on the type\ of commercial ties maintained by its countries. If a smooth, orderly adjustment is itchicved, then the United States cconomy's slower rate of growth can be expected to aITcct Mexico and Central America more than the rcst of the regron, since their export structure is more concentrated in that market. South America, by contrast, has a more diversified structure in which China and other Asian economies are playing an increasingly important role. In addition, a large pcrccntage of Mexico's and Ccntral America's exports are manufactures that are engineered to mcct dcstinationmarket specilications and that would therefore be more difficult to d~vcrtto other markets in the short run. Anothcr consideration i \ how much of' an impact the supply shock generated by rising hydrocarbons prlces may have on indiv~dualcountries depend~ngon whether thcy are net oil exportcrs or importers. The Central American and Caribbean countries (with the exception of Trinidad and Tobago) would appear to be the most vulnerable in this respect. Sorric South American nations arc also in this position. The implications ol'mounting uncertainty and volatil~ty and their effects on financial markets are another element to bc considered. In fact, as a rcsult of the growing uneasc that began to be seen in intcrnational financial markets in May, the demand for emerging-economy bonds has slackcned. This. in turn, has driven up country-risk and exerted varylng degrees of pressure on thesc countries' currencies. Nevertheless. as notcd earlier, the I,atrn American and Caribbean region is better prepared to deal with thesc typcs of processes than it has been on other occasions. But although this is true for the rcgion as a whole, there are quite significant differences across countries, depending on the following factors: (i) their current account balance itnd thc assoc~ateddegree of reliance on external savmg; (ii) the extent to which their current account balance is determined by commodity price levels; (iii) thc lcvcls and, especially. structure of their external asscts and l~abillties;and (iv) their fiscal position.

'

(a) Current account balance and reliance on external saving As noted eiirlier, thc rcgion as a whole is registering an increasingly l a y c surplus on its balance-of-payments current account, with the final balance for 2005 being estimatcd at 1.5% of GDP In 2004, only 8 out of 19 Latin American countries had a surplus on this account, but in 2005 thc rcgion's surplus was attributablc to the results posted by just 7 countries. In a number of countrics that did run deficits, however, thosc shortfalls were quite small and were more than offset by forcign-exchange inflows in the fiwn of forcign direct investment. An analysis of trends in the basic balance (rather than in the current account balance) shows that the region as a whole had a surplus equivalent to 3.2% of GDP in 2004 and 3.5% in 2005. In addition. out of the 19 countries covered by this study, there were 12 countries with surpluses in 2004 and 15 in 2005. The Caribbean as a whole registered a small dcficit on its current account in 2005 and a surplus on its basic balance equivalent to 5.2% of GDP. This result is duc entirely to the results posted by Trinidad and Tobago (an oil exporter), however; the rcst of the countries in the subregion ran deficits on both of thcsc accounts. In summary, then, with the exception of some Central American and most Caribbean countries, thc region can be described as exhibiting a lowcr dcgrcc of external vulnerability than in the past. '

(h) External accounts and terms of trade It is also clear that thc surpluses recorded by some countries were heavily influenced by changes in their tcrrns of trade. If, for example, the value of the region's merchandise trade flows were calculated on the basis of its ternls of trade during the 1990s, then its current account surplus would turn into a dcficit equal to 2.7% of GDP and its basic surplus would turn into a deficit amounting to 0.7% of crnrl. A return to the rcgion's terms of trade in the 1990s would, howcvcr, make almost no changc at all in the

One factor that has helped to Icsscn vulnerability tu external shocks in some cases is the reducdon of the deyree of dollarization in some of the rcgion's economies, especially in South America. This continues to bc a risk factor in a number of the economics, however.

Economic Survey of Latin America and the Caribbean 2005-2006

number of countries having a basic surplus in 2005, since some oil importers (especially Central American countries) would, all other things being equal, then have a surplus instead of a deficit. Something quite similar would surely happcn if such calculations werc done for the Caribbean countries (with the exception of Trinidad and Tobago), but some of the information needcd to prepare such an estimate is not available. Some countries that arc highly specialized in raw rnatcriitl exports, such as Chile and, to a lesser extent. the Uolivarian Republic of Venezuclii and Mexico, would thcn run sizeable dcficits, howcvcr, although the Chilean cconomy is. on the other hand, the least vulnerable to external sl~crcksthanks to its countercyclical policy, lowcr degree of dollarization and low public debt levels. Thc MEKCOSUR economies (which are largc exporters of agricultural commodities) eithcr d o not exhibit any ma.jor impact from thc terms-of-trade effect (Argentina, Brazil) or this type of price correction would rcsult in a larger surplus (Paraguay and Uruguay). In this casc, the comparison based on 1990 price levels docs not show up such a marked different in the tcrnis of trade bccause price rises have not bcen as sharp in rccent years. Another reason for this result is that agricultural prices were relatively higher in the 1990s than mctul and oil prices were. In this case it should iilso be noted that. with few exceptions, the ~nacroecnno~nic equilibria associated with the external sector arc not as sensitive to the level of the countrics' terms of trade.

21

seen from figure 1.5, thc ratio of thc total dcbt to exports of goods and serviccs is less than half of what it was 10 years ago, and if the debt nct of international reserves is substituted for the total debt, then the ratio falls to around one third of its Sormer level. Although some countrics' external debt ratios arc still high (6 out of 19 Latin American countrics and 6 out of 13 Caribbean countries have ratios of over 100%). the situatioti is significantly better now than it has bcen since the 1980s. This is not only because the external debt-toexports ratio is lower, but also because ol'the change in the ratio between short-term debt and international reserves. As figure 1.6 shows, improvements in the dcbt structure and increases in international reserves have altercd the trend of this coefficient, which is now only one third as high iis it was 10 years ago. Figure 1.5 LATIN AMERICA AND THE CARIBBEAN: TOTAL GROSS EXTERNAL DEBT

Figure 1.4 LATIN AMERICA: BASIC BALANCE. 2005

Source: Economic Commlsslon for Latin America and the Car~bbean(ECLAC),on the basts of otflclal f~gures.

F ~ g u r e1.6

LATIN AMERICA AND THE CARIBBEAN: SHORT-TERM EXTERNAL DEBT

Source: Econom~cCornmlsslon for Latln Arner~caand the Carlbbean (ECLAC). on the basts of offlclal flgures.

(C)

Level and structure of external assets and liabilities

In recent years, the countries ofthe region have sharply Of theit.debt burdens' both re'ative reduced the CDP iind as a ratio of the region's exports. As may bc

Source: Econom~cCommission for Latm America and the Carlbbean (ECLAC), on the bas~sof off~c~al flgures

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure 1.8

d) Fiscal position The countries of the region havc also bccn consolidating their fiscal positions in rcccnt years. On the one hand. the macroeconomic situation has boosted fiscal revenues thanks both to the upswing in cconomic activity and to the irnprovcment in the countries' terms of tradc. On the other, unlikc what has occurred during other growth phases, public expcnditurc has been kept under control. The combination ai'thcse two factors has resulted in hefty primary surpluses which thc countries have used to pay down their debts (see figurc 1.7).

LATIN AMERICA, EMERGING ECONOMIES AND INDUSTRIALIZED COUNTRIES: PUBLIC DEBT AS A PERCENTAGE OF GDP

Figure 1.7

LATIN AMERICA AND THE CARIBBEAN: REVENUE, EXPENDITURE AND PRIMARY FISCAL BALANCE (Central government, as a percentage of GDP) Source: Economlc Commission for Latin America and the Cartbbean (ECLAC), on the basis of offlcial f~gures.

Source: Economic Commiss~onfor Lat~nAmer~caand the Caribbean (ECLAC), on the basls of official f~gures.

Thc rcduction in the public debt relativc to GDPhas bccn sharper in the region than in developed countries and in dcvcloping countries as a group (see figurc 1.8). Not only has the debt been cut in size, but its composition has changed in ways that hclp make the region less vulnerablc. One of thcse improvements has been the incrcase in the share of the debt that carries a fixed interest rate. Fixed-rate obligations have risen from 45% of the total in the late 1990s to nearly 70% in Argentina, from 7% at the start of 2002 to 28% in early 2006 in Brazil, from 38% in 200 1 to 60% in 2006 in Peru and from 43% in 2000 to 70% at prcscnt in Uruguay. Another important improvement has t o do with the shift in the currency mix o f t h e debt towards a larger proportion of debt denominated in local

currencies. For example, just 10% of Argentina's debt was denominated in pesos in the late 1990s, but that share has riscn to 52% now, while Brazil has increased the share of its net obligations that are denominated In reais from 54% to 95% between 2002 and early 2006. The widespread improvement in public accounts is thc nct result o f difi'crmg situations, however. For example, only a fifth of the Latin American countries (Argentina, Bnlivarinn Republic of Venezucla, Chile and Paraguay) have overall fiscal surpluses and half of them havc dcbts amounting to over 50% of GDI? In addition, thc need to maintain balanced fiscal accounts poses formidable challenges for economic policymakers. For countries specializing in non-renewable resources, the sharp rise in revenues has prompted a debate about how these windfall profits can be used to best advantage. Given the existence of a justified need to raise the level of social spending and to invcst morc in infrastructure, the region as a whole must now strive to determine the most appropriate direction for fiscal policy. Above and beyond these issues, and although much remains to be done in order to ensure the sustainability of internal and external macroeconomic equilibria, it is clcar that the Latin American and Caribbean region is better placed now that it was in the past to contend with any change for the worse in the external environment, providcd that it takes place in a gradual, controlled manner.

Economic Survey of Latin America and the Caribbean 2005-2006

23

C. The outlook for the economies of Latin America and the Caribbean Although it is certainly possible that the world economy may be able to cope with the risks represented by inflation and the correction of global discquilibria without experiencing a hardlanding, these phenorncna constitute a source of uncertainty. The csciilatio~~ of the conflict in the Middle East and other intcrnational disputes are also a cause of concern. Eve11 if cvcrything works out well, a pcriod of grcater global volatility appears to be in thc offing, and the possibility cannot be ruled out that this could cause growth ratcs to decline and capital flows to reverse direction and begin lnovrng towards developed countries. whcrc the levcl of risk is pcrccived as being lower. Against this backdrop, the prices of the region's commodity exports are not expected to display a great deal of forward monientum, and this could h a w an impact on the size or sign ol'the countiics'current account balances. Smaller trade surpluses and a tighter supply of external funds could havc w ~mpacton cxchange marhcts that would either halt or partially reva-se the currency appreciations witnessed over the past two years. So long as thcsc changes arc moderate and occur gradually. and givcn the region's lcss vulnerable external

and fiscal positions, it is unlikely to dcpiirt in any major way horn the growth path that it has rccently embarked upon. In an international environrnenl such as this, the economics hiivitlg a more clivcrsified expm stnlcturc in rcms of the countries of destination and a con~paratively smitll sharc of sales to the Unitcd States market (and especially o f products that cannot easily bc diverted to other markets) will he the oncs that er~+joy the greatest amount of manoeuvring room. Furthermore. although somewhat lowcr commodity prices and slightly higher real exchange rates may pose a grcater challenge for public finances, they may also spur the search for a morc cliversificd and knowledge-intensive pattern of specialization. In this sensc, the proccss of defining the region's style of growth in the coming years should provide some scope for thc application of productive policies. As ECLAC has noted on rcpcated occasions. it is also essential for the rcgion to boost its rate of investment, sincc, although investment has made a considerably rccove.ry, it is still too low to ensure sustained growth at the pacc needed to alleviate the social situation in Latin Amcrica and the Caribbean.

D. Latin America and the Caribbean: growth and inflation in 2006 and 2007 The Latin American and Caribbean countries' GDP will grow by 5% in 2006 and by slightly less (nearly 4.5%) in 2007.' In gencral. iis shown in tiihle 1.3. the various subregions will grow at fairly similar rates in 2005, with most falling into the rangc of 3.5%-6.5%. The exceptions will be Argentina, the Rolivarian Kepublic of Venezuela and thc Doininican Republic, whosc economies will expand

by over 7.5%, and Haiti, with a projected growth rate of 2.5%. As in past years, thc Southern Cone and thc Andean countries will be the two fastest-growing subregions, with ratcs of 7% and 6.2%. respectively. The outlook for Latin America and the Caribbciin in 2007 continues to he quite promising, with growth projected at 4.3%. Thc predicted ratc is sonlcwhitt lower

Economic Projections Centre. "Latin America and the Caribbean. Pr~iections2006-2007". E.~trrrliosr.studkricn~ prnsprc~rivosr r i r s , No. 42 (LCiL.2528-PII). Sanliago. Chile. Economic Comnlission lor Latin Arrlerica and thc Caribbean (EULAC), April 2006; and Economic Cv~rurlissior~ for Latin Amcrica and the Caribbean (ECLAC), "Atlas del crecimicnro, 2006-2007" [onlinej www.e~lac.cl/dcyjleiatlaa~crecitnien~o/indcx.l~trn.

Economic Commission for Latin America and the Caribbean (ECLAC)

Table 1.3 LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH, 2004-2007 (Annual growth rates, in percentages)

Latin America and the Caribbean South America Brazil Southern Cone Andean countries Mexico and Central America Central Amenca Mexico Caribbean

2004

2005

2006

2007

5.9 6.9

4.5 5.1 2.3

5.0 5.4 4.0 7.0 6.2 4.1 4.5 4.0 6.3

4.3 4.7 4.0 5.4

4.9

8.4 9.5 4.2 4.0 4.2 3.7

8.3

6.9 3.2 4.4 3.0 4.0

Figure 1.9 ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN, 2000-2007 (Annual growth rates)

5.2

3.6 4.1 3.5 4.3

Source: Economic Commission for Lat~nAmerica and the Caribbean (ECLAC),on the basls of offlc~alfigures.

than the figurc for 200h chiefly because domestic demand is expected to be more sluggish in most of the countries of the region and the world economy's expansion is likely m slow its pace slightly. The Southern Conc's growth rate for 2006 is projected at nearly 7%, mainly because the Argentine economy is expected to expand by 7.6% thanks to the strength of domestic dcmand, particularly for investment. In 7007, Argcntina's growth rate is expected to slip to around 5.5%. The Andean countries are likely to post a rate of h.2%, primarily owing to the Bolivarian Republic of Venezuela's continucd rapid pace of growth. A slower ratc. within the range of 5%-SS%, is expccted for the Andcan countries and thc Southern Cone in 2007. In Brazil, the statistics published for the first quiirter of 2006 provide confirmation of a positive economic outlook for the year. during which domestic demand will continuc to respond to the expansionary monetary and fiscal policies, marking up a growth rate of 4%. As in the past few ycars, Mexico and Ccntral America are expected to grow more slowly than South America in 2006 (see figurc 1.9), but the gap between them will narrow as the formcr subreg~onexpands by about 4.1%. Primarily as a consequence of the Uriitcd States' robust growth pattern, the Mexican economy will cxpand by 4% in 2006. Its projected rate fbr 2007 will be around 3.5%. Thc projection that Central America will post a rate for 2006 of around 4.5% is based on the strengthenmg of demand bcing seen in most of that subregion's countries. This figure also represents a slight irnprovemcnt over its 2005 performance. Private consumption will continue to bc spurred by increascd consumer credit and remittances. In addition, implementation of the Dominican Republic - Central America - United States Frec Trade Agreement (CAFTA-DR) is cxpccted to boost investment in thc sccond half of the ycar. Some countrics' non-traditional exports will continue to rise quite sharply, and the Central

Source: Economic Commtssion for Latin America and tile Caribbean (ECLAC), on the bass of off~c~al flgures.

American countries are expcctcd to continuc growing at a rate slightly above 4.0% in 2007. The Caribbean subregion's economy is likcly to grow at over 6.0% in 2006, with Trinidad and Tobago leading the field with a ratc of around 10%. The 2006 hurricane season represents the biggest risk in terms of the Caribbean's economic performance: there is also somc concern about some countrics' public finances. Consumer prices in thc rcgion are expected to rise by 5.4% in 2006. as compared to thc 6.1 % rate of inflation recorded in 2005. This reduction is associated with the fairly fiivourable pricc indices registcrcd early in thc year (see l'igur-e I. 10) and will enable the rcgion to continue to hold inflation to historical lows (sec table 1.4). F~gure1.10 LATIN AMERICA: INFLATION, 2005-20C16~ (Annual rate of vanation)

Source: Econom~cCommission for Latln Amer~caand the Caribbean (ECLAG),on the bas~sof off~c~al figures " Average lnflat~onrates are calculated using population f~guresas the basis for we~ghtlngs.

Economic Survey of Latin America and the Caribbean 2005-2006

Table 1.4 LATIN AMERICA AND THE CARIBBEAN: INFLATION, 204-2006" (Annual growth rates, In percentages)

Latin America and the Caribbean South America Southern Cone and Brazil Andean countries Mexico and Central America Caribbean

2004

2005

7.4 7.1 6.9 7.5 8.0

6.1

6.4 6.7 6.0

9.1

9.5

5.4

2006 Low 4.6 4.8 4.8

4.9 4.1 7.2

Projected

High

5.4

5.9 6.2

5.5 5.6 54

6.1

4.9

6.5 5.2

7.6

7.9

Source: Economtc Comnws~onfor Lat~nAmer~caand the Caribbean (ECLAC), on the bas~sof offlclal flgures ' Average mflatlon rates are calculated using population f~guresas the bass for

welghtlngs

Trends in inflat~onat the regonal and subregional levels are depicted in figure 1.10. A slight reduction is shown for the Southern Cone and Brazil, while the

25

prc?jection for 2006 of 5.5% is mainly a reflection of trcnds in Argentina, sincc the other countries' inflation rates are expectcd to be quite nioderatc. Thc Andean countries arc rdso showing a reduction relativc to 2005, and their 2006 inflation rate is expected to come in at an estimated 5.5% as well. This is partly attributable to the positive results achieved by a numbcr of countries in this subregion through the use of inflation targets. There continues to bc some uncertainty as to future trends in the Bolivarian Republic of Venezuela, howcver, where inflation remains at double-digit lcvels. Pmjcctions put the rate for Central America and Mexico at nearly 5% Sor 2006, which is slightly lower rhan the 2005 figure. even though don~csticprices in Central Arncrica continue to rcflcct the trend in oil prices. The Caribbean subregion's inilation rate is cxpecte,dto Fall to 7.6%, mainly thanks to price trends in Jarnaicn.

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Economic Survey of Latin America and the Caribbean 2005-2006

Chapter II

International economy

A. World growth World economic growth slowed in 2005, with globiil output increasing by 3.5% comparcd to 4.0% in 2004. This was partly duc to the fact that many ccononiics have finishcd making a recovery from the recession that took place at the beginning of the decade; the slower expansion of thc Unitcd States economy at year's end was anothcr Sactor.'

As shown in table 11.I , growth slowed throughout the world in 2005. Both thc Unitcd States' cconomy and that of the euro area posted lowcr growth rates than thosc of 2004; the former grew by 3.5% in 2005, comparcd to 4.2% in 2004, while the euro arca grew by 1.3%, down from 2.1 % in 2004. While the rate of expansion in developing countrics also slackcncd somewhat, dropping from an aggregate rate of 6.8% in 2004 to 6.2% in 2005, it should be notcd that growth in thcsc countrics ovcr thc last thrcc years hiis cxc~cdcd5% -something which had not occurred sincc the late 1960s and early 1970s. Moreover, when the distribution OS growth in developed countries is comparcd to the averqc Sor thc first five years of the last few decades, it becomcs clcar that not only were growth rates higher in 2000-2005. but variations across countltes also dcclincd (see figure 11.1). In fact, thc rcmarkablc buoyancy of thc Chinese and Indian economies -which grew at rates exceeding 9% and 8%. respectively, in 2005 - hiis hclpcd

l

Table 11.1

WORLD GDP GROWTH RATES, 2002-2005 (Percentages)

World Developed countries United States Euro area Japan Developing countries Latin America and the Caribbean China Newly tndustrialired economies Transition economies

1.8 1.2 1.6 0.9 01 3.7 -0.8 9.1 5.0 5.3

2.7 1.9 2.7 0.8 1.8 5.2 2.0 10.0 3.0 6.8

4.0 3.1 4.2 2.1

2.3 6.8

5.9 10.1 5.4 7.9

3.5 2.6 3.5 1.3 2.7 6.2 4.5 9.6 4.4 7.6

Source: Econom~cCommission for Latin America and the Caribbean (ECLAC), on the basls of offlclal figures.

The reduced growth of the Unitcd Statcs during thc last quarter o f 2005 was mainly the one-off result of Hurricanc Katrina

Economic Commission for Latin America and the Caribbean (ECLAC)

to improve the tcrrns of trade for commodity-exporting countries, thereby enabling emerging economics to sustain hiyhcr ratcs of expansion. Conscqucntly, the price of petroleum continues to rise, driven by an upsurge in global dcmand. In 2005, the price per barrcl of West Texas Intermed~ate(WTl) showed a year-on-year Increase of 32% measured in constant May 2006 dollars. Uncertainty regarding the possible impact of high petroleum prices on inflation is one of thc main concerns facing developed and emerging

economics that import crude 011. The world growth rate in 2006 may thcrcforc be close to that of 2005. with a 0.2% range of vwiation, dcpcnding on the reaction o f clcveloped econo~niesto stricter monctary policies aimed at curbing inllation. While the growth rate of thc United Statcs is cxpected to slow slightly, the greater buoyancy displayed this ycar by the euro area and the Japancsc economy. coupled with continuing high growth rates in China, may offset this slowdown and prcscrve the favourable international environmcnt.

Source: EGonornlc Cornrn~ss~on for Latin Arnerlca and the Car~bbean(ECLAC), on the basis of offic~alf~gures Does not Include transltlon economies

"

Economic Survey of Latin America and the Caribbean 2005-2006

29

B. Inflation and economic slowdown in the United States: A global concern In the United States, thc inflationary effect of high crude oil prices is a cause of' concern for the Federal Rcscrvc. In mid-2004, thc Federal Reserve began implementing a restrictive monetary policy, as high ~*ealestate prices buoyed the. economy. As shown in figure 11.2, rnonthly core inflation in the United States, measured on the basis of personal consumption, grcw at an average year-on-year rate of 2% between January 2004 alld May 2006. Thc monetary authoritics sct this rate as the upper limit of the permissible rangc (1 %-2%). It is therefore rcasonahle to assume that, in thc short term, the Federal Rcscrvc is likely to continue raising intcrest rates. Thc monetary authorities of the United States are facing :i ycar of mixed economic indicators. After growing at a rntc of 9.2% in 2004, thc cconomy slowed in 2005, growing at a rate 01'3.5%. GDP appears to have cxpandcd by over 2% during the first half' of 2006, thiinks to a strons rally during the first quarter of the year following a weak pcrforniance during the last quarter of 2005.2 Certain indicators are unsettling. howcvcr. These signs include a slowdown in private consumption cxpenditutx in May 2006 due to rising giisoline prices and the apparcnt end of the real estate boom, which may erode consumer conf'idcncc in the short term. Thc impact of interest rate hikes on consurncr credit should also be considcrcd, given the high household indebtedness ratio and heavy reliance on private consumption chiiracteristic of the Unitcd States economy. In short, the growth rate of thc United States may dccline during the second halfol'2006, with GDP for thc ycar as a whole rising by approximately 3.4%. The persistence and expansion of the United States economy's external imbalances remain the most pressing concern from a global perspective. Thc country posted a current account dei'icit of over US$80U billion in 2005, which wiis approximately US$ 137 billion more than in 2004 (see figurc 11.3).As a percentage of GDP, thc deficit rose from 5.7% in 2004 to 6.4% last year. This ppersistcnt imbalance is a reflection of the growing deficit on thc balance of trade in goods and services. While intercst payments to non-resiclcnts have risen as a resul~01incrcased debt issues, the profitability of United States assets abroad has more than offset this increase, thereby cvening out

*

Figure 11.2 UNITED STATES: PETROLEUM PRICES, CORE INFLATION AND THE EFFECTIVE FEDERAL FUNDS RATE

Source: Econorn~cComm~sslonfor Latm Amerlca and the Carlbbean (ECLAC), on the basls of lnternat~onalMonetary Fund, lnternat~onalFlnanc~alStat~st~cs [onllnej, Bureau of Econom~cAnalys~sof the Unlted States Department of Commerce. and Federal Reserve Statlstlcal Release database

Figure 11.3 UNITED STATES: CURRENT ACCOUNT IMBALANCES, BY COMPONENT, 1996-2005 (Milhons of dollars)

Source: Econom~cComniiss~onfor Latln Amerlca and the Carlbbean (ECLAC), on the basis of offmal f~gures

In seasonally adjustcd tcrrns, rlunng the first quarter of 2006 the GDP of thc Uniled States rosc at an armual rale of 5.6% with respect to thc last quarter of the preceding year.

Economic Commission for Latin America and the Caribbean (ECLAC)

30

the result o n the income account. Debate on this issue focuses on thc medium- and long-term sustainability of the imbalance. While some experts have called for an adjustment in the form of a strong depreciation of' the dollar and fiscal discipline, othcrs acknowledge that the imbalance is a problem sharcd with the ecc~nomiesthat are financing this continuing deficit. ln fact, many Asian nittions (particularly China and Japan) and petroleumexporting countries possess large current account surpluses thanks to the competitiveness of thcir products and high commodity prices. The abundant global liquidity which this generates is channelled mainly into dollw-dcnorninated asscts, thereby financing the current account imbalances of thc Unitcd Statcs economy. In real efkctivc tcrms, while the United States dollar depreciated slightly morc than 6% during the first five months of 2006, its cu~nulativedepreciation sincc 2002 is equivalent to over 21%. This is thc rcsult of it gradual process. The euro continucs to gain strength, posting a real effective exchangc ratc increase of 2.4% during the first five months of 2006. Since its revaluation in mid2005, the Chincsc yuan has undergone a real appreciation of slightly more than 5%, which has not been enough to reduce its trade surplus. Thc dollar may be expected to continue depreciating slowly in the future, as pressure for a further revaluation of the yuan continucs. In 2005, the euro area, which includes 12 of the 25 countries that make up the European Union. was unablc to sustain the rate of economic growth it had achieved the preceding ycar. Alicr an aggregate GDP increase of 2.1% in 2004, conditions deteriorated during the last quartcr of 2005; at year's end. growth stood at 1.3%.This slowdown was a result of lower growth in Germany (1.0%). Francc (1.2%)and Italy (U%), which together account for over 70% of thc subregion's GDP.In Germany, private and public consumption both contracted during the last quarter of 2005, in seasonally adjustcd terms. conlpared to the prcvious quarter. The growth rate of overall consumption in Francc declincd during thc same period, while the level of the country's nct exports M. This was also the case in Italy, where the growth of consumption also declined and investment contracted betwccn the third and fourth quarters of' last ycar. In 2005, thc Harmonised Consumer Price lndex (HCPI) of the European Economic and Monetary Union rose by 2.2%. Since 2000, intlation in the euro area has grown at an annual rate exceeding 2%. The rcsponsc of the European Ccntral k i n k (ECB) has been to raise its benchmark rate by 25 basis points, beginning in late 2005,

in order to reduce intlation without unduly interfering with the region's growth. In fact, during the first quarter of 2006, private consumption in Germany and Francc surpassed levels reached during the last quarter of 2005 (0.6% and 0.9%, respectively). Rcncwcd optimism early in the ycar has been rcinforccd by recent improvements in thc European Union's employment indicators, which may bolster overall consumer confidencc. Households in Germany may even begin buying ccrtain types of consumer goods in advance. thereby increasing their overall spending levels, in response to the country's announced 2007 VAT hike. Private consumption expenditure in Europe's major cconomies is likely to become robust once again in 2006, with thc monetary union's aggregate GDP growth hovering itround 2% at year's end. The I'uturc is less ccrtain from 2007 onward, as thc sustainitbility of these rates will depend on thc pass-through of fuel prices to the rest of the economy, as well as the measures adoptcd by the European Ccntral Bitnk within a framework of more restrictive fiscal policies and a stronger e u r ~ . ~ Japan continued to recover, buoyed mainly by an improvemcnt in domestic demand. The country's GDP expanded by 2.3% in 2004 and 2.7% in 2005. Thcse rates exceeded thosc posted between 2001 and 2003, consolidating the rcvitali~ationof an economy that accounts for approximately 14% of global GDR Thus far in 2006, private consumption and investment have continued to risc, accompanied by low unernploymcnt and highcr wages, and improved corporate profits have offset rising fuel prices. Prices have bcgun responding to this increased growth, with cumulative intlation reaching 0.8% during the first quxtcr of 2006 as a result. This dcparturo from eight years of deflation may soon reverse thc Bank of Japan's expansionary monetary policy. More robust domestic demand also generated a 15.7% inclease in imports of goods and scrvices in 2005, surpassing thc upsurge in the country's exports (7.3%) and reducing its trade and current account surpluses, which amounted to 3.6% of GDP. Economic expansion is expected to continue in 2006, with GDPgrowth approaching 2.8%. In the futurc. the Japanese economy's hcfty fiscal deficit (5.5% of GDP in 2005) may lcad the government to make adjustments in an effort to increase revenues or cut spending. Depending on thcir intensity. these adjustments may dampcn private consumption and corporate profits. The Chinese economy remains vibrant. GDP in China expandcd by 9.6% last year, after marking up a 10% rate for 2 0 0 4 . ~Thc country has experienced two

In addition to a VAT hike in Germany, thc rcstrictivc policies planned for 2007 include a 1 % cut in governrncnt spending in France. The National Bureau of Statistics of China has revised ils GDP l'igures. increasing its cstimatcs for recent years lo rellecl lhe good performancc of the service seclor.

Economic Survey of Latin America and the Caribbean 2005-2006

dccadcs of high, sustained growth, at an averagc annual rate of 10% between 1987 and 1996 and 8.4% between 1995 and 2005. This forceful economic perSorniance is founded upon three main pillars: it considerable increase in net exports, invcstmcnt (mainly in infrastructure) 'and thc energizing cffcct of domestic consumption. In 2005, exports increased by 28.4% over the preceding year, totalling US$ 762 billion -more than the combined total of all exports from Latin America and the Caribbcan (US$576 billion). Spurred by domestic demand, imports climbed by 17.6% following a 36% increase in 2004.

This resulted in a US$90 billion increase in the country's current account surplus in 2005 -from 3.6% of GDP in 2004 to over 7% only one year later. Investment in China is estimated to have excccdcd 42%) of CUP in 2005 -down slightly from 45.3% in 2004. This decline is a rcsult of stmnger administrative restrictions on the real estate scctor that are intended to rcgulatc its growth. In 2006, thc Chinese economy is expected to grow at niuch the same rate as in 2005, although questions rcrnain regarding its sustainability and possible inflationary pressures.

C. Investment in production declines amid increasing uncertainty The last few years have been charrrctcri~edby high lcvels 01' inicrnational liquidity owing to improved corporate profils and thc Ibrcign trade surpluses generated by high con~modityprices -particularly for petrolcuni. Institutional investors, such as the ccntral bank\ of surplus countries (mainly Asian nations and some petroleurnproducing countries), havc placed a significant portion of their reserves in dollar-denominated assets. Higher earnings in the production scctor have not been used to increase installed capacity, but rather to purchase financial assets, most of them in dollars. This has kept investment demand below the levels that would gcncrally bc cxpcctcd, givcn thc abundance of liquidity in the

economy. One cxplanat~onfor thls phenomenon Inay be that transnational corporiitions have already undergone a restructuring process in early 2000 and havc thcrcfore ruled out thc idea of cxpand~ngthe~rinstalled capacity in the short tern1 at a time when productivity is on thc risc Stronger demand for dollal*-denom~natedtcrrri asset\ has put an end to thc trcnd in long-term intcrcst rates, which had been rlsing nwre slowly than 3hort-tcrm rate\ (which were being hiked by thc major economics' ccntral banks). thereby flattening the asset yield curve (sec I'igurcs 11.4 and 11.5). The helghtcncd uncertainty sparked by the ~ncreased paw-through of fuel prices m developed economies uoaitted

Figure 11.4 SHORT- AND LONB-TERM YIELDS OF UNITED STATES TREASURY BONDS. JULY 2004 -JULY 2006

Figure 11.5 YIELD CURVE OF UNITED STATES TREASURY BONDS, 2005 AND 2006

Source: Economtc Comnrissionfor Latin America and the Caribbean (ECLAC). 017 the bass of f~guresobtamed from Bloomberg.

Source: Econorntc Comrnrsslonfor Latln Arner~caand the Caribbean (ECLAC), on the basis of f~guresobta~nedfrom Bloomberg.

Economic Commission for Latin America and the Caribbean (ECLAC)

32

wlth higher production and shipment cost<, as well as further increases in short-term interest rates, may begin to affect long-term interest rates, since markets remain alert arid sensitive to inflation and the monctary policies doptcd to address it, particularly in the Unitcd States. The behaviour of investors in May 2006 offers one example of this phenomenon: faced with a risk of higher inllation in the United Statcs. they withdrew thcir investments in emerging economies. taking refuge in developed-country assets instead. This suggests a more uncertain global environment and a latent risk of flight to quality. There arc two quite different scenarios as to how events may unfold in this regard. Some experts espouse the de-coupling view, which holds that the slowdown of thc United States cconomy will not havc significant repercussions in the rest of the world because of thc strength of Asian economies (particularly China. India, the Republic of Korea and Japan) and a higher rate of growth in Europe. Others believe thitt persistently high petroleum prices and slowcr economic expansion in the United Statcs will drag the rest of the world down as a

1.

rewlt of reduced trade, higher global interest rates and a greater aversion to risk that could l e d to a marked decline in worldwide growth over the next fcw years. Despite these competing views, the world economy has retained the upward momentum observed in 2005, although uncertainty has increased. Incipient signs of a slowdown in the United States economy, as well as the possible adoption of stricter monetary policics by the Unitcd States Federal Reserve and the European Central Bank, may affect the expansion of the world's major economies in early 2007 (with the usuiil lag). It is too early, however, to draw conclusions regarding the depth. speed and consequences of the cooling of the Unitcd States economy, or the possibility that higher growth in rhe euro arca and Japan may continue to offset that slowdown. What is clear 1s that emerging economies must be prepared to face an environnwnt of greater global uncertainty characterized by increiiscd geopolitical instiibility in the Middle East, which would in turn affect future oil priccs and givc risc to more doubts concerning the performance of the global economy.

Commodity prices

During the present decade, unlike the 1980s and 1990s, incrcascs have been recorded both in the overall commodity export pricc index and in thc price index for energy, metals and agricultural products.s Energy sources registered the steepest increase (183.3%), followed by metals and mmerals (98.8%). while the price index for agricultural exports rose by 25.9%. During the first six years of the 1970s, energy and agricultural prices posted smaller increases, rising by 386.9%- and 89.7%, respectively. Metal and mineral prices climbed by only 46.5% during the same period -a smaller increase than has been recorded during thc present decadch In 2005, the average prices for commodities exportcd by Latin America conttnued to risc, in keeping with a trend that first appeared in 2002, reaching rates above 13% for the third year in a row. As in 2004, energy products turned in the strongest performance. The 2005 pricc index was 59.0% higher than the average for the 1990s: 175.4% for encrgy products, 58.4% for metals

and minerals. and only 1.2% for agricultural products. As shown in Figure 11.6, both the overall price index for commodity exports and the index for energy, metals and agricultural prices arc in the expansionary phase of the business cycle, and their values are above the trend values for the corresponding series. The magnitude and duration of the current cycle's upswing sets it apart from the two preceding ones. A positive correlation, reinforced since the l990s, can also be observed among the threc product cycles. The simultaneous across-the-board recovery of commodity prices is associated with the favourable impact of the increase in external deniiind for raw materials. In 2005. the overall price index for comnlodities exported by Latin America rose by 2 1.1%, which falls short of the 29.4% increase recorded in 2004. Moreover, in 2005, unlike the preccding year; the upturn in price indices for energy products (2 1.1 %) far exceeded that of other commodities (15.3%).

None of thcse indices increased during the 1990s; during the 1980s, only the metals and nlincrals index rose. For a dctailed analysis, see Alejandra Ovallc, "Anledca Laiina: evoluc16n del indice dt: precios dc 10s principules productos dt:expc~rtriciba1980-2005". Santiago. Chilc, Economic Comtnission Ibr Latin America and the Caribbean (ECLAC). 2005, unpublished. "etwcen 1970 and 1979, the ovcrall price index rose by 215.9% for commodily exports, 143.6%)for agricultural products. 1.187.9% for energy products and 123.3% for rnctals and minerals. The upswing in h e price index for encrgy products reflected the higher petroleum prices brvught on by the embargo enforced by Arab countries in 1973.

Economic Survey of Latin America and the Caribbean 2005-2006

Figure 11.6 PRICE INDICES, SERIES, TRENDS AND CYCLICAL COMPONENTS

Economic Commission for Latin America and the Caribbean (ECLAC)

34

F~gure11.6 (concluded)

Source: Econom~cComm~ss~on for Lat~nAmer~caand the Cambean (ECLAC), on the base of offlcial f~gures

In the first group of products, there have been incrcases worth noting in thc prices of crudc oil (36.7%), petroleum products (33.4%)and natural gas (51.4%).The increase in oil prices is a reflection of the unstable balance between supply and dcmand associated with the expansion of dcmand for crudc oil, which is bcing driven mainly by China and India. It should bc notcd that, as a result of this upsurgc in dcmand. thc amount by which maximum short-tcrm production capacity currently exceeds actual output is only enough to cover 2% of world demand. The strategies devised to address this issue are reflected in the changes made in the United States' strategic reserves, as well as the replacement of crude oil with other sources of energy. The combination of these ftictors has heightened the reaction of petroleum prices to any news that might point to an impending imbalance between supply and dcmand, such as an important supplier's possible exit l'rom thc m a r k ~ tThe . ~ activc hurricane season of 2005 -especially the temporary impact of Hurricane Katrina on the refining capacity of the United States- iilso played a considcrablc role in thc pricc riscs registered by pctrolcum products. Among non-energy products. beverages turned in the strongest performancc. The incrcases rccordcd in the price of cuffcc -both Typc I (39.1%) and Type I1 (48.7%)- have been quite n o t a b l ~ Metal .~ and mincral prices climbed by 22.58, with this general upward trend

' K

"' "

bcing lcd by iron. zinc and copper. which rose by 7 1 .S%, 3 1.9% and 28.4'%, respectively. Among foods. the price of sugar increased by 37.9%. In contrast, prices for soybeans, soymcal and soy oil, which are important products for thc rcgion, fell by 10.4%. 9.5% and 11.5%."his trend is attributable to the increase in supply rcsulting from good harvests in Brazil and Argentina. As of April 2006, the overall price indcx Ibr commodity cxports was up by 23.1%.1° The price index for cncrgy products rose by 36.6%).and that of non-energy products increased by 17.1%. While energy products displayed the strongest momentum, the largest incrcases were posted for sugar, zinc, iron, copper and othcr metals. The rise in sugar prices can bc cxplaincd by demand-related factors, namcly an upsurge in purchases for use in thc producrinn of cthiinol, ;i substitute for petroleum-bascd fuels. In Latin America. Brazil and Colombia, among other countrics, are partially modifying their energy structure, especially with regard to motor vehicle fuels." Moreover, a seasonal supply factor -the drought in India and the rcsultinp contraction of worldwide sugar production- has influenced its intcrnationiil price. In the case of metals. the expansion of demand in China and India has driven up prices. Buoyant demand, low stocks and the fact that any iidditional increase in production capacity can only be made at a higher niarginal cost suggest that mctal prices will remain high in the immcdiatc futurc.

The market has, for example, closely tracked the royal successicm in Jordan. election rcsults in thc Islamic Republic of Iran, and the acts of sabotagc carried out upainst the petroleum industry in Nipel-ia. Type I col'fee ct1rrespontls to Culomhian Mild Arahicah, while Type 11 is composed of Brazilian and othcr natural Arabicas. The weight of soybeans and soybean products in the ovcrall pricc index is 7%. This fifurc rcfcrs to thc pcrccntngc variation in thc avcragc indcx ovcr thc last 12 months. In cities such as Cali and Bogola. gasoline is legally req~~ired to be 10%ellianol.

Economic Survey of Latin America and the Caribbean 2005-2006

Chapter Ill

Macroeconomic policy

A. Fiscal policy

1.

Introduction

200.5, improvements in thc countries' public accounts have lessened their cxternal vulnerability. This trend. which has been reflected in I'iscal and public-debt indicators, is attributable to a range of factors, including the characteristics o f the current macroccononiic situation and decisions taken by national authorities. Since 2002, fiscal policy has been implemented against a generally fitvouriible macroeconomic backdrop, although the specific situation has varied somewhat from onc subregion to another. In light of the international situation and the development of the region's economies, thc expansionary phase that began three years ago is expected to continuc in 2006. Since2003, the region's overall fiscal dclicit hltl narrowed, many countries have been posting pnmvy surpluses, and thc region's degree of external vulnerability has declined as its public debt has shrullk. The question arises, however, as to how sustainable this situation may provc to bc.

'

These developmcnts have raised ncw concerns among the fiscal authorities of some of thc countries that are benefiting thc most from external factors and rising commodity priccs, and there has been somc debate as to how fiscal surpluses should be used and as to thcir impact in terms of stability and cquity (see box 111.1). Givcn the institutional diversity of the way in which the countsics' public sectors are structured, it is difficult to find an indicator capable of reflectmg their various fiscal positions. As a first approximatlon of fiscal pcrfo~mance (and, in some c a m , as a lowest common dcnominator), data on central povcrnment accounts will bc uscd, although

LClG.2292-PlE. Sarltiap, Chile. December 2005. United Nations publicatior~,Sales No: E.05.II.G. 188.

Economic Commission for Latin America and the Caribbean (ECLAC)

Box 111.1 RISING PRICES FOR NON-RENEWABLE RESOURCES AND FISCAL POLICY IN COUNTRIES SPECIALIZING IN SUCH RESOURCES

Traditionally, LatinAmerica has been a major supplier of energy and mineral resourcesto the rest of the world. It contributes almost

Bolivia and Chile to considerably boost the level of fiscal resources they derive from

usually made in this regard is that, when an economy is booming, fiscal authorities

14% of world oil production and possesses about 10% of the world’s reserves. Chile is

such commodities, thanks, in particular, to the strong upswing in the prices they bring, as can be seen in the following figure.

should be able to temper the pace of economic activity by restricting public spending while, during recessions, they

the world’s biggest producer and exporter of copper, making up an average 30% of total output. Soaring prices for oil and

The second issue has to do with the role of fiscal policy in stabilizing the economy. The basic recommendation

should use fiscal policy to help spur the economy. During b o o m periods, export

copper in recent years have therefore had a strong impact on the economies which specialize in producing these goods.

FISCAL REVENUES FROM NON-RENEWABLE RESOURCES AS A PERCENTAGE OF TOTAL FISCAL REVENUES

(Percentage of total fiscal revenues)

This situation has created a number of dilemmasfor fiscal policymakers,who must now answer two fundamental questions

70

-1

which often arise during economic booms: How can the countries take advantage of rising prices for such commodities to boost

40

-1

fiscal revenues? and, How should fiscal surpluses be allocated in order to avoid the macroeconomic problems that often arise during price spikes? In responseto the first question, the countries of the region have designed a number of mechanisms to take advantage of the additional resources.The most direct way to transform the income from these

10

\

/

~

0 1993

1994

1995

1996

1997

1998

*Bolivia

- - *-- -Colombia -Mexico

1999

2000

2001

2002

2003

2004

2005

Chile --t Ecuador Venezuela (Bolivarian Rep. of)

Source: Juan Pablo Jimenez and Varinia Tromben, “La politica fiscal en paises especializados en productos no renovables”, Macroeconomia del desarrollo series, No. 46 (LWL.2521-P), Santiago, Chile, Economic

commodity exports into fiscal resources Commission for Latin America and the Caribbean (ECLAC), 2006. United Nations publication, Sales No: S.06.11.G.48. has been for governments to participate in their production. Also, the countries generally use the followingtax instruments windfalls can trigger what the specialized that target the source of the fluctuations, to collect funds derived from the production and sale of the commodities by public- or

literature refers to as “Dutch disease.” In such cases, the economic upturn results in an immediate improvement in

private-sector corporations: (i) royalties, usually based on production, which the terms of trade, but can have harmful provide the government with at least a consequences for the economy. These minimum payment for mineral resources; may include the highly paradoxical effect (ii) traditional forms of income tax (often of encouraging a cut in production and with differential rates); and (iii) profits taxes external trade in tradable-goods sectors levied on corporations involved in the which have not benefited from the boom. development of such resources. In recent years, some countries have implemented reforms in this area which have coincided

This effect can result from variations in relative prices and the impact of exchange-

with the strong upswing in commodity prices. In 2005, Chile introduceda specific tax on operating revenues in the mining

rate appreciations. It is therefore usually recommended that fiscal policy should provide for the creation of a stabilizing mechanism.

industry, and Bolivia adopted a direct tax on oil and petroleum products.

Mechanisms of this kind can be classified according to the variable to be stabilized.

These instruments have enabled

On the one hand, there are mechanisms

including the price of the commodity in question. This category includes financial instruments (such as futures contracts and bonds tied to non-renewable resource futures), diversification of exports and international price stabilizationagreements. On the other hand, there are mechanisms which, based on the assumption that international prices are unstable, are designed to minimize their main impacts on the domestic economy by stabilizing one of the variables directly affected by the volatility. This category includes rules aimed at reducing the effects of fluctuating revenue upon spending and stabilization funds financed with export earnings. Countries in the region have set up a variety of mechanisms, although their

Economic Survey of Latin America and the Caribbean 2005-2006

Box 111.1 (concluded) existence continues to be a matter of debate. In 2001 Chile adopted a fiscal rule requiring the government to maintain

(created in 1995); in Ecuador, the Fund for Stabilization, Social Investment and Public Debt Reduction (created in 2002

Stabilization Investment Fund (created in 1998). Although it would be difficult to make a conclusiveassessment regarding

a cyclically-adjusted structural surplus equivalent to 1% of GDP. The cyclical component of this rule is defined not

and deactivatedin 2005); in Mexico, the Oil StabilizationFund (createdin 2000), and in the Bolivarian Republic of Venezuela, the

these funds, it should be noted that frequent rule changes and the high percentage of precommitments have restricted their

only on the basis of GDP but also by the prices of copper and, more recently, of molybdenum as well. This has softened

MacroeconomicStabilizationFund, created in 2004 to replace the Macroeconomic

capacity to accumulate balances, even during periods of rising prices.

the impact of income volatility on public spending. Although the region has some long-

YEAR-END STABILIZATION FUND BALANCES. 1996-2004

(Percentages of GDP)

established stabilizationfunds (Colombia’s NationalCoffee Fund dates back to 1940), in recent years there has been a revival of such funds, whose objective is to reduce the impact of income volatility on public accounts. To date, the following funds have been created: in Chile, the Copper Compensation Fund (founded in 1985 and activated in 1987); in Colombia, the Petroleum Saving and Stabilization Fund

Chile Colombia Ecuador Mexico Venezuela (Bol. Rep. of)

1996

1997

1998

1999

2000

2001

2002

2003

2004

2.3

2.3

2.0

1.5 0.6

1.0 1.4

0.9 1.5

0.4 1.6

0.2

0.1

0.0

0.1 1.4 0.3 0.1

0.2 1.3 0.4 0.1

3.9

5.2

3.6

0.8

0.7

0.2

Source: Juan Pablo Jimenez and Varinia Tromben. “La politica fiscal en paises especializados en productos no renovables”. Macroeconomia del desarrollo series. No. 46 (LWL.2521-P). Santiago. Chile. Economic Commission for Latin America and the Caribbean (ECLAC). 2006. United Nations publication. Sales No: S.06.11.G.48.

other aggregates, such as indicators for the countries' nonfinancial public sectors (NFPS), will be also bc brought into the discussion. At thc central governrnont level, the region's fiscal perfom~anccproduced a sinlplc average primary surplus of 1.4%of GDPat the close of2005, cornpared with 0.6% a year earlier.2 If thc overall deficit is takcn into account (in other words, if interest payments on public debt arc included), then thc deficit ranged bctwecn the equivalent of 1.9% and 1.1% of GDP. This average rellects a widespread improvement in the countries' fiscal accounts. In 2005, 15 out o f the 19 countries listcd in table 111.l recorded a primary surplus. This contrasts sharply with the outcome in 2002, whcn only seven countries achieved a primary suiplus. An examination of figure UI.1 indicates that, assuming that the aforementioned averagc is the result of varying performances, then measuring the stand& deviation can facilitate the analysis of that diversity. I n general tcims, it can be said that unevenness in perforrilance as ~ncasured by primary balances tended to increase during the crisis (beginning in 19%) and to lessen when the situation improved, beginning in 200 1-2002. As for the overall

balance. variation in the standard deviation is relatcd to thc influence OSdcbt interest payments, which differ according to the level o r indebtedness and the interest rates charged to cach country. F~gureIII.1 LATIN AMERICA AND THE CARIBBEAN: PRIMARY BALANCE, OVERALL BALANCE AND STANDARD DEVIATION FOR CENTRAL GOVERNMENT

Source: Econom~cComrntss~onfor Latm Amer~caand the Caribbean (ECLAC), on the basls of offic~alflgures.

As a wcifhted average. thc primary surplus I-oscfrom 2.04 01- GDP in 2004 ~o2.24, of GDP in 2005

Table 111.1 LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT FISCAL INDlCATORS a (Percentages of GDP at current prices) Public debt

Primary balance

Overall balance Central government

2002

2003

2004

2005"

2002

2003

2004

2005'

2002

2003

2004

NFPS 2005

2002

2003

2004

2005

Lat~n America and the Caribbean Simple average Weighted average MERCOSUR MERCOSUR + Chile Andean Community Petroleum exporting countries0 Other Mexico Central America Argentina" Bol~via Brazil Chile Colomb~ag Costa Rica Ecuador El Salvador Guatemala h Haiti Honduras Mexico ' Nicaragua Panama Paraguay h Peru bminican Republic Uruguay Venezuela (Bolivarian Rep, of)

'

Source: Economic Commissim for Lam America and the Caribbean (ECLAC). on the basis of officlal figures. Includes social security. %t 31 December each year. using the average exchange rate in the case oi external debt. The figures for Mexico tn the central government column relate only to the federal government and. In the NFPS column. to the public sector. For the Dominican Republic. the public debt lncludesonky external debt. C Pretimmary estimate. Simple average. eNational administrat~on. 'Federal government and central bank. Nomlnal balances. a National h Central admlnlstration. ' Federat government and soclal security. central administrat~on.Resuks do not Include net loans. adjustments for accruals. floating debt ci the cost of financral restructuring.

a

39

Economic Survey of Latin America and the Caribbean 2005-2006

According to the national budgets prcpared at the cnd of 2005 and fiscal data for the firs1 few months of 2006, a sllialler primary surplus is expccted for 2006. As rnentioncd above, howevcr. central govcrnment figures are not entircly representative ofthe situations of a number of the countries in the region whose public sectors are more decentrali~ed.When thc broader coverage nf government accounts in the reg~on'smost decentsali~ed countries (Argentina,Bolivia, Brazil, Colombia. Ecuador and Mcxico) is taken into account, then the calculations indicate that the non-financial public aector' primary surplus rose. on avcrage, from 0.9% of GDP in 2002 to 3.1% in 2005.

Figure 111 2 LATIN AMERICA AND THE CARIBBEAN: PRIMARY BALANCE FOR THE NON-FINANCIAL PUBLIC SECTOR

Source: Econom~cCommission for Latln Amer~caand the Caribbean (ECLAC),on the basis of ofhal figures.

2.

2003-2005 in comparative terms

'The fiscal outturn in 2003-2005 has diffcred from the situation in other boom pcriods in the past 15 years because the region's governments took advantage of the favourable economic conditions to strengthen their fiscal positions. I n 2002-2005, average annual GDP increased by about 4%, fiscal revenues expanded by 1 .h% of GDP iind primary spending rose by an average 01.0. l O/u of GDP. As shown in figure 111.3, trends in public spending during that pcriod contrast with those seen in two other periods with equivalerit annual growth rates (average increases of 4%). Whereas in 2003-2005 spending diminished by 0.4% of GDP, primary expenditure rose in all thc other cases (by 0.7% of GDP in 1995-1998 and by 2.2% in 1991-lC394). Worn the standpoint of resources, this cyclc also stands apart in that revenues climbed by 1.6%of GDP, whereas for the two earlier pcriods it rose only slightly ( 1995-1998) or fell ( 199 1 - 1994). The variation of spending can be broken down into i ~ various s components in e~thercconomlc or functional tcrms. On thc basis of iin economic classification, capital spending for 2002-2005 fell by 0.2% of GDP, whereas it increased in the previous two periods. If a functional classil'iciition of expenditure is used, social spending In

2002-2005 Sell by 0.3% ofGDP, whereas it rose significantly in the other two periods. by 0.7% in 1995-1998 and 1.5% in 1991-1994.3 F~gure111.3 LATIN AMERICA AND THE CARIBBEAN: VARIATION OF THE MAIN CENTRAL GOVERNMENT FISCAL INDICATORS

Source: Economic Cornmisston for Lat~nAmerica and the Caribbean (ECLAC), on the basls of official f~gures. " Saclal expenditure f~guresare for 2002-2004. Growth rate of simple yearly averages for Latln Amerca. 18 countries.

This classificatior~o l spending is based on data from the Social Developrrier~lDivision and includcs the Collowing public-sector functicms: cclucalion, health care, social security and welfarc. housing and other

Economic Commission for Latin America and the Caribbean (ECLAC)

3.

The year 2005 in aggregate terms

The improved balancc recorded in 2005 was due to a general increasc OS fiscal revenue across the region (on1y Guatemala ancl Paraguay saw a fall in their fiscal resources). Spcnding also rose, but lcss than revenue. The incrcase in revenues was duc to the continuing upward trend in commodity prices. The countries in whlch revenucs climbed the most wcrc the Bolivarian Republic of Venemcla (4% of GDP), Bolivia (3.5%) and Chile (2.3%), all of which specialize in extractive industries producing commodities whose prices have been rising sharply (oil, natural gas and coppcr). Another factor In the casc of Bolivia is the direct tax on hydrocarbons (IDH) that it introduced in 2005, which yielded reccipts cquivalent to 3.1 % of GDP. From a longer-term perspective, fiscal revcnue in 1990-2005 grew by 3.8% of GDP, but that growth was concentrated in 1998-2005;fiscal revenue rose continuously from 1998 onward (3% of GDP), peaking in 2005. As for the composition of those revenucs, the share of tltx receipts ha\ grown (over 60%), while the contribution of capital Income and of grants donations hits fallen. Box 111.2 provides a morc detailed analysis ol thc various causes of these changcs in the tax revenue structurc. In most cases, therc arc a series of con4erations that are useful in analysing tax issues and dcfining ways of strengthening the tax structurc. First, Latin American and Caribbean tax systcms are based mainly on indirect

Figure 111.4

LATIN AMERICA AND THE CARIBBEAN: BREAKDOWN OF FISCAL REVENUE (Percentages, srmple averages)

Source: Economc Comm~ssonfor Lat~nAmerlca and the Caribbean (ECLAC). on the haws of off~c~al f~gures

taxes, with lowcr direct tax receipts than in other regions. In recent years there has been a downturn in the share of revenue provided by taxes on cxtcrnal trade, greater VAT receipts, a lack of significant progress on income taxes, a tcndcncy [or revenue systems to become concentrated in a smaller number of different taxes, and thc dcvclopment of extraordinary or emergency tax schemes.

Box 111.2 TAX REVENUE TRENDS IN LATIN AMERICA

Tax policy and its role in Latin America have been ongoing subjects of analysis in recent years.aThe changing economic and social conditions in the region in relation to trade and financial liberalizationefforts at the worldwide level, the abandonment of the State’s entrepreneurial role, increasing labour-market informalityand the growing concentration of income in general have all left their mark in the area of taxation. Over the past two decades there have been major structural changes in the tax situation in Latin America. These changes have not led to a suitable balance in the distribution of the tax burden among

the various socio-economic strata. As a result, no social consensus has been reached concerning that distribution, nor

ongoing reform efforts are being undertaken in an attempt to broaden the tax base for VAT on goods and services in line with

has there been any success in ensuring that these changes result in lasting distributional patterns for the different levels of government in the tax burden in those countries where there are competing taxing powers. Despite repeated reforms, the countries of the region have not yet achieved a satisfactory degree of stability regarding the appropriate level of the tax burden or the socially accepted tax structure; there is often debate as to the direction to be followed. For instance,

the belief that the majority of the tax burden should be borne by consumption in order to make sure that incentives for saving and capital formation are not undermined; on the other hand, however, efforts are being made to avoid taxing the basic basket of goods, and there is a prevailing belief that direct taxes should play a more important role and that the contribution of personal income taxes should be increased by raising the rates charged to the most dynamic sectors of

Economic Survey of Latin America and the Caribbean

Box 111.2 (concluded)

LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT TAX BURDEN AND SOCIAL SECURITY CONTRIBUTIONS,2005

the economy, such as the financial and export sectors. The relevant data indicate that the tax burden in countriessuch as Argentina, Brazil, Chile, Colombia and Uruguaydiffers considerably from its size in countries whose tax intake is lower, such as the Bolivarian Republic of Venezuela, Ecuador, Guatemala, Haiti, Mexico and Paraguay. In any case, regardless of the size of the tax burden, most of the countries still have not achieved a sufficient degree of fiscal solvency, and there are a number of

(Percentages of GDP)

40.0 7

35.0 30.0 25.0 20.0

7

m

,:

unmet social needs that cannot be satisfied without increased public resources. It is also clear that, despite all the economic changes which have affectedthe region’s development in recent decades, the tax burden has grown. Comparingthe receipts for 2005 with those for 1980,the rise in the tax burden is between 2.5% and 3% of GDP, depending on whether or not social security contributions are taken into account. This shows that, in one way or another, the countries’ numerous tax reforms and improvements have borne fruit. Nonetheless, as mentioned in the section on fiscal policy in this chapter, countries in some parts of the region - particularly Central America - have not yet realizedtheir tax potentiaLbA number of developments in terms of the tax structure can also be identified: on the one hand, there has been a significant decline in taxes on external trade, a clear increase in general taxation on consumption, excise taxes have decreased and, at the same time, the share of income tax revenues has remained constant over the years. According to this analysis, wealth

..

2005-2006

1

a,

a

x 3 3

>

m a,

-

6

-’

7

n m

.Ea m

4-

0 0

n

u1

U 2

I 0

Ic

D a,

m

0

W Tax revenues

0

> 0

m

I 1 11

-

-

7

mx

2

a a,

W

0

0

Is)

a

3

m a

a

U

-

h

W

:.8

7

0

m

x

2

n 2

I m

J

>

0

m ma, N

E

2

W Social contributions

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures. a

General government coverage. Data for 2004. Simple average.

and asset taxes have accounted for an extremely small fraction of total receipts, but since this study has focused on central governments, further investigation of this last point at the subnational level is called for. Lastly, tax structures have been oriented towards deriving receipts from a reduced range of taxes, thanks to the elimination of a substantial number of minor taxes. These trends have been seen in all the countries to a greater or lesser degree, regardless of the level of their tax burdens in absolute terms. Internationalexperience has shown that the movement away from a reliance on taxes on foreign trade has

been counterbalanced by an increased use of taxes on consumption, although in many cases this has also been coupled with increases in income taxation. This process has not been as widespread in Latin America, however. There is also a growing problem with informality in labour and goods marketsand increasingunregisteredeconomic activities. These factors’ effects on the countries’ tax structures is substantial in relation both to the level of availabletax resources and to the equity and neutralityof the system, since the fact that some taxpayers do not actually pay any taxes introduces vertical and horizontal inequities.

Source: Juan C. Gomez Sabaini, “Evolucion y situacion tributaria actual en America Latina: una serie de temas para la discusion”, Santiago, Chile, Economic Commission a

for Latin America and the Caribbean (ECLAC), September 2005. See R. Bird, “Taxation in Latin America: Reflections on sustainability and the balance between equity and efficiency”, IfTfapel; No. 0306, Rotman, University of Toronto, June 2003; R. Martner and V. Tromben, “Tax reform and fiscal stabilization in Latin American countries”, Gestion pljblica series, No. 45 (LC/L.2145-P), Santiago, Chile, Economic Commission for Latin America and the Caribbean (ECLAC), June 2004; P. Bird, “Taxation in Latin America: Structural trends and impact of administration”, Working fapel; No. 99/19, Washington, D.C., International Monetary Fund, 1999; V. Tanzi, “Taxation in Latin America in the last decade”, working paper, No. 76, Center for Research on Economic Development and Policy Reform, Stanford University, December 2000. See J.C. Gomez Sabaini, “La tributacion a la renta en el lstmo Centroamericano: una serie de temas para la discusion”, Santiago, Chile, Economic Commission for Latin America and the Caribbean (ECLAC), July 2005. Macroeconomia del desarrollo series, No. 37 (LC/L.2359-P); Agosin, A. Barreix and R. Machado, Recaudar para crecer: bases para la reforma tributaria en Centroamerica, Washington, D.C., Inter-American Development Bank (IDB), 2005.

Economic Commission for Latin America and the Caribbean (ECLAC)

LATIN AMERICA AND THE CARIBBEAN: TAX BURDEN AND COMPOSITION OF TAX REVENUES (S~mpleaverages, percentages of GDP)

Figure 111.6 LATIN AMERICA AND THE CARIBBEAN: COMPOSITION OF CENTRAL GOVERNMENT EXPENDITURE (Simple averages, percentages of GDP)

Source: Economrc Commission for Latm Amerlca and the Carlbbean (ECLAC), on

Source: Economrc Comm~sslonfor Latm Amerlca and the Car~bbsan(ECLAC), on

Figure 111.5

the bas~sof offlclal flgures Data shown fa<2005 oclude the author's eshrnates

As for disbursements, as mentioned above, the trend in public spending has been a distinctive characteristic of this pcriod. inasmuch as central government spending rose in 2005. regaining its 200 1-2002 levels after having diminished in 2004. Cornpared with 2004, thcre was an increase of 0.4% of GDP in 2005 (from 19.1% to 19.5%). On average. the whole of this expansion was concentrated in current spending. while capital outlays remained very close to their low 2004 levels. Changes in social cxpenditure patterns must also be considered. The document presented during the thirtyfirst session of ECLAC and the Social Puwamrw-l qf Luti~tAwrrrica, 200.5 both noted that social spending rose considerably from 1990 to 2002. Nonetheless, as mentioned above, this category of cxpenditure saw an average decline of a b u t 0.4% of GDP between 2002
the bas~sof off~cialf~gures.

F ~ g u r e111.7

LATIN AMERICA AND THE CARIBBEAN: CENTRAL GOVERNMENT CAPITAL EXPENDITURE AND PHYSICAL INVESTMENT EXPENDITURE (Simple averages, percentages of GDP)

Source: Economlc Commission for Latin Amerlca and the Caribbean [ECLAC). on the bas~sof off~c~al figures.

was equivalent to 48.6% of GDP in 2005, compared with 55.910 in 2004. As noted in the introduction to this study, this decrease coincided with declines in other emcrging economies, although the percentage for Latin America fell more sharply than it did in other regions. Nonetheless, among the 19 countries analyscd, there are still nine countries whcrc the level exceeds 50% of GDP. In addition to thesc striking primary surpluses, the most important contributing factors in this trend within the

Slrupitig tlre F-~rnirccfSoc'iii1 Prnfecriorr:A w r s s . I.inarlc.irlg urrd S o l i i h i n (LC/G.2294(SbS.3l/?)), Santia~o.Chile, March 2006. Bolivia, Guyana, Honduras and Nicaragua are the countries in the region that are eligible for thc Heavily Indebtcd Poor Countries (I.IIPC) Deht Initiative. Their eligibility is conditional upon thc adoption of ccrrain economic policics (tnacroecononlic adjustments. structural reforms and sc~cialpolicies oriented towards the education and health scctors) which led to considerable spertcltng increctses in those areas.

Economic Survey of Latin America and the Caribbean 2005-2006

F ~ g u r e111.8

Figure 111.9

LATIN AMERICA AND THE CARIBBEAN: SOCIAL EXPENDITURE (S~rnpleaverages, percentages of GDP)

LATIN AMERICA AND THE CARIBBEAN: PUBLIC DEBT OF THE NON-FINANCIAL PUBLIC SECTOR (Percentages of GDP)

Source:

Econom~cCornm~sslonfor Latin ~ r n e i and a the Carlbbean (ECLAC), on the bas~sof off~c~al flgures. Figure 111.10

LATIN AMERICA AND THE CARIBBEAN: LOANS PROVIDED BY THE INTERNATIONAL MONETARY FUND (Millions of special drawing rights (SDRs))

Source: Economc Comm~sslonfor Latln Amerlca and the Carlbbean (ECLAC) on

the basls of off~c~al f~gures

rcgion have been debt restructurings and the revaluation of local cun-cncies against the United States dolhr. In addition, the HIPC lnitiativc has brought about a steep reduction m thc total public dcbt stocks of Bolivici,Guyana, Honduras and Nicaragua. Thc countries of the region are also taking advantage of favourable lnacroeconornic condit~onsto implcmcnt active debt 111an:igement policics which have helpcd to rcduce their Gnar~cialvulnerability. As was underlined in thc Prrlinlblary O v ~ r \ i r wqf the Ecnrionii~sof Latm A ~ n e r i m m d C ~ Cmibbeun, P 200.5, as wcll iis in other seclions of this document, that policy has been slrcngthened by a nurnbcr of initiatives, such as the retlrenlcnt of external bonds (Argentina, Braril, Mexico, Panama and Pcru): swaps of external ilor domestic debt (Argentina, Colombia and Peru): buybacks of Brady bonds (the Boliviirian Republic oT Venezuela and Brazil) and the issuiince of external dcbt paper denominated in local currency (Blazil and Colombia). As mentioned in the Prdi~ninary0 1 . r r v i e ~the : h

Source: Source: Economic Cornmiss~onfor Latin Amer~caand the Car~bbean (ECLAC), on the haws of figures from the International Monetary Fund (IMF).

improving fiscal pos~tion(which transliites into lower borrowing requircrnents), togcther with growing reservcs. reduccd the incentivc for arranging for the usc of special driiwing rights agreements with the Intc~niitionalMonctary Fund (IMF). Notewolthy events in this conncction includcd the early repayment, in late 2005, of LMF loans by its two largest debtors, Argentina and Brazil, amounting to USs9.9 billion and US$ 15.5 billion. r e ~ ~ e c t i v c l ~ . ~ T h e s e payments, which rcduced the Fund's loan portfolio by almost half, rncant that for thc first time in many years. Latin America was no longcr one of the main recipients oTIME' funds. Thc region now accounts Tor 8.6% of thc Fund's total loan portfolio, which is far below the averagc -35%- for 1984-2006 (see I'igure I11.10).

I n Mal-cl1 2006. Urujiuay maciz an advance payment of USS625 rnillion on amounts that were to fall due during that year.

Economic Commission for Latin America and the Caribbean (ECLAC)

Y 4.

2005 in disaggregated terms

In disaggregatcd terms, the improved average for the region in 2005 conceals a number of differing patterns. Although the great majority of the countries expanded their primary surpluses, primary balances were down in Argentina, Brazil. Colombia, Guatemala and Paraguay relativc to the figures for 2004. In the cases of Argentina, Brazil and Colombia, this downturn in the primary balance was attributable to increased primary spending (dcspite an increase in fiscal revenue of about 0.5% to 1% of GDP). In the case of Guatemala, it was caused by a sharp slump in fiscal revenue. Further infbrmation is contained in table llI.2. The four countries where capital spending fell thc most wcre Haiti, Honduras, Nicariigua and Panama (1.4%, 0.9%. 0.6% and 0.7% of GDP). Honduras is among the countries benefiting from the HlPC Initiative. The ratio between the primary surplus and debt interest payments offers an additional measurement of vulnerability. If the primary surplus covers less than 100% of such payments (meaning that the country has an overall deficit), then it means that the fiscal authorities must borrow further in order to cover their intercst obligations. Countries can be categorized into various groups according to the level ofthis ratio:

Countrics whose primary surplus exceeds 100% of interest payments: Argentina, the Bolivariiin Republic of Venezuela, Chilc and Paraguay; Countries whose primary surplus is equivalent to bctween 50% and 80% of their interest payments: Brazil. Ecuador. El Salvador, Mexico, Peru itnd Uruguay: Countries whose surplus covers less than 50%: Costa Rica, Nicaragua and Panama. This list is bascd on data for the past year. Figure 111.11 gives some historical perspective to the i-iscalpolicy picture, combining information on the primary balance for 2005 with an indicator of past fiscal situations. In this case, the indicator is the ratio of public debt to GDP. If the regional averagcs of these indicators are included, thcn the countries of the region can each be placed in one of the four quadrants of this graph according to whether their present (the ratio of the primary balance to GDP) and past (public debt as a percentage of GDP) fiscal positions have improved or worsened. The reader should bear in mind that public debt reflects the cumulative impact of past deficits. By combining the 200.5 central government primary balance figures with the level of public debt as a percentage of GDP, the count~ies'public tlnanccs can bc classified

Table 111.2 LATIN AMERICA AND THE CARIBBEAN: VARIATION OF FISCAL AGGREGATES, 2004-2005 (Percentages of GDP)

Prmary balance

Overall balance

Revenue

Total spending

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dorn~n~can Republic Uruguay Venezuela (Bolivarian Rep. of) Latin America and the Caribbean, simple average Source: Econom~cComrn~ss~on for Latin Amer~caand the Caribbean (ECLAC), on the basls of offlc~alflgures

Current spending

Capital spending

Interest

Primary spending

Economic Survey of Latin America and the Caribbean

2005-2006

Flgure III.11 LATIN AMERICA AND THE CARIBBEAN: PUBLIC DEBT AND CENTRAL GOVERNMENT PRIMARY BALANCE, 2005 (Percentages of GDP)

Source: Economc Cornrn~ss~on for Lam Arnerlca and the Caribbean (ECLAC), on

the bas~sof offic~alfigures.

into four groups corresponding to the four quadrants shown in figure TIT. I l . Countries where the public debt-to-CDP ratio is below average and the primary surplus is

5.

Subregional overview

The fiscal positions of thc countries in different subregions reflect thcir varying performances. The MEKCOSUR countries continucd the trend towards the generation of primary surpluses observed over the past three years (although Argentina and Paraguay short of the rccord levels seen in 2004). This had the effect of helping to lower their dcbt-to-GDP ratio, which had peakcd in 2W2 but has fallen by 25% of GDP over thc past year: This sharp reduction can bc attributed to the level of these primary surpluses, combined with Argentinit's and Uruguay 'S debt restn~cturingsand Argentina's and Brazil's prcpayrnents ofIMF debt. In the Andean subregion, a distinclion must be drawn between the 011-producing and non-oil-producing countries. The pctroleum-producing countries itre continuing to gencrate hefty prlrnaly surpluses, thanks to

' K

'

above avcrage: the Bolivarian R c y u b l ~ cof Venczuela, Brazil, Chile, Costa Rica, Ecuador and Paraguay:' Countries whcrc the public debt-to-GDP ratio is below uveragc and the primary surplus is below avcrage: the Dominican Republic, El Salvador," Guatemala, Haiti, Mexico and Peru: Countries where the public debt-to-GDPratio and the primary surplus are above average: Argentina and Uruguay; and Countries wherc the public debt-to-GDP ratio 1s above average and the primary surplus is bclow average: Bolivia, Colombia," Honduras, Nicaragua and Panama. If thew country groupings are compared with the results of the primary surplus/intcrcst ratio, a rnorc dynllrnic version of this classification ernergcs: countries with a primary balance/interest ratio above 100% (or thosc havins an overall Fiscal surplus) arc reducing their indchtedncss. whereas for those with a11 overall fiscal dcficit, total public dcbt is rising.

their steeply rising fiscal receipts from the hydrocarbons sector. Elsewhere, Bolivia significantly narrowcd its fiscal deficit. Colombia's central government dcficit increased in 2005, but decentralized bodies returned a surplus thar led to an improvenlcnt in thc consoliditted accounts. Peru also witnessed a marked improvement in its public accounts. The Central Americiin countries' primary accounts were balanced in 2004-2005, but there is still a large overall cicficit of more than 2% of GDP. The improved dcbt-to-GDP picturc is basically due to Nicaragua's entry to the HIPC Initiative, which led to thc forgiveness of a large part of its dcbt. The Caribbean economies showed a mixed fiscal perfonnance in 2005. Bahamas, Dominica. Jamaica, and Saint Kitts and Nevis narrowcd their fiscitl gaps, but

Brazil would changc yadrants. moving into thc category of counrries with above-average debt. if data for tllc ncn-hancial public scctor were ~ ~ s einstcad d 01-central government data. Both Colornhia and El Salvador would change quadrants, movinp into the category of countries with an above-avcrajic primary surplus, if data c public sector were used instead of data on central government primary balances. Ibr ~ h nowfinancial Ibid.

Economic Commission for Latin America and the Caribbean (ECLAC)

Antigua and Barbuda, Belize, Barbados, Guywa, Saint Lucia, Saint Vincent and the Grenadines, ;tnd Trinidad and Tobago adopted expansionary fiscal policies. In the first group, these fiscal changes were attributable to short-term cconomic factors (as in Bahamas), oncc-off reforms (closing down the sugar industry in Saint Kitts and Nevis), or more pcrmancnt changcs (Dominica and

6.

Jamaica). The second group o f countries opted for fiscal expansion, mostly in ordcr to stimulate aggregate demand (Antigua and Barbudit, Guyana, Saint Lucia, Saint Vincent and the Grcnadines, and Trinidad and Tobago). Antigua and Barbuda, Guyana and Saint Lucia boostcd capital spcnding, and the Government of Saint Vincent and the Grcnadines expanded its payroll.

Conclusions

As noted in the Prelirninarv Overview of the Eronorrzier ofLatin Arrzerica and the Caribb~an.200-5, the region's governments refrained from adopting expansionary fiscal policies during the 2003-2005 growth cycle. opting instead for debt repayments and accu~nulationof reserves. This marked a departure from earlier episodes in the region. This policy rcduccd cxtcrnal vulncrability and, to some dcgrec, pavc fiscal policymakers more room to manoeuvrc. Thc rcgion's authorities should seize this opportunity to m o w forward with a widc rangc of tasks in the area of fiscal policy. As for fiscal rcvcnuc, sincc half thc region's countries have tax burdcns bclow 15% of GDP at thc ccntral government lcvcl, priority should bc givcn to strcngthening the tax structure. Countrics spcciali~ingin thc extraction of non-

renewable resources have sccn a s h q increase in their fiscal revenues thanks to upswings in the prices of their exports. The prcscnt combination of circumstances thus provides them with a chance to make strides in designing stabilization mcchanisms and diversifying their revenue structures and tax systcms away from a reliance on the non-renewables sector. Countries in the region that have wcak tax structures and low lcvels of investment in physical and human capital should look for ways to improve their social spcnding patterns, while also investing in public inhastructure. an area wherc cxpcnditure remains at the lowest levels seen in rcccnt decades. Aside from the improvcmcnts obscrved in recent years, it should be noted that only a fifth of the countries ofthe region show overall fiscal surpluses, and half of thc countrics hiive debts exceeding 50% of GDP.

B. Exchange-rate policy

1.

Exchange-rate movements in 2005

Between December 2004 and December 2005, the Latin American and Caribbean region's real effective exchange rate vis-a-vis the rest of the world diminished by 8.3% (signifying a currency appreciation), although the annual average rate of appreciation for 2005 (5.1%) was lower than it was for 2004. This situation is depicted in figure 111.12.Thc ratc ofapprcciation was almost twice as high in South America (10.1% from December 2004 to Deccmbcr

2005) as in Central America, the Caribbean and Mcxico (6%). Interestingly, these figures are not thc nct result of widely differing situations; in fact, 17 of thc countrics in the region (all those considered cxccpr for Peru) showed declines (currency apprcciation) in their extraregional effective cxchangc ratc over this period. As indicated in thc section on the external sector, this upward pressure can be accounted for by signiticant improvcmcnts in thc

Economic Survey of Latin America and the Caribbean 2005-2006

current account balances of u number of South Aniericaii1 countries. Elsewhere, in Central Anicrica, thc real rate of appreciation was linked to the high level of current transfers, mainly consisting of emigranl rcmittanccs. Figure U.12 LATIN AMERICA AND THE CARIBBEAN: REAL EFFECTIVE EXCHANGE RATE IN RELATION TO THE REST OF THE WORLD (Index: simpie average for January 1990-December 1999=100)

Source: Econom~cCornm~ss~on for Latln Amer~caand the Caf~bbean(ECLAC). on the b a s s of offual f~gures

The total effective cxchauge ratc (which takes into account trade with all partners, including thc countries of Latin America and the Caribbean) dcclined less, as the currencies of trading partners in the region iippreciatcd in real terms relative to the rest of the world. Fourteen countries, however. posted real cll'cctive appreciations m relation to all of thcir trading partners bctwcen December 2004 and December 2005. Eight countries recorded signil'icant apprcciations (over 5 % ) , with four South Amcrican countries posting the highest figures: Brazil (20.1 %). Chilc ( 1 2.4%), Uruguay (9.8%) and Colombia (8.3%). They werc followed by two Ccntral Amcricm countries (Guatemala. with 6.7%, and Nicaragua, with 5.5%). Jarriaicii (6.7%) and Mexico (6.2%). Some of the most striking cases in South America, Ccntral An~crica and the Caribbean arc analyscd below. Brazil rlin a currcnt account surplus in 2005 ( l .8% of GDP) and early 2006. as well as having a high levcl ot foreign direct invsstment (FDI), equivalent to 1.6%of GDR and high interest rates, which neverthcles showcd a downward trend as of December 2005. Probably as a result ol their effect in adding, to the levcl of the country's debt obligations had an impact on thc balance-of-paymen~s capital iind financial account balance (excluding FDI) In

"'

47

2004 and 2005. This balance nloved from a net outflow of Soreign currency equivalent to about 2.2% of CDP in 2004 to a nct inflow of 0.1% of GDP in 2005. In 2005. the country received capital inllows amounting to US$ 6.45 1 billion, which werc used to purchase equities, and there were no large privatc debt piiyrnents on the sciile sccn in 2004.10 These factors contributed to the 15.9% nominal appreciation of the real against the dollar between December 2004 and Dccembcr 2005. In Chile there wcre two main factors bchind the peso's nominal appreciation ol' 10.8% against thc dollar in 2005, which in turn largely accounted for its rcal cffectivc appreciation. First. FDI rcmained high (4.1%)of GDP). Chile also bcnefi~edfrom a substantial improvement in its tcrnis of trade, thanks mostly to stccply rising coppcr prices during the ycar, but its strong tritde pcrforrnancc was partially countercd by an increase in net payments of investment income. which amounted to 9.2% oSGDP. Second, there wiis a large reduction in ciipital outflows compared to 2004. In Guatemala, when analysing the rcal effective appreciation in 2005, a distinction should be made betwecn domcstic inflation (a cuniulative rate ol' 8.4%) iind the nominal appreciation of 2% against the dollar. The lattcr was primarily attributable to capital inflows (cxcluding FDI). which wcre equiviilent to 4.2% of GDP despite a substantial reduction in purchases of Guaternalw portfolio assets. and current transfers (mainly emigrant remittances) amounting to 10.9%;of GDP. The increase in currcnt transfers in 2005 almost offsct the striking upturn in imports and fi-cight expenses. Even so. the build-up of reserves in 2005 was less than half of what it had bcen in 2004. The real cffective appreciation of thc Jamaican dollar in 2005 retlccted a nominal depreciation (4.5%) between Dccernber 2004 and December 2005) that was rathcr less than the intlation rate Sor the period (12.9%). The nominal exchange rate remained stable until July, when it began to rise (depreciation). In the second half of the year there wiis an increase in the dcmand for foreign currency and dollar-denominated assets. Factors affecting the availability of foreign currency in 2005 included the continuins high levels ol' remittances and of FDI and capital inflows, although the trade dcficit widcned. In any case, the government's avcrsion to a depreciation in the cxchangc rate, by reason of its fiscal impact (in view of the high levels of public debt, half of which is linked to the price of the dollar). has led the central bank to draw upon its rcscrves in order to scll United States dollars on the open market.

In the course of2005. howeve]. the government p a ~ doll' ils dcbt w ~ t hthc International Monetary Fund.

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure 111.13 PERU AND CHILE: TOTAL REAL EFFECTIVE EXCHANGE RATE (Index: s~mpleaverage for January 1990-December 1999=100)

Figure 111.14 BRAZIL AND MEXICO: TOTAL REAL EFFECTIVE EXCHANGE RATE (Index: simple average far January 1990-December 1999- 100)

Source: Econorn~cComrn~ss~on for Latln Amerlca and the Caribbean (ECLAC), on f~gure~. the bass of off~c~al

Source: Econom~cComm~ss~on for Latln Amer~caand the Caribbean (ECLAC). on the bass of offlclal f~gures

Of thc four coirntrics in the region that registered effectivc depreciations in 2005, the ratc was significant only in thc case of Peru, with 4.7%. This was largely attributable to the uncertainty about upcoming elections that bcgan to make itself felt in the third quarter of 2005, dcspite very positive trends in metals prices and the subsequent improvement in the trade balance, which in 2005 posted an 84.9% improvcn~entrelative to 2004. Nevertheless, the current account rcsult was negatively

affccted by increased payments of investmcnt income, especially profits and dividends, which rose by 2.1 % of GDP. The net result was a current account surplus of 1.3% of GDP. Meanwhile, the balance-of-payments capital and financial account (without including FDI) recorded a net capital outflow of 2.5% of GDP. Foreign-exchange outflows from the public sector amounting to US$ 1.44 billion also hclpcd to ease the upward pressure on the exchange rate.

movements in early 2006 The Latin American and Caribbean aggregate extraregional real effective cxchange rate increased (depreciatcd) by 2.8% hctwccn Decembcr 2005 and June 2006. Three countrics in South America (Paraguay, Bolivarian Republic of Vene~uelaand Peru) recorded appreciations,while the other seven saw depreciations, the most notable being Colombia (13.5%) and Chile (9.5%). Consequently, the extraregional real effectivc cxchange rate Ihr South America rose. on average, by 2.6% over the period. In Central America. Mexico and the Carihbcan, it was up by 3%, with all the countrics of the subrcgion showing depreciations, led by Mexico (10.5%). Although the prices of the region's export commodities remain high, uncertainty in relation to the future course of United States interest rates and slacker demand for emergingmarket assets in gencral may help to dampen demand for asscts dcnorninated in Latin American and Caribbean currencies.

Only five countrics posted an effectivc appreciation of their currcncics over the first six months of 2006 relative to their December 2005 lcvcls. Paraguay had the largcst appreciation, with a ratc of 8%, while the figurcs for Peru, Bolivarian Republic of Venezuela. Guatemala and El Salvador did not exceed 3%. The other countries registered effectivc depreciations. The scale of these declines in value was generally small, except in the cases of Colombia ( 1 2.7%). Mexico ( 10.3%) and Chile (8.2%). In Colombia. the incrcase in United Statcs interest rates, weakening demand for peso-denominated assets and a widening current account deficit led to a 12% nominal depreciation of the Colombian peso between Decembcr 2005 and June 2006, even though thc Banco de la Kep6blica sold US$944 million in foreign exchange on the markct between April and June 2006. In the case of Mexico. monetary policy heciirrlc more flexible in the second half of 2005, and in May 2006 policy~nakersst~ucka neutral

Economic Survey of Latin America and the Caribbean 2005-2006

stance. The rcductron in interest rate spreads d a t i v e to industrial countries and, rnorc recently, the proximity of the elections and sagging Investor demand for cmcrgingmarket assets werc probably the cause of the real cl'fective cicpreciation recorded by Mexico in 2006. F~gurc111.l S compares the total effective exchange rates of thc countries In the region in June 2006 with thosc o f the 1990s. Guatemala's and Honduras' real effective exchange rates were 24.1% and 17.5% lower

(iippseciation), respectively, than the values recordcd in thc 1990s.To ii large extcnt, this was the result of the high level\ of rcmittances received by both countries in thc past I'ew years (see figure 111.16) and, more rcccntly and in the case of Guatemala, of capital inflows. Argentina's real effective exchange ha5 held at a much higher level than in the 1990s, which tends to corroborate the theory that there was a hignificant misalignment in the effective exchange rate for at lcast part of that decade.

Figure 111.15 LATIN AMERICA: TOTAL REAL EFFECTIVE EXCHANGE RATE, JUNE 2006 (Percentage change in relat~onto the historrcal average for January 1990-December 1999)

Figure 111.16 LATIN AMERICA AND THE CARIBBEAN: NET CURRENT TRANSFERS TO THE REGION,2005 (Percentages of GDP and millions of dollars)

Source: Econom~cComm~ss~on for Latln Amerlca and the Caribbean (ECLAC). on the bass of offlclal figures

Source: Econom~cComm~sstonfor L a t ~ nArner~caand the Car~bbean(ECLAC), on the bass of offlclal figures.

3.

Equilibrium exchange rates and emigrant remittances

Although a compariqon between the current effective exchange rate and a hi\torical avcrage 1s not the siime as calculating the dcgree of divergence of an efltctive exchange rate from its long-term cquilibr~unirate, the lattcr is a very difficult calculation to petform in thc cii\e of the Central American countrics. T h ~ sis bccituse the long-term component of emigrmt rernlttanccs and ~ t s probable future trajectory would have to bc determined m order to compute that dwergcnce, and, unfortunately, there arc no reliable or comparable clo\+country data o n such trend\ In the rcgion. This is ii significant fact, since. rf these flows continuc to produce income levels 'l

similar to or higher tlian the figures for 2005 (sce figure LII. 16il1ovcr an extended pcriod of time, then the exchange ratc's low values (apprecialion) would come to represent an "equilibrium" situation. In contrast, if the trend in rcmittances is reversed, and this type of inflow declincs in the not-too-distant f ~ ~ t u rthen c , these low exchangc rates will not constitute an equilibrium levcl and economic theory would provide stronger support for the authoritics' iitternpts to avoid a very substantial apprcciation. It is important to head o f f an exchange-ratc misalignment becausc of the cost involved when prtxiuction sectors hiive to adapt to changes in thc relative prices of

Figure 111. I6 shows data on ourrcnt transkrs rathcr than ren~illanccs.This is becausc data un current transfer!, i s available in all the countries (which is not the case of data on emisrant remittances), and currcnt tranders arc often a good indicator of [he scale of remittances In most countrieh, as thcy make up the bulk of such mnsfcrs [cxcept in countrics where official development aid is more significant, such ;IS Haiti).

Economic Commission for Latin America and the Caribbean (ECLAC)

tradable and non-tradable goods," as well as the spillover effects on the rest of the economy of changes in higher value-added sectors. For example. if time is needed to acquire specific human capital and enterprise capacity in high-value-added tradable-goods sectors (for example, owing to the need for learning by doing), then situations in which rclativc prices remain distorted over an extended period of time can lead to dcindustriali~ation,and thc ensuing adjustment costs entailed by the eventual correction of these distortions may be quite high. Continuous, large-scale emigration flows, which are unlikely to be

4.

Intervention in the exchange market

In 2005 cxchange-market intervention policies varied a grcat dcal and significantly inllucnccd the accumulation of rescrves. as rellectcd in figure 111. 17. Onc rcason lor this diversity was the varicty of exchange-ratc rcgimcs existing in the regic~n.Countrics with a dclincd exchangeratc targct havc to intcrvenc in order to maintain nominal parity within the desired range. Countries with crawling pegs, such as Costa Rica and Honduras, or those with fixed rates, such as the Bolivarian Republic of Venezuela (which also has strict exchange controls). are in a similar position. Situations vary in the casc of countries that have flexible exchi~nngcratcs.I3 Thc reasons for intcrvcning in the market may range from the reduction ofexchange-rate volatility, whcn the markct is not highly dcvclopcd and is subject to u high degree 01 asymmetry and hctcrogcncity, to thc avoldancc of significant exchange-rate misalignments. Nevcrthclcss, the most frequently cited reason is the need to replenish reserves so that the country will be better able to w~thstandsudden chiinges In capital movcmcnts (cspccially in countries with highly dollarnzed financial sectors), which IS clearly a very valid objective. Nations that apply monetary policy systems based on inflation targets include, on the one hand. countries such as Chile, where rhcrc has bcen no inlcrvention in the foreign-exchange market since 200 1 (although thc ccntral bank has publicly expressed its willingness to do so if there arc signs of an exchange-rate d~stortion)and, on the other hand, countries such as Peru rind Colombia. The central hanks Of Peru and Colornb~amtervened cxtensivcly in thc cxchangc markct

'l

n"'

sustainable in the long term, arc csscntial if remittances are to remain at a high level as a pcrccntage of GDP. Even so. empirical evidence indicatcs that remittances may remain high for quite somc timc. In hot. between 1490 and 2005, current transfcrs in El Salvador reached an average of 14.2% of GDP and were never le\s than 12.2% of GDP. Meanwhile, and despite the fact that the migration policies of the main Latin American receiving countries have become stricter in recent ycars. it is still too early to concludc that the region's emigration flows have slowed down.

in 2005, and in the case of Peru, these operations have involvcd both purchases and sales. In Argentina, where there is no formal system of inflation targets, thc trend in terms of intervention in the foreign-exchange market would seem to indicate a clear interest in prcvcnting the nominal parity of the dollar from falling below three pesos. The country accumulated reserves amounting to 4.5% of GDP in 2005, and the central hiink purchased US$ 6.13 billion in the first six months of 2006. F~gure111 17 LATIN AMERICA: VARIATION IN NET RESERVES OTHER THAN GOLD OR IMF RESERVES. 2004-2005 (Percentages of GDP and m~llronsof dollars)

Source: Econornlc Cornrnlss~onfor Latm Arnerlca and the Caribbean (ECLAC) on the basis of off~c~al flgures

This by no mcans cntails maintaining an artificially dcpreciatcd cxchangc ratc, howcvcr. Latin America. the expression "floating exchange rate", which is often used in thc litcraturc. actually has a number ofdil'ferenl meanings, as countries that illlow their nominal currencies to h a t tend lo engage in various forms of intervention in the foreign-exchange market.

Economic Survey of Latin America and the Caribbean 2005-2006

-

51

C. Monetary policy

Monct:tly policy in thc region has becn rapidly adapting to changes in the external environment,especially slumps in financial markets and in international economic activity. In most countries, policies in this area in 2005 included slight increases in monetary policy rates,

1.

although rcal interest rates remained relatively low in historical terms. There are some important eexcptions, however, including thc largest countries in thc region: Brazil and Mcxico.

Monetary policy in the region

Monetary policy in the region ccmtinues to givc priority to controlling inflation, although the emphasis placed on this objective varies somewhat depending on the state of the economy. Thc hike in oil prices has been a cause of concern to Latin American central banks as they seek to avoid further impacts on price indices, but the widespread trend of appreciating local currencies has helped rein in thc piice of price increases. This appreciation has unwanted effects, howcvcr, and a number of central banks havc therefore decided to intervene in thc foreign-exchange market in order to slow the rate of iippreciation. A variety of monetary policy schemes haw been adopted by the countries o f the region. which currcntly fall into three broad categuries. First. Brazil, Chile, Colombia. Mexico and Peru haw adopted a regime of inflation targets in tandem with a flexible exchange rate. In these regimcs. the central bank's control of intcrest rates is thc main instrument of monctary policy. Second. countrics whose financial systems are dollarized, albeit unoffici:~lly, are not easily placed to conduct an independent monetary policy. Bolivia and Uruguay havc a high proportion of their deposits in dollars, as does Peru, although the latter has adopted a system of inflation targets. The majority of thcse countries usc a monetary aggregate as a policy tool, as well its intervening in foreign-exchange markets. Third, Panama (since 1904),Ecuador and El Salvador havc currency systems that are linked to the United Statcs dollar and thus use the dollar as their currency. Thcsc countries havc decided to forego the use of monetary policy instnlments, and thcir interest ratcs follow rnovcments very similar to thosc of international interest ratcs, and their country risk remains constant. In Panama, which has a highly developed and dficient banking system, interest ratcs :ire practically the same as international ratcs. The incrcasc in monetary policy rates initiated by the United States Federal Reserve has been followed

with caution and moderation by various ccntral banks in the region. Their rates are therefore still at relatively low levels from a historical perspective. For most countries, real intcrest rates have basically held stcady or have even rnovcd downward over thc last three years (sec figure 111.181. Neverthelcss there arc some important exceptions, including Brazil and Mexico, the largest countries in the region. After successfully bringing down consumer inllittion from an annual 8.1% in April 2005 to 5.1% at the end of that year. the Brazilian central bank reduced the nominal Special System of Clearance and Custody (SELIC) raw on three successive occasions, lowering it from its August 2005 levcl of 19.75% to an annual 18% by the end of that year. The SELIC ratc was reviscd downward eight times and reached an annual 15.25% in May 2006. It is expccted to rcnch 14% by the end of thc year. The ccntral bank also injectcd more liquidity into the market aftcr a bout of financial turbulence in May. Despite these expansionary monetary policy measures, Brazil's rcal rates are still the highest of any of the larger economies (over I I % in annual terms), taking into wcount the expectcd 12-monthinflation ratc of 4.3%. This is almost double the real rates of China arid Mcxico, which have the second a d third highcst red rates, respectively, an~ong the larger economies. If the SELIC ratc reaches 14%)at the cnd of 2006, the real rate will amount to over 9%. In Mexico, the authorities reacted to thc rise in prices between the second half of 2004 and the second half of 2005 with the largest rate hike in the region. Only the sudden drop in the 12-nionth inflation rate to 3.5% in August 2005 made a less restrictive monetary policy possible, with a cut in thc funds rate (interbank intcrest rate) from 9.75% to 7% at the erid of April 2006. As core inflation has bccn curbed so far, it seems likely that cautious rate reductions and a gradual yet larger decrease

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure 111.18 LATIN AMERICA AND THE CARIBBEAN: REAL INTEREST RATES (Annualized percentages)

Economic Survey of Latin America and the Caribbean 2005-2006

Figure 111.18(continued)

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure 111.18 (concluded)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official flgures.

Economic Survey of Latin America and the Caribbean

2005-2006

in thc sprc:id between short-term ratcs in Mexico and the United States will probably continue for the rest of thc yeas. This spread nasrowcd from seven percentagc points in May 2005 to lcss than three in May 2006. For the first time, the rate reduction was not accompamed by an incroasc In the corto (the I'unds Mexico's central bank rriakcs available to the marhet at twice the market rate), which until :i few months earlier had been the main instrument of monctary policy. The use 01 the interest rate alone seems to indicate that the monetary authority was taking the first stcp towards rnaking the bcnchmiwk intereqt rate, rather than thc corto, ~ t main s monctary tool. The Mexicw central bank's decision to hold its interest rilte steady in May iriterruptcd thc successive rate cuts that had taken place ovcr the prcceding nine months and lcd to a rethinking ofthc outlook for additional reductions in the future. In vicw ofthc upcomlng presiclential elections and the weaker pcso, which had depreciated by 8.3% between the end of January and mid-June 2005, financial markcts had been expecting this. The Dominican Republic. Haiti and Juma~caare the remaining cxccption\. These countries wcrc hit by serrous bouts of high inflation, and, in their wakc, interest rates havc rcma~nedabove t h e ~ 2003 r lcvcls. In short, red wtes in most countiics ren~a~ned moderate lroni u historical pomt of view and have risen only slightly in 2006. In contrast, real interest ratcs in Brazd and Mexico arc still h~gherthan they were two or three years ago and have only recently gone down very slightly. Argentina and Chile offcr more interestmg examplcs as thcy rcprcsent opposlte extremes in tcmnis of exchangerate regimes. Argentina faccs thc challenge of gradually lowcring its inflation rate, which arnounted to over 12% in 2005 and thus overshot its 8% targct figure. 11s main objcctivc 1s to prevent the cxchwge rate from appreciating at a pace that would undermine the competitivcncss of the country's exports. Since the governmcnt managed to stabilize the cxchange rate at around thrcc pesos per dollar in August 2003, M l had expanded by 90.1% by April 2006 and M2 by 59% over the same period. This expansion of the money supply hiis been accompanied by a shift in money demand towards morc liquid asseth, which seems to be a rcsponsc to unresolved problems in the financial system. Ncvertheless, money demand is unlikely to increase as rapidly in the future as it has ovcr the past three years. One positwe aspect is that thc monetary prograrrlrne's M2 target was easily met in thc first quarter of 2006. al'tcr

55

a failure to meet the target in the last quarter of 2005. Meanwhile, real interest rates arc less negative, as the interbank rate rose from 6.7% at the end of 2005 to 8.2% at the cnd of March 2006: the inflation rate is expected to be highcr than 10%by the cnd of 2006. The government has emphasized not only monctary policy but also the success of reccnt price agreerncnts, although thcy have not eliminated monetary pressures on prices. Chile's central bank continued to raise its monetary policy interest rate in 2005, quickening the pace of the acljustmcnt as consumer priccs neared and thcn cdged slightly iibove the target bi~nndceiling of 4%. They ended thc year close to thc upper limit (3.7%). Under Chilc's currency flotation systern. the pcso appreciated substantially until May 2006 in line with the financial dictates of the market, reaching a ratc o f iilmost 500 pcsos to the dollar. This sparked adebate in Congress regarding the suitability of thc cxistjng exchange-rate system undcr current circurnstanccs. This became an issuc, in par-ticular. because of the scale of the appreciation, as the exchange rate fell from 741 pcsos to the dollar in Fcbruary 2003 to 514 pesos in December 2005 and in thc Ibllowing months. The widesprcaci decline in stock markets and a higher level of country risk in the region translated into iin exchange rate of 550 pesos to thc dollar in June. The change in the global scenario in the wake of a weakening of economic activity and the uncertainty generatccl by the contraction o f world stock markets, in addition to a sharp reduction in Chile's domestic growth rate, havc lcd the central bank to put off making any further increases in the monetary policy ratc, which reachcd 5%) in April and remaincd at that level for thc following two months. Before this change in the situation, the rate had been expected to reach around 5.75% by the end of 2006, but now, given this turn in events, there is no longer m y clear-cut pro6ection as to its ycar-end level. Thc greatest challenge facing the authorities is not consumer priccs, as their 12-month increase of 3.7% as of end-May 2006 is below the 4% cciling of the targct b i d , but rather wholesale prices, which have climbed by 8.9% over the past five months, as wcll as the greater impact of mining-sector imports, which shot up by 27.1% between January and May 2006. As this increase I'ccds into price levels, thc system of inflation targets will be put to the test, sincc the pressure on priccs is not coming from demand but rather from the cost of imports, against which an incrcasc in rates is not only ineffective, but could trigger an economic contraction.

Economic Commission for Latin America and the Caribbean (ECLAC)

2.

Nominal interest rates

Synchronized movements in the monetary-policy, interbank, deposit and lending rates arc a sign that rhe relevant monctary authorities havc thc situation well in hand, whereas diverging movements point to a loss of control. In 2005 most of the countries in thc rcgion witnessed a changc of the trend of thew ratcs relative to 2004, as thcy exhibited a slow but steady increase (see figure 111.19). Monctary authorities have had interest rates well

under control for some time now in Brazil, Chile, Colombia and Peru. The intcrbank and deposit rates have been highly synchronized in thcsc countries and, in fact, have been at practically identical lcvcls for thc past few years. Argentina and Paraguay have rcgaincd a similar degree of synchronization and similarity since mid-2004. Other countries, such as Mexico and Costa Kica, have maintaincd a stable margin between thc two ratcs. with thc two moving in tandem with one anothcr.

F~gure111.19 LATIN AMERICA AND THE CARIBBEAN: NOMINAL INTEREST RATES (Annualized percentages)

Economic Survey of Latin America and the Caribbean 2005-2006

Figure 111.19 (continued)

58

Figure III.19 (continued)

Economic Commission for Latin America and the Caribbean (ECLAC)

Economic Survey of Latin America and the Caribbean

2005-2006

Figure 111.19 (concluded)

Source: Econom~cCommission for Latln Amerca and the Carlbbeati (ECLAC), on the bas~sof offic~alflgures.

Economic Commission for Latin America and the Caribbean (ECLAC)

60

3.

Monetary policy of the Caribbean countries

In most of the Caribbean countrics, monetary policy ceased to be expansionary in 2005. In a majority of thc countrics the money supply grew more slowly in 2005 than in 2004, whilc Barbados and Belize applied clcarly restrictive monetary policies. In November 2004 circulation of the United Statcs dollar was prohibited in Cuba, and the convertible peso camc into general use, with a 10% chargcd being levied on the exchange of dollars for convcrtible pesos. As a result. bank balances in dollars have shrunk by

4.

57%, and accounts in convertible pesos have tripled. Thc monetary union of the Organization of Eastern Caribbean Statcs (OECS) uses the Eastern Caribbean dollar @C$), which has a fixed exchange rate against the United States dollar. The union uses the operating rules of a currency board, mttking adjustments when money demand i~~creases by issuing EC$ dollars with 60% of thcir value backcd by United States dollars. There was no change in the discount rate or interest ratcs of commercial banks in 2005.

Countries whose currency is tied to the dollar

. Countries with a dollari~edmonetary rcgime or whose currency is tied to thc dollar cannot dcploy monetary policy as such, sincc their moneta~yaggregates are endogenous and thcir interest rates tend to align themselves with

5.

Real interest rates

Nominal rates are a suitable indicator when they are used as an instrument of monetary policy. Generally speaking, however, interest rates adjusted for inflation -real rates- are the rclevant variables for the authorities and often are used as intermediate policy objectives.

6.

international interest rates. Interest rates rose slightly in 2005 in Ecuador, Panama and El Salvador and continued to do so in 2006 in line with the rises in intcrnational interest rates.

A majority of the countries have seen a rise in real lending rates in recent months. This trcnd reflects the change in direction of the Federal Reserve's interest-rate policy in June 2004, since many of the region's central banks have followcd its lead.

Bank credit

Lending activity has rebounded from its depressed prc2003 levels. Nominal growth rates for total credit and private credit have both topped 15% (and havc rcached over 35% in Argentina and Costa Rica) in thc 12 months prior to the first quarter of 2006. This constitutes an upward trend in comparison to the preceding years and

has brought these variables back up to their pre-2001 levels, which is a reflection of the improvcrnent in global economic conditions. Only Bolivia and Paraguay show increases in total credit of less than h% over this 12month period.

Economic Survey of Latin America and the Caribbean 2005-2006

Table 111.3 LATIN AMERICA (SELECTED COUNTRIES): BANK CREDIT (Percentage increase in 7 2 months) Country

lndustrlal and commerctal loans

Pertod

2005 Argentina Boltvta Braz~l Chile Colombia Costa R~ca Mexico Paraguay Peru

Mortgage loans

2006

.. .

Apr~l- Apr~l March - March March March March - March April - April April - April December - December April - Aprll Apr~l- April

-7.8 16.0 24.0 18.5

-

8.7

8.9 17.6 -0.4

C

'

-4.1 -47.3 17.3 C 14.8 37.9

Consumer loans

Total credit

-

2005

2006

2005

2006

2005

2006

-3.2 9.1 5.0 24.5 -25.3 -11.5 39d

1.8 18.9 17.3 21.3 -0.9 42.5

67.6" 4.6 41.8" 22.6 31.7

29.2

68.7 23.0 33.9 26.1 44.1 0.3

35.7 1.2 20.1 18.4 19.5 39.0

52.9 -13.5 18.0

18.3 30.2

30.0 -4.7 22.6 15.4 13.3 18.0 7.1 30.9 3.4

-6.4 17.8

11.4

.".

22.7

"

...

5.7 20.2

Source: Economic Cornmiss~onfor Latln America and the Carhbean (ECLAC), on the basis of off~c~al flgures. Includes credit cards. Personal loans. C Commercial loans only.

7.

Monetary aggregates

The money supply grcw faster in 2005 than in previous years in mosr of thc countrie\ of the region. Argentina (29.h%), Bolivia (40.6%), thc Bolivarian Republic of' Venezuela (54.6%), Dominica (28.6%), Dominican Rcpublic (26.9%), Trinidad and Tobago (47%) and

Uruguay (33.4%) postcd the largest lncreascs in their M 1 growth rates. Thus, the reduction In interest rates hm bccn accompanied by a fairly widespread expansion ol' the rnoncy and credit supplieb.

Table 111.4 LATIN AMERICA AND THE CARIBBEAN: VARIATION IN M1 (Percentages) 2004 varlatlon 2005 variatlon (December - December) (December December)

-

2006: 12-month variation. 2005: 12-month var~atlon. last avadable month same month as 2006 column

Antigua and Barbuda Argerlt~na Bahamas Barbados Bel~ze Boliv~a ~ i a i Chile Colombla Costa Rica Dorn~nlca Ecuador El Salvador Grenada Guatemala Guyana Halt1 Honduras Jama~ca Mexlco N~caraaua panam: Paraguay

IS

available

Apr~l March Apr~l Aprll April May Mav Aprll April April March March March March April May March April April May

P wI

c~ an& li Republic Sa~rrtK~ttsand Nev~s Samt V~ncentand the Grenadines Samt Lucta Suriname Trinidad and Tobago Uruguay Venezuela (Bal. Rep. 09

Last month of 2006 for which lnformatton

40.2 27.9 14.6 13.0 46.3

13.7 10.5 47.0 33.4 54.6

24.3 19.0 37.0 69.6

Source: Econom~cComrn~ssionfor Lattn America and the Car~bbean(ECLAC), on the basis of offlclal f~gures

8.3 24.4 16.0 46.8

January Apr~l Aprll Apr~l

Economic Commission for Latin America and the Caribbean (ECLAC)

Box 111.3 FOUNDATIONS OF MACROECONOMIC POLICY COORDINATION: FOSTERING DIALOGUE AS A POLICY TOOL IN LATIN AMERICA

The document entitled “Foundations of macroeconomic policy coordination: fostering dialogue as a policy tool in Latin America” is a contribution to the theoretical analysis of macroeconomic policy coordination in Latin America. This analysis uses game theory to suggest

which strengthens the transmission channels of macroeconomicpolicy from one country to another, lend practical support to the theoretical arguments in favour of macroeconomic policy coordination.

macroeconomic measures in order to achieve a Pareto-superioroutcome. After a review of the underlying concepts of some of the most important “equilibrium selection’’ mechanisms, macroeconomic

Before considering ways of going about encouraging policy coordination

dialogue is presented as a fundamental coordination tool which can avert situations

that the problems inherent in such coordination can be resolved with the help of a mechanism for macroeconomic dialogue. On the basis of this theory, it explains how macroeconomic dialogue can be used as a very effective tool for achieving coordination in this area in Latin America.

between countries, however, it is important to have a logical framework for the analysis

where a lack of coordination results in low levels of well-being. A demonstration of

of their interactions.The document therefore reviewsthe literature on non-cooperative game theory, which indicates the forms that this interaction can take and how to analyse it. The document limits itself to analysing those situations in which countries

this macroeconomic dialogue in action is provided by the MacroeconomicDialogue Network (REDIMA) project, which is currently being implemented by ECLAC with technical and financial support from the European Union. Lastly, the document points out that macroeconomic dialogue is a suitable coordination tool not only because it facilitates coordination through the sharing of information but also because of the learning experience involved and

It starts out by looking at the reasons why policy coordination is needed in the region. In general, macroeconomic policy decisions in one country have spillover effects in others, and policymakers often fail to take these spillovers into account.

This has been the basis for the analysis of policy coordination in the literature. If national policymakers could coordinate the types of measures that have spillover effects, they could achieve a Pareto-superior outcome. The volatility that the lack of policy coordination can generate in trading partners(independently of the scale of the impact) is also a reason for coordinating macroeconomic policies. A third reason has to do with the pressure brought to bear by certain domestic groups in response to sudden changes in relative prices, which can lead to demands for sectoral protection measures. In Latin America, where intraregional trade increased during the 199Os, efforts to promote integration,

are not capable of making “credible commitments” to pursue a particular predetermined policy, which seems to be the most relevant situation when analysing the potential for coordination between sovereign countries in the absence of supranational institutions, as in the case of Latin America. The document begins with a description of the simplest games (static games, without uncertainty),and then adds complexity by incorporatingmultiple periods and imperfect information. There is a review of basic concepts, such as the Nash equilibrium in cooperative games, and other more complex ones involving uncertainty in a dynamic context. In particular, this examinationshows that countriesoften participate in dynamic games with imperfect information and that the multiplicity of possible results can often be ranked in terms of their contribution to countries’ welfare. In this case, mechanisms are needed to facilitate coordination of

because it strengthens the very concept of “collaboration” between countries when there is uncertainty as to the will and capacity of the authorities to coordinate policies with their partners. This is particularly important for Latin America, in view of the high turnover rate among the economic authorities in a number of countries, as well as the difficulty of determining these authorities’ actual coordination capacity owing to various restrictions. Moreover, the strengthening of policy coordinationthrough macroeconomic dialogue may foster the establishment of institutionsthat can help to find cooperative solutions among all of the countries in the region.

Source: Rodrigo Carcamo, “Foundations of macroeconomic policy coordination: fostering dialogue as a policy tool in Latin America”, Macroeconornia del desarrollo series, No. 39 (LC/L.242O-P/I), Economic Commission for Latin America and the Caribbean (ECLAC), Santiago, Chile, November 2005. United Nations publication, Sales No. E.05.11.G.167

Economic Survey of Latin America and the Caribbean 2005-2006

Chapter IV

Domestic performance

A. Economic activity and investment Drivcn by strong dornestic and cxtcmal demand, the economies of Latin America and the Caribbean grew by 4.5% in 2005, following the previous year's 5.9% expansion. The slowdown in rclation to 2004 occurred largely because the rcgion's two largest economies, Brazil and Mcxico, underperformed the rcginnal average. Nonetheless, the regional growth rate is still above the average for thc 1990s and the first Scw years of the 2000s. Economic growth was widcsprcad, with all countrics posting positivc ratcs except for Guyana. The strongest

expansions were recorded in thc Bolivarian Republic of Venezuela (9.3%) and in Argentina and thc Dominican Republic (9.2% each). The lowest growth rates were in Haiti (l.8%), Brazil (2.3%) iind El Salvador (2.8%). Guatemala, Mexico and Pariiguay grew by sroimd 3%. Ecuador, Honduras, Nicaragua and Bolivia by about 4% and the remaining countrics by between 5% and 7%).Despite the occurrence of intense hurricanes in 2005. GDP growth in thc English- and Dutch-spcaking Caribbean was similar to the rates registcrcd by the Latin American countries

(4.5%). The highest rates wcrc posted in Antigua and Barbuda (5.6%),Saint Kitts and Nevis (7%), Saint Lucia (7.3%) and Trinidad and Tobago (7%)'

The 2005 figures mean that thc region has recorded thrcc consecutive years of GDP growth, cxpandlng by a cumuliitive 12.9% during 2003-2005 in rcliition to 2002 (pcr capita GDP rose by X% in thc same period). The

'

annual average growth rate for that three-ycar pcriod was the region's highest in the last 15 years (1990-2005) (scc figure IV.1).

Thc unwei$ted average growth ratc among the co~mlrieso f the region was 5%. while the median was 4%. Cuba was not included in thc rrgionnl calculations.

Economic Gommission for Latin America and the Caribbean (ECLAC)

Figure M1 LATIN AMERICA: GDP AND PER CAPITA GDP (Percentages calculated on the basis of figures in constant 2000 dollars)

Source: Economlc Comm~ss~on for Lattn America and the Caribbean (ECLAC), on the basis of official f~gures.

Growth of both GDP and per capita GDP was widespread across thc subregions. The expansion was more pronounced in South America (among Andean and Southern Cone countrieh alike), but partly represented a recovery 01 activity levels following the downturns of 1999-2000 and 2001-2003. Although per capita GDP growth rates in Mexico, Brazil and the Ccntral American countries fcll short of the regional average in 2004-2005,

Table IV.1 LATIN AMERICA AND THE CARIBBEAN: GDP AND PER CAPITA GDP, AVERAGE ANNUAL GROWTH RATES (Percentages calculated on the basis of figures in constant 2000 dollars)a

Gross domestic product

CentralAmer~ca 3.4 SouthAmerica 4.4 Caribbean 0.8

5.0 3.1

4.3 0.6

2.4 0.2

3.5

3.7

3.8

1.2 4.5 6.1 2.7 4.0 -0.1

2.8 1.5 2.7

2.2 -0.9 3.0

0.3 -1.3 3.2

2.4

-2.2 2.7 -2.6 0.8 3.5 1.0 1.0

-1.8 -2.5 -0.7

6.6 7.2 2.2

1.1

4.6 3.5

3.0 4.1

-0.5 -1.4

-0.1

-1.3

8.4

2.6 2.6

5.2 2.6

0.7

3.6

1.3

3.6

1.9 6.1 1.7 1.2

LatinAmerica 4.2 Latin America and theCaribbean 4.1

3.1

2.1

0.4

5.2

2.3

1.3

0.5

-1.1

3.7

3.1

2.1

0.5

5.2

2.3

1.4

0.5

-1.0

3.7

8.4

Figure IV.2 LATIN AMERICA: YEAR-ON-YEAR QUARTERLY GDP GROWTH RATES (Percentages calculated on the bass of figures in constant 2000 dollars)

Per capita gross domestic product

4.0 7.7 3.5 2.8

Andean countries Southern Cone Braz~l Mexico

they are noncthclcss higher than the ratcs rccorded in the early 1W0s (sec table 1V. 1). In 2006, the region as a whole is expected to continue growing at around 5%. but trends are likely to vary across countries. Whereas growth in certain Central American economies, along with Brazil and Mexico, looks set to gather pace, most other countries will see a slightly slower expansion. The trend ofthe international economy, wd in particular thc conduct of monetary policy in the United Statcs. Europe and Japan, together with the behaviour of international financial ~narkctsand these factors' economic policy implications for the region's countries, give rise to uncertainties that could affect the region's outlook, especially from 2007 onward. Economic activity lcvcls picked up gradually throughout 2005, although quarterly growth rates were below those rccorded in 2004 (see figure IV.2). Nonetheless, the situation varied from country to country (see figure 1V.3).Year-onyear quarterly growth rates show that, while economic activity in some countries tended to slow, particularly in the second half of the year (Brazil and Chile), elsewhere it picked up speed (e.g. Dominican Republic); but in most cases the quarterly growth rate was similar to the annual average rate.' Thc yciir-on-year growth rate in the first quarter of 2006 rosc in relation to the second half of 2005 as a result of an expansion of economic activity in Brazil and Mexico. Regional GDP growth strengthened from 4.1% in the scccmd half of 2005 to 5.5% in the first quarter of 2006.

-0.2 2.2

Source: Econorntc Comrntsslon for Lattn America and the Caribbean (ECLAC), on the bas~sof off~ctalfigures. a The per~odswere deflned as years in wh~chthe rates of varlatton In regional per caplta GDP had the same sign (years In whtch thts Increased and years In wh~ch it decreased), w ~ t hthe years of separatton b a n g defined as those in whlch the variation In regtonal per caplta GDP was negative

Source: Econorntc Commtss~onfor L a m Amer~caand the Caribbean (ECLAC),on the basis of official figures.

Year-on-year quarterly growth rates correspond to the rate ol yrowth in one quarter conlparcd to thc snrrle quarter a year ea111er.

Economic Survey of Latin America and the Caribbean a 2005-2006

Figure IV.3 LATIN AMERICA (14 COUNTRIES): YEAR-ON-YEAR QUARTERLY GDP GROWTH RATES (Percentages calculated on the bass of figures in local currency at constant prices)

66

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure IV.3 (concluded)

Source: Econornlc Comrntss~onfor Latln Arnerlca and the Caribbean (ECLAC), on the basts of offlclal flgures

The comparison of seasonally adjusted regional GDP growth rates with those of the immediately preceding quarter shows that, despite upturns in a number of quarters, the pace of expansion in 2005 was generally slower than in 2004 (sce figure IV.4). In the first quarter of 2006, the region as a whole grew by 1.4% relative to thc l i ~ u ~ t h quarter of 2005, but this figure also mainly reflects the upswing in cconomic activity in Brazil and Mexico. Thc positive trend displayed by the international economy since 2003 provided the backdrop for economic expansion in Latin American and Caribbean countries in 2005, boosting activities with links to the extcrnal hector, in particular. The region's exports of goods and services have been growing in volumc since the fourth quarter of 2003, driven by burgeoning world demand.

This external stimulus, which was sustained throughout 2004, made it possible for the strong performatice of the exporl sector to be transmitted to other activities. This in turn spurred domcstic demand, triggering a recovery of investment and consumption and fuelling a considerable incrcase in import volumes. The persistence o f this favourable external climate, in conjunction with higher rates of capacity utilization in many scctors, low levels o f investment following the sustained decline seen in 1999-2003, exchange-rate appreciation in relation to the levels postcd in 2002-2003 and casier credit, all combined to drive thc cxpansion of investment which had begun in 2004. At the same time, private consumption was encouraged by lower interest rates and the greater availability of credit, in conjunction with higher wages. In

Economic Survey of Latin America and the Caribbean 2005-2006

Frgure iV.4 LATIN AMERICA: SEASONALLY ADJUSTED QUARTERLY GDP GROWTH RATES IN RELATION TO THE IMMEDIATELY PRECEDING QUARTER (Percentages calculated on the basis of figures m constant 2000 dollars)

Source: Econom~cCornmlssion for Latin America and the Caribbean (ECLAC), on the bass of off~cralf~gures.

Fact, although the other components of regional aggregate demand also expanded, total consumption was the only component in which growth in 2005 outstripped the 2004 figure. In 2005, regional export growth (8.4%) continued to outpace GDP, while thc rise in imports ( 11.4%)reflected the buoyancy of domestic dcmand (5.1 %). The various sectors of economic activity rei'lcctcd trends in the different components of expenditure. Strongcr external demand continued to drive mining and hydrocarbon production (3.6%), although this sector undeq~erl'ormedregional GDR exccpt in Bolivia. Bradl, El Salvador, Haiti, Honduras, Paraguay and Peru. The strengthening of domestic demand also had favourable effects on manufacturing activity (3.2%). both in sectors serving the domestic market and in those where production is largely destined for exports within the region. Strongcr domestic dcmand in the individual countries thus promoted an upturn in intraregional trade, particularly in rnanuhctured products. Although bilateral exchange ratcs against the dollar fcll in most countries throughout 2005. thc real effective exchange rate remained favourable in many cases, thanks to the substantial devaluation of local currencies that occurred in 1999-2003. Moreover, in countrics whose currencies arc tied to the United States dollar (Ecuador, El Salvador and Panama), the depreciation of the dollar against other currencies in 2005 enhanced the cornpetitivcness of their exports to some extcnt.

'

'

67

Activity in the agricultural sector grew by 2.2% regionally, although perli)rrnances varied from country to country. While Mexico experienced a contraction. most countries recorded increases. although they were smallcr than overall GDP growth rates, except in the cases of Argentina, Bolivia, Ecuador and El Salvador. The construction industry experienced robust growth (6.4% in regional tcnns) in most o f the countries in 2005, and in Argentina and thc Bolivarian Rcpublic of Venezuela it posted rates of over 20%; this, in turn, Suelled an inclcase in gross fixcd capital formation. In general, services were more buoyant than sectors linked to goods production. Consumption growth stimulated commerce (which rebounded by 5.6% regionally), while expansion in the transport and communications sector (7.8% regionally) reflected activity in the goods-producing and con~municationssectors, particuliirly mobile telephony. Meanwhile, the pcrlbrmance of tourism-related activities, such as hotels and restaurants and transport, benefited from increasing tourist arrivals both from the region and elsewhere. The upswing in disposable income in scvcrnl Latin Amcrican countrics, in conjunction with local-currency appreciations and brisker economic activity generally, set thc stage for an increase in recreational and business travel among the countrics of the region. In 2005. the number of tourist arrivals climbed by 13.6% in Central Amcrica. hy 12.7% in South America and by 5.4% in Caribbean countriesG3Cruisc line tourism was hurt by the hurricanes that battercd that subregion, and the numbcr ol'passengers shrank by about 2% on aggregatee4 One of the most notable aspects of the region's perfoimancc in the last two years has bccn the substantial increase in gross nationitl disposable incomc, which rosc by 5.9% and 7.1% at constmt prices in 2005 and 2004. respectively. As figure IV.5 shows, this stronger income growth wits common to most countries o f thc region and, apart from the Dominican Rcpublic, Panama and Uruguay, the average annual increase in gross national disposable inmme surpassed GDP growth in all the countries in 20042005. This brisker pace of growth is basically explained by substantial gains from trade arising from the variation in thc terms of trade. which amounted to 1.7% of GDP at 2000 priccs (0.49 in 2004).5 Explanations for this larger increase in gross national disposable incomc vary from country to country (see figurc 1V.6). In some cases, it represents gains from trade arising from terms-of-trade movements, particularly in countries where the purchasing power of exports increased the most,

World Tourism Orgar$izatio~~ (UNWTO). l+"/d 7 i , ~ - i . ~BCODNW~EI: in vol. 4, NO. 1. January 2006. See Caribbcan Tourism Organiziilior~.Chribhron h n - i s m P P I : ~ O ~ I ~i n~2005. L I ~ LFebruary .Y 2006. Scc box1.1.

Economic Commission for Latin America and the Caribbean (ECLAC)

i.e. exporters of metals and miner& iind hydrocarbons. In Argentina, the greatcr increase in disposable income stemmed kom a reductiori in factor paymcnts, while in El Salvador, Haiti, Honduras and Nicaragua, it is attributahlc to an increasc in current transfers received from abroad -mostly in the form or remittances from nationals of those countries living elscwhcre. As a result of this increase in gross national disposable incomc, the region rccorded its highest level of national saving since 1990 (22.4% of GDP in currcnt dollars). National saving rates have bccn rising steadily since 2002 (see figure IV.7), with considcrable upqwings hcing noted in several countries. The region also reported a higher negative external saving rate for the third straight year, equivalcnt to 1.S% of GDP in 2005 (up from I .O% in 2004

F ~ g u r eIV5 LATIN AMERICA: GDP AND GROSS NATIONAL DISPOSABLE INCOME, 2004-2005, AVERAGE ANNUAL GROWTH RATES FOR THE BlENNlUM (Percentages calculated on the bass of frgures in constant 2000 dollars)

Source: Econom~cCornrn~ss~on for Lam Amer~caand the Car~bbean(ECLAC),on the basls of off~cal f~gures.

Box IV.l THE CRICKET WORLD CUP AND ITS EXPECTED EFFECT ON ECONOMIC ACTIVITY IN ENGLISH-SPEAKING CARIBBEAN COUNTRIES

In 2007 the cricket world cup will be held

public investment. Governments have

group of countries will involve expenditure

in the English-speaking Caribbean for the first time since the tournament began in 1975. Nine countries will combine to host

also awarded concessions with a view to attracting investment; in some cases this has spurred private investment as

amounting to 10% of their GDP (US$ 1 billion). Calculations suggest that grants

the event:Antigua and Barbuda, Barbados, Grenada, Guyana, Jamaica, Saint Lucia, Saint Kitts and Nevis, Saint Vincent and

concession holdersbroughttheir investment projects forward.

received by Antigua and Barbuda for the reconstruction and renovation of cricket grounds will raise capital transfers to the country from 2.4% of GDP in 2004 to 24.4%

In addition t o the preparatory work, the event itself will have major repercussions on the external accounts of the countries involved. Movements

in 2005. In the case of Jamaica, official forecasts put the additional Government expenditure at 1.2% of GDP.

on the current account of the balance of payments are expected to run in both directions. On the one hand, a significant

One of the aims of the authorities in these countries is to obtain permanent benefits from these investments, and

considerable effect on the economies involved. The construction sector has grown vigorously on the back of renovation

increase in tourist flows to the region is expected, with a consequent upswing in income from travel operations. On

world cup marketing strategies are being designed and fine-tuned for this purpose. Another aim is to capitalize

the other hand, there is likely to be a substantial rise in merchandise imports

and rebuilding works at cricket grounds, together with an expansion and upgrading of tourism infrastructure, which has promoted physical investment in these

owing to purchases of construction materials from other countries. Longterm capital inflows into the country, both official and private, are also likely

upon the resulting internationalexposure to promote these countries widely as tourist destinations.

countries. The tournament is also expected to boost expenditure and tourism.

to climb substantially. Given the size of their economies, the

Fiscal accounts are also likely to be significantly affected in the countries involved, since much of the construction work will be undertaken by government

greatest economic impact will probably be felt by members of the Organization of Eastern Caribbean States (OECS). According to p re1iminary calculations,

agencies and will thus entail increased

preparations for the tournament in this

the Grenadines, and Trinidad and Tobago. The opening match is scheduled to take place in Jamaica on 11 March, and the final will be held in Barbados. Antigua and Barbuda and Jamaica will host six of the eight most important games in this tournament. This event is expected to have a

a

Staging this event poses major challenges for the tourism sector. First, there needs to be a guarantee that the planned expansion of hotel capacity will actually be ready by the time of the tournament; second, national authoritiesand a number of Caribbean hotel associations are debating the question of hotel price levels. The rise in airfares could also dampen the expected surge in tourism flows.

The cricket world cup is held every four years. The first was staged in England; the most recent was held jointly in South Africa, Zimbabwe and Kenya in 2003.

Economic Survey of Latin America and the Caribbean 2005-2006

and 0.5% in 2003), thanks to trade surpluses and thc large volume of current transfers. As a result, and repeating the pattern ofthe last two years, regional investrrlent was cntirely financed out of national savlng, while the surplus (external saving) was used to repay dcbt, build up assets abroad and accumulate rcserves. At the subregional level, this pattern was particularly clear in South American countries, whereas external saving continued to play a major role in flnanclng gross domchtic investment in Central American countries and Mexico. Although economic activity was bnsk throughout most of the region, it was particularly so in the South American countries (sec tablc IV.2). As mcntioncd above, the positive Figure IV.6 LATIN AMERICA: COMPONENTS OF GROSS NATIONAL DISPOSABLE INCOME (Dollars (year 2000) and, percentages of GDP)

results posted in 2004-2005 partially represented a recovery from the 1990-2003 recession, and this was especially true in that subregion. In the Southern Cone countries, all components of expenditure had declined during that period except for the volumc of gords and services expcnts. This was not the case in the Andean countries, howcver. where exports declined along with investment and i~nporrs, while consunlption rosc slightly. In thc Southern Cone, imporr volumes decreased more sharply (5.5% per year on avcragc), and both subregions experienced similar reductions in investment (annual avcragcs of 6.5% and 6.4%,respcctivcly). In Brazil, thcse aggregates behaved in much the satnc way as thcy did in thc Southern Cone. albeit on a smaller scale: average annual total consumption grew very slowly, investment declined, and the stalling of domestic demand was reflected in a reduction in the volume af goods and services in~ports.

Figure IV.7 LATIN AMERICA: SAVING-INVESTMENT RATIO (Percentages of GDP in dollars at current prices)

Source: Economic Comm~ss~on for Latln Amer~caand the Caribbean (ECLAC),on the has6 of offual figures

Source: Economic Comm~ss~on for Latln Amer~caand the Car~hbean(ECLAC), on the bas~sof off~c~al f~gures

Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.2 INVESTMENT AND GROWTH

Latin America’s modest recovery after a period of stabilization and reforms

Data for the six largest Latin American countries (Argentina, Bolivarian

Evidence was also found that physical investment had a significant effect on the

following the 1980s debt crisis has sparked additional interest in the factors that contribute to economic growth in

Republic of Venezuela, Brazil, Chile, Colombia and Mexico) shed some light on this issue. Investment growth

growth of per capita GDP. Differencesin the economic policies applied in the various countries were also important factors

the region and, in particular, the role of investment as a source of economic growth. With a backdrop provided by

in 1960-2002 was examined from three different perspectives. First, growthaccounting methodologies were used

in explaining different economic growth rates, including policies relating to inflation control, external debt, open trade practices

liberalization of the region’s economies in the 1990s and early 2000s, growth and investment staged a modest recovery

to measure the contributions made by the sources of GDP growth (capital, labour and total factor productivity) in

and education. In the case of physical investment, investment in machinery and equipment made the largest contribution

from their 1980s slump. Rates of growth have not yet regained the levels of the 1960s and 197Os, however, and are

the six countries during the period under study. Then the effects of investments in machinery and equipment and in

to per capita GDP growth. The study also found that, although secondary education was an important

lagging behind those of other emerging economies. The role of investment in the economic

construction were estimated. The third step was to prepare estimates

contributor to per capita GDP growth in the 1960s and 1970s, its role has tended

for the effects of private and public investment on per capita GDP growth in those countries. The findings indicatethat investment

to decline since then, partly because the coverage of secondary education has increased. The evidence suggests that

growth processis a key issue both in growth theory and in policy formulation. This lends added importance to the criteria used in deciding whether to employ large-scale investment programmes as a mechanism for boosting the growth rate, along with considerations regarding the role played by productivity, the definition of areas to be given preference, and the policies to be implemented. Economists continue to disagree about the role of investment in the growth process. Some see it as the key explanatory factor for economic growth, while others acknowledge the important part played by fixed investment but argue that productivity is what marks the difference between fast and slow growth. Still others focus on specific categories of fixed investment.

has played an important role in the six largest Latin American countries, but that total factor productivity has

education policies need to incorporate new ways to expand the human capital stock, mainly through efforts to improve the quality of training and dynamic

made the difference between faster and slower growth experiences. When additional elements are factored into

adoption of new technologies. Moreover, analysis of the effect of the public and private components of investment on

the traditional growth-accounting methodology -physical capital series

per capita GDP growth shows that the private component has been the more important .

adjusted for utilization rates, physical capital expressed in terms of GDP and a breakdown of the labour factor between its physical and human capital components- no evidence was found on the role of total factor productivity in promoting economic growth that would alter the conclusions reported in other growth-accounting studies.

Lastly, the evidence also indicates that there is a relationship of mutual causality between growth and private investment and that stable macroeconomic conditions, particularly in terms of prices, are a prerequisite for applying countercyclical public investment policies.

Source: Mario A. Gutierrez, “Economic growth in Latin America: The role of investment and other growth sources”, Macroeconomia del desarrollo series, No. 36 (LWL.2341PA), Santiago, Chile, Economic Commission for Latin America and the Caribbean (ECLAC), June 2005. United Nations publication, Sales No. E.05.11.G.84.

In Southcm Cone countries, the depreciations of 2002 boostcd cxport earnings in local-currency terms. restored the profitability ofgoods-producing sectors and fostered greater export competitivcncss.This, togcthcr with the presence of idle capacity in a number of production scctors. stronger external demand and rising prices for the raw materials exported by these countries. madc it possible to reenergize economic activity. The rcvival was

due firstly to the expansion of goods and services exports, in somc cases accompanied by import substitution, and secondly to a growth spurt in other sectors ofthc economy. This fuelled a substantial recovery of domcstic dcmand that was linked to consumption growth and thc uptuin in investment. In the Andean countries. the adjustment of domcstic demand was significantly smaller in 1999-2003, since

Economic Survey of Latin America and the Caribbean

2005-2006

Table IV.2

LATIN AMERICA: COMPONENTS OF AGGREGATE SUPPLY AND DEMAND, AVERAGE ANNUAL GROWTH RATES (Percentages calculated on the basis o f figures In constant 2000)

"

Gross capital formation

Total consumption

Central America

4.8

5.1

3.5

4.3

South America

4.6

3.3

-0.3

5.1

Andean countries

3.5

2.6

0.9

8.1

Southern Cone

8.8

-1.8

7.9

Brazil

2.6

3.8 3.2

0.1

1.9

Mexco

3.7

0.9

3.4

4.1

Latin America

4.3

2.7

1.0

4.8

Exports of goods and services

Imports of goods and servlces

Source: Econom~cCornrn~sslon for Latln Amerlca and the Caribbean (ECLAC),on the bass of offlclal flgures ' The Arldean countoes are Bollv~a,the Bol~var~an Republlc of Venezuela. Colomb~a.Ecuador and Peru, the Southern Cone comprises Argentina. Chlle. Paraguay and Uruguay. and Central America conslsts of Costa R~ca,the Dom~n~can Republ~c.El Salvador, Guatemala, Ha~ti,Honduras. Nicaragua and Panama

global consumption continued to expand. The reduction in iiveragc wnual exports from these countries reflected the drop in volumes exportcd by the Bolivarian Republic of Vcnczuela. The exports of goods and services by the other countrics in this subregion, measurcd at constant prices, climbed by 3.8% in the period. The Andean countrics also witnessed thc largest increase in national incorne relative to GDP, which fuelled a sharp upswing in domestic demand and espccially in investmcnt. The comparison between these two groups of countries shows that while economic growth in ihc Southern Cone in 2004-2005 initially responded to an expansion of cxporT volumes, growth in the Andean countries reflects a strongcr upturn in domestic demand, particularly for investment, which has bccn financed by thc substantial rise in disposable incomc in thesc countrics. Although this phenomenon was also seen in the Southern Conc. it was more pronounced among thc Andean countries. Nonetheless, in sonic countrics. particularly thosc that experienced sharp decreases in economic activity in earlier years, foriner levels of investment and imports have yet to bc fully regained. In the Central Amncriciin counties and Mcxico, although consumption, investment. exports and imports all grew more vigorous1y in 2004-2005, growth figurcs were similar to those achieved in other periods of expansion. Export perli~nnancchas been closely linked to thc business cycle in the United States. but has also been affected by the growing competitivcness of Asian countries, especially China. as exporters of manufactured products to the United States markct. At the same timc, the subregion's cun-cncies have undergone real appreciations, which has croded the competitivcness of thcir exports of manufactures to the United States and limited their growth. The trend of

domestic demiind has been associated with a sustained increase in remittances from nationals living abroad. As shown in table IV.2, gross domcstic investment, rneasurcd in constant 2000 dollars. was one of the mosl dynan~iccomponents of dernand in 2004-2005. In fact, gross fixcd capital formation is thc component with the highest annual average growth ratc during this pcriod, at 11.7%, compared to a figure of 9.9% ror goods iind services exports. Nonetheless, while the region's gross fixed ciipital formation in 2005 surpassed the 1998 figure (the highest level since 1990) in absolute temnls. it is still below that year's value in relation to GDP (see figure IV.8). This overall result was reflected in the national figures for most countries in the rcgion.

Figure IV.8 LATIN AMERICA: GROSS FIXED CAPITAL FORMATION (Percentages o f GDE in constant 2000 dollars)

Source: Econom~cCommlsslon for Latln America and the Caribbean (ECLAC),on the basis of official figures.

Economic Commission for Latin America a n d the Caribbean (ECLAC)

As notcd above, sevcral factors have been fuelling robust investmclit growth in 2004-2005. In thc first place, investment had bccn lagging behind other sectors of demand as a result of its persistent decline in 1999-2003, so the sharp increasc represented a recovely oCprcvious levels. Second, following the depreciations or 1999-2003, which had significantly raised the local-currency prices of imported capital goods, local currencies havc now been appreciating sharply against the dollar. A third factor has been the increased buoyancy of extcrnal demand in 2004-2005. In 1999-2003, and particularly in 200 12003, external demand was weak owing to the sluggish growth of European countries, rcccssion in the United States in 2001, and low levels of dcmand among Latin American countries. which also hurt trade within thc region. Thc slump in external demand was also reflected in low international commodity prices, which dampened export earnings. In thc second haITof2003 these trcnds began to revcrse direction: commodity prices rosc sharply, external demand for raw materials strengthened substantially and there was synchronized growth among the developed economies intcrnationally. In addition, intercst rates remaincd low in 2004-2005, both in thc rcgion and intcrnationally, despite hikes in several countries, particularly in thc second half 01' 2005. This. conibined with easicr credit both in individual countries and internationally, buttressed an increase in gross fixed invcstment (see table IV.3). Another factor had to do with the increase in national savings rates during this biennium, which reverscd the trcnd of 1999-2003, albeit to varying extcnts across countries. In current dollars and as a percentage of GDP, national saving declined gradually from 19.5% in 1998 to

17.5% in 2001. This reduction was not offset by greater external saving, which droppcd from 4.5% of GDP in 1998 to 0.8% in 2002 and turned negative thereaficr, leading to a reduction in regional investment. 111 2004-2005, the growth of national incorne in thc region and the lagged rccovery of consumption led to a significant increase in national saving. This was also true for the SouthAmerican countries and, to a lesser extent, for the Central American countries and Mexico. Thc increase in national saving at a time when capital goods prices on international markets remained flat significantly boosted the purchasing power of the former in terms of importcd capital goods, with the sizc of the rise in each country depending on how much the savings rate had climbed (see f'igure 1 ~ . 9 ) . ~ In 2004-2005, invcstment in construction and in machinery and equipment. particularly impo~teditems, expanded. Construction-related investment was particularly dynamic, especially in vicw of its low previous levcls, while fixcd investment in durable equipment also increased considerably. In 1999-2003, both categories had declined, although machinery and equipment by relatively less. As a result, the lattcr's share ol' investment has been rising over time in most countries and now accounts l'or roughly 40% ol' total gross fixed capital f ~ r m a t i o n . ~ The available data indicate that the import content of gross fixed capital formation in machinery and cquipment Figure IV.9 LATIN AMERICA: NATIONAL SAVING IN CURRENT DOLLARS AND ITS PURCHASING POWER IN TERMS OF IMPORTED CAPITAL GOODS " (Series expressed in indices: 1995=100)

Table IV.3 I N I N AMERICA: COMPONENTS OF GROSS DOMESTIC INVESTMENT, AVERAGE ANNUAL RATE OF VARIATION (Percentages calculated on the basis of figures in constant 2000 dollars)

Gross capital formation Gross fixed capital formation

Construction Machinery and equipment

8.7

4.9

-1.5

10.0

7.8

4.1

-2.2

7.1

3.2

-2.6

11.7 9.0

9.0

5.6

-l .B

15.6 Source: Economlc Cornmrsslon for Latm Arner~caand the Car~bbean(ECLAC), on

Source: Economlc Cornmissimfor Latln America and the Caribbean (ECLAC), on hgures. the bas~sof off~c~al

h

'

the basis of offrc~alfigures

" Calculated on the basls of the Index of cap~talgoods lrnport prlces, base year 2000

The unitary value index o f capital goods irnports from h e Unitcd States was used as a proxy for an indcx o f the international prices o f capital goods, since that country irnports a very wide rangc o f pruducts from several regions o f thc world. Measured by this index, the international prices of capital goods have bccn steadily Sallinp over the last few ycrus. This percentage varies across countries and from year to year.

Economic Survey of Latin America and the Caribbean 2005-2006

expandcd until 1997- 1998, beforc givins ground to goods of national o r i g h 8Then, in 2004-2005, the import component of invcstrncnt in machinery w d cquipment rcbounded to 90% oftotal investment in that catcgory in Chile. nearly 70%)iin Guatemala, about 60% in Mcxico and Peru, slightly over 50% in Argentina (after having dropped to 30%) and around 30% in Rra7il. Another important issue concerns the destinittion scctors of imported machinery and equipment. From 1998 to 2000 (2002 in many countries), capital goods imports declincd, bctore staging a recovcry in the region from 2003 onward thanks to the increase in gross fixed capital formation rccorded in that year. An aniilysis of imports by type of product shows that most countrics registered significant increases in imports of transport cquipment. electrical matcrial (except in Uruguiiy), machinery for the mininz sector in some of the countrics with significant activity in this sector. and cquipmcnt for the con~municationssector.' In those whcrc agricultural

exports provide ii large component of foreign sales, there was also an increase in imports of agricultural machinciy. Foreign purchases of power-generating machinery and equipment rose more slowly, with very few cxccptions, and in some countries actually deolincd."' The aggrcgatc data available for 2005 also reveal a sizeable increase in capital goods imports and the persistence of trends noted in 2003 and 2004 in terms of the destination scctors of imported machinery and equipment. Fcw of thc region's countries publish up-to-date national accounts series giving a breakdown of the public and private components of invcstmcnt. Nnncthcless, the available data suggest that public investrncnt has generally been maintained at around 20% of gross fixed investment." except in Bolivia and Chile. In Bolivia, public invcstmcnt slumped from 60% in the early 1990s to 23% in 1998 before rising again to 47% in 2004: in Chile public investment accounts for roiyhly 10% 01' total gross fixed investment.

B. Domestic prices Latin America and the Caribbean recorded a weighted average ~nflationrate OS 6.1% in 2005, compared to 7.4% a year earlier, and the downward regional trend of this indicator thus continued. The siniplc avcragc of the individual countries' inflation rates wits 7.3%, compared to 8.6% in 2004. Thc rcsults for 2005 reflect the trend in inflation rates in Brazil and Mcxico, which declined from 7.6% and 5.2% in 2004. respectively. to 5.7% and 3.3% in 2005. Steeper reductions wcrc achieved in Haiti (from 20.2% in 2004 to 14.8% in 2005). Peru (from 3.5% to 1.5%), Dominican Kcpublic (frorn 28.7% to 7.4%), Uruguay (from 7.6%to 4.9%) and the Bolivuian Republic of Venezuela (from 10.2% to 14.4%), whereas Argentina, Chilc, Ecuador, Pitrapay, and Trinidad and Tobago rccorded the largest incrcases. Inflation rates in thc other countries of the region X V

"' l'

wcrc similar to thosc 1-cportcdin 2004. Although several countrics postcd doublc-digit increases in the consumer price index (CPI), Sor the first time there was no rate above 16% -the year's highest being thc 14.8% registcrcd in Haiti, lntlation in English- and Dutch-spc~ikingCaribbean countries rose in 2005, with the simple avcragc climbing to 6.6% in 2005, compared to 4.3% in 2004. The trends that had been emerging in the second half of 2004 persisted throughout 2005. Cost-push factors displayed mixed trends, as illustratcd by thc priccs of imported productr. The international priccs ofrnctals and mincrals and of oil and othcr fuels all increased sharply, cvcn surpassing the already-high rates recorded in 2004, but the upward trend of interniitioniil priccs for Soods and iigricultural raw matcrials cascd overall and in some cases actually rcvcrsed direction, although coffee and sugar

The available data are publishcd by the following countries: Arccntina, Brazil. Chilc. Ciuatemala, Mexico and Peru. An analysis was made OS data held in thc ECLAC Foreign Trade Dala Rank li)r Latin A~rlcricaand thc Caribbean (HADECEL). in accordance wit11 the Standard International Trade Clarhification SITC Kcv. 3. Scction 7. "Machinery md transporl equip~nmt".The following sroups were excluded from this scction: 781. "~nolnrc m and other tnotor vchiclcs principally designed for the transport of persons (othcr than motor vehicles 01- the type used for public transport). including station wagons and racing cars": and 784. "parls and accessories of motor vchiclcs," since these corrcspond more to consumer durables or intcrtncdiate goods. Data are available up lo 2004. For 2005, thc analysis was based on the tradc statistics published by individual countrics. Corresponding to SITC Rev. 3, Division 71. The percent:lges refer to thc official national accounls series publishcd by thc individual countries, at constanl pricea.

Economic Commission for Latin America and the Caribbean (ECLAC)

prices were considerably higher in 2005 than in 2004. The prices of manufactured goods on international markets did not vary markedly during the year. Lastly, trends in real wages and salarics wcrc also mixed: Argentina, Chile and Uruguay saw the largest increases. while rcal wagcs and salaries in other countries either were broadly unchanged or clsc slipped back slightly. Consumer clcmand benefited from the increase in rcal wagcs and salarlnes in certain countries. as well as

from stronger liibour-market indicators and greater access to inexpensive credit. This enabled several countries to make upward adjustments in the prices of some sei-vices (e.g., health and education) and in products whose pl-iccs rejpond readily to increases in demand, such as clothing and footwear and household equipment. In this setting, performances varied from country to country (see table IV); some countries witnessed a sharp reduction in inflation rates relative to their curnulat~ve

Thble IV.4 LATIN AMERICA AND THE CARIBBEAN: CONSUMER PRICE INDEX, 2004,2005 AND 2006

(Percentage rates of variatfon) Cumulative inflation for the year

Cumulative inflat~onfor the per~od

Cumulative 12-months in May each year

2004

2005

2005

2006

2005

2006

December 2003December 2004

December 2004December 2005

December 2004May 2005

December 2005May 2006

May 2004May 2005

May 2005May 2006

Argentina Boliv~a Braz~l Ch~le Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dommican Republlc Uruguay Venezuela (Bolivarian Rep. of) Ant~guaand Barbuda Bahamas Barbados Belize Dommica Grenada Guyana Jamaica Saint Kitts and Nevis Saint Vincent and the Grenadines Saint Lucia Suriname Trinidad and Tobago Latin America and the Caribbean (weighted average) Latm America (unweighted average) Caribbean (unweighted average) Latm Amertca and the Caribbean (unweighted average)

Source: Economlc Commlsslon for Latln Amerlca and the Caribbean (ECLAC) on the basls of offmalflgures January 2006 In relat~onto December 2005

a

Q~ar1l2006In relatlon to December 2005

Economic Survey of Latin America and the Caribbean 2005-2006

values in 2004. whcreas others posted increases. Thc latter stenimcd from pricc hikes in response to stronger domestic demand. adjustments in the prices of rcgulatcd goods and services, and priccs incrcases for food products, transport and basic serviccs. Thc appreciation of various countries' currencics mitigated the higher prices of' imported products to somc extent (see table IV.5). Against this backdrop, thc authorities of most of thc region's countrics continued to base their monetary policies on inflation targeting and the avoidance of sharp incrcases in consumer pricc indices. The price indices for product groups consisting mainly of goods and those composed primarily of services also displaycd varicd trends.12 Goods prices fuellcd inflation in 2005 in one group of countries, while the priccs of services clirnbcd mow sharply in anothcr. The first group includes Argentina, Bolivia. the Holivarian Republic of Venezuela, Colombia, Ecuador. Paraguay and Uruguay, along with the Central American countrics; thc second

Table IV5 LATIN AMERICA AND THE CARIBBEAN: NOMINAL EXCHANGE RATE, LOCAL CURRENCY PER UNITED STATES DOLLAR, 2004,2005 AND 2006 (Percentage rates of variatron) "-

2004 a

Argentina Bolivia Brazil

2005 R

I .B -0.1

-I 1.8 -8.1

Chlle

Colombia Costa Rica Ecuador El Salvador Guatemala Hait1 Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Reoubl~c Uruguay Venezuela (Bolivarian Rep. of) Antigua and Barbuda Bahamas Barbados Belize Dommica Grenada Guyana

-5.3 8.3 0.0 0.0 -1.8 15.5 14

2.8

Jamalca

20.7 0.0 0.0 0.0 3.4 0.0

Samt Kitts and News Saint Lucia Saint Vincent and the Grenadines Suriname Tunidad and Tobago

1.8 -0.4

-1.7 3.3

8.4 2.7 0.0 0.0 -0.2

-4.4 0.0

-4.3

3.3

5.0 0.0 -2.1 4.5 12.1

2.0 0.0 -5.6 -4.0 -4.9 -1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 1.9 0.0 0.0 0.0 0.2 -0.1

-8.5

0.0 0.0

2006 "

11.9 0.0 0.0 0.0 0.0 0.0 0.0 0.3 2.0 0.0 0.0 0.0 0.9 0.2

Source: Econorn~cComm~sswfor L m America and the Caribbean (ECLAC),or1 the bas~sof official flgures. December each year in relat~onto December of the previous year. W a y 2006 In relation to December 2005. C April 2006 in relatlon to December 2005. a

--

'?

'

P

group consists of Brazil, Chilc, the Dominican Republic, Mexico and Peru. In Brazil, the reduction in the general inflation rate in 2005 was largely due to a sharp slowdown in the goods catcgory owing to lower food prices in thc third quarter of the year. In Mcxico, the annual rate reflects a reduction in food prices in the second half of the ycar and a downturn in the price of housing xrvices. The dccreasc in electricity prices in thc third quarter of the ycar resulted in a slnallcr risc in administered prices, but this trend began to reverse itself in the last few months of 2005. In the Dominican Republic, a sharp exchangcrate appreciation tempered price i~lcrcasesfor imports and food products. In Chilc, despite the larger relative increase in services prices, goods priccs also rose, unlike what happened in 2003 and 2004, thereby contributing to the higher inflation ratc in 2005. Although domestic demand, particularly private consumption,was quite buoyant in 2005 in several countrics, it was not so strong as to gencrate major increases in consumcr prices, and core inilation was thcreforc below thc general rate except in Hrazil and U n t g ~ a y . ' ~ In the first fivc months of' 2006, somc of thc trends seen in 2005 have continued. while others have changed. A ~ a r from t manufactures. the nrices of imaol-ted -,~oocls have generally increascd: food products on international markets have displaycd uneven trends, while the prices of agricultural raw materials arc rising and the prices of metals and minerals and of oil and fuel products have continued to climb sharply. On forcign currency markets, the appreciation of bilateral exchange rates against the dollar seen in 2005 has intensified in some countries, while in others the local currency has depreciatcd. Rcal salaries and wages in the first quarter of2006 were higher than a year earlicr. Thus, over thc 12 months to May 2006, inflation rates eased in some countries relative to cumulativt' figures as of Mav 2005. but other countries rccorded incrciises. The latter represented price corrections resulting from the expansion of private consumption, adjustments in regulated prices and higher food prices. Core infliition rose more sharply in the initial ~nonthsof the ycar in regional terms, reflecting price increases for education and health services, basic services, and clothing and household equipment in response to the upturn in private consumption (sec figurcs IV. I 0 and I V. 11).

--

Thew indices wcre calc~~laletf using the samc procedure for all thc countries, which involvctl grouping food and bcveragcs. clothir~gand footwear, and householcl equipment within ihc goods index and placing ihosc relating ro trnnsporr serviccs, housing anti education, culture and recreation. and hcalth services within thc services index. The indices are collstrucied on thc basis of the groups of goods and services included in the pruducl haskcts used in thc consumer pricc index for each OS the region's countries. A common methodology was used lo calculate the corc ir~llationrate which cxcludes hels. fuel products and pcrlsllable food products frcrm thc consun~crpricc index.

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure IV.10 LATIN AMERICA: VARIATION IN CONSUMER, GOODS AND SERVICES PRICE INDICES (Three-month unweighted moving average)

Figure IV.11 LATIN AMERICA: VARIATION IN THE CONSUMER PRICE INDEX AND THE CORE INFLATION INDEX (Three-month unweighted moving average)

Source: Economlc Commlss~on for Latln America and the Car~bbean(ECLAC),on

Source: Economic Commission for Latln America and the Caribbean (ECLAC), on the basis of offmal ftgures.

the bass of official figures.

Table IV.6 LATIN AMERICA AND THE CARIBBEAN: WHOLESALE PRICE INDEX, 2004,2005 AND 2006

Cumulative inflation for the year

December 2003December 2004

December 2004December 2005

Cumulative inflation far the period

December 2004May 2005

December 2005May 2006

Cumulative 12-months inflation in May each year

May 2004May 2005

May 2005May 2006

Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivarian Rep. of) Latin America (unweighted average) Source: Econom~cCommlsslon for Latln America and the Caribbean (ECLAC),on the basls of offic~alfigures.

Other price indcxcs published in the region's countries also display varied patterns. The wholesale price index (WPI) in countries for which information is available rose by less than the consumer price index in 2005 except in El Salvador, Paraguay i i d Pcru (see table IV.6).Then. in the first few months of 2006, it gathered

pace in several countrics, and thc 12-month variation to May 2006 came in higher than the corresponding figure of a year earlier. The trend of this indicator in Brazil and Chile is interesting: in Brazil, although the WP1 for May 2006 was at the same level as it was in December 2005, it displays a negative 12-month variation. In Chile, thc

Economic Survey of Latin America and the Caribbean 2005-2006

WPI rose by a cumulative 8.9% in the first five months of 2006 as a ~ c h d of t the higher p r i c ~of oil imports. . As mentioned above, the rise in international oil and fucl prices has been a highly influential hctor in domestic price trends, Although this situation has mostly iiffectcd the net hydrocarbon importers, it has also had conseq~~enccs for countries that arc net cxporters of crude oil but importers of fucls and other refined products. Thc end cffect of the higher prices of fucls. transport and basic serviccs on domestic prices in specific countries has dcpendcd on national policies regarding the regulation and setting of domestic priccs. Gasoline priccs in South American countries have been analysed as a means of providing nn indicator of fuel pricc increases in general.14 Comparing 2005 with 2004, the stecpest rises in gasoline prices occurrcd in Pcru (8.9%). Colombia (7.4%). Bolivia and Chile (both 5.7%). Since 2002, when fuel prices bcgan to rise sh:irply on international markets, the pricc of gasolinc has risen considerably morc than the culllukitivc variation in thc consu~nerprice index in Chilc, Colombia, Ecuador. Paraguiiy, Peru and Uruguay; in the Bolivariiin Rcpublic of Venezuela. the prices ofthesc products have rcrnaincd constant throughout the period (see figurc TV. 12).

77

F~gureIV12 SOUTH AMERICA AND MEXICO: CONSUMER AND GASOLINE PRICES, CUMULATIVE VARIATION, 2003-2005

Source: Econom~cCornm~sslonfor Latin Amerlca and the Caribbean (%LAC). "Preclo de 10s combust~blesen America del Sur y Mexlco", statlst~caldata [on line] http:l/www.eclac.cl/drn~/.

C. Employment and wages Thc relatively high levels of economic growth attained over the last fcw years has had a substantial cffect on the region's labour markets; in 2005 thcre was a significant increase in the employmcnt ratc for the third straight year, which on this occasion rose by 0.5 percentage points to 53.6% of the working-age population. Nonetheless, this irnprovcment simply represents a retum to the regional employmcnt r a k achieved in 1997.'" The recovery of employment levels since 2001 has undergone a ~na~jor qualitative change as it increasingly shifts towards the creation of wage-based jobs. This trend reilects businesses' greatcr confidence in the

l''

lS

prospects for future growth and has set the stage for a significant expansion of forrnitl-sector cmploy~nentin many countries. With favourable economic trends as a backdrop. the unemployment rate shed more than one percentage point, falling to 9.1% (its lowest level since thc mid-1990s). This improvement is the net effcct not only of higher employment. but also a decline in the labour supply. In fact. the piuticipation rate slipped by 0.3 percentage points to 59.2% of the working-age population, with the urban labour forcc expanding by a below-trend rate ofjust 1.8%. Patterns seen over the last fcw ycars attest to thc

Sec Economic Commission for Latin America and the Cnrihhean (ECLAC), Natural Ke~ource:~ and Ir~lrastructureDivision [onlir~elhttp:ilwww. eclac.cl/drni/. This is measured as a weighted averagc of employment rates In I6 countries representing 88.W of llie total populalion ot'Latin Amcrica and the Carihhcan. Thc employrnent rate inditales thc percentage of the working-age population [hat is employed.

Economic Commission for Latin America and the Caribbean (ECLAC)

78

fact that relativcly robust economic growth has positive effects on labour markcts. Nonetheless, the unemployment rate remains high, and an estimated 18 million pcople are still out of work. Although in 2004 and 2005 there was a clwr upturn in formal employment, a longertcrni view indicates that over the last 2.5 years thc vast majority of new jobs have been created in the informal sector. Moreover, a largc proportion of new jobs arc low paying, and short-term job contracts are becoming more prevalent in the formal sector. A final point to be madc in this connection is that thc reactivation of the labour

markct in 2005 did not elicit significant increases in real wages, which cdged up by just 0.5%. Consequently. to improve thc cmployment situation of large sectors of the labour force in the region, a lcngthy period of high cconomic growth will be nceded to boost labour demand, in addition to cornplcmentary employment and labourmarket policics.Ih In early 2006, the decline in the regional unemployment rate was continuing but at it slower pace. as the net effect of a rise in the employmcnt rate and a moderate upturn in thc participation rate, while real wages began to display more significant incrcascs.

A considerable drop in unemployment

1.

The rcgional urban unemployment rate (as a weighted avcragc) dropped sharply from 10.210 to 9.1 %, which was its lowcst level since 1994.In absolute terms, the reduction corrcsponds to roughly 2 million people distributed across all but four of the 21 countries for which information is available; in cight cases the unemployment rate fell by one percentage point or more (see table A-22 o f the statistical appendix).

The simple average of unemployment ratcs therefore dropped sharply as wcll (from 10.0% to 9.1%), with significant reductions being recorded in all the subregions (see table 1V.7). The unusually sharp decrease in the rcgionitl unemployment rate is accounted lor by the combined effect of strong job creation and a reduction in the region's labour-force participation rate.

Table IV.7

LATIN AMERICA AND THE CARIBBEAN: LABOUR MARKET INDICATORS, 1991-2005 1991

1995

2000

2001

2002

2003

2004

2005 a

7.9 9.9

10.0 10.6

10.3 10.3

10.1 10.6

11.0 11.1

11.0 10.9

10.2 10.0

9.1

Total participation rate Weighted average Simple average Male participation rate * Female participation rate

58.5 57.0 74.6 38.0

58.8 58.3 75.1 41.7

59.2 59.0 73.8 43.8

50.7 59.0 73.5 44.3

58.9 59.2 73.0 44.2

59.3 59.2 72.5 45.0

59.5

59.2 59.5 72.4 45.4

Employmentrate Weighted average Simple average

53.9 51.2

53.3 52.0

52.9

52.5 52.2

52.1 52.1

52.6 52.3

53.1

52.4

53.0

53.6 53.5

86.8

95.2 94.1

100.0 100.0

100.1 101.o

98.5 102.9

94.5 103.3

95.5 103.6

95.9 103.8

92.7 96.3

100.0 100.0

104.5 101.7

104.4 101.7

105.9 103.0

111.6 103.6

117.7 105.6

Unemploymentrate Weighted average Simple average

59.5 72.7 44.9

9.1

Real average wage Weighted average Median

82.5

Real minimum wage Weighted average Median

90.2

97.5

Source: Economic Commission for Latin America and the Carlbbean (ECLAC), on the basis of official flgures

Preliminary figures. 23 countries Series adjusted to account for methodological changes in Argentina (2003). Bran1(2002) and Mexico (2005) 16 countries

Simple average for 14 countries. l6

See hconomic C o m m ~ w o nfor Latin Aoierica arid the Caribhem (ECLAC). Ec'conon71r SWIWofLat1~7Anwrccra~7dtheCnrihhraii. 2004-2005 (LL3/ci.227Y-P/I).Sanriapo, Chile, Augurt 2005, chapter V

Economic Survey of Latin America and the Caribbean

2.

2005-2006

Reduction in the labour-force participation rate

At the regional level, the weighted avcriige of total labour-force participation rates fell from 59.5% to 59.2%, thereby signalling a slow-down in the expansion of the economically active population. This reduction was somewhat surprising, since in recent years relatively rapid econon~icgrowth has generally prompted an upturn in the liibour supply in response to better opportunities. Thc decline in the participation ratc was not all that widespread, howcvcr, as in I l of the 19 countries [or which information is aviiilable the rate eithcr increased or was unchanged; as a result, the simple avcrage of thc countries' participation rates did not decrease. Nonetheless, economies in which participation rates declined include several of the largest in the region (Argentina, the Bolivurian Republic of Venezuela, Brazil, Colombia and Peru), which is why the weighted regional average did, in fact. fall. In the long run, labour participation depends on individual Factors such as age, sex and education level, in conjunction with predominant sociocultural values, As noted in an earlier edition of the Economic Szlrvq " it is hard to project the short-term behaviour ofthis rare because of the diversity of strategies deploycd by households in different economic circun~stances;but while a variety of reactions are seen in all countries. there are patterns that distinguish some ciises from others, as figure IV. 13 illustrates. Mexico provides the clearest example of a positive corrclation between labour participation and economic growth in recent years; in Argentina iind Brazil the trend is less clear. although the participation rate in these countries has also moved broadly in line with growth over the last 10 years. In contrast, Colombia iind especially thc Bolivariw Republic of Venezuela arc countries where thc p;irticipation ratc tends to climb during periods of slow economic growth and vice versa. Apparently, in these countries, the perceived bencfit of having an additional income-earner tends to prevail in downswings. while the income effect predominates in upswings. In Peru, participation piitterns have becn more varied, although the behaviour of the labour supply is broadly similar to that described for the prcvious two countrics. An analysis of events in 2005 in medium-sized or largc countries shows that the reduction in the participation

"

rate at the regional level can be cxplaincd by a number of factors. In rhc Bolivarian Rcpublic of Venczuela, Colombia and Pcru, the drop it1 pa~zicipationreflects a continuation of thc pattern ol'behaviour in the Iribour force seen during times of relatively rapid economic growth. In Brazil, the decrease in participation may represent a continuation of the shrinkage of the labour supply that has occurrcd in this country whenever economic growth has been weak. Nonethe,lcss, given that thc Brazilian economy continucd to create jobs (the employment rate rose by 0.4 perccntage points), it is unlikely that this has becn caused by a discouraged-workcr phenomenon: instead, people's withdrawal from thc labour market seems to have been motivated primarily by an income effect. Argentina, for its part, saw a clciir-cut departure from the procyclical behaviour of the labour supply that previously characterized that country. In Argentina,the Bolivarian Republic of Venczuela and Brazil, the stecpest drop in labour participation occul-rcd among young peoplc. In Argentina, the ernploymcnt rate for this age group rose at the same time, whereas in Brazil it declined only slightly, by 0.1 perccntage points. Thus, at least in these cases, a discouragement effect has apparently not been a factor in the reduction of the labour-force participation rate among thc young population. Instead, the increase in household incomes -largely thanks to the expansion of ernploymcnt- is likely to have made it possible for ii segment of young people to withdraw h m the labour market and, at least for a significant proportion of them. to continue with their studies. In the Bolivarian Republic of Vcnezuela. labour participation among young people betweell 15 w d 24 years of age dropped by 5.8 percentage points between 2003 and 2005, while the employment rate for this age group rose by 0.4 perccntage points. The vast majority of young people who withdrew from the labour market did so to pursue educational activities, with the proportion of students in this age group rising from 30.8% in 2003 to 34.2% in 2004 and 37.8 % in 2005. A breakdown ol' the trend in regional average participation rates by gender shows that the fcmale participation rate has continued to trend upward, while the male participation rates has continucd to dccline

Economic Corrmission for Latin America and the Caribbean (ECLAC). Erotiomir .SLIIIY:~. o/'L~(fin AIYILT~(.O m d llw Cnrihtwun. 2001-200,' (LCIG.2179-PIE). Santiago, Chile. A U ~ L 2002, I S ~ pp. 86-89.

Economic Commission for Latin America and the Caribbean (ECLAC)

80

(see table IV.7). Exceptions are medium-sizcd or large countries in which overall labour participation dropped sharply and thc female labour participation ratc weakened.

in some cases considerably (in Argentina and Brazil by 0.7 percentage points and in the Bolivarian Rcpublic of Vcnc~uelaby 3.0 points).

Figure IV.13 ECONOMIC GROWTH AND LABOUR PARTICIPATION

Source: Economlc Comrn~ss~m for Latln Amenca and the Caribbean (ECLAC), on the bas~sof offlclal figures

3.

Expansion of employment

The number of employed persons chmbcd by about 3% in the region as ii whole, thereby raising the employment rate by 0.5 pcrccntage points. Employment growth was

substantial for thc third consecutive year and was quite widespread in 2005 across thc different countries (see table 1V.8).

Economic Survey of Latin America and the Caribbean 2005-2006

fable IV.8 LATIN AMERICA AND THE CARIBBEAN: LABOUR MARKET INDICATORS, BY COUNTRY, 2004 AND 2005

Employment rate 2004

2005 t'

Unemployment rate

Real average wage a

Real minimum wage a

2004

2004

2004

2005 h

2005"

2005 h

Argentina Bolivia Brazil Chile

Colombia Costa Rica Ecuador El Salvador Guatemala Hait1

Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Dommican Republic Trinidad and Tobago Uruguay Venezuela (Boiivarian Rep. of) Source: Econom~cCornmisson for Latr America and the Larlbbearl (ECMC), on the bas~sof offic~alf~gures " Rates of varlatlon ')Prel~m~nary f~gures

As figurc IV.14 shows, the quttc close correlation existmg betwecn economlc growth and the variation in the employment rate in 2004-2005 explains this upturn. 'Thc ch:tractcrist~cs of jab crcation have changed significantly over the last few years. In ternis of occupat~onal categories, the high concentration of new employment in own-account activities in 2003 gave way to an increase in wage-paying job creation in 2004 and, in 2005, ncw

jobs wcre concentrated almost exclusrvely in this sector IV. 15).18 Wage employment rose by 4.2% on average In 2005, rellecting a very strong rcsponsc by labour demand to economic growth.'" (sce figme

Figure IV 15 LATIN AMERICA AND THE CARIBBEAN: VARIATION IN EMPLOYMENT, BY BRANCH OF ACTIVITY AND OCCUPATIONAL CATEGORY, 2005 (Percentages) a

Figure iV.14 LATIN AMERICA AND THE CARIBBEAN: ECONOMIC GROWTH AND EMPLOYMENT. 2004-2005

Source: Economic Commrsslon for Latln Amer~caand the Caribbean (ECLAC), on the bass of offlc~alflgures

Source: Econom~cCornmrss~onfor Latin America and the Caribbean (ECLAC). on the bass of offlclal f~yures.

IX

Iq

F~guresIn parentheses Indicate the number of countries cons~dered Note: Preltrnlnaryfgures

a

[n 2003, own-account work and wage employrnenl were up hy 4.8% anti 2.8%. respectively. cornpared to figul-es of 2.9% and 3.7% for 2004. This calculaticnl did trot include Mexico hecausc clat~iwerc no longcr ci)mpm%blefollowing a tne~hodologicalchange. Accordingly, to evaluate [lie effects of thc expansion of economic activity on labour demand, h i s country also needs to be excluded from he calculi~tlonsreli~~in:tii econornlc growth. The expansmn of the regron's economy, rxcludinp Mex~co,arnounteci to 5 18.

Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.3 CHANGES IN THE CHARACTERISTICS OF LABOUR DEMAND

The structure of employment has become increasingly heterogeneousover the last

latter case, the wage gap can be expected to widen as more highly skilled personnel

ranking port workers have lost ground in this new occupational structure.

few decades and has frequently been associated with a tendency towards polarization and greater inequality. Studies

are rewarded while pay raises for workers in less demanding positions are restricted. This process has probably been intensified

Differencesin organizationalstructure are also reflected in the distribution of the available work and, hence, income.

conducted at the aggregate level in several parts of the world have not found any single cause for these processes,

by organizational changes that make labourmarket conditions more heterogeneous, such as outsourcing.

Whereas in mixed systems (single operators and multi-operators) there is growing underemployment,with a declining number

but in most cases technological change has been identified as the main one, with demand for skilled labour being

A case study of the Chilean port sector provides evidence of the varied effects that organizational and technologicalchanges

of shifts per worker and the resulting drop in their average incomes, the data on ports organized by a single operator point to

stimulated at the expense of lower-skilled labour. Other factors that have been mentioned in this connection are market

have had on employment and working conditions. Organizational changes in this sector included the introduction of a

more favourable trends. The study thus provides grounds for a rejection of technological determinism.

restructuring, labour reforms, reduction of the real minimum wage, weakening of

differentiatedsystem of port concessions and alterations in the work system, while

labour unions, and relative prices that are unfavourableto labour because of prevailing macroeconomic policies. Nonetheless,

technological changes included the use of new types of cranes as well as information and communication technologies. These

The effect of new technologiesdepends on how production processesare reorganized, and in such situations there is no immediate

there are major discrepancies regarding the weightings assigned to each of these factors.

changes raised the sector’s productivity, but many of the expectations in terms of employment were only partially fulfilled. For example, although the skill requirementsof

about. Factors unrelated to technological change also affect the characteristics of employment in the sector. This study also highlights the fact

port workers generally increased, the work did not become concentrated in a small number of highly skilled workers, as had

that any public intervention aimed at leveraging the positive effect of

As some studies have claimed that the influence of the various factors varies between sectors, one methodological proposal has been to deepen the analysis and study changes in the characteristics of labour demand at the sector level. A review of the literature on changes in Latin America’s production sectors, particularly with regard to the effects of technological and organizationalchange on the demand for labour and its characteristics, reveals the existence of mixed trends. On the one hand, there has been a significant degree of upskilling in the occupational structure, both in relation to new jobs that call for higher qualificationsand as regards increasingly demanding requirements for personnel in existing posts. This is not happening

been predicted. In mixed systems, where part of the port is operated by a single enterprise (single operator) and another by several active firms (multi-operators), the high level of unemployment in the main port zones added to the labour supply. This, compounded by strong pressure to reduce costs, the discontinuous nature of the work and rising productivity’s effect in driving down labour demand, led to an increase in the proportion of work undertaken by temporary staff working a small number of shifts per month. The result was increasing polarization in the port labour force, with a relatively small

across the board, however, since some job categories have not exhibited these kinds of trends of this type and, what is

group of highly skilled and increasingly multi-functional staff at the top of the

more, simultaneous deskilling processes are to be observed in some cases, even within the same firm or business. In the

occupational structure and a growing contingent of relatively low-skilled temporary workers at its base. Middle-

adaptationof the organizational structure, nor a single or obvious way of bringing this

technological and organizationalchange on employment and at reducing its negative consequences needs to take account of the specific characteristics of the sector in question. Above all in activities that involve discontinuous labour demand, such as port work, organizationalchange affecting human resources needs to be undertaken from a sector-level perspective. In fact, the Chilean port system is still searching for the best way to integrate its strategic objectives (productivity gains with lower costs and fewer interruptions of port activity) and the consequent technological and organizational change, with a humanresource policy that is sustainable in the long term. Achieving these goals requires better coordination on various levels: between firms in the sector, between them and workers, and among firms, workers and the public sector.

Source: Andreas Raithelhuber and Jurgen Weller, “Reestructuracion sectorial y cambios en las pautas de la demanda laboral”, Macroeconomia del desarrollo series, No. 38 (LC/L.2372-P), Santiago, Chile, Economic Commission for Latin America and the Caribbean (ECLAC), July 2005. United Nations publication, Sales No. S.05.11.G.112.

Economic Survey of Latin America and the Caribbean 2005-2006

In addition. the growth of own-account employment virtually came to a standstill. Thcrc arc two dynarn~cs that drive the increase in this category of cmployment: the explo~tat~on of opportunities creatctl by cxpiindinp economies for the production and sale of goods and scrviccs: and scll-cmploymcnt creation to compensate for a lack of business-generated labour demand. Following several years of economic revival, and in a setting o f dynamlc labour demand, the sccnnd type of strategy seemed to lose its appeal in 2005, and some people took advantage of new wage ernployment opportunities to abandon own-account work. This seems to explain the slight contraction in this type of ernployment, although new informal jobs werc also no doubt created during the year to capitalize upon the growing domcstic dcmand for goods and s e r v ~ c e s . ~ ~ Employment in domestic service grew at a robust 4.9%. in keeping w ~ t hthe procyclical pattern ~t hiis followed over the last few years, wh~chmay be rcflccting middle-class households' incomc and job prospects. I,astly, in 2005, unpaid lamily work continued on its long-term downward path, which has recently been mtermptccl only in years of very low growth, such as 2001 and 2002, when. given the lack of job optlons, some young people seem to have prefemed to contribute to the cconomic act~vities of their families. An analysis of rcgional employment growth by branch of activlty shows that thc manufacturing sector continued to take advantage of domcstic dcmand growth and favourable competitiveness conditions to expand production and hire workcrs. The upturn in domest~c demand is also crci~tingjobs in construction. Financial scrviccs, rcal cstate iind business services, in which thc numbcr of jobs shrank early in this decade, expanded by 5% or more for the third straight year. It is also interesting to note that in commercc and in community, social and perwnal qervices -the two largest non-agricultural branches of activity in terms of employment, which have accounted for the majority of new jobs in recent years- employmcnt grew more slowly than the overall increase, even though 47% of new jobs wcre created in these two branches. Nonetheless, in 2005, as in 2004, job creation was more &versified than in most of the 1990s and the stiirt of this decade. Up to 19% of ncw jobs were created in manufacturing, 9% in construction and 19%in the financial services, real estate and busincss services sector. In several countrics, the upturn in economic growth has resulted in forn~aljob creation at ratcs that frequently

"'

outpacc aggregate employmcnt growth. Table IV.9 shows thc pcrfijrmance of formal cmployment in a numbcr of countrics in the region. "Fonnal cmployment" is defincd as jobs covcrcd by acornprehensivc social security system or. in two cases (Jamaica and Peru). as the employment of workers who arc hircd by formal enterpliscs. Table lV.9 LATIN AMERICA AND THE CARIBBEAN: FORMAL EMPLOYMENT INDICATORS, 1998-2005 (Index 2000=100) 1998

1999

2000

2001

2002

2003

2004

2005"

Argentina Brazil "

Ct~ile Costa Ricad El Salvadord Guatemala Jamaica"

"

Mexico Nicaragua Peru *

Uruguay d f Source: Economic Commlss~onfor Latin America and the Caribbean (ECLAC),on the basls of offlc~alfigures. Prel~m~nary figures. workers covered by the pension system. Workers covered by soclal and labour leg~slat~on.

"orkers covered by soclat security. Workers irr m e d ~ u m - w e dand large firms.

' Index 2001=100.

The table shows how indices of formal employment reflected the weakness of labour demand in years of sluggish economic growth in the late 1990s and at the start ofthe current decadc and also how those indices have recovered since thcn. This upturn is the combincd result of dynamic wagc-based job creatlon and the li)rmalization of casual employmcnt relationships. In addition to higher employment, some countries also saw an improvement in thc index of visible underemployment (employed perqons who arc working for less than what is normally considcrcd :i full working day and want to work morc). Visible underernploymcnt declined in Argentina, Briizil, Colonibia, Ecuador, Paraguay and Peru, but increased in Chile, Costa Rica, El Salvador, Honduras and Uruguay. Other indicators of employment quality show that. dcspite the buoyancy of formal employment, a large proportion of new jobs arc of low quality. Thus, in B r a d , Colombia, Costa Rica, Honduras and Uruguay, the proportion of eniployed workcrs receiving inconics below a certain level (invisible underemployment) rose; and in Chile and Mexico, lbmiil cmployrnent contracts involve predominantly temporary jobs.

In fact, in 9 of the I h cuunll-ies lor which therc is information, own-account employmcnt retreated in ahsnlure t c r m in 2005

Economic Commission for Latin America and the Caribbean (ECLAC)

Little variation in wages As was the case in 2004, the upturn in economic activity in 2005 had a greatcr cSSect on employment than on wages: real average wages in thc formal sector in most countries recorded modest variations of between plus or minus 2%. Thc regional median and regional wcighted average of rcal avcrage wages rose by just 0.2% and 0.5%. respectively (see table IV.7). Exceptions to this pattern included a number of countries that are rccovering from deep economic crises in which high inllation rates had eroded real wage lcvels. Thesc countries (Argentina, Dominican Republic, Uruguay) recordcd increases in excess of 4% (sec tablc IV.8). To support thc recovery of the purchasing power of labour incomes, the authoritics in these three nations implemented active wage policies involving substantial hikes in the real minimum wage (32%, 19% and 70%, respcctivcly). The fact that in the Bolivarian Republic of Venc~ucla,Brazil

and Honduras real minimum wages also rose by niort: than 5% suggests that this instrument is being used differently than in the 1990s. During most of the last decade. the minimum wage was managed cautiously in order to avoid fuelling labour costs and stoking inflationary prcssurcs: as a result, between 1990 and l997 its median rcal valuc for 20 countries slipped by 0.9% per year. In contrast, sincc 1998, wage increases have been more widespreiid, and between 1997 and 2005 the median annual growth rate was 1.3% while the weighted avcragc rosc by 2.7%. The sharp rise in the real minimum wagc in 2005 led to increases of 2.0% in the rcgional median and 5.5% in the regional weighted avenigc. This typc ol'morc active wage policy was not implemented across the board, however, since in seven countries the real minimurn wage declined or remained unchanged in 2005, and in another four it climbed by no more than 2%.

Prospects for 2006 In the first few months of 2006, thc unemployment ratc has continued to fall, although at a morc measured pace, and thc ratc is forecast to drop from 9.6% in the first half of 2005 to 8.8% for the first six months of 2006. Since regional crnployment is continuing to grow vigorously, the slowcr rate of decline in unemploymcnt is accounted for by thc fact that the regional participation rate has not only ceased to fall but has actuiilly bcgun to rebound slightly. The slackening of cconomic growth in Brazil in 2005 was rcflcctcd with a lag in a numbcr of labour-market indicators, and employment growth stalled (see tablc IV. 10). The acceleration of cconomic growth in Mcxico -another of the region's largest economies- led to an upturn in the employment rate and, despite an increase in the labour supply, a fall in unernploymcnt. Thc other countries for which information is availablc also rcgistered improvements

in their rcspectivc unemployment and employment rates, with the rate of formal job crcation remaining strong. The first quarter of the year saw significant increases in the rate of growth of formal employment in Mexico and Peru (5.5% and 6.2%, respectively), while this rate eased somewhat in Argentina and Brazil, although fomiil job creation remains vigorous (8.6% and 5.1%). Thc decrease in the unemployment ratc is cxpcctcd to slow in the second half of 2006, and an annual figure of #.h% is projected, compared to 9.1 % in 2005. In the first few months of 2006, no country for which data are available reported a reduction in rcal wagcs, and in several cases wage growth actually pickcd up speed. A simple average of nine countries shows real wages in the formal sector rising by 3.2%, with substantial increases in Argentina, the Bolivarian Republic ol' Vcnc~uclaand Uruguay.

Economic Survey of Latin America and the Caribbean 2005-2006

Table l V l 0 LATIN AMERICA: UNEMPLOYMENT RATES, EMPLOYMENT RATES AND REAL AVERAGE WAGES, FIRST HALVES OF 2005 AND 2006 Unemployment rate

Latin America and the Caribbean

2005

2006

9.6

8.8

Real average wage a

Employment rate

'

"

2005

2006

53.3

53.9

Argentina Brazil Chile Colornb~a Costa Rica Ecuador Mexico Nicaragua Peru Uruguay Venezuela (Bolivarlan Rep. of) Source: Economlc Cotnmlssiwl for Latln Amerlea and tlie Caribbean (ECLAC), on the basis of offmai figures. a Index 2000=100. a Est~mate. C Preimnary f~gures. January-Apr~laverage. January-March average. January-May average.

2005

...

2006 C ..,

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Economic Survey of Latin America and the Caribbean 2005-2006

Chapter V

External sector

A. Balance-of-payments current account

1.

The current account Worldwide econonlic growth has rcsulted in more buoyant international tradc and has boosted dcmand for raw materials and helpcd push up prices. This trend has not bccn seen in all commodities, but the upswing hits included most energy products, some industrial metals and ccrtain agricultural products such as sugar, bananas and coffee. In the last three years, this extcmal demand shock has fuelled a significant incrcase in economic activity in Latin America which has been coupled with surpluses on its balance-ol-payments current account. This growth trend and impnwed extcrnal balance havc been seen in countries whose cxport structures iirc based

cm commodities whose prices havc ~isen.In othcr words, these results me due to an exogenous fiictor: h~gherpriccs for commoditics that some countries posses\ in abundance. For the third year in a row. thc region posted a surplus on thc balancc-of-payment current account, with the 2005 surplus amounting to US$35.325 billion, or thc eyuiviilcnt of 1.5% of Latin America's GDP. The capital and I'inancial accounts of the balance of payments (including errors

iind omisswns) recordcd a surplus of US$21.650 billion. or 0.9% o l regional GDP. The overall balance thcrefore took the foim of a surplus of US$ 56.977 billion (2.4% of rcgional GDP). Rescrve assets rose by US$ 35.265 billion (equivalent to 1.5% of regional GDP), the regon

88

made USs26.8 16 billion in payments on loans from the International Monetary Fund (IMF) ( l . 1% of GDP), and exceptional financing amounted to US$ 5.105 billion (0.2% of rcgional GDP). The positive balance on the currcnt account reflected surpluses on the mcrchandise trade account (US$ 80.627 billion, or 3.4% of rcgional GDP) and in currcnt transfers (US$48.694 billion or 2.1%of regional GDP). In contrast, thc services account posted a deficit of US$ 18.519 billion (0.8% of regional GDP), while the deficit on the income account came to US$75.476 billion, or 3.210 of regional GDP. In 2005 only nine Latin American countries improved their current account balances rclativc to 2004 (when 14 countries had shown advances over 2003). while seven countries registered a current account surplus, which was one less than in 2004 (see figure V. I).' All of the seven exocpt Haiti were South Arricrican countrics. As in 2003 and 2004, current transactions werc within the interval of +/-three points of regional GDP in 10 of the region's countries. Thc median of the distribution went from a deficit of 0.5 pcrccntage points of GDP in 2004 to onc of 0.8 percentage points. Argentina and the Bolivarian Republic of Vencmcla are the only countries to have had an uninterrupted string of current account surpluses since 2002. In 2005, Nicaragua posted the region's largest current account deficit (16.2% of its GDP). whilc the Bolivarian Republic of Venezuela turned in the biggest surplus (20% of its GDP). If the latter country wcre factored out of the calculations, thcn the region's currcnt account balancc in 2005 would have been US$ 9.966 billion instead of US$ 35.325 b i l l i ~ n . ~ In 2005. the Caribbean countrics posted a current account deficit of US$136 million (0.3% of their GDP). This was an improvement over thc situation in 2004, when the currcnt account deficit amounted to 0.9% of the subregion's GDP. As shown in figure V.?, all the countries of this subregion registered ii current account deficit in 2005 except Trinidad and Tobago, which had a surplus of US$ 2.741 billion (2 1.2% of its GDP). This result is a rellcction of the rising value of that country 'S hydrocarbon exports; it was also thc only State to post a mercharldise tradc surplus."f the accounts of Trinidad and Tobago were factored out of the cquation, then the Caribbean countries would have had a cun-cnt account deficit of US$ 2.939 billion (12% of the GDP of thc Caribbean countrics other than Trinidad and Tobago). Latin Amcrica also displays substantial subregional

' '

Economic Commission for Latin America and the Caribbean (ECLAC)

Figure V 1 LATIN AMERICA AND THE CARIBBEAN: CURRENT ACCOUNT BALANCE (Percentages of GDP at current prices)

Economlc Comm~ssionfor Lam Amer~caand the Carlbbean (ECLAC). on the basls of offlc~alf~gures Preltmmary f~gures.

Source: a

Figure V 2 CARIBBEAN COUNTRIES: CURRENT ACCOUNT BALANCE (Percentages of GDP at current prices)

Source: Economlc Cornm~sslonfor Latm America and the Carlbbean (ECLAC). on the basls of offlclalfigures. ' Prellm~naryfigures

differences in terms of the current account balance (scc figure V.3). The improvement in South America's current account rel-lected a larger mcrchandise trade surplus. cspccially in the Andean countrics, thanks to the increase in petroleum exports from the Bolivarian Republic o f Vcne~uela.In Central Amcrica, the slight improvement seen in the current account was related to the upturn in

In terms of thc basic balance (i.e., the sun1 of the current account balance and net foreign direct investment), four countries posled a deficit in 2005: Costa Rica. El Salvador. Cuatcmala and Nicaragua. This is the equivalerrt of 0.45 'i'c of regicrnal GDP (excluding the Bolivarian Kcpublic of Venezuela). "The current account balancc of Carihhean countries (as a simple average) was -14.18.

Economic Survey of Latin America and the Caribbean 2005-2006

the income account. Here too, worker remittances made a lnajor contribution to the positive balance in current transfers of almost 9.3 pcrcentage points of GDP. South America turned in a surplus of' US$ 44.899 billion in 2005 (thc equivalent 01'3% of the subregion's GDP). This was half a percentage point highcr than in 2004, with improvements observcd in the rnerchiindise trade balance ( a surplus of 7.2% of GDP, which was 0.3 percentage points higher than the year before) and the income account (whose deficit narrowed by 0.5 points). Thc serviccs balance deteriorated by 0.1 percentage points of GDP, whilc nct current transfers wcrc down by 0.2 points. The countrics of the Andcm Community recordcd a surplus of almost US$24.790 billion, or 6.8% of thcir GDP (2.6 percentage points higher than in 2004).4

89

In 2005, the wade balancc of The Andean Colnmunity 's trade surplus expanded by 2.3 points of GDP, while thc surplus on it, inconic accounl rose by 0.4 pints. Contributing factors to this rcsult included the balances posted by the Rolivariiin Republic of Venezuela and Boliviii thanks to higher hydrocarbon prlces on inteimat~onalmarkets, while the currcnt transkrs account recorded a slight decline. The MEKCOSUK countries' currcnt account surplus amounted to US$19.407 billion ( l .9% of the group's GDP) in 2005. while they witnessed a deterioration in thcir trade b.a1iince (by 0.3 pcrcentagc points of GDP), services balance (0.2 points) and currcnt transfers (0.09 points). The currcnt account deficit in Central Amcrica totalled US$ 5.020 billion, or 5.2 percentiige points of thc subregion's GDP (an itnprnvcment 01'0.4 points over the preceding year). All the Central American countries

Figure V.3 LATIN AMERICA AND THE

CARIBBEAN: TREND OF THE CURRENT ACCOUNT BALANCE (Percentages of GOPat current prices)

Source: Econom~cCommiss~onfor Latin America and the Car~bbean(ECLAC), on the basis of offtcal f~gures. Prel~m~nary f~gures.

"

The Bolivnrian Republic of Vene~uelahas announced its deparlurc from the Andcnn Community in 2006. Thc country is thcrelre included in all analyses of the Andean Community for 2005.

Economic Commission for Latin America and the Caribbean (ECLAC)

posted negative balances for currcnt transactions. The subrcgion's trade deficit was cquivalcnt to 13.8% of its GDP, which was 0.2 percentage points lcss than in 2004. Thc higher prices brought by hydrocarbons have been a dctcnnining factor in this result, since all of these countrics are net importers. Net currcnt transfers closed at a level similar to the figure rccordcd for 2004. A comparison with cmcrging economies in other world regions shows, for instance, that some oil producers in the Middlc East (such as Saudi Arabia and Kuwait) posted major incrcases in their current account balances in 2004 and 2005. In 2004, Saudi Arabia's current account surplus climbed by 7.7 pcrccntagc points of GDP. while Kuwait's rose by 13.5 points. In 2005, Saudi Arabia's current account surplus increased by 7.4 perccntage points. In contrast, most cmcrging countries in Eastern

2.

Trade in goods and services

In 2005, Latin America's balance of goods and services stood at US$ 62.108 billion, or 2.6% of GDP. Growth ratcs Ibr cxports and imports were 20.0% and 18.2%, respcctivcly. with both of these figures being lower than thc rates recorded in 2004. Incrcascs in export volumes contributed 8.1 to thc cxpansion of external sales, while higher pricc contributed I I %. For imports, thcse two factors' contributions were cquivalcnt to 12.1% and 5.5%, respectively. These growth ratcs for the value of exports and imports were quite high, espccially when compared to thosc finm the early part of this decadc. Changing price levels were one of thc main determinants of the region's merchandise tradc result. If thc 2004 import and export buskcts arc held constant. then price increases widened the mcrchandise surplus by almost US$28.993 billion. The valuc of Latin America's merchandise exports climbed by 20.3%, of which 1 1.7% is attributable to pricc incrcases and 7.7% to higher volumes. As illustrated by Colombia, Chile and the Bolivarian Rcpublic of Venezuela -threc of the countries with the largest percentagc incrcascs in external sales- thc

5

h

Eurnpc and Central Asia saw their current account balances dcterioratc in 2005. This was the case for Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Hungary, Moldavia, Montencgro, Scrbia, Ukraine and T ~ r k e y . ~ Some Asiiin economics, such as the Republic of Korea and Indoncsiii, rccordcd reductions of 2.3 and C). I points in their respectivc current account balances; the merchandise tradc balances of both countries also deteriorated. As in Latin America and the Caribbean. results vary widely and are largely dependent on the export and import structures of the countries concerned. Evcnts in the first few months of 2006 -particul:irly the upswing in international prices for metals and petroleum- suggest that Latin Amcrica will record a current account surplus for 2006 that is at lcast as largc as its 2005 surplus.

difference between thc risc in prices and the expansion of volumes was greater than thc rcgional a v c r a g ~This . ~ helps to demonstrate that the increasc in Latin Amcrican exports is linked to higher prices for raw materials (especially metals and petroleum). As for imports, their value increased by 17.9%. Unlikc thc case of exports, however. the increase in import volumes (10.8%) exceedcd the risc in priccs (6.4%). This may bc linkcd to the fact that the region's economic growth in 2005 drove up demand for imported goods and to thc apprcciation of many of its countries' currencies, which made imports chcapcr in relative terms. This was not the case in all the countrics, howcvcr. In El Salvador, Guatemala, Honduras and Nicaragua, for instance, prices made a more significant contribution than volumes to the increase in imports owing to the higher prices paid for fuel imports. In 2005, the valuc of the Andean Community's cxtcrnal sales rose by USs28.4 billion, which was an increase of 36% and 4.2 percentage points of these countries' GDP. This group's imports expanded by US$ 15.5 billion, which was an upturn of 29.5% (1.8

Some of thcsc countries are running deficits on thcir currcnt accounts and are therelore highly dependent on capital inflows, which could easily undcrgo changes in an inkmalional context of rising interest rates. In the Bolivarian Republic of Venezuela, prices increiisetl hy 5.3% and volumes by 36.0'70: in Colombia, prices rose hy 9.7% ancl volurnes by 15.070: and in Chile, priccs climbcd by 3.2% and volumes by 22%:.

Economic Survey of Latin America and the Caribbean 2005-2006

Figure V.4 LATIN AMERICA AND THE CARIBBEAN: PERCENTAGE VARIATIONS IN MERCHANDISE EXPORTS F.O.B., BY UNIT PRICE AND VOLUME, 2005 "

Source: Economic Commiss~onfor Latin Amertca and the Caribbean (ECLAC), on the basts of offmai f~gures a Prelimmary ftgures.

points of its GDP). The MERCOSUR countries' cxports swelled by US$27 billic~n(a growth rate of 19.7%~)and its imports by US$ 16.8 billion (an 18.6% increase). Trade within these integration schemes has been relatively limited cornpucd with other cconornic integration groups. and intra-group tradc has been gradually declining in the Andciin Community and MERCOSUR.7 In 2005. exports within the Andcw Community represented 9.6% of its total exports, compared with 10.5%in 2004. These trade flows' peak level over the last 16 years reiiched its peak (14.2%))in 1998 and since then has been fluctuating betwccn 8.8% y 10.6%. Intra-MERCOSUR cxports represented 13.2% of total external sales in 2005, which was far below the record lcvel of 25.3%' recorded in 1998. In contrast, trade within the Central American Common Market (CACM) is trending upward, reaching a record high of 28.7% of thc subregion's total exports in 2005. Trade within the Caribbean Community (CARICOM)

T "he

has also been expiinding in recent years. thanks in large part to Trinidad and Tobago's crudc oil salcs. A number of changes in the region's integration schemes arc now in rhc making, following the Bolivarian Republic of Vcnez.uela's announcement of its departure from thc Andean Community (of which it was n founding member) and its intention to join MBRCOSUR and to conclude tradc and various cooperation agreements with Bolivia and Cuba as part of the recent Pcople's Trade Agrcernent (PTA). As Tor the Andean countries, the Andean Tradc Promotion and Drug Eradication Act (ATPDEA), which has bcen in fbrce sincc 1991, is due to expire in December 2006. At the Spccial Mceting of the Andean Council of Presidents (held in Quitn in June). Bolivia, Colombia, Ecuador and Pcru signed a letter requcsting that the United Statcs extend the Act. This would mainly benefit Bolivia and Ecuador. as Peru signed a free trade agreement with the United Stiites in April 2006 (ratification by Congress is still pcnding in both countries. although this is expectcd to occur by thc end of the year), while Colombia is expected to sign a similar agreement soon. Various Latin American countrics are in the process of negotiating f ~ e etradc agreemcnts with the United States. have reccntly signed such accords or are about to do so. For instance, the Dominican Republic -Central Americii - Unitcd States Free Trade Agreement (CAFTADR) was iniplemcnted by El Salvador in the first quarter of 2006 and by Nicaragua and Honduras in the second quartcr. This agreement is expectcd to enter into force in Guatemala and the Dominican Republic and to be approved by the Costa Rican Congress in the second half of 2006, whilc Panama is engaged in the finiil round of negotiations on this trcaty with the United Statcs. The Central American countries arc also negotiating an agreement with Canada, and in November arc expeclcd to begin talks on a lixc trade agreement with thc European Union.%111 addition, niitions such as Brazil, Chile and Peru are negotiating bilateral agreements with countries in Asia and Africa.'

For a morc detailed analysis. see Josc D u r h and Kaiil Maldonaiio. "Amkrica Lattna y el Caribe: ia ir~tcpcitjnregional en la hora de las tleflnicioncs". Comercio inremacional scries, No. 62 (LClL.2454-P). Santiago. Chile. Economic Commission for Latin America ancl thc Cnr~bbear~ (ECLAC). Decembcr 2005. Dominican Rep~~blic is no1 taking part in lhe negotiations with thc European Union being pursued by the Latin American bloc of countrics. For a morc detailed analysis, see M. Kuwayama. J . Duriin and V. Silva. "Hilateralism and repionalisrn: re-establishing thc primacy of multilateralism: A Latin Antericsn and C'aribbem perspective". Crmewio inte~-ttiicionrrlswies. No. 58 iLCIL.1441 -PIE). Santiago. Chile. Economic Commission for Lalin Amcrica and [he Caribbean (WLAC). December 2005.

Economic Commission for Latin America and the Caribbean (ECLAC)

3.

Terms of trade

Although recent years have seen a significant improvement in Latin America's average terms of trade, this trend has not manifested itself equally in all subregions (sec figure VS). In 2005, Latin America's tcrms of trade went from strength to strength: improving by 5.7% compared with thc 5.2% incrcase rccordcd in 2004. In 2003, the region's terms of trade had improved by 2.1 %.As shown in ligurc V.6, Latin America's terms of trade are in an upward phasc of the business cycle and are closely linked to the Latin America's commodity export price index (the statistically significiint correliitinn of 0.52 has risen to 0.65 since the beginning of the 1 990s).I0 The countries that recorded the largest incrcascs in their terms of trade in 2005 werc thc Bolivarian Republic of Vcnc~uela(a risc of 30.8%) and Ecuador and Chile ( 1 1.9% each). Chile, which is an oil importer, recorded an increase i n its terms of trade as higher coppcr prices more than offset the rise in crude oil prices on international markets. At the c~therextreme, the terms of trade of Costa Rica, Paraguay and Uruguay decreased by 8.2%. 7.8% and 5.7%, rcspcctivcly. An w e n clearer picture of the improvement in the region's tcrms of trade in recent years is provided by a cornparison bctwcen the average for

the 1990s and for 2005, which shows a 23.2% increase. This sharp upswing reflects the strength of demand for raw materials, which is being driven by world cconomic growth, and especially that of China and India. and of the political uncertainty that has generated additional oil price volatility. This process has bccn quitc uneven across subregions. In 2005, South America's terms of trade climbed by 6.5% while Mexico's increased 2.9% and Central Amcrica's fell by 3.3%. A comparison with the average for thc 1990s shows that thcse suhregions' t e r m of trade varied by 50%, 21% and -11.8%, respectively. Within the subregion ol' South Amcrica, there are considerable differences at thc country level. In 2005, South Arncrica's tcrms of trade (excluding Chile and the Bolivarian Republic of Venezuela) rose by 1.8%. Higher oil and copper prices in 2005 havc bccn a miijor factor in the improved terms of tradc for South America as a whole. Figure V6 TERMS OF TRADE

Figure V.5 LATIN AMERICA AND THE CARIBBEAN: TERMS OF TRADE (Percentage var~afion,2004 and 2005)

Source: Econorn~cCornm~ss~on for Latln Arner~caand the Carlbbean (ECLAC), on the basls of o f f ~ c ~f~gures al Prel~rnmaryf~gures

a

IU

Source: Economc COmm~ss~On for Latln Arner~caand the Caribbean (ECLAC), on the bas~sof o f f ~ c ~f~gures al

The result varies across countries according to their export structurc. Thc tcrnls of trade ofcounmies such as Brazil and Mexico arc Icss closely correlated with commodily exporl price indices lhan thosc of Bolivia, Chile arid the Bolivilrian Repuhlic of Venezuela bccausc of the large proportion of manufactures in these first two counlries' exports.

Economic Survey of Latin America and the Caribbean 2005-2006

Box V.l THE OIL BILL IN CENTRAL AMERICA AND THE CARIBBEAN

As mentioned earlier, Latin America has seen a major improvement in its terms of trade over the past three years.a Nonetheless, in 2004 and 2005 that improvement was mainly due to rising prices for energy products and certain minerals, and as a result, a number of net importers of these goods have witnessed a deteriorationin both their terms of trade and their trade balances. The higher prices being fetched by petroleum and petroleum productsb were also responsible for the upswing in the value of net oil importers’ external purchases in 2005 This had a particular impact on two subregions -Central America and the English-speaking Caribbean- that are mostly made up of small economies and net oil importers.c It is hard for these economies, which have limited means for substituting alternative energy sources, to absorb the impact of the soaring oil bill. If world oil prices continued rising at the present rate, these countries’ balance of payments could worsen and their economic growth could even be held back. Central America Rising prices for oil and petroleum

products had various consequences in Central America. In terms of the subregion’s external accounts, the rising

a

oil bill led to a considerable worsening of the trade balance, while fuel price adjustments pushed up inflation at the domestic level. The oil bill for Central America soared by 39% in 2005, an increase of US$ 1.559 billion, or 34.8% of the overall increase in the cost of imports. If the Dominican Republic and Haiti are included, the increase amounts to US$ 2.386 billion (the equivalent of 37.2% of the overall increase in imports). The countries for which the growing oil bill

The English-speaking Caribbeand As in Central America, English-speaking Caribbean countries (including Trinidad and Tobago) often post sizeable balanceof -pay ments current account deficits. The rising oil bill, which climbed from 49.1 % of the current account deficit in

represented the greatest proportion of increased spending on imports were Haiti (96.1%), El Salvador (50.5%) and Guatemala(49.2%). All the countries of the subregion apart from Panama registered a deterioration in their merchandise trade balances. As a percentage of the overall current account deficit for Central America, the oil bill rose from 83% in 2004 to 118% in 2005. Over the past three years, Central America’s oil bill has risen by 0.4%, 0.7% and 1.1% of GDP, respectively. If the Dominican Republic and Haiti are

2003 to 55.9% in 2005, has been one of the reasons why these deficits have been widening over the past three years. In 2005, this subregion’s external purchases of petroleum and petroleum products increased b y 18.8% (the equivalent of US$ 172 million), thus accounting for 34.8% of the overall growth of imports. The countries where the rate of increase in expenditure on crude oil and fuels was the highest relative to the rate of increase in total imports were Barbados(339.7%) and Guyana (36.8%). As a percentage of GDP, the oil bill

included, the figures are 0.7%, 0.6% and 1%, respectively. The country whose oil

for the Caribbean countries expanded by 7.9% in 2003 and about 9.5% in 2005. The

bill showed the greatest increase as a percentageof GDP in 2005 was Nicaragua (2.3%), whereas it had been the Dominican Republic in 2003 (2.9%) and Honduras

biggest increase in 2005 was recorded by Guyana, at 6.4% of GDP. In 2004, it was Barbados, with 2.3% of GDP, and in 2003, Jamaica, with 2.9% of GDP.

(1.7%) in 2004. The picture drawn by all of these figures shows just how serious an impact the rising prices of petroleum and petroleum products have been having on these economies.

At the subregional level, however, it should be noted that the terms of trade have worsened for Central America. In 2005, price indices rose by 36.7% for petroleum and by 33.4% for petroleum products. Because it is a net oil exporter, Trinidad and Tobago is not included in the English-speaking Caribbean for the purposes of this analysis. This analysis covers the countries in this subregion for which data are available. The oil bill for 2005 is known for the following countries: Bahamas, Barbados, Belize, Guyana, and the member countries of the Organization of Eastern Caribbean States (OECS). Information on the oil bill for Jamaica and Suriname is available up to 2004.

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Economic Commission for Latin America and the Caribbean (ECLAC)

B. Capital flows and external debt

1.

Capital and financial account balance

In 2005, Latin America posted an overdl baltince of 2.4% of GDP, which was US$ 44.6 billion higher than in 2004. This was made possible thanks to surging dcmand for raw matcrials exportcd by thc region and an extremely favourable financial environment at thc international level. As mentioned previously, US$ 16 billion of this result was attributable to the current account surplus (1 5%of GDP) while US$28.6 billion corresponded to the transformation of the US$7 billion capital and financial account deficit (including errors and omissions) into a surplus of US$2 1.6 billion (0.9% of GDP) in 2005. Thc overall balance was used to build up rcservcs by thc cquivalent of 1.5% of GDP and to pay the Tntcrnational Monetary Fund (IMF) (I. I % of GDP); in addition, exceptional financing amounting to 0.2% of GDP was recorded. The region therefore became a net rccipicnt of capital flows while at the same time running a currcnt account surplus. This was thc first time that this had happcncd (with the exception of 2003. when both surpluses were much smaller) since the beginning of the data series in 1980 (see figure V.7). Capital flows were received under two subhcadings in thc capital and financial account. First, foreign direct investment (FDI) amounted to US$47.8 billion (2% of GDP), which was 9.7% higher than the previous year but nonetheless below the record net inflows for this data series of US$ 79.3 billion (4.4% of GDP) registered in 1999. The main recipients of FDI in 2005 were Brazil and Mexico (with nct inflows of almost US$ 12 billion), followed by Colombia (US$5.5 billion). Chile (USs4.7 billion), Argentina (US$ 3.5 billion) and Peru (US$2.5 billion). Bolivia, on the other hand, closed out the year with US$280 million of disinvestment. Second, at US$26.2 billion ( l . I U/o of GDP), the deficit in short-term capital tlnws was smaller than in 2004. This rigure was the net result of two opposing flows: on thc one hand, debt paydowns and exte~niilassct formation (particularly in the case of the Bolivarian Republic of " "

Venezuela) and, on the other, si~eablccapitiil inflow\ in the form of portfolio mvcstmcnts. International investors took advantage of the favourable economic conditions in Latin American and. in the ca\e of Brazd and Mexico, of high intcrcst ratcs, to channel resources Into the financial assets ofthc region'\ countries. Buybacks of external bonds and cxtcrnal debt restructurmgs spurred the devclopmcnt of the countries' dornest~cbond markets, thercby attracting an increasing number of foreign investors. Some countrics such its Brad, thc Bolivarian Republic of Venezuela and, in mid-June 2006, Colombia made progress adjusting their legislation in ordcr to facilitate financial transactions and the entry of foreign investors into their domestic markets." With the exceptmn of Costa Rica, El Salvador, Guatemala and Nicaragua, :ill Latin American countries posted a positive basic balance." ln the aforementioned Figure V.7

LATIN AMERICA AND THE CARIBBEAN: BREAKDOWN OF BASIC BALANCE, 2000-2005 (Millrons of dollars) a

Source: Economlc Comm~ss~on for Lam Amer~caand the Car~bbean(ECLAC), on the bass of offoal f~gures a A manus sgn (-) ~nd~cates an Increase In reserve assets.

Mexico and Peru also have similar legislation. The basic balance is the sum of the current account balance and FDI flows.

Economic Survey of Latin America and the Caribbean 2005-2006

countries, inflows of FDI failed to entirely offsct thcir current account deficits. I11 Bolivia, Brazil, Mexico, Panamit, l'araguay and Uruguay, bitsic balance inflows combined with positive flows of short-term capitiil. The negative short-term capital ilows ofthc other countries that postcd

95

positivc basic balances were attributable to external iissct formation (as was the case in the Bolivarian Republic of Vcnczuela. Chilc and Colombia) and to a decrease in net external liabilities. All of thc countries except El Salvador recorded ii build-up of' reserves (see figure V.8).

Source: Econolnlc Comm~ss~on for Latin Arnerlca and the Caribbean (ECLAC), on the bass of official figures. minus slgn (-) Indicates an increase in reserve assets.

96

2.

Economic Commission for Latin America and the Caribbean (ECLAC)

Management of external liabilities

High international liquidity, an almost flat yield curve in the Unitcd Statcs, low interest rates and rent-seeking on the part of invcstors were a11 determining factors in the entry of capital flows into the region and the take-up of local-currency bond issues with lower cost. The reduction in the region's cxtcrnal dcbt was coupled with a widespread restructuring of dcbt profiles in thc intcrcsts of diminishing exposure to shifting exte~nal conditions (particularly interest-rate and exchange-rate movements). Liability management operations focused on extending externiil-dcbt maturitics, retiring thc more expensive debts, diversilj~ingcxchange risk by issuing deht instruments in currcncics other than the United States dollar, and reducing that same form of risk by increasing the proportion of debt issued in local currcncics. Countries such as Argentina, Brazil, Panama, Pcru and Mexico undertook external bonds buybacks. while certain countrics also swapped external for domestic debt (Argentina, Colombia and Pcru).13 Mexico issued warrants that give investors the option of swapping dollardenominated bonds for peso deht. In M m h 2006, Mexico issued warrants to swap US$720 million worth of curodenominated bonds for peso-denominatcd papcr. These external bonds buybacks camc in rcsponsc to a strategy aimed at eliminating obligations with high interest rates and more restrictivc conditions. In early 2006, thcre was a spatc of dcbt buy-back operations, including thc withdrawal from the market of Brady bonds, which had been introduced at the end of the 1980s as part of non-pcrl'orming debt swap operations. Many cou~ltries decided to take advantage of thc buy-back option provided by Brady bonds to remove thcm from thc markct, which suggests that the miirket for such instruments may be coming to an end. In August 2005, Brazil exchanged USS4.2 billion in C-bonds (capitalization bonds) for US$ 4.5 billion in A-bonds (amortization bonds), thercby cxtcnding this debt maturity from 20 14 to 20 18. In October, the remaining US$ 1.2 billion in C-bonds was also retired. For n long timc, C-bonds (a type of Brady bond introduced as part of thc 1994 dcbt restructuring) were Brazil's main external dcbt instrument. In latc February 2006, Brazil and the Bolivarian Republic of Venezuela announccd their intention to buy back USs6.6 billion and US$3.9 billion in Brady bonds,

l4

respectively. For Brazil, this operation eliminates its Bracly bond debt, while the Bolivarian Republic of Venezuela will clear out its par and discount Brady bonds. Mexico had retired all of its Brady bond debt back in mid-2003. Total debt held in Brady bonds in the region peakcd at almost US$ 150 billion in August 1996, but had shrunk to US$ 10.1 billion by the end of April 2006. By that time, only nine countries were holding such bonds, and only four of those were Latin American (the Bolivarian Republic of Venezuela, the Dominican Republic, Panama and Peru).14 At the beginning of Junc, Panama announced that it would buy back all its Brady bonds (almost US$360 million) at the end of that month. In addition to the retirement of Brady bonds, carly 2006 siiw ii number of countries join the wave of buyback operiitions. These included Mexico, which in March retired bonds worth US$ 2.9 billion by issuing US$ 3 billion in dollars -denominated benchmarkcd bonds. Brazil announccd that in 2006 it would buy back othcr short-term cxternal debt bonds, while in March, Colombia retired US$ 600 million in external bonds as part o f its stratcgy to rcducc the proportion of its debt in forcign cul-rcncy. In May, Ecuador retired US$ 740 billion in 2012 global bonds (some of its most costly dcbts) with a coupon ratc of 12%, and announced that it would rctirc the rcmaining US$ 510 million of such bonds by January 2007. At the end of 2005, Brazil and Argentina announced that they would be paying off all their debts with the International Monetary Fund (IMF) (US$ 15.5 billion and US$9.5 billion rcspcctively). Howcvcr, thc cnsuing markct reactions in the two countries differed: in Bra~il,the operation was considered an example of successful management of external dcbt and international reserves, while in Argentina it was deemed a rash dccision that might have to be financed with more costly subscqucnt opcrations. Although this pushed up Argentina's risk rating, the concerns provcd unfoundcci and the risk rating began to trend downward once again in January 2006. At the end of March 2006. Uruguay announced the early payment of US$630 million to IMF, while in May Mexico announced the early payment of US$7.0 billion to the World Bank and the Inter-American Development Bank (IDB).

Peru paid some of its debt to Ihc Paris Club using funds that were raised partly on thc domestic market. According to information from J.k? Morgan.

. Economic Survey of Latin America and the Caribbean 2005-2006

The region's international reserves

3.

The payment of debt outstanding with IMF and many external bond buy-hack operations werc financed with the countries' international reserves, which have swclled thanks to their healthy current account balances, capital ~nllowsand certain fbreign-exchange policy measures. Although the returns on some of thc new issues were used to build up rcserves (spec~ficallyearmarked for future cxtenial debt payments), the aggregate incrcase in reserves was piu-tially curbed by asset formation abroad. As a result, the international reserves of Latin America and the Caribbean in 2005 amounted to a rccord lcvel of almost US$255 billion, which is the cquivalcnt of 10% 01' regional GDP and 15.7% higher than in 2004 (we figurc V.9).All thc countries cxcept El Salvador rccordcd yearon-year growth in thc~rstock of international reserves. l'hc Dominican Republic posted the highest growth rate for reserves (130%). whilc Brazil and Mexico accounted for 50% of the region's reserve\ in abwlute terms.

Figure V.9

LATIN AMERICA AND THE CARIBBEAN: INTERNATIONAL RESERVES (Index-2000= 100 and m~llionsof dollars)

source: Economlc Conmss~on for Latr America and the Csr~bbean(ECLAC), on the bas~sof f~guresfrom the lnternatlonalMonetary Fund (IMF) Note The Latln Amer~canand Car~bbeanr e g m appears on the r~ght-handaxis

--m----4.

International bond issues

Despite the various bond buy-back operations, internationid markets recorded a high lcvel of bond issues in 2005 and during the first six months of 2006. A large number of prc-financing operations wcre carried oul in 2005 both to take advantage of low interest rates and in an effort to bypass elcction periods in 2006 that might heighten market volatility and drive up interest rates. in 2005, Latin American and Caribbean countries issued U S 4 6 billion in bonds (see figure V.4). Sovereign bonds accounted for 53% of that total. while corporate bonds and bank paper reprcsentcd 47%. The overall total was 26% higher than in 2004 and represents 29% of all emerging-cconomy issues. She region was outp:tcccl only by thc emerging econctmies of Europe, which accounted for 34% of the total. Meanwhile. Asian and PaciI'ic emcrging economies increased their share of total emerging-economy issues fin111 17% in 2004 to 27% in 2005.

l5

Sotnc Brazilian banks also carried out similar bond issuea

One trcnd observed in 2005 was thc use of international ~ssucsin local currencies. B r a ~ i lfloated its first rcaibdenominated issue on the international market Tor US$ l .S billion, which wac the largcst local-curi*cncyissue to be madc by any emerging-market issuer. These bonds have a 10-year maturity and a coupon ratc of 12.5%. The Government of Colombia and several Brazilian, Mexican and Peruvian companies issued bonds on the international market in local currency.15 These local-currency bond issues (includmg that or the Brazil~anGovernment)totalled around USs3.9 billion. Another widespread pattern in the rcgion was the lcngthcning ol'rnaturities (scc figure V. 10).Brazil reopencd its issuc of 2034 global bonds, issuing US$ S00 million in May w d the same amount in Novcrnber 2005. In 2006, Hriitil extended maturitics by issuing US$ I billion of 2037 global bonds in January (with a yicld of 7.56%) and

Economic Commissionfor Latin America and the Caribbean (ECLAC)

98

US$500 million in March (with a yield of 6.83%), both with a coupon rate of 7.125%. Peru also issucd a further US$ 500 million in 2025 global bonds for the same purpose. The first five months of the year saw other issues of long-maturity bonds by the Dominican Republic (21 years). Ecuador (9 years), El Salvador (29 years), Jamaica (30 years), Panama (20 years) and Uruguay (1 5 and 30 years). By the beginning of April 2006,70% 01' schcdulcd issues for the year had already been carried out, thereby covering the issuers against future riscs in intei-nittional interest rates. In addition to salcs of federal government bonds (BODENs) to the Bolivitrian Republic of Venezuela on a number of occasions during 2005, Argentina placcd a bond issue on the international market in March 2006 for the first time since the moratorium of Decernbcr 2001. This US$ 500 million issue o f 5-year Rnnar V bonds had a yield of 8.36% and carried a coupon rate of 7%. In May, a similar amount was issued at a somewhat lower yield (8.09%).

5.

millions of dollars)

Source: Econom~cCornm~ssionfor Latin Amer~caand the Caribbean (ECLAC), on t h e bass of figures from J P Morgan and Merrilf Lynch ,e,,o,,,a,,,n,r,,,,t,nt,,,,,,

,,,. ,,,,,

,,,

External debt to GDP ratio

In early January 2006, the International Monctary Fund (IMF) approved the Multilateral Debt Relicl' Initiative (MDRI) for countries covered by the Heavily Indebted Poor Countrics (HIPC) Initiative, which include Bolivia, Guyana, Honduras and Nicaragua. According to IMF data, debts existing prior to '5% amount l January 2005 that are eligible for f'or~ivcnt.. to US$23 1 million in the casc of Bolivia, US$45 million for Guyana, US$ 154 million for Honduras and (including remaining US$ 201 million for Nicarug~~ii assistance under the HIPC Initiative). This translates into reductions in the external public debt of 4.7% for Bolivia. 5.9% for Guyana, 3.5% for Honduras and 3.8% for Nicaragua.lh In March 2006, the World Bank approved financing and irnplemcntation dctiiils for its MDKl contribution, which is aimed at cancelling the debt of the 17 most indebted poor countries with the Intcmational Development Association (IDA) from 1 July 2006. Although the Inter-American Development Bank is not part of the MDRI Initiative, it announced that it would analysc thc feasibility of cancelling the debt it is owed by live of the region's countries (Bolivia, Guyana, Haiti, Honduras w d If'

Figure V 1 0 LATIN AMERICA AND THE CARIBBEAN: INTERNATIONAL BOND ISSUES (3-month moving averages - in years, percentages and

Nicaragua) and that the proposal would be discussed at the meeting of the Bank's Board of Govcmors in early April. However. no concrete measures have yct been implemented as a result of the meeting. Countries' external debt operations -in the form of policies for liability reduction, restructuring of debt profiles and borrowing requiscmcnts- brought down the ratio of external debt to GDP in Latin America and the Caribbean from 37%) in 2004 to 27% at the end of 2005. Not only is the region less dcpendent on external financing in general, but it has also succeeded in reducing its exchange risk by increasing its external issues of local-currency bonds. In 2005, 80% of the region's sovereign issues were dcnominitted in dollars, 10% in euros, 1 % in yeti and 9% in Brazilian reuis, Colombian pesos, Mcxican pesos, Peruvian soles and Swiss francs. The countries of the region have also increased their debts' maturity profiles and lowered thc cost of external dcbt by retiring short-term and more expensive bonds from the market.

Cornparison wilh the external public debt of thcsc countries as of Decemher 2005.

Economic Survey of Latm America and t h e Caribbean 2005-2006

Outlook for 2006 In 2005, internat~onalmurket conditions wcre a dcterrnining factor in achieving thc above-mcntioncd results. I n particular, cont~nuinglow interest ratcs, narrow interest rate spreads and excess liquidity werc associated with robust extcn~aldemand for raw ~natcrialscxported by the region. This pushed up prices of' thosc exports and gave a major boost to income. The historical serles ofthe rcgion's mterest rates spreads measured by the Emerging Markets Bond Index (EMBI+) reached its lowest level of2005 in September of that year, when it registered 280 basis points. At the begmning of 2006, sprciids trended downward, posting a record low of 199 basis pointh in April (sec figure V. 11). During 2006, however, the markct began to rcflect greater risk aversiol~in thc face of ~tsinginterest ratcs In the United States. In May, when inflation increased by more than expccted in the United States, financial markets cooled considerably (especially crnerging markets). This reflected the reaction of investors to expectatiorh of an intcrest rate hike and a rcsulting slowdown in world growth.

In May, Latin American stock markets a n d currencies contracted while intercst rate spreads as measured by EMBI+ expanded (see figures V. 12, V.13 and V. 14). 'Thc spread was 239 basis points in May and 235 basis points in June. There is uncertainty about how long this situation might continue and the potential consequences of adjusting to international disequilibria. However, thc niacroeconornic conditions in the region (particularly the primary surpluses, build-up of international rescrves and irnprc~ved debt profiles) suggest that thc region is now in a bettcr financial position to face a potential retreat of capital or global recession. Despite the increasc in risk premiums, the region's fundamcntals d o not seem to be under threat. as the corrections that were made mainly took place in thosc markets and currencies with the highest levels of appreciation. However, this does not mean the region is devoid of risk factors such as a lack of development in domestic financial markets.

Figure V 1 1 LATIN AMERICA: INTEREST RATE SPREADS, MEASURED BY EMBI* (Basis points)

Figure V 12 LATIN AMERICA: COUNTRY RISK AS MEASURED BY EMBI+ IN 2005 AND 2006 (Basis points)

Source: Econornlc Comm~sslonfor Latln Arner~caand the Car~bbean(ECLAC), on the basls of figures from J P Morgan

Source: Econom~cComm~ss~on for Latm Amerca and the Caribbean (ECLAC) on the bass of figures from J P. Morgan

Economic Commission for Latin America and the Caribbean (ECLAC)

Source: Economlc Commission for Latin Amerca and the Cartbbean (ECLAC). on the bass of ftgures from Bioomberg.

Source: Econom~cComm~sstonfor Latln Amer~caand the Caribbean (ECLAC). on the bas~sof figures from Bloomberg.

Box V.2 CAPITAL-ACCOUNT VOLATILITY AND CYCLICAL FLUCTUATIONS IN GDP IN LATIN AMERICAN COUNTRIES

In the economies of Latin America, fluctuations in economic activity and employment tend to be linked to external

analysis of the relationship between the cyclical components of GDP and of external financing, particularly from

constraints and insufficient financing, factors which have at various times

private sources.a Push factors and pull factors are therefore controlled for in the

brought about sharp adjustments in aggregate demand. Trad i t i o n a I Iy, a u t h o r s h a v e

estimates, and the causes of fluctuation in external financing are also considered. The authors conclude that the GDP of the United States and external financing

distinguished between two categories of determinants for capital inflows to emerging economies: pull factors (which relate to better investment opportunities

-as measured by the capital account to GDP ratio- were procyclical in relation to domestic GDP, while the domestic

is a non-balanced panel comprising 13 countries for which annual balance-ofpayments and national accounts data are available for the period 1983-2004: Argentina, the Bolivarian Republic of Venezuela, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru and Uruguay. The conclusions of the study are reached by estimating specifications from two equations. One seeks to explain the cyclical fluctuation of GDP and the other accounts for the volatility of the

in the countries receiving the flows) and push factors (external influences such as lower international interest rates

interest-rate gap was countercyclical. As for external financing, the real exchange rate, the United States interest rate

and slower growth in industrialized co unt ries) . The work of Budnevich and Le Fort

corrected by country risk (measured by the EMBI) and the domestic interest

capital account. Since the explanatory variables for both equations include the lagged dependent variable, estimates

rate were all countercyclical. The database used for this study

were prepared using the Arellano-Bond method.

on this subject contains an empirical

Source: Guillermo Le Fort and Carlos Budnevich, “Entendiendolas volatilidadesciclicas de la cuenta de capitales y del PIB: un estudio de panel para paises latinoamericanos”, Macroeconomia del desarrollo series, No. 42 (LC/L.2452-P), Santiago, Chile, Economic Commission for Latin America and the Caribbean (ECLAC), November 2005. United Nations publication, Sales No.S.05.II.G.198. a The authors used the Hodrick-Prescott filter to obtain the cyclical components or gaps.

Economic Survey of Latin America and the Caribbean 2005-2006

Chapter VI

The role of the real exchange rate and investment in export diversification in Latin America and the Caribbean

Introduction The region's unsatisfactory export pcil'nrn~ancehas long been a central thernc of ECLAC documents. Thc Commission's analysis indicates that the lack of buoyancy and high volatility

of the region's export earnings are linkcd to its cxport structure's excessive concentration in a s~nallnumher or natural-resource-intensive products cntailing a low levcl of processing.' This arialysis has led to the recommend:ition that the region should diversify its exports with a view to achieving a higher vduc-added structure with greatcr technological content. Such a structure would enable the region to sell morc dynamic products on the international market, which would in turn rcducc the volatility dexport carnings and have a greater impact cm CDP growth and cmploymnent.

'

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111the carly days of ECLAC. criticism of the limitations of cxport specialization hascd un natural resources ernphasi~edthe aspecr of world demand. which lended to worscn the tcrrns 01trade. Allhough that argutnent was no1 cotnpletcly ahanclnnccl. aubsequent criticism of exporl performance focused on thc lack of prrduction linkages within the spccializalion in natural rcsnurocs. Later ';M. ECLAC stressed that specializing in natural resources would no1 stimnlatc knowledge crealion in the samc way as l lie industrial scctor would. 111 reccnl years, the polential of a specializahn in mtural rcsourccs haa been asseshed more favourably.

Economic Commission for Latin America and the Caribbean (ECLAC)

Thcrc is a general consensus that most of thc rcgion's countsics have done little to diversify their export structure. The question arises as to why Latin America and the Caribbean have had so much dilTiculty in diversifying this structure during thc past 30 years. In ordcr to divcrsify iin economy's exports, it must be capable of producing ncw tradable goods and serviccs. This requircs thc appropriate technical conditions and economic incentives to be present at the same time. Although ECLAC has tended to emphasize onc aspect of the problem: thc lack of policies and mechanisms for technical capacity-building or compensation of rnarket failures that hamper the development of new skills. But these skills will not translate into regular goods production unless the right cconomic conditions prevail. This raises the question as to what has been happening with regard to capacity-building and the profitability of producing tradables in the rcgion over the last three decades. Individual countrics' performances have clearly varied, but the insufficient cxpansion of export production appears to be associated with a fcature common to most of the countries: macroeconornic instability that manifests itsclr as a condination of high inllation and sizeable variations in GDP growth. There seem to be two reasons for this. First, macroeconomic instability has rcduced the profitability of tradable goods as a result of highly volatilc rcal exchange rates, with prolongcd pcriods

of real appreciation being intersperscd with short-lived bouts of very steep real depreciation (usually caused by external shocks). Second, thc region's macrocconomic instability also conspired against increased investment in physical and human capital and thcrcfore against the expansion and divcrsification of the capacity to produce new goods. The aim ol'this chapter is to present search findings regarding thc dctcrminants of export diversification in the region."his rcsearch was undertakcn in order to analysc how the proportions of certain types of industrial exports haw been inl-luencedby thc following three variiibles (each of which has been affected by macroeconomic instability): thc lcvel of the real exchange rate; its variability; and investment in machinery and equipment. The countries analysed werc: Argentina, Barbados, Bolivarian Republic of Venezuelii, Bolivia, Brazil, Chile. Colombia, Costa Rica, Ecuador. El Salvador, Guatemala, Honduras, Jamaica, Mexico. Nicaragua. Panama, Paraguay. Peru, Trinidad and Tobago. and Uruguay. The following section reviews concepts and empirical litcraturc relating to the link between the production of tradablc goods and these thrcc viiriables (level of thc rcal exchange ratc, its volatility and investment).The third scction discusses somc stylized facts of export diversification, while the Sourth presents an econoriictric imalysis of panel data for thc cntire set of selected countries.

A. Determinants of export diversification Diversifying exports is about modifying an economy 'S pattern of specialization to produce new exportablc goods. This requires technical capacity and an appropriate level o f profitability. An economy's technical capacity to produce new cxportables depends on its endowments of human and natural resources and the stock of physical capital and knowlcdgc it has accumulated. These determinants have L

varying effccts on the developmcnt of an economy's technical production capacity.3In the short and medium terms, developing the capacity to produce tradable goods basically depends on the development of knowlcdgc and the growth of physical capital stocks. which in tum determinc factor productivity. The profitability of producing exportable goods compared with the rest of the economy depends on the

Robcrto Iglesias. "El nd del tipcl de camb~orcal y la inversiiln en la diversificacion dc exporlaciones en Ankrica Latina y el Caribe". Mrrc~roer~or~oto del desurm~lloseric.\. No. 43 (LCL.2460-P). Santiago, Chile, Economic Commission for L a h America and thc Caribbean (ECLAC), December 2005. Although the quantity and quality of natural rcsources in an economy cannot bc taken as givens, they chnngc very gradually as a function of thc stock of knowledge and capital that is accumulated. Increased knowledge, whether generated at home or abroad, Inay make it possible to expand an economy's resourcc cndowment and use il more efficiently (World Bank. Fro111Nrrnrrd Ik~sowresIO the K ~ ~ o w l e c fL~wtrotiry: ,~y T t - d e ur~rlJob Q u a l i n Washington. D.C.. 2002).

Economic Survey of Latin America and the Caribbean 2005-2006

level of the real cxchange ratc and its volatility. Real, g r d u a l and sustained devaluarions appear to have been a fundamental factor in the diversification of the export supply by highly successf~~l exporters (particularly in the case of Asian c o u n t t i ~ s ) . ~ Real exchange-rate volatility mllucnces the projccted profit ratio\ of projects focusing on thc expansion of exportable production, as ~tgcnerates uncertainty about futurc income \trcams and profits and increases the level of risk. In addition, the supply of such goods may take comc time to rcspond to rcal devaluations or may be inhibited from doing so. This is why rcal exchange-ratc

volatility is particularly detrimental for economics sccking to diversify their supply of tradable goods. lnvcstmcnt and the rcal exchangc ratc's level and degree of volatility are thus thrce fundament:il variables influencing thc characteristics of an economy's export supply. Three main issues to be considered in this rcgard are: thc relationship between the real cxchange rate and changcs in an economy's supply of exportables; the role of exchange-rate volatility in inhibiting thc diversification of export pi*oduction;and thc way in which this volatility and macrocconomic instability influence the level of investment in tradables.

Real devaluation as an instrument for the diversification of production There arc at least two ways in which real devaluations can havc a positive effect on an economy's supply of export goods. First, they may increase profitability levels and, as a result, stimulate production of existing export goods and create incentives for thc emergence of new tradablc activities. Second, as real devaluatioris encourage and expand the pruduction of existing and new tradables, they opcn up opportunities for achicving econon~icsof scale and new knowledge in thc scctors involvccl. This may enable thcsc sectors to rcach international productivity standards and thus pcnnanently transform thc country's pattcm of ~ ~ e c i a l i ~ a t i o n , ~

"he

(a) The impact of devaluations on the profitability of exportable goods In order for tradable goods to rcspond positively to devaluiitions, changes in the relative priccs of tradables and non-trudablcs must be such as to raise the profitability of the formcr." Whether this occurs o r not will be determined by how the devaluation affects exporters' earnings and costs. Thc reglon used to be reluctant to consider r e d dcvaluation as a mcans of expanding tradable pnduction for two reasons. First, the high inflation that prevailed

According to Aposin and Tussie. most countrics that achieved stcady export growth maintained exchangc rates that were attractive to their exportcrs ("An overvicw". T ~ w l ulid t ~ i3,vcvrl.r. NW Di1~1m)ttlxIYI n u d e Po1it.j: NCWYork, St. Martin's Press, 1993). ?'hese exchange rarcs also tcnded ~oremain stable, thereby cnabling tradable-goods producers to lnake long-terrn invcstments. Rodrik discusses the roles of the real exchange rate and investment in the expansion and divcrsificadon of exports in Soutl~-EastAsia (D. Rodrik, "Cictting interventions right: how South Korea and Taiwan grew rich". NRER Workirr~I'cq~rix.No. 4964, 1984; and "Tmdc strategy, investmcnt and exports: anotI1e1-look at East Asia", NRER Workitig Pupe~~c. No. 5339. 1985). Krugman (1987) analyses the dynamic process of production specialitation that can be trlggcred by a rcal devaluation within an economy. P. Krugman, "The narrow tnoving band, the Dutch disease, and thc competitive consequences 01- Mrs. Thatcher: notes on trade in Ihe presence ol' dynamic scale economics". Jnlci-11u1I ! J ' D P V P I O ~ IhP~Ji~~~o t t t i cvol. . ~ ,27, 1987. dura~ionofa real devaluation depends on how long it takes thc real exchange ratc to relurn lo its purchasing power parity (PPPconvergencc). Recent evidence (liompcriods of llexihle cxchange rates and low inflation in dcvcloped countries) shows that this convergence process may he very slow, and dotncstic mechanisms to adjust prices in accordance with nominal valuation may vary greatly.

Economic Commission for Latin America and the Caribbean (ECLAC)

in most of thc region's countrics provided limited and fleeting opportunities for a reiil dcvaluation. Second, during the import-substitution industrialization (ISI) phase, real devaluations had ambivalent effects on the profitability of firms that sold a large proportion of thcir goods on the domestic market and whose cost structures wcrc strongly influenced by the cost of imported inputs and of servicing foreign-currency debts. The problcms that impcdcd devaluations wcrc not limited to the difficulty of altering relative prices in a context of high or chronic inflation. The rcgion also faced stumbling blocks in its attempts to expand its supply of exportablcs. The factors that hindered or restricted the expansion of export supply following a d e ~ a l u a t i o n , ~ particularly in the short run, included the low short-term elasticity of thc export supply of certain natural-rcsourceintensive goods and the lower profitability and tighter liquidity constraints faccd by export companics following devaluations. Thesc increased liquidity constraints were the result of the devaluation-induucd decrease in domestic demand, higher prices for imported inputs, reduced extcrnal financing and tightcr monetary conditions within each of thc affected nritional cconomies. In short, the pessimistic view of how the supply of exportables would react to real devaluahons was associated with two phenomena that were common in the region up until the 1990s: high inflation and a lower profit ratio for many manufacturing companies owing to thcir cost structures and the liquidity constraints iissociated with dcvaluations. Under thcsc circumstances, real devaluations were short-lived or small in scale iind tended to depress profitability and increase insolvency rates, with the rcsult that the supply of exportables expanded very little. (b) The dynamic effects of real devaluations

A dcvaluation of thc real exchange ratc pushes up external demand for a country's tradablc goods, which crcatcs opportunities h r expanding thc production of

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existing exports as well as for producing and exporting new goods. This can incrcasc the economy's productivity in the short term or procyclically for a variety of reasons, including the emergence of economies of scale, increased utilization of factors of production and the effccts of "learning by doing". According to Krugmitn ( 1987). real devaluations clin have lasting effects on an cconomy's relative productivity and its pattern o f spccialization. Exchange-rate policy can pave the way for thc cmcrgence of new production sectors, and experience and knowlcdgc in these activities can thus bc accumulated. In his modcl, a given sector's factor productivity depends on its cumulativc production experience, both nationally and abrod. Relativc productivity v i s - h i s the rest ofthc world therefore rises in those sectors that gain expcricncc through producing. Dynamic scale economics resulting from the production process bring down costs and allow for new arcas of specialization. According to this model, a new sector that has emerged thanks to this kind of exchange-rate policy's iipplication will produce goods at increasingly lower costs thanks to the productivity gains it will realize as it accumulates morc production experience, thus consolidating a new specialization pattcm8 Krugman describes somc limitations on the possibilities for diversification based on cxchange-rate policies. First, the increase in the numbcr of sectors will lead to more employment and thus to higher wages. This will limit diversificiition, since very large productivity gains will be rcyuircd to make a new sector profitable. He thereforc suggests that real devaluations may produce a greater changc in comparative advantages for countries with rclatively large labour forces or rclatively low wage levels. "Although knowledge- and expericnce-based speciiilization does not depend on the initial relative resource cndnwment, Krugman concludes that this endowment does affect factor remuneration and places a limit on the expansion of production opportunities.I0 Second, the size of the domcstic market also makes a

There is a considerable amount of litcrature on the effects of devaluation on production. relative prices and exports in the region. firnpirical suidies that cover more than onc country include: R.N. Cooper, "An assessment of currcncy devaluation in developing countries". Covr~-rzr~rr~rr arrdfiurrronric D ~ ~ ~ l o p n i Gustav r r ~ r . Ranis (cd.). New Haven. Yalc Univcrsity Press, 1971:and S. Edwards. Ke~ilExC11lcrii~eRutrs, Dvvdlruriwi andAdjusrnwnt: t.xc~/iori#rRurr Polir:~iri Lkvrlijpirrg ('ourrrries. Cambridge, MIT Press. 1989. For a more h.vetical cliscussion of the impact of devaluation. scc W.M. Corden, Ir!flutiori. Exc:hurqt, RUILYL I I the ~ WorM Ecotiowi~;Lel.t~rrrsorr Irrt~r~~~at~ornrl Morwrrrry E~-onmnricxOxlbrd. Clarendon Press, 1985: C.F. Diaz Alejandro. "A nole on lhe impact of devalua~iunand distrihutivc effect". Jourriul rlJ Aj1irir:ul Ewnowiy v o . 71. 1963; P. Krugtnan and L. Taylor, "Contractionary effects of devaluation", Jourrirrl rf Iii~rrnaririr~i~l Ecoriomii~~, vol. X , 1978: and. P R Agenor and P Monticl. D P ~ P I O I ~ JM ~ Iu~~P~IlI~I oI ~ c o l l ~ Princeton n i i i ~ ~ sUniversity ~ Press. 1996. The relative productivity 01- the ncw production proccss vis-a-vis the rest 01- the world will increase in line with thc accumulation i l l experience. Countries with high wages m y find it din'icult to find sectors in which a rise in productivity would sufticc to achieve a relative cost advantagc. Relatively large ctmntries or those with morc rcsources (in terms of labour) tend to have greater production cxpcrience and relativc productivity vis-a-vis countries with fewer resources. since a larger workforcc may be able to produce a higher number of goods.

Economic Survey of Latin America and the Caribbean 2005-2006

difference in terms of diversification. In small countries that do not have large enough domestic markets to permit production to expand. cxchange-rate policy may not succeed in speeding up productivity growth sufficiently to achieve cornparativc advantages for that sector. Clearly, increases in the potential profitability ol exportable goods brought about by rcal devaluations do not autoniatically creatc capacity for producing new varieties of goods. It is plausible to think, however, that increased profitability would encourage ncw or existing entrepreneurs to creatc that capacity by investing In research, imitating other countries, purchasing technology and training the labour force. Yet the lcarning experience is basically limited because imitating and applying existing technologies may not be a lineiiiAor automatic process. Cimoli (l 992)" stresses that, following a real devaluation, the possibility of diversifying thc supply of tradable goodc and changing an economy's pattern of specialization in rclntion to its trading partners will depend on the technological gap betwccn them. This technologrcal gap has two elcrnents: imitation (bascd on technological asymmetrics between the country and the rest OS the world) and innovation.

According to Cimoli, an economy with no innovation capacity can diversify its export structure only by using its imitation capacity to produce goods bascd on consolidated technologies. This capacity may be relatively low, however, duc to considerable technological ;isymmctries in relation to the rest of the world that entail differences in production coefficients and in product characteristics and performance. Cimoli emphasizes that, when faced with a rcal devaluation. an economy with major technologicnl asynlmetrics in relation to its main trading partners can do not more than to use its imitation capacity to begin to produce a limited range of products using the best available technology, thereby accomplishing little in terms of narrowing the technological gap separating it Srom the rest of thc world. Keal devaluations generate opportunities f o r diversification, but low technology-absorption and imitation capacities may limit the possibilities of taking advantage of them. This may have been the casc for many Littin American economies in the past. Thc failure of exportables production to respond to a real devaluation may itlso have been linked to thc region's very low levels of productive and tcchnological dcvelopmcnt.

Volatility of the real exchange rate and the reaction of exportable supply To analyse thc role of that volatility in rcal exchange ratcs plays in trade flows, it must be remembered that winning over or penetrating an cxternal markct has high costs stemming Srom the production, investment and marketing dccisions inhcrcnt in such a strategy. These decisions includc: (i) Extending production capacity; (ii) Acquiring knowledge and tcchnology to adapt products and production processes to the foreign market so that high-quality goods can bc offercd at competitive prices; and

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(iii) Incurring the expenses involved in developing a distribution and marketing network. " Krugman (1989)'htates that investment aimed at winning entry iljto a foreign markct is. to some extent, irrcversiblc, since it involvcs sunk costs for the company concerned. Once the cornpany has invested in the product and in developing a foreign clientele (which involvcs a high proportion ol'intangible assets relating to the acquisition ofknowledge about external markets), it will be difficult for it to sell or liquidate the venture (or it can do so only at it price far bclow thc investment valuc).

M. Cirnoli. "Exchange rate irnd produclive structure in a technological gap model'., Eiwrori~ic.N o r ~ svol. , 21. Monte dei Pasctii cii Siena. 1992. Investment aimed at adapting proclucts and developing distribution and muheting networks has similar characteristics to investtncnl in and the outcome is extrcnlely uncertain, givcn the cultural distance hetwcen the technology. This kind v t inveslrnent is knowledge-~ntc~~sive, ciomestic producer and the external niarkct. As in the case for teolinology, those who invest to cnier an external market cannor appropriale all the benefits. as their knowledge generates positivc spillover effects for other exporters. Consequently, prlvate investment levels are lower than what w o ~ ~ be l d socially desirable. The volatility of [lie real exchange rate may reint'orce this situation. P.Krugman. L k h m r p - K o w h~.rridAtvCamhridgc. MIT Press. 19W .

Economic Commission for Latin America and the Caribbean (ECLAC)

As a result of the high costa of cntcring external markets, exportable supply displays atypical reactions to movcrncnts in the real exchange rate. For instancc, smiill movements in the real cxchange rate may not be sufficient to encourage a potential exporter to enter the cxtcrnal market if the resulting changc in profitability will not offset the cntry costs. According to Krugman, potcntial exporters' tendency to refrain from reacting to real dcvaluations is accentuated when the devaluation is expected to be temporaly. When thc post-devaluation lcvcl of the real exchange rate is expected to be temporary. potcntial exporters who benefit from the higher real exchmgc rate will wait before investing in order to avoid losing profitability if the riitc returns to its pre-devaluation level. Thus, in a context OS high entry costs, if'rcal devaluations are temporary or if real exchange ratcs are extremely volatile, potential exporters of non-traditional products may refrain from entering external markets altogether and traditional exporters may decide not to expand into any new markets.

The fact that most Latin American countries had expcricnccd a rapid reversal of real devaluations must have contributed to the perception that such dcvaluations were likely to be short-lived. This perception and the existence of market entry w d exit costs, discouraged potential expclrtcrs from entering cxtcrnal markets. These factors no doubt contributed to the forces that reduced the diversification of the region's supply of exportable goods. Exporters' tendency to wait bcrore entering or leaving an cxtcrnal market may grow stronger as real exchange rates bccomc more volatile. For Krugman, the higher the volatility of the real excha~lgerate. the greater a difference there will have to be between entry costs and expected camings in order for exporters to enter the market. In this context. there is more of an incentive to wait and avoid incuming such costs, as corporate decision-makcrs know that they can wait and carry out the invcstment at a substantially higher real exchange rate or avoid significant losses in the event of an appreciation of the real exchange rate.

Devaluation of the real exchange rate, macroeconomic instability and investment in exportable goods Rodrik (1995)'~ suggests that investment was a key factor in building export capacity in Asian countries. Compared with Asia, there is a much lower rate of investmcnt in Latin Amcrica and the Caribbean. The region's macrocconomic instability and volatile real exchange rates may have bcen partly responsible for dampening the level of invcstment in thc production o f tradable goods and conscqucntly for reducing the region's possibilities of divcrsifying its exports. According to the theory of investment undcr uncertainty and irreversibilitics, the volatility of future invcstment returns may delay the decision to invest." When macroeconomic volatility is chronic, as in Latin Arncrica, this can end up reducing the economies' level of investment.

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(a) High inflation and investment High inflation tcnds to be linked with variability in relative price^.'^ This affects long-term corporate decisions, as it increases the complexity of contracts and the frequency of negotiations while reducing the timeframes for planning. Companies avoid long-term commitmcnts that would saddle them with a set of relativc priccs that could become detrimental to their profitability. Tomrnasi (1994) studics how the instability of relative prices and reduced incentives to seek price information arc related to thc establishment of inefficient equilibria in the economic systcm.17In particular, his analysis emphasizes that high relative price variability can increasc thc risks

D. Rodrik, "Tradc strategy, investment and cxports: another look at East Asia". NU611 Wor.kitl,q TJupt.rs,No. 3339, 1995. A. Carruth, A. Dickcrson and A. Henley. "What do we know about investrr~a~t undcr unccnainty?', Jour11ul r!fErwio~~irS~rvrw,vol. 14, 2(XK,. According to J. Temple, recent empirical evidence indicatcs that the variability of relative prices increascs with inflation and that bariability seems to he associatcd with unltnticipaled conlponents of infla~ion.Relative price variations caused by inflation appear to intluencc rcsource vol. 14. 2000). allocation ("Inflation and growth: stories short and tall", Jour71ol r$Ernrlonti~ S~tn~eys, M. Tommasi, "The consequences of price instability on search markets: toward understanding the effects of inflation", AIIIPI.~(.II)I E~:OIIOIII~C. Rrvirw: vol. 84. 1994.

Economic Survey of Latin America a n d the Caribbean

2005-2006

that Sirms face when introducing a new tcclinology, as it heightens the probability of gcnerating inefficient relations with the suppliers of the technology or of that technology bccon~ingunprofitable in thc event of changcs in relative prices. For all of these rcasons, macroeconomic instability may have exerted a ncgttivc effect on aggregate investnient and the introduction oS new technologies in the countries of the region. As discussed below, volatility and thc diffioultics involvcd in sustaining iwtl dcvaluiitions may have had a particular impact on investment in exportable goods.

(b) Real devaluations and investment In the short term, real devaluations boost profitability and the external dcmand for the production of cxportablcs. These two factors mity thcn encourage decisions to expand production capacity i n those scctors. Howevcl; thc positive cffects on protitability and external dcmand may be offset by a series of factors that can accompany clevaluations, such as higher prices for irnportcd equipment, external financing constraints, tightening of domestic credit terms and conditions, lowcr domestic demand for expel-table goods and changes in thc assct portfolios of export producers. These factors have a stronger impact in the short run and may taper off over the medium term, but, as noted earlier, the region hits found it difficult to maintain real deviiluations and the cosresponding profit incentives for thc production of cxportables. Burstcin, Neves and Kebelo (2004) show that nominal devaluations have a greater impact on the prices of imported capital goods than on other products, such as consumer goods." In developing countries, a high proportion o f machinciy and equipment is imported. A real dcvaluation may therefore increase investment costs and hitve an adverse effect on investment dynamics and technological modcrnization projects. The uxpansion of investmcnt in tradables may suffer Srom the financial constraints associated with devaluation. Devaluations in the region usually occur in response to an external financing crisis, but they do not immediately solve those crises. The shortagc of external finiincing in the immediate aftermath of a devaluation hinders the importation of the machinery and equipment that are so

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Important for investment in tradable goods. In addition, devaluations may worsen local companies' financial position by puhhing up its leveriige ratio. Deteriorating solvency ind~catorsand the lower vitluc of Soreign-currency assets make it more diflicult for them to gain access to credit and external financing in the wiikc of a devaluation. Financial surpluses and self-financmg resources shrink as a result ofthe incrcased debt-servicing burden relative to cash Slow, thereby he~ghteningthe financial constraints on investmenl. Devaluntion also produces a tightening of domestic credit terms. This is the result of two sets of Sactors. First, dcvaluittion quickens the pacc of intlarion, which obliges the monetary authorities to tighten monetary policy. Second, the domcstic financial system's crcdit supply suffers bccause of the reduced quantity and highcr cost of external resources and from the rise in thc system's default rate. which in turn leads to wider sprcads and higher interest rates on loans. Weaker domestic dernatid Sor exportable goods is the result of changes in relative prices and falling real domestic expcnditure (due to higher inflatinn and its various effccts on spending capacity) and lower rcal wages. This weakening o f domeslic demand may make it possible to meet external demand without expanding production capacity in the short term. Such negativc effccts on investment may, as noted carlier, fade over the medium term. External demand and the recovery of domestic demand, combined with the increased financial resources provided by the boom in exports, may make it possiblc to take advantagc of idle capacity and overcome Sinancing constraints. For exportables production itnd investment to rcniain attractive, howcver, the real devaluation must be maintained over time. To achicve this, inflation must be controlled so that relative prices can shift in hvour of tradable goods."'~his ensures an appropriate incentive system for thc export sector which pavcs the way for the expansion of exports and investment in tradable In the past, Latin American economies found it difl'icult to maintain real devaluations and to generate a virtuous circle of export expansion, a reduction in the constraints affecting invcstment in tradablcs and an increase in production capacity. l l i e erratic perform~tnceof the rcal

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"Invcsiment prices and exchange rates: some basic facts". NREX W o r k b i ~h p e r s . No. 10238. 2004. Tlris would not he a valid statement il iradahle-goods companies' sales were made up entirely ofexporls prior to the devaluation. The followin: nwsureh must he taken in order to avert a devaluation's intlalionary impact in rclaiivcly stable econcmies: control of aggregate expenditure, openness and productivity-based norninal wage hikes. Another effect of a policy of controlling expcnditure and real wages is to guide production towards exports as a way ol'compensatin:: for the reducticm in domestic demand, thereby changing the economy's aggrega[e dcrnand sttucture by incrcasir~gthc proporlion of external demand in the medium tcrm. Rccent experierices in the region's largcst economies indicate that macroeconomic stiability has made it possible to maintain real devaluations.

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Economic Commissionfor Latin America and the Caribbean (ECLAC)

exchange rate generated highly variable patterns in the production of exportables and inhibited the investment reflex of' tradables produccrs. The volatility of rcal cxchange rates contributed to the limited diversification of exportable production in the rcgion by reducing the dcmand and profitability expectations for investments in tradable goods. The impact of such volatility dcpcnds on several factors, including investors' attitude toward risk and the costs of adjusting invcstments in the event of changes in demand and profitability. Depending on the hypotheses formulated in regard to these factors, the relationship between volatility and investment can be negative or positive. Theoretical predictions regarding this relationship can therefore be ambivalent. Carruth, Dickerson and Hcnlcy (2000) assert that the literature focusing on the irreversible nature of

investmcnt indicates that greater volatility in real exchangc rates can cause investment decisions to be delayed and can lead to a drop in the current lcvcl of investment even among risk-neutral investors. This is the result of the notion that :i decision to invest is tantamount to a "perpetual call option". Tncreascd uncertainty -i.e., an increase in the variance of the distribution of future returns- raibes thc value of the option represented by the postponement of thc decision to invest. In addition, the irreversibility of investment projects may give rise to asymmetrical adjustment costs if volatility generates change\ in demand and profitability conditions, and these costs may be greater in the case of a contraction than an expansion. This leads to the postponcmenr of investment decisions at certain price intervals, but it does not necessarily create a negatlve relationship bctween volatility and investment.

B. Observations on export diversification in the region According to the line of thought traditionally espoused by ECLAC, diversificationis about more than merely reducing the export concentration index. Although the Commission now acknowledges that reducing the concentration index of' total exports is important fbr income stability and the growth rate of export value, the diversification of cxports is seen as the result of a country's industrialization as it moves from exporting a high proportion of primary goods and derivatives to selling more manufwtured goods with a higher technology content. The indicators used in the empirical analysis were sclccted on the basis of those that would best represent what ECLAC mcans by diversification. For the most part, these indicators are composed of' export ratios or the proportions of total exports represented by certain types of industrial goods." "e ratio that best rcpresents diversification as defined by ECLAC is exports of durables and dillusers of technical progress over total exports (XDDTPJXT). ECLAC regards thcse goods as having the dynamism and the high technological content necessary for the rapid growth of export valuc and of production linkages with the rest of the world economy.

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The XDDTPIXT ratio may dif'fcr by destination market. For each country in the samplc, the XDDTPI XT ratios wcrc therefore established for exports to: (i) all Latin American and Caribbean countries, (ii) United States and (iii) the rest of the world. For South American countries. the United States wab considered as part of the "rest of the world". For Central America and the Caribbean, the "rest of the world" excluded the United States and the entire Latin American and Caribbean market. South Americiin exports of durables and diffusers of technical progrcss to Latin American markets may be favoured by trade preferences, so Latin America has also been excluded from the "rest of'thc world" category, The most objectivc diversification variable is therefore the XDDTPIXT ratio of sales to the rest of the world. Table VI. 1 shows the XDDTPIXT ratio of salcs to the rest of the world by country and some weighted averages. The ratio for thc sample as a whole went from 2.8% in 1970-1979to 14.4% in 2000-2003. This result is largely attributable to Mexico, which has accounted for a large share of the region's total exports (especially since the 1990s) and which has an atypical trading pattern in

These proportions wcrc obtained by gronping exports by intended use on the basis of the Standard International Trade Classification (SITC Rev.]) liom the Unitcd Nations COMTRADE databasc (1970-2003). The catqory of traditional industrial goods is made up of two groups: I'oodstuffs. beverages and tobacco, arid otllcr traditional products. Non-traditional goods correspond to natural-resource-it~tensive products with high economies of scale, durables and diffusers ol' technical progress.

Economic Survey of Latin America and the Caribbean 2005-2006

Table VI.1 EXPORTS OF DURABLES AND DIFFUSERS OF TECHNICAL PROGRESS AS A PERCENTAGE OF TOTAL EXPORTS TO THE REST OF WORLD P(DDTP/XT), SELECTED PERIODS

Argentma Barbados Bol~via Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Jamaica

Mexico Nicaragua Panama Paraguay Peru Trinidad and Tobago Uruguay Venezuela (Bol~varianRep. of) We~ghtedaverage, Latin America and the Caribbean Weighted average without Mexico Weighted average without Mexeo, Brazil and Argentina

1970-1979

1980-l989

1990-l 999

2000-2003

2.45 4.96 0.05 7.17 0.44 0.46 0.58 0.12 0.40 0.05 0.00 0.36 8.78 0.30 0 42 0.01 0.21 0.89 0 00 0.14 2.75 2.55 0.24

3.46 13.80 0.06 14.62 0.85 0.50 1.02 0.05 0.28 0.09 0.01 0.25 5.79 0.02 0.54 0.02 0.73 2.22 0.81 0.46 6.35 6.41 0.56

4.36 12.18 8.24 16.00 0.81 0.80 18.27 0.23 1.35 0.45 1.19 0.08 36.21 6.50 0.93 0.33 0.81 4.24 1.58 112 9.86 7.35 1.45

5.35 14.01 12.81 21.98 0.93 1.49 50.60 0.78 6.01 0.80 0.80 0.09 49.52 0.77 0.26 0.58 1.24 1.33 2.17 1.32 14.39 10.62 2.63

Absolute difference (2000-20031 1970-1979)

2.91 9.05 12.75 14.81 0.49 1.03 50.02 0.66 5.61 0.75 0.80 -0.27 40.73 0.47 -0.16 0.58 1.03 0.44 2.17 1.18 11.65 8.07 2 39

Annual average growth rate

(1971-2003) 2.8 4.5 17.9 8.0 2.7 7.1 17.1 15.3 10.4 8.1 20.3 -5.7

6.2 -16.0 10.0 29.0 11.4 -0.7 8.9 4.3

Source: Econornc Cornm~ssionfor Latm Arnertca and tne Car~bbean(ECLAC), on the bass of United Nations, Cornmodlty Trade Database (COMTRADE).

regional terms. Excluding Mexico, the weighted average remained almost unchanged in the 1970siind 1980s - when Mexico accounted for a smaller share of the region's cxports- but fell to 10.6% in 2000-2003 (almost four perccntage points less than the regional averiige includirig Mexico). Regional averages are heavily jnnuenced by the perfoimiince of Brazil and Argentina, which, together with Mexico, are the region's largest economies and often turn display atypical patterns. Excluding these countries, the average XDDTPIXT ratio o f the remaining countries was 0.24% in 1970- 1979 and 2.6% in 200-2003 (almost 12 pexccntage points less than the average for thc sample as a whole). What follows is an attempt to associate the XDDTPI XT ratio Ior exports t o the rest of the world with possible detcrminants. Figurc Vi. 1 relates average annual rates of variation in the rcal exchange ratc to changes in thc XDDTPIXT ratio in sales to the rest of the world in 197 1-2003. As expected, there is a positive association between the riite of variation in the XDDTPIXTratio in sales to the rest of world and the rates of variation in real exchange rates in the countries analysed for the sample. Atypical perl-imnancesin the fitted line were found in the cases of Chile and Mexico, whose XDDTPIXT ratios expandcd less than expected given their economies' real devaluation

Figure VI.l AVERAGE ANNUAL RATES OF VARIATION IN THE PROPORTION OF EXPORTS OF DURABLES AND DIFFUSERS OF TECHNICAL PROGRESS RELATIVE TO TOTAL EXPORTS TO THE REST OF WORLD AND IN THE REAL EXCHANGE RATE (Averages, 1971-2003)

Source: Econom~cCornmlss~onfor Latln Amer~caand the Caribbean (ECLAC).on the basls of Un~tedNat~ons.Comrnodtty Trade Database (COMTRADE).

rates, and in those of Honduras, Peru and El Salvador, where exports of durables and diffusers of technical progress as a perccntage of total cxports cxpanded morc than cxpected given thcir rcal dcvaluatlons. F~gureV1.2 dcpicts a negative relation between thc average wnual volatility o f the real cxchange rate and the growth rate of the XDDTPlXT ratio. The fitted line

Economic Commission for Latin America and the Caribbean (ECLAC)

appears to undcrcstimau:the perfornmce of low-volatility countries such as Bolivia, Costa Rica. Honduras and Paraguay. Inports of capital goods are a crucial part of investment in the production of tradablc goods. Figurc VI.3 shows the relationship between thc avcragc growth of capital goods imports and the variation in XDDTPIXT for each country in the sample.

The calculations yicld a positive relationship between the two variablcs. Costa Rica, Paraguiiy, Honduras and Bolivia rcgistcrcd a high v,ariation in XDDTPIXT compared with thc ratcs ofcxpansion of their capital goods imports. By contrast, imports of capital goods rose substantially in some countries that did succeed in increase the XDDTPIXT ratio very much (Argentina, Chile, Jamaica, Nicaragua, and Trinidad and Tobago).

Figure V1.2 ANNUAL GROWTH RATE OF THE PROPORTION OF EXPORTS OF DURABLES AND DIFFUSERS OF TECHNICAL PROGRESS RELATIVE TO TOTAL EXPORTS TO THE REST OF WORLD (XDDTPMT) AND ANNUAL VOLATILITY OF THE REAL EXCHANGE RATE (Averages, 1971-2003)

Figure V1.3 ANNUAL GROWTH RATE OF THE PROPORTION OF EXPORTS OF DURABLES AND DIFFUSERS OF TECHNICAL PROGRESS RELATIVE T0 f OTAL EXPORTS T0 THE REST OF WORLD (XDDTPMT) AND REAL IMPORTS OF CAPITAL GOODS (Averages, 1971-2003)

Source: Econom~cComm~ssonfor Latin America and the Caribbean (ECLAC), on the basis of Un~tedNatbns, Commodity Trade Database (COMTRADE).

Source: Econom~cC O ~ ~ ! S S forI O Latm ~ America and the Caribbean (ECLAC), on the bass of United Nations. Commodity Trade Database (COMTRADE).

C. Econometric analysis of the determinants of export diversification To assess the determinants of export diversification, thc following equation was estimated using pancl data:

where EXP,, is the export diversitication variable; X(, corresponds to a vector that contains thc variablcs: rcal exchange rate, real exchangc raw volatility, investment, productivity and world demand; cl is the fixed effect of each country; and U,, is the random error. The diversification variable considcrcd was thc ratio of cxports of durables and diffusers of technical

progress to total exports (XDDTPIXT) for sales to the rest ofthe world. On the basis that sales to certain markets bcnefit from economic complementarity and integration agreements, the variable excludes Latin American and Caribbean markets for all countries in the sample and also excludes sales to North Amer~cafor Mexico. Central America and the Caribbean countries. Sales to the "rest of thc world" arc a better reflection of the determining influence of thc sclccted cconomic variablcs on salcs of durablcs and diffusers of tcchnical progrcss. The choice of the ratio of exports of durables iind diffusers of technical progress to total exports (XDDTPI

Economic Survey of Latin America and the Caribbean 2005-2006

XT) as an indicator ofdiversitication should be explained. This choice docs not imply that this is the only, best or most reprcsentative indicator ofthe cxport diversification process. Nor does it imply it rejection of other cxport diversification options such as those implemented by some Latin American countries. 'The ratio in question simply happens to be thc proxy that best represents the ECLAC tenet that diversification is tantamount to increasing the proportion of products with the highest valuc added, the greatest technological content and, thcreforc, the least natural-resource content. Usually, empirical analyscs ol' divcrsification includu structural variahlcs or variables representing factor cndowmcnts. In this case, invcstnlent (and, more specifically, imports of machinery and equiptnent) may be considered a proxy for changes in an cconomy's production capacity that can be used to gain a greater understanding nfthc XDDTPJXT relationship. However, this is clearly insufficient. The accumulation of knowledge is also rellectccl in changes in production capacity and is even more important in terms o f producing complex or hightechnology goods. There is thus a need Ibr an indicator of an economy's level of ktiowledgc or knowledge-related production capacity. Labour productivity or thc levcl of schooling of the labour forcc are two proxics uscd in the literature to capture the impact of knowledge on production capacity.

This study did not use reprcsentative data 017 education, as not all countries had such data available for the 1970s. The problem with using enrolment rates includes the fact that, for durables and diffusers of tcchnical progress, university cnrolmcnt would have to be considered in addition to primary enrolment. Thc decision was therefore taken to use a labour p~mductivityindex, based on the average output per worker in the countrics concernccl. Labour productivity, thus dcl'ined, rose during the 1970s but then subsequently slowed or remained constant. As a result, the productivity levcls of most of the sample countries declined relative to those c f the Organisation for Economic Co-operation and Development (OECD). This variable was calculated on the basis of two different definitions: absolute productivity and productivity as compared to the average of the seven main OECD economies. Thc results were not significant and had a negative sign. The dynamic panel data partly resolves the problem of the role of factor endowment, as XDDTPIXT in period t is thc result of that ratio in t-l, of the level and volatility of thc real exchange rate and of investment in machinery and cquipment in t. The lagged dcpendcnt variable captures production capacity and profitability detcrminants up until t-l. Bctwecn t-l and t. the structure of the economy undergoes few changes, and XDDTPIXT shifts according to variations in economy's profitability and stock of machinery and equipment.

The data The ratio of exports of durables and diffusers of tcchnical progress to total exports (XDDTPIXT) was calculated on the basis of the product classification used in the United Nations COMTRADE database. In selecting the country samplc, priority was given to thc availability of data over time.?" Each country's rcal effective exchange rate was calculated using the weighted geometrical mean of the exchange rate with each of that country '\ trading partners, weighted by each yeary\export s t r ~ ~ c t u r e . ~ ~ The volatility of the rcal exchangc rate was calculated as thc standard deviation of thc first difference of the natural logarithm of the real effective exchange rate. The

""

other two options cons~dercdfor measuring the volatility of the rcal exchangc rate were the I2 months of'the year in question and a total o f 3 6 months (the previous, current and following ycars). As explained in section B, investment in tradable goods has a large component of rnachlnery and cquipment. In most (IS the r e p n ' s countrics, imported equipment plays an important role in domestic investment, glvcn the existing shortcomings in the countries' domestic production of capital goods. Imports of capital goods were therefore considered to be ii proxy for investment In machinery and cquipn~ent.'~ The following two options for representing the

The Dominican Republic, whose cxporrs boomed during rhc 199Os, was cxcludcd due to a lack ol'sutficient d a ~ ai n terms of lhc claas~ficalton used in [his study. Thc real cfft.crive exchange riite was calculaled by !he ficonomic: Devclop~ncntDivision of LCLAC. Inforn~ationon capital goods imports was compiled by the Staticlics and Economic Projections Division of ECLAC.

Economic Commission for Latin America and t h e Caribbean (ECLAC)

112

World Bank's World L)evrlopment Irrdicators. The two productivity criteria used were each country's labour productivity and cach country's relative productivity. The lattcr is thc quoticnt of cach country's productivity and the averagc productivity of the s e w n main OECD countrics. Thc following thrcc indiccs wcrc used for world demand: real world imports (nominal world imports adjusted by world import prices): real imports of industrial countries (nominal imports adjusted by the average import pricc indcx of industriali~cdcountrics); and the physical industrial output of industrial countrics."

variable of capital goods imports were considcrcd: the indcx of real imports of capital goods and the levcl of capital goods imports in terms of GDP.Values for real imports were obtained by adjusting each country's nominal imports according to the United States price index for capital goods import^.'^ The capital goods import.c;/GDPratio was calculated using constant-dollar series for imports and GDP. Productivity corresponds t o incomc pcr worker. Data for GDP are in constant 1995 dollars (from the Stiitistics and Economic Projections Division of ECLAC). Data on countrics' labour forces were obtained from the

Results (iii) Out of all the indicators of world demand, real world imports were the best proxy for world demand; (iv) the Real capital goods imports index yielded less satisfactory results than the capital goods importsIGDP ratio. Thc valuc shown in brackets below the coefficients is the standard error for that cocflicient. With the cxccption of world demand and the constiint variiiblc, iill thc variablcs are statistically different from zero with at lcast a 10% confidence margin (p-values below 0.10). Column (2) is thc samc spccification as equation ( l ) without the constant. This formula yields values different from zero

(a) For all the countries in the sample Table V1.2 shows thc cstimates for thc complete The equation in column (1) was arrived at after experimenting with other specifications: (i) Two definitions of productivity yielded coefficients that wcrc not significant and carried a negative sign: (ii) Thc indicator lor volatility of the real effective exchangc rate (REER) in 36 months revealed that thc best volatility measure in econometric terms is the 12-month trend;"

Table V1.2 RESULTS OF THE ESTIMATES FOR ALL THE COUNTRIES IN THE SAMPLE

XDDPT/XT (t-l) Real world imports (T-l)

Coefficient PzlzI

Coefficient P>/zl

Coefficient P>Jzl

Coeficiente P>lzl

(1)

(2)

(2)-Robust estimate

(2)-Two steps

0.54 (0.033) 0.67 (0.44) 0.876 (0.15) REER (0.05) Volatility of the REER over 12 monthsrr) -0.10 (0.06) Imports of cap~talgoods/GDP O 0.136 Constant -0.02 (0.02) Sargan test Prob. z chi2 = 0.0336 Wald test (Chi2) 373.2 1st-order auto-correlation (p-value) 0.0 2nd-order auto-correlation (p-value) 1.O

m

0.00 0.12 0.00 0.03 0.02 0.49

0.53 0.40 0.86 -0.11 0.13

(0.032) (0.10) (0.14) (0.04) (0.057)

...

Prob > chi2 = 0.031

0.00 0.00 0.00 0.02 0.02 ..,

0.53 0.40 0.86 -0.11 0.13

(0.09) (0.21) (0.48) (0.10) (0.11)

0.00 0.06 0.08 0.32 0.22

...

...

...

...

0.0 0.9

0.0

0.39 0.03 0.70 -0.08 0.48

(0.11) (0.21) (0.40) (0.02) (0.23)

0.00 0.90 0.08 0.00 0.04

...

...

Prob z chi2 = l.0

0.9

... 0.0 0.7

Source: Economic Commlsslon for Latln America and the Caribbean (ECLAC). on the bass of United Nations. Commodity Trade Database (COMTRADE).

'7

"

This index was chosen because it represents a diversified baskct of capital goods and therefore represents the approximate import prices that the countries in the sample pay for capital goods. Data from the Inlcrnalional Munetary Fund. 11r1t~r7~cr1io1rul Hnuwcitrl Sr~uisricx The estimate was arrived at using variablcs in natural logarithms, and the coefficienl:, therefore reprexent elasticilies. A 60-month vcdatili~yindicator was also used, with thc samc result.

Economic Survey of Latin America and the Caribbean 2005-2006

Box VI .1 METHODOLOGY

The choice of panel data methodology was based on two factors. First, the

values of the dependent variables as instruments.

arguments must be found to justify the model chosen and the way in which the

aim was t o determine how export diversification in the region as a whole reacts to the selected economic variables.

The validity of the instruments can be tested for a period of time T > 3, as in this case, since the model is overidentified:

variables are mutually affected. Strict exogeneity is assumed in the real effective exchange rate (REER), the

Second, the country series contained few observations, which made it difficult to approach the analysis as a set of seemingly

for a given time t , there are numerous instruments available, which are lagged values of the variables. The validity of

volatility of the real exchange rate (RER), world demand (WD) and of (INVEST), in other words, DDTPKT does not affect

unrelated equations or, alternatively, to produce a traditional time series analysis of each individual country.

instruments for the estimate is tested using the null hypothesis of the Sargan test. The higher the p-value of the test,

these variables either in the same period or in future periods. These variables are determined by other factors of the

The usual hypothesis employed for panel data is one of strict exogeneity of the explanatory variables, that is, the

the more confidence we can have in not rejecting the null hypothesis of the test, which indicates that the instruments

economy and exports of durable goods to the rest of the world do not exert pressure on them.

explanatory variables in each time period are not correlated with the error for the

used for the estimate are valid. The strict exogeneity hypothesis can also fail for the other explanatory

same period. In the structure defined in (l), this hypothesis is unsuccessful

The estimated model was: EXPi, = pEXPi(t-lj+ p,TCREit

+ p,VOLi,+

+ P4DMj(t-l)+ ci + uit

(2)

owing to the dynamic introduced by the

variables xi,. If uit is not correlated with xiswhere s I t , xi, can be said to be

p,ZNVEST.,

lagged dependent variable. The relevant hypothesis thus becomes one of sequential exogeneity, that is, EXPis is not correlated with the

predetermined. If Xi, is contemporaneously correlated with uit, xi, is considered to be endogenous. B o n d (2002) m a i n t a i n s t h a t

demonstrated that the lagged values are weak instruments for the estimation. Arellano and Bover (1995) and Blundell

error when s I t. The solution proposed by Arellano and Bond (1991) consists in the first-difference estimate of the above

the classification of xi, variables as predetermined, whether endogenous or

equation (the “generalized method of moments (GMM) approach”) using lagged

exogenous, is arbitrary to some degree, although there are tests to validate the assumptions. In general, economic

Where p is close to one, it can be

and Bond (1998)solve this problem by adding levels equations to differenced equations in the estimate. This method is known as the GMM System. Since the p in the estimates are statistically different from 1, the GMM difference is used.

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

for world dcmanci. In both equations, there is cvidence of h t - o r d e r auto-correlation in residuals, as expected. hut not of second-order a u t o - ~ o r r c l a t i o n . ~ ~ Lastly, in both specifications. the Sargan test gives ii low p-value, indicating thiit thc instruments used for the estimatc are not valid. Since various instrurnents exist fix a given period of time, one solution proposcd by Bond (2002)" is to limit the nuinbcr of' instruments or thc dcgrec of lag judged as acccptable when choosing which variables to usc as instruments. Various adjustments werc

"

31

made along these lines, such as limiting the number of lags used as instruments, but thc p-value of the Sargan test did not improve. Thc fact that countries react differently to these variables or the prescncc of heteroskcdasticiry tnay account Por the unsuitability ol' thew instruments. As Mcxico posted the best pcrformancc in terms of cxpoi-ts of durables and diffusers or technical progress, interactive dummy variables were estimated for the real exchange rate (RER), RER volatility and investment in order to

The lower the p-value of lhc test. the more confident our rejection of the null hypothesis of the ahscr~ceof an auto-correlatinn. In the case of the first-order auto-correlation test, the p-value is hirly low antl the null hypothesis is rejcuted: tor thc hecond-order test, ~ h p-value c i s high and the null hypothtxis is not rejected. S. R. Bond. "Dynamic panel data models: a guidc to microdata mcthods and practices". NU'orkit~nT'u/)cvT, NO. 09/02, London, Centre tor Microdata Method and Practices (CEMMAP), 2002.

114

Economic Commission for Latin America and the Caribbean (ECLAC)

capture the specific features of each country. These dummy variables did not differ from zero, and the p-value of the Sargan tcst did not improve. In order to correct for the effects of heteroskedasticity in the matrix of variances and co-variances of the estimators, a robust estimate of this matrix was applied in equation (2). As can bc sccn from column (2)-(robust estimate), thc cocfficicnts of the volatility of the rcal cffcctivc cxchange rate and of investment in machinery and equipment wcrc 11ot dif'l'crcnt fiom zero. Finally, equation (2) was estimated in two steps in order to heighten the efficiency of the estimate while kccping the standard errors low. Blundell and Bond (1998) stress that in spite of being asymptotically more efficient, the two-step estimates of the standard errors tcnd to be severely downward biased.32

(b) Estimates for the sample excluding Mexico and Costa Rica As shown in tablc VI.3, Mexico and Costa Rica performed differently from thc rest of thc countrics of thc sample. The absolute difference in XDDTPIXT between the 1970s and 2000-2003 was 40 and 50 percentage points for Mcxico and Costa Rica, respectively, while the average XDDTPIXT for the region without Mexico was

Table V1.3 RESULTS FOR THE SAMPLE WHEN MEXICO AND COSTA RlCA ARE EXCLUDED

Coefficient

P>lzl Coefficient

(1)

(2)

XDDPTIXT v-1)

0.52 (0.03)

0.00

0.52 (0.03)

Real world imports (T1)

0.37 (0.48)

0.76

0.38 (0.11)

REER (T)

0.86 (0.16)

0.00

0.86 (0.16)

Volatility of the REER over 12 months (T) Imports of capital goods1GDP (T) Constant Sargan test Wald test (Chi2)

eight percentage points higher. Anothcr dimension of the atypical bchaviour of thesc two countrics is indicated by the fact that the ncxt-largest dilTcrcnuc is that of Brazil. with an absolute 15 pcrccntagc-point incrciisc in the ratio. The increase for the rest of the countries of the region was far below these values. Furthermore, the geogruphical proximity of the Unitcd States as a major consumer and producer market has influenccd Mcxico's spccialization and production structurc. and this factor is imperfectly captured by the lagged dependent variable in these estimates. In the case of Costa Rica, specific investments in the 1990s had a strong impact on the economy in terms of its level of activity and completely transformed this cconorny's export profile, as can be seen if its performance is compared with that of the region before and after that dccadc. A new estimate was thcrelbrc prepared cxcluding Mexico and Costa Rica from the sample of' countrics. This new estimate is presented in table V1.3. In cquation ( I )the signs are correct. The coefficients differ statistically from zero within a 10% confidence intcrval. with the exception of the v:iriablc of real world imports. The p-value does not allow us to reject the null hypothesis that the instruments are valid Thc constant was eliminated and equation (2) was estiniatcd. This cquation yields cocfficicnts with correct signs, and all thc variables, both individually and taken together, arc statistically different from ~ c r o . Table VI.4 prcscnts clasticitics for the complctc sample and the sample excluding Mcxico and Costa Rica, which arc not statistically different. A rise of 1% in the real effective exchange rate increases the XDDTPIXT by almost 0.9%. The weight of the structure and history of the ratio is significant. All clse remaining constant, a I % rise in the t-l ratio increases the t ratio by 0.5%. The volatility of the exchange rate and imports of

-0.1 2 (0.05)

Table V1.4 SUMMARY OF ELASTICITIES

0.12 (0.06) 0.00

Complete sample

Sample excluding Mex~coand Costa Rica

XDDPT/XT (T-l)

0.53

0.52

World demand

0.40

0.38

REER

0.86

0.86

-0.1 1

-0.1 2

0.13

0.12

Elasticities

0.39 320.2

1st-order auto-correlation (p-value)

0.0

2nd-order auto-correlation (p-value)

0.9

Volatility of REER

Source: Econorntc Cornrn~ss~on for Latin America and the Car~bbean(ECLAC) on the basis of Unlted Natlons. Comrnodtty Trade Database (COMTRADE)

Imports of capital goods

Source: Econom~cCornrn~ss~on for Lattn Amer~caand the Car~bbean(ECLAC) on the basis of Un~tedNations. Commod~tyTrade Database (COMTRADE)

Blundell and Bond recommend using the results ot onc stcp to tnakc intcrcnccs about thc coefficicnts (K. Ulundcll and S. K. Bond. "Initial conditions and moment restrictions in dynamic pancl data models", Joirrrrul c!f L~otrotrrer~~i~~.~, vol. 87. 1998).

Economic Survey of Latin America and the Caribbean 2005-2006

capital goods havc very little effect on XDDTPIXT. but thc combination of a real appreciation and sustnincd volatility ends up having a strong impact on the XDD'I'PI XT ratio. 'The relcvant literature and empirical evidencc appear to mdicatc that the region's difficulty in Increasing the production of tradable goods has bcen associated with the high degrec of macrocconornic ~nstahilitycxpericnced ovcr the la\t three decades, wh~chhas affectcd some of the determinants of the relative growth of tradables m the production structure. The econometric analysis demonstrates that, in order to increase the proportion ol'durable goods and diffusers ol'technical progress in total exports, a high, stablc rcal exchange ratc is rcquircd along with investment in

machinery and equipment. Macroeconornic instability and other factors rnditated agiiinst thc possibility of having real sustamed devaluations, a low degrce of volatility in thc real exchange rate and high investment ratcs. Macroeconomic institbility has therefore played a crucial ~ o l ein limiting thc diversification of exports in the sense traditionally referred to by ECLAC, namely an increasc in thc proportion of exports having a high technological content. The findings of this study thus provide empirical cvidence to backup two public policy recommendations for stimulating cxpori divcrsificatlon in the mcdium term: thc achicvemcnt and maintenance of macrocconomic stability, and a gradual and sustained devaluation of the real cxchange ratc.

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Economic Survey of Latin America and the Caribbean 2005-2006

Statistical Annex

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Economic Survey of Latin America and the Caribbean 2005-2006

Table A-l LATIN AMERICA AND THE CARIBBEAN: MAIN ECONOMIC INDICATORS

Annual rates of variation

Gross domestic product Per capita gross domestic product" Consumer prices C Percentages

Urban open unemployment rated Total gross external debt / GDP Total gross external debt I exports of goods and setvices Millions of dollars Balance of payments

Current account balance Merchandise trade balance Export at goods. f.o.b. Import of goods. f.o.b. Services trade balance Income balance Net current transfers

'

Capital and financial balance Net forelgn direct investment Financial capital 4 Overall balance Variation in reserve assetsh Other financing Source: Economic Commissionfor Latin America arid the Caribbean (ECLAC). on the bass of off~cialfigures.

Preliminary figures. Based on official fgures expressed in constant 2000 dollars. December - December vanation. O The data for Argentma. Brazil and Mexico have been adjusted to allow for changes in methodology in 2003. 2002 pand 2005 respectively. Estimates based on figures denominated in dollars at current prices. Includes errors and omiss~ons. 9 Refers to the capital and financial balance (including errors and omissions). minus net foreign d~rectInvestment. V minus slgn (-) indicates an increase in reserve assets. I Includes the use of IMF cred~t and loans and exceptional financing. a

h

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-2 LATIN AMERICA AND THE CARIBBEAN: GROSS DOMESTIC PRODUCT (Annual growth rates)

Latin America and the Caribbean Latin America Argentina Bolivia Brazil Chile Colombia Costa Rica Cuba Cuba Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dommican Republic Uruguay Venezuela (Bolivartan Republic 09 Caribbean Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jamaica Samt Kitts and Nevis Saint Vincent and the Grenadines Saint Lucia Suriname Trinidad and Tobago

Source: Economic Comm~ssionfor Latin Amer~caand the Caribbean (ECLAC). on the basis of official f~guresexpressed in constant 2000 dollars a Prelim~nary figures. Qased on new national accounts calculations from the National Stat~sticalOffice of Cuba.

Economic Survey of Latin America and the Caribbean 2005-2006

Table A-3 LATIN AMERICA AND THE CARIBBEAN: PER CAPITA GROSS DOMESTIC PRODUCT (Annual growth rates)

Latin America and the Caribbean Latin America Argentrna Boliv~a Brazil Chile Colombia Costa Rlca Cuba Cuba h Ecuador El Salvador Guatemala Hait1 Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivarian Republic of) Caribbean Antigua and Barbuda Bahamas Barbados Belize Dominica Grenada Guyana Jama~ca Saint Kitts and News Saint Vincent and the Grenadines Saint Luc~a Suriname Trinidad and Tobago

Source: Econom~cCommission for Lattn America and the Caribbean (ECLAC). on the basis of off~cialf~guresexpressed ~nconstant 2000 dollars. Preliminary figures. Based on new national accounts calculations from the National Statistical Office of Cuba.

a

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-4 LATIN AMERICA AND THE CARIBBEAN: GROSS FIXED CAPITAL FORMATION (Percentages of GDP)

Latin America and the Caribbean Argentina Bolivia Brazil Chile Colombia Costa Rica Cuba Cuba D Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua

Panama Paraguay Peru Dommican Republic Uruguay Venezuela (Bolivarian Republic of) Source: Economic Commission for Latin America and the Caribbean (ECLAC). on the bass of official figures expressed in constant 2000 dollars. a

Preliminary figures. Based on new national accounts calculations from the National Stat~st~cal Office of Cuba.

Table A-5 LATIN AMERICA AND THE CARIBBEAN: FINANCING OF GROSS DOMESTIC INVESTMENTa (Percentages of GDP)

1. Domestic saving 2. Net factor income

3. Net transfers 4. Gross national saving 5. External saving C 6. Gross domestic ~nvestment Source: Economic Comm~ssionfor Latin America and the Caribbean (ECLAC).on the basis of offcial figures. a C

Based on coefficients calculated in local currency expressed in current dollars. Preliminary figures. These figures (with the opposite sign) are the same as those given for the current account balance In table A-7.

Economic Survey of Latin America and the Caribbean

2005-2006

Table A-6 LATIN AMERICA AND THE CARIBBEAN: BALANCE OF PAYMENTS (Millions of dollars) Exports of goods, f.o.b.

Imports of goods, f.0.b

Goods balance, f.0.b

Services balance

Income balance

Current transfers balance

Current account balance

Latin America and the Caribbean Argentina Boliv~a Brazil Chile Colombia Costa R~ca Ecuador El Salvador Guatemala Haiti

Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bohvarian Republic of/

Table A-6 (continued) Trade balance

Latin America and the Caribbean Argent~na Bolivia Brazil Ch~le Colombia Costa R~ca Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivarian Republic of)

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-6 (concluded) Capital and financ~al balancea

Latin America and the Caribbean Argentina Bolivia Brazil Chile Colomb~a Costa Rca Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay . . Peru Dominican Republic Uruguay Venezuela (Bolivarian Republic of)

1937 -8974 -17019 -10230 15 -211 -451 -5 073

1459 -1 583 1092

Reserve assets (variation) h

Overall balance

Other financing C

21 652 2312 26 13 398

2 336 -596 263

498 813 884

-6 005 -1 1 932 -19 902

Source: Economic Commission for Latin America and the Caribbean (ECLAC),on the bas~sof figures from the International Monetary Fund (IMF) and nat~onalagencies. a Includes errors and omissions. A minus sign (-) indicates an increase in reserve assets. C Includes the use of IMF credit and loans and exceptional financing. Preliminary figures.

Table A-7 LATIN AMERICA AND THE CARIBBEAN: CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS a (Percentages of GDP) 1997 Latin America and the Caribbean Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Hait1 Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivar~anRepubllc of)

-3.3 -4.2 -7.0 -3.8 -4.4 -5.4 -3.7 -1.9 -0.9 -3.6 -1.5 -5.8 -1.9 -24.8 -5.0 -7.3 -5.7 -0.9 -1.3 4.3

1998

1999

-4.4

-3.1 -4.2 -5.9 -4.7 0.1 0.8 -4.2 5.5 -1.9 -5.6 -1.4 -4.4 -2.9 -24.8 -10.1 -2.3 -2.8 -2.0 -2.4 2.2

-4.9 -7.8

-4.3 -4.9 -4.9 -3.7 -9.0 -0.8 -5.4 -1 .O -2.8 -3.8 -19.2 -9.3 -2.0 -5.9 -1.7 -2.1 -4.9

2000

2001

2002

2003

2004

-2.4

-2.7 -1.2 -3.4 -4.6 -1 .6 -1.3 -3.7 -3.3 -1 .l -6.0 -3.8 -4.7 -2.8 -19.3 -1.4 -4.1 -2.1 -3.0 -2.7

0.8 8.5 -4.4 -1.7 -0.9 -1.7 -5.1 -5.6 -2.8 -5.3 -2.8 -3.6 -2.1 -19.1

0.5 6.2 0.8 0.8 -1.3 -1.2 -5.0 -1 -2 -4.7 -4.2 -1.6 -3.7 -1.4 -18.3 -3.9 2.3 -1.5 5.3 -0.5 13.7

1.O

1.5

2.1 3.8 1.9 1.7 -1 .O -4.3 -0.5 -4.0 -4.4 -1.5 -5.3 -1 .O -15.5 -7.9 1.2 0.0 5.3 0.3 12.6

2.9 4.9 1.8 0.6 -l .6 -4.8 -0.4 -4.6 -4.1 1.6 -0.5 -0.6 -16.3 -5.3 -1.4 1.3 -0.4 -0.5 18.1

-3.2 -5.3 -4.0 -1.2 0.9 -4.3

5.8 -3.3 -5.4 -3.0 -3.9 -3.2 -20.1 -5.8 -2.3 -2.9 -4.4 -2.8 10.1

1.6

-0.8

1.8 -1 .g

-3.2 3.1 8.2

2005b

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from the International Monetary Fund (IMF) and national agencies. a These figures (with the oppos~tesgn) are the same as those given for external saving in table A-5. Preliminary figures.

Economic Survey of Latin America and the Caribbean 2005-2006

Table A-8 LATIN AMERICA AND THE CARIBBEAN: EXPORTS AND IMPORTS OF GOODS, F.O.B.

(Annual growth rates) Exports Value

Imports

Volume

Unit value

Value

Volume

Unit value

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and data from the International Monetary Fund (IMF). a Preliminary figures.

Table A-9 LATIN AMERICA AND f HE CARIBBEAN: EXPORTS OF GOODS, F.O.B.

(Indices: 2000 = 100) Value

Latin America and the Caribbean Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivanan Republ~cof)

Volume

Unit value

2003

2004

2005"

2003

2004

2005a

2003

2004

2005a

105.5 113.7 128.2 132.7

129.7 131.2 172.2 175.1

156.0 151.9 214.3 214.8

107.5 112.6 127.8

118.0 118.1 151.9 163.8

127.1 134.8 164.4 178.5

98.1

101.0 100.4 96.3

109.9 111.0 113.4 106.9

122.7 112.7 130.4 120.3

137.7

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from the International Monetary Fund (IMF) and national agencies. a Prel~mmaryfigures.

Economic Commission for Latin America a n d the Caribbean (ECLAC)

Table A-1 0 LATIN AMERICA AND THE CARIBBEAN: IMPORTS OF GOODS, F.O.B. (Indices: 2000 = 100) Value 2003

Latin America and the Caribbean Argentina Bolivia Braz~l Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dornin~canRepublic Uruguay Venezuela (Bolivarian Republ~cof)

2004

Volume 2005'

2003

2004

Unit value 2005a

2003

2004

2005"

99.4 94.2 101.9 99.3 93.4 98.3 97.2 101.2 97.5 98.7 101.7 88.6 100.8 101.4 100.7 96.7 100.5 101.4 91.4 101.1

105.7

112.5

101.7 109.0 109.3 99.9 105.1 103.1 106.3 102.4 107.6 109.8 95.7 105.9 109.5 105.7 103.5 108.6 106.5 97.8 108.2

105.5 116.6 121.3 108.9 111.5 107.2 115.9 107.5 117.3 118.6 104.3 111.2 120.4 111.0 109.7 119.4 111.8 107.5 112.5

Source: Economic Commisson for Latin America and the Caribbean (ECLAC), on the basis of f~guresfrom the International Monetary Fund (IMF) and a

national agencies. Prelimmary figures.

Table A-l l LATIN AMERICA AND THE CARIBBEAN: TERMS OF TRADE FOR GOODS, F.O.B.1F.O.B. (Indices: 2000 = 100)

Latin America and the Caribbean Argentina Bolivia Brazil Chile Colombla Costa Rlca Ecuador El Salvador Guatemala Haiti Honduras Mex~co Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Eol~varianRepublic of)

Source: Economic Comm~ssionfor Latm Amer~caand the Caribbean (ECLAC), on the basis of figures from the International Monetary Fund (IMF) and a

national agencies. Preliminary figures.

Economic Survey of Latin America and the Caribbean 2005-2006

Table A-12 LATIN AMERICA AND THE CARIBBEAN: NET RESOURCE TRANSFERS a (MiIIions of dollars) 1997

Latin America and the Caribbean Argentina Boiiv~a Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nrcaragua Panama Paraguay Peru Dominmn Republic Uruguay Venezuela (Boiivarian Republic of)

1998

1999

2000

2001

2002

2003

2004

2005h

-3 606

Source: Economic Commlssron for Lattn America and the Caribbean (ECLAC), on the basis of f~guresfrom the International Monetary Fund (IMF) and national agencies. The net transfer of resources is equal to total net capital inflows minus the Income balance (net payments of profrts and ~nterest).Total net capital inflows correspond to the capital and financial accounts, plus errors and omissions, and the use of IMF credit and loans and exceptional financing. Negative f~guresindicate net outward resource transfers. Prehminary figures.

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-13 LATIN AMERICA AND THE CARIBBEAN: TOTAL NET CAPITAL INFLOWS AND NET RESOURCE f RANSFERS a (Billions of dollars and percentages) Total net capital inflows

Autonomous C

Non-autonomous

Balance on income account

Net resources transfers

Exports of goods and services

Total

Net resource transfer as a percentage of exports of goods and services

(1)

(2)

(3)

(4)

(5) = (3) + (4) (5)

('3

(7) = (5)/P3 (7)

29.2 38.4 3.3 -22.3 -10.9 -16.4 -12.4 -13.2 -1 9.8 -18.8 -5.5 23.3 48.6 68.5 41.5 29.3 63.9 89.2 63.4 42.5 61 .B 34.0 -12.1 1.9 -7.0 21.7

1.7 1.8 17.2 30.1 23.9 20.3 21.9

30.9 40.1 20.5 7.9 13.0 3.9 9.4 12.4 3.0 10.2 16.1 35.1 56.1 66.6 47.3 61 .O 64.8 80.2 79.1 48.6 53.9 50.4 10.5 20.6 1.4 -0.1

-18.9 -29.1 -38.9 34.5 -37.5 -35.5 -32.7 -31 -0 -34.6 -39.0 -34.2 -31.4 -30.1 -34.5 -36.1 -40.8 -42.7 -47.7 -51.3 -51 .l -53.7 -53.8 -52.0 -57.6 -66.4 -75.5

12.0 11.l -18.4 42.4 -24.5 -31.6 -23.3 -18.6 -31 -6 -28.8 -18.1 3.7 26.1 32.1 11.2 20.2 22.0 32.6 27.8 -2.5 0.2 -3.4 -41.4 -36.9 -65.0 -75.5

106.9 115.6 105.2 105.4 117.5 112.8 99.2 113.4 130.6 145.8 162.0 164.2 177.5 194.1 223.0 265.9 295.0 327.3 327.1 342.9 408.2 391-7 394.0 428.6 523.2 628.0

11.3 9.6 -1 7.5 40.2 -20.8 -28.1 -23.4 -1 6.4 -24.2 -19.7 -1 1.2 2.3 14.7 16.5 5.0 7.6 7.5 9.9 8.5 -0.7 0.0 -0.9 -10.5 -8.6 -12.4 -12.0

25.6 22.8 29.0 21.6 11.8 7.5 -1 -9 5.8 31.6 0.9 -9.0 15.7 6.1 -7.9 16.4 22.6 18.7 8.4 -21.7

Source: Economic Commission for Latin Amenca and the Caribbean (ECLAC), on the basis of figures from the International Monetary Fund (IMF) and

nat~onalagencies. Includes information from 19 Latr American and Caribbean countries: Argentina. Bolivarian Republic of Venezuela, Bolivia, Brazil, Chile. Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras. Mexico. Nicaragua. Panama, Paraguay, Peru, and Uruguay. h Corresponds to net payments of profits and ~nterest. Vncludes errors and omissions. Vncludes the use of IMF credit and loans and exceptional financmg, which includes transactions such as external debt forgweness and accumulation of arrears. Preliminary f~gures.

Economic Survey of Latin America and the Caribbean

2005-2006

Table A-1 4 LATIN AMERICA AND THE CARIBBEAN: RATIO OF TOTAL ACCRUED INTEREST TO EXPORTS OF GOODS AND SERVICES a (Percentages)

Latin America and the Caribbean Argentina Bolivia Braz~l Chile Colombia Costa Rica Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivarian Republic of)

12.9

14.7

12.6

8.6

9.7

8.5

7.9

54

6.7

8.2

4.6

Source: Economic Commission for Latin Amerlca and the Caribbean (ECMC), on the basis of official figures. A Includes interest paid (w~thout deducting interest received) and Interest due but not paid. h Prel~minaryfigures.

Table A-15 LATIN AMERICA AND THE CARIBBEAN: RATIO OF PROFIT PAYMENTS TO EXPORTS OF GOODS AND SERVICES a (Percentages)

Latin America and the Caribbean Argentina Ballvia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay ~enezuela(Bolivar~anRepublic of)

6.6

11.4

3.9

4.1

6.7

7.0

Source: Economic Commission for Latm America and the Caribbean (ECLAC), on the basls of figures from the International Monetary Fund (IMF) and national agencies. a Includes re~nvestment of proflts. Preliminary figures.

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-16 LATIN AMERICA AND THE CARIBBEAN: NET FOREIGN DIRECT INVESTMENT a (Millions of dollars) 1997

1998

1999

2000

2001

2002

2003

2004

2005"

Latin America and the Caribbean Argentina c Bolivia Brazil Chtle Colombia Costa Rica Ecuador El Salvador a Guatemala Haiti Honduras Mexico F: Nicaragua Panama Paraguay Peru Dominican Republtc Uruguay Venezuela (Bolivarian Republic of)

Source: Economic Commission for Latln America and the Caribbean (ECLAC),on the basis of ftgures from the Internattonal Monetary Fund (IMF) and national agencies. Refers to direct investment tn the reporting economy, minus direct investment abroad by reporting-economy residents (both excluding disinvestment). Includes reinvested profits. Wreltmmary figures. For 1999, includes the value of the investment by REPSOL in Yacimlentos Petroliferos Flscales. Part of thls amount corresponds to the purchase of shares in the company held by non-residents. In the balance of payments, the value of those shares is reflected as a debit under the portfolio investment item. From 1998 onward the figures are not comparable, since up to 1997 no offic~alrecords were kept. For 2001, includes the value of the investment by Citigroup in BANAMEX; for 2004, includes tnvestment in Bancomer. a

Table A-1 7 LATIN AMERICA AND THE CARIBBEAN: lNf ERNATIONAL BOND ISSUES a (Mill~onsof dollars)

Latin America and the Caribbean Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Grenada Guatemala Jamaica Mexico Panama Paraguay Peru Domtntcan Republic Trinidad and Tobago Uruguay Venezuela (Bolivarian Republic of)

Source: lnternatlonal Monetary Fund Research Department, Emerging Markets Studies Division and Merrill Lynch. a

Includes sovereign, bank and corporate bonds. Does not include US$ 784 millton issued jointly by the Andean Development Corporation (ADC) and the Central American Bank for Economic Integration (CABEI).

Economic Survey of Latin America and the Caribbean + 2005-2006

Table A-1 8 LATIN AMERICA AND THE CARIBBEAN: TOTAL GROSS EXTERNAL DEBT a (Millions of dollars)

Latin America and the Caribbean Latin America Argentina Bolivia Brazil Chile Colombia Costa Rica Cuba Ecuador El Salvador Guatemala Haiti a Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguayf Venezuela (Bolivarian Republic of)

"

"

"

"

Caribbean Antigua and Barbuda Bahamas a Barbados Belize Dominlca Grenada a Guyana " Jamaica Sarnt Kitts and Nevis Sarnt Vincent and the Grenadines Samt Lucia Suriname Trinidad and Tobago Source: Econornc Commission for Latin America and the Caribbean (ECLAC),on the basis of figures from the lnternational Monetary Fund (IMF) and national agencies. a Total gross external debt includes debt owed to the International Monetary Fund. Preliminary figures. ': Does not include Cuba. Publ~cexternal debt. U For 2005. includes prlvate external debt up to September. For 1997 and 1998, figwes refer to public external debt. From 1999 onwards, figures refer to total external debt (includmg the private sector but not memorandum items).

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-1 9 LATIN AMERICA AND THE CARIBBEAN: RATIO OF TOTAL GROSS EXTERNAL DEBT a TO EXPORTS OF GOODS AND SERVICES (Percentages)

Latin America and the Caribbean Latin America Argentina Bol~via d Brazil Chile Colombia Costa Rica Cuba Ecuador' El Salvador Guatemala Haiti Honduras Mextco Nicaragua Panama Paraguay Peru Dominican Republic Uruguayf Venezuela (Bolivarian Republic of)

"

"

Caribbean Antigua and Barbuda a Bahamas Barbados Belize Dominica Grenada U Guyana Jamaica Saint Kitts and Nevis Saint Vincent and the Grenadines Sa~ntLucia" Suriname Trinidad and Tobago

"

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from the International Monetary Fund (IMF) and national agencies. a Total gross external debt includes debt owed to the International Monetary Fund. Preliminary figures. C Does not include Cuba. V u b l i c external debt. For 2005, includes private external debt up to September. For 1997 and 1998, figures refer to public external debt. From 1999 onwards, figures refer to total external debt (tncluding the private sector but not memorandum items).

Economic Survey of Latin America and the Caribbean 2005-2006

Table A-20 LATIN AMERICA AND THE CARIBBEAN: STOCK EXCHANGE INDICES IN DOLLARSa (Indices: December 2000 = 100)

Latin America and the Caribbean Argentina Brazil Chile Colombia Mexico Peru Venezuela (Bolivarian Republic of)

121.5 139.7 113.9 122.9 402.3 114.2 189.9

118.0 133.3 109.2 116.4 181.5 125.6 138.5

100.0 100.0 100.0 100.0 100.0 100.0 100.0

93.9 69.1 77.7 94.8 125.1 112.2 112.3

72.6

122.5

168.6

100.0 65.4 86.0 227.0 69.9 114.5

34.8 51.9 80.7 137.3 93.6 146.9

79.4 105.9 145.9 174.7 123.5 263.1

97.4 141.8 176.9 376.4 182.8 294.9

242.7 140.3 212.7 202.4 783.0 262.7 366.1

177.7 248.9 202.1 580.6 269.2 497.2

187.8

90.5

79.0

100.0

79.9

51.8

59.2

88.9

69.4

98.7

75.1

267.5

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the bass of figures from the lntsrnatlonal Finance Corporation (IFC). a

Year-end values; overall index. Figures up to June.

Table A-21 LATIN AMERICA AND THE CARIBBEAN: REAL EFFECTIVE EXCHANGE RATES a (Index: 2000 = 100, deflated by CPI)

Latin America and the Caribbean

"

Argentina Bohvia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaraqua Panama Paraguay Peru Uruguay Venezuela (Bolivarian Republic of)

141.4

116.5

102.6

100.0

95.2

123.7

136.8

143.2

143.4

140.6

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and data from the International Monetary Fund (IMF). Wnnual averages. A country's real effective exchange rate index is calculated by weighting its real bilateral exchange rate indices with each of its trading partners by their shares in the country's total trade flows in terms of exports and imports. A currency depreciates in effective real terms when this index rises and appreciates when it falls. b Prel~minaryf~gures,provisionally weighted by trade in 2003. L January-June average. "Simple average.

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-22 LATIN AMERICA AND THE CARIBBEAN: URBAN UNEMPLOYMENT (Average annual rates)

Latin America and the Caribbean 9.3 Argentina c: Urban areas 14.9 Barbados Nationwidetotal 14.5 Belize Nationwidetotal 12.7 Bolivia Urban total 4.4 Brazil SIX metropolitanareass 5.7 Chile Nationw~detotal 6.1 Colombia 13 metropolitanareas 9 12.4 Costa R~ca Urban total 5.9 Cuba Nationwide total 7.0 Ecuadord Cuenca. Guayaquil and Quito h 9.3 El Salvador Urban total 7.5 Guatemala Urban total ' 5.1 Honduras Urban total 5.8 Jamaica Nationwide total 16.5 Mexico Urban areas 5.4 Nicaragua Urban total 14.3 Panama Urban total l 15.4 Paraguay Urban total 7.1 Peru Metropolitana Lima 9.2 Dominican Republ~c Nationwidetotal 16.0 Trinidad and Tobago Nationwide total 15.0 Uruguay Urban total 11.5 Venezuela (Bolivarian Republic of) Nat~onwidetotal 11.4

'

"

J

Source:Economic Commission for Latin Amer~caand the Caribbean (ECLAC),on the basis of offlc~alfigures. a C

I 9 h l

1 K I

Preliminary flgures. The data for Argentina. Brazil and Mexico have been adjusted to allow for changes in methodology In 2003, 2002 and 2005, respectively. New measurements have been used from 2003 on; these data are not comparable with the preceding series. Includes h~ddenunemployment. Up to 1999, the figures refer to departmental cap~tals. New measurements have been used from 2002 on; these data are not comparable with the preceding series. Up to 1999, the figures refer to seven metropolltan areas. Up to 1999, the figures refer to the total for urban areas. Up to 1998, the figures are offcial estimates of nationwide totals. Data based on new methodology and are therefore not comparable with data in previous editions of the Economic Survey. Up to 1999, the figures refer to nationwide totals. Up to 1999, the figures refer to the metropolitan region.

Economic Survey of Latin America and the Caribbean

2005-2006

Table A-23 LATIN AMERICA AND THE CARIBBEAN: CONSUMER PRICES (Percentage variations, December-December)

Latin America and the Caribbean Antigua and Barbuda Argentina Bahamas Barbados Bolivia Brazil Chile Colombia Costa Rica Cuba Dominica Ecuador El Salvador Grenada Guatemala Guyana Ha~ti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Dominican Republic Saint Kitts and News Salnt Vincent and the Grenadines Sa~ntLuc~a Suriname Trinidad and Tobago Uruguay Venezuela (Bol~varian Republic of)

10.7

29.9

-

-

31.2

L . .

.

Source: Economic Comrn~ssionfor Latin America and the Caribbean (ECLAC), on the basis of offic~alf~gures. a 12-month var~ationup to June 2006. h The only English-speaking Caribbean countries included under this heading are Barbados. Jarnalca and Tr~nidadand Tobago. In addition, the figure for 2005 does not ~ncludeCuba. L 12-month variation up to March 2006. 12-month var~ationup to May 2006. 12-month variation up to April 2006.

Economic Commission for Latin America and the Caribbean (ECLAC)

Table A-24 LATIN AMERICA AND THE CARIBBEAN: AVERAGE REAL WAGES (Average annual indices: 2000 = 100)

Argentinab Brazil C Chiled Colombla h Costa Rica Mexico Nicaragua Paraguay Peru Uruguay Venezuela (Bolivarian Republic of) g

93.3 99.7 69.3 76.3 81.5 88.9 75.8 87.8 93.7 89.1

95.0 105.7 93.8 92.1 89.7 90.4 92.5 102.7 103.5 98.0

95.0 105.8 96.3 92.2 94.7 92.9 96.2 100.8 101.4 99.7

140.5

98.0

103.3

97.8 101.1 98.6 96.3 99.2 94.3 100.0 98.7 101.3

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

99.2 95.1 101.7 99.7 101.0 106.7 101.0 101.4 99.1 99.7

85.4 93.1 103.7 102.5 105.1 108.7 104.5 94.9 103.7 89.0

98.5

100.0

102.4

92.1

99.3

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures. Preliminary figures. "anufacturing. C Workers covered by social and labour legislation. Private sector only from 2003 onwards. General index of hourly wages. H Average wages declared by workers covered by soc~alsecurity. Private-sector manual workers in the Lima metropolitan area. g Private sector

'

Economic Survey of Latin America and the Caribbean

2005-2006

Table A-25 LATIN AMERICA AND THE CARIBBEAN: PUBLIC-SECTOR DEFICIT (-) OR SURPLUS a (Percentages of GDP) Coverage D Latin America and the Caribbean Argentina Bolivia Brazil Chile Colombia Costa Rca Ecuador El Salvador Guatemala Haitl Honduras Mexico Nicaragua Panama Paraguay Peru Dominican Republic Uruguay Venezuela (Bolivarian Reaublic of)

CG NA NFPS CG NFPS CGef CPS CG NFPS GNC Q NFPS

CG NFPS CG " NFPStl CG NFPS CA CG CG NFPS CG' PS CG NFPS CG NFPS CA NFPS CG NFPS

CG CG NFPS l CG RPS

Source: Economlc Commission for Lat~nAmerica and the Caribbean (ECLAC), on the basis of official figures. a Total income minus total expenditure, expressed in local currency. "Abbreviations used: CA = Central administration: CG = Central government; CNG = Central national government; CPS = Consolidated public sector; NA = Natlonal admmistration; NFPS = Non-financial public Sector: PS = Publ~csector; RPS = Narrowly defined public sector. ' Prelim~naryfigures. "irnple average. Includes the federal government and the central bank. Nommal balance. q These results do not include adjustments for accruals, floating debt or the cost of financ~alrestructuring. In 2003. does not include US$130 million that the Office of the Under-Secretary of the National Treasury %-earmarked from central government accounts. l Includes the federal government and social security. I Does not include departmental governments.

"

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Publicaciones de la CEPAL I ECLAC publications Comision Econ6m1capara America Latina y el Caribe I Economic Commission for Latin America and the Caribbean Casilla 179-D, Santiago de Chile. E-mail:[email protected] Vealas en: www.cepal.orglpublicaciones Publications may be accessed at: www.eclac.org

Revista de la CEPAL I CEPAL Review La Revista se inicio en 1976 corno parte del Programa de Publicaciones de la Comision Econornica para America Latina y el Caribe, con el proposito de contribuir al examen de 10s problemas del desarrollo socioeconomico de la region. Las opiniones expresadas en 10s articulos firrnados, incluidas las colaboraciones de 10s funcionarios de la Secretaria, son las de 10s autores y, por lo tanto, no reflejan necesariarnente 10s puntos de vista de la Organization. La Revista de la CEPAL se publica en espaliol e inglb tres veces por aAo. Los precios de suscripcion anual vigentes para 2006 son de US$ 30 para la version en espafiol y de US$35 para la version en ingles. El precio por ejemplar suelto es de US$ 15 para arnbas versiones. Los precios de suscripcion por dos ailos (2006-2007) son de US$ 50 para la version espaAol y de US$60 para la version ingles. CEPAL Review first appeared in 1976 as part of the Publications Programme of the Economic Commission for Latin America and the Caribbean, its aim being to make a contribution to the study of the economic and social development problems of the region. The views expressed in signed articles, including those by Secretariat staff members, are those of the authors and therefore do not necessarily reflect the point of view of the Organization. CEPAL Review is published in Spanish and English versions three times a year. Annual subscription costs for 2006 are US$ 30 for the Spanish version and US$ 35 for the English version. The price of single issues is US$15 in both cases. The cost of a two-year subscription (2006-2007) is US$50 for Spanish-language version and US$60 for English.

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+

Estudio economico de America Latina y el Caribe 2005-2006, 148 p. Economic Survey of Latin America and the Caribbean 2004-2005, 362 p Panorama de la insertion international de America Latina y el Caribe, 2004. Tendencias 2005, 212 p. Latin America and the Caribbean in the World Economy, 2004. 2005 trends, 204 p. Panorama social de America Latina, 2005,442 p. Social Panorama of Latin America, 2005, 440 p. Balance preliminar de /as economias de America Latina y el Caribe, 2005, 196 p. Preliminary Overview of the Economies of Latin America and the Caribbean, 2005, 788 p. La inversion extranjera en America Latina y el Caribe, 2005, 172 p. Foreign Investment of Latin America and the Caribbean, 2005, f90 p. Anuario estadistico de America Latina y el Caribe /Statistical Yearbook for Latin America and the Caribbean (bilinguelbilingual), 2005,442 p.

Libros de la CEPAL Financiamiento para el desarrollo. America Latina desde una perspectiva comparada, Barbara Stallings con la colaboracion de Rogerio Studart, 2006, 396 p. Politicas municipales de microcredito. Un instrumento para la dinamizacion de 10s sistemas productivos locales. Estudios de caso en America Latina, Paola Foschiatto y Giovanni Stumpo (comps.),2006,244 p. Aglomemciones en tomo a 10swcursos naturales en America Latina y el Caribe: Politicas de adiculaciony articulacih de politicas, 2006,266 pp. Pobreza, desertificacion y degradacion de 10s recursos naturales, Cesar Morales y Soledad Parada (eds.),2006,274 p. Aprender de la experiencia. El capital social en la superacion de la pobreza, lrma Arriagada (ed.),2005, 250 p.

85 Politica fiscal y medio ambiente. Basespara una agenda comun, Jean Acquatella y Alicia Barcena (eds.),2005,272 p. 84 Globalizaciony desamllo: desafios de Puerto Rico frente a1 siglo XXI, Jorge Mario Martiner, Jorge Mattar y Pedro Rivera (coords.),2005,342 p. 83 Elmedio ambiente y la maquila en Mexico: un problema ineludible, Jorge Carrillo y Claudia Schatan (comps.),2005, 304 p. 82 Fomentar la coordination de /as politicas economicas en America Latina. El metodo REDIMA para salir del dilema del prisionero, Christian Ghymers, 2005, 190 p. 82 Fostering economic policy coordination in Latin America. The REDIMA approach to escaping the prisoner's dilemma, Christian Ghymers, 2005,170 p. 81 Mondialisation et d8doppement. Un regard de I'Amkrique lathe et des Caraibes,J o g Antonio Ocampo et Juan Martin (ds.),2005,236 p. 80 Gobernabilidad e integration financiera: ambito global y regional, Jose Antonio Ocampo, Andras Uthoff (comps.),2004, 278 p. 79 Etnicidad y ciudadania en America Latina. La accion colectiva de 10s pueblos indigenas, Alvaro Bello, 2004,222 p. 78 Los transgenicos en America Latina y el Caribe: un debate abielto, Alicia Barcena, Jorge Katz, CBsar Morales, Marianne Schaper (eds.) 2004,416 p. 77 Una dbcada de desarrollo social en America Latina 1990-1999,2004,300 p. 77 A decade of social development in Latin America 1990-1999,2004,308 p. 77 One decennie de d6veloppement social en Amerique latine 1990-1999,2004,300 p. 76 A decade of light and shadow. Latin America and the Caribbean in the 1990s, 2003,366 p. 76 Une decennie d'ombres et de lumieres. L'AmBrique latine et les Cara~besdans les annbes 90,2003,401 p. 75 Gestion urbana para el desarrollo sostenible en America Latina y el Caribe, Ricardo JordAn y Daniela Simioni (comps.),2003, 264 p. 74 Mercados de tierras agricolas en America Latina y el Caribe: una realidad incompleta, Pedro Tejo (cornp.),2003,416 p. 73 Contaminacibn afmosferica y conciencia ciudadana, Daniela Simioni (comp.),2003, 260 p. 72 Los caminos hacia una sociedad de la informacion en America Latina y el Caribe, 2003, 139 p. 72 Road maps towards an information society in Latin America and the Caribbean, 2003, 130 p. 71 Capital social y reduccidn de la pobreza en America Latina y el Caribe. En busca de un nuevo paradigma, Rad Atria y Marcelo Sites (comps.), CEPALlMichigan State University, 2003, 590 p.

Copublicaciones recientes I Recent co~publications Politica y politicas p~iblicasen 10s procesos de reforma de America Latina, Rolando Franco y Jorge Lanzaro (coords.), CEPALIFlacsoMexicolMiAo y Davila, Mexico, 2006. Finance for Development. Latin America in Comparative Perspective, Barbara Stallings with Rogerio Studart, ECLAClBrookings Institution Press, USA, 2006. Los jovenes y el empleo en America Latina. Desafios y perspectivas ante el nuevo escenario laboral, Jurgen Weller (ed.), CEPALlMayol Ediciones, Colombia, 2006. Condiciones y politicas de competencia en economias pequeiias de Centroamerica y el Caribe, Claudia Schatan y Marcos ~ v a l o s(coords.), CEPALlFondo de Cultura Economics, Mexico, 2006. Aglomeraciones pesqueras en America Latina. Ventajas asociadas a1 enfoque de cluster, Massiel Guerra (comp.)CEPALlAlfaornega,Colombia,2006. Reformas para America Latina despues del fundamentalismo neoliberal, Ricardo Ffrench-Davis, CEPALlSiglo XXI, Argentina, 2006. Crecimiento esquivo y volatilidad financiera, Ricardo Ffrench-Davis (ed.), Mayo! Ediciones, Colombia, 2005. Seeking growth under financial volatility, Ricardo Ffrench-Davis (ed.), ECLAClPalgrave Macmillan, United Kingdom, 2005. Macroeconomia, comercio y finanzas para reformar las reformas en America Latina, Ricardo Ffrench-Davis (ed.),CEPALlMayol Ediciones, Colombia, 2005. Beyond Reforms. Structural Dynamics and Macroeconomic Theory. Jose Antonio Ocampo (ed.), ECLACllnter-American Development BanklThe World BanklStanford University Press, USA, 2003. Mas alla de las reformas. Dinhmica estnlcturaly vulnerabilidadmacroecon6mica,Jose Antonio Ocampo (ed.),CEPAUAlfaomega, Colombia,2005. Gestion social. Como lograr eficiencia e impact0 en las politicas sociales, Ernesto Cohen y Rolando Franco, CEPALlSiglo XXI, Crecimiento esquivo y volatilidad financiera, Ricardo Ffrench-Davis (ed.),CEPALlMayol Ediciones, Mexico, 2005. Pequefias y medianas empresas y eficiencia colectiva. Estudios de caso en America Latina, Marco Dini y Giovanni Sturnpo (coords.), CEPALlSiglo XXI, Mexico, 2005. En bljsqueda de efectividad, eficiencia y equidad: /as politicas del mercado de trabajo y 10s instrumentos de su evaluacibn, Jiirgen Weller (comp.),CEPAULOM, Chile, 2004. America Latina en la era global, Jose Antonio Ocampo y Juan Martin (coords.),CEPALIAlfaomega. El desarrollo economico en 10s albores del siglo XXI, Jose Antonio Ocampo (ed.), CEPAUAlfaomega, Colombia, 2004. Los recursos del desarrollo. Lecciones de seis aglomeraciones agroindustriales en America Latina, Carlos Guaipatin (comp.), CEPALIAlfaomega, Colombia, 2004. Medir la economia de 10s paises segun el sistema de cuentas nacionales, Michel Seruzier, CEPALIAlfaomega, 2003, Colombia, 2003. Globalization and Development. A Latin American and Caribbean Perspective, Jose Antonio Ocampo and Juan Martin (eds.), ECLACllnter-American Development BanklThe World BanklStanford University Press, USA, 2003. Globalizaci6n y desarrollo. Una reflexion desde America Latina y el Caribe, Jose Antonio Ocarnpo y Juan Martin (eds.),CEPALIAlfaomega, Colombia, 2003.

Autonomia o ciudadania incompleta. El Pueblo Mapuche en Chile y Argentina, lsabel Hernandez, CEPALlPehuen, Chile, 2003. El desarrollo de complejos forestales en America Latina, Nestor Bercovich y Jorge Katz (eds.),CEPALIAlfaomega, Colombia, 2003.

Cuadernos de la CEPAL 91 Elementos conceptuales para la prevencibn y reduction de dafios originados por amenazas naturales, Eduardo Chaparro y Matias Renard (eds.), 2005, 144 p. 90 Los sistemas de pensiones en America Latina: un analisis de genero, Flavia Marco (coord.),2004,270 p. 89 Energia y desarrollo sustentable en America Latina y el Caribe. Guia para la formulaci6n de politicas energeticas, 2003, 240 p. 88 La ciudad inclusiva, Marcello Balbo, Ricardo Jordan y Daniela Simioni (comps.),CEPAUCooperazione Italiana, 2003, 322 p. 87 Traffic congestion. The problem and how to deal with it, Alberto Bull (cornp.), 2004, 198 p. 87 Congestibn de transito. El problema y como enfrentarlo, Alberto Bull (cornp.),2003, 114 p.

Cuadernos Estadisticos de la CEPAL 31 Comercio exterior. Exportaciones e imporlaciones segun destino y origen por principales zonas economicas. 1980, 1985, 1990, 19952002. Solo disponible en CD. 30 Clasificaciones estadisticas internacionales incorpomdas en el banco de datos del comercio exterior de America Latina y el Caribe de la CEPAL, 2004,308 p. 29 America Latina y el Caribe: series estadisticas sobre comercio de servicios 1980-2001, 2003, 150 p.

0bservatorio demografico ex Boletin demografico I Demographic Observatory formerly Demographic Bulletin (bilinguelbilingual) Edicion bilingiie (espaiiol e ingles) que proporciona informacion estadistica actualizada, referente a estimaciones y proyecciones de poblaci6n de 10s paises de America Latina y el Caribe. lncluye tambien indicadores demograficos de interes, tales como tasas de natalidad, mortaiidad, esperanza de vida al nacer, distribution de la poblacion, etc. El Observatorio aparece dos veces al aRo, en 10s meses de enero y julio. Suscripcion anual: US$20.00. Valor por cada ejemplar: US$15.00. Bilingual publication (Spanish and English) proving up-to-date estimates and projections of the populations of the Latin American and Caribbean countries. Also includes various demographic indicators of interest such as fertility and mortality rates, life expectancy, measures of population distribution, etc. The Observatory appears twice a year in January and July. Annual subscription: US$20.00. Per issue: US$15.00.

Notas de poblacion Revista especializada que publica articulos e infones acerca de las investigaciones mas recientes sobre la dinamica demogkfica en la region, er1 espailol, con resumenes en espailol e ingles. Tambien incluye informacion sobre actividades cientificas y profesionales en el campo de poblacion. La revista se publica desde 1973 y aparece dos veces al aAo, en junio y diciembre. Suscripcion anual: US$20.00. Valor por cada ejemplar: US$ 12.00. Specialized journal which publishes articles and reports on recent studies of demographic dynamics in the region, in Spanish with abstracts in Spanish and English. Also includes information on scientific and professional activities in the field of population. Published since 1973, the journal appears twice a year in June and December. Annual subscription: US$20.00. Per issue: US$12.00.

Series de la CEPAL Comercio internacional 1 Desarrollo productivo I Estudios estadisticos y prospectivos I Estudios y perspectivas (Bogota, Brasilia, Buenos Aires, Mexico, Montevideo) I Financiamiento del desarrollo l Gestion publica I Informacion y desarroilo l lnformes y estudios especiales I Macroeconomia del desarrollo I Manuales I Medio ambiente y desarrollo I Poblacion y desarrollo I Politicas sociales I Recursos naturales e infraestructura I Seminarios y conferencias.

Vease el listado completo en: www.cepal.org1publicaciones A complete listing is available at: www.cepal.org/publicaciones

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Las publicaciones de la Corn~s~bn Econbmica para Arner~caLatina y el Car~be(CEPAL) y las del lnst~tuto Latinoarner~canoy del Canbe de Planificacion Economics y Socral (ILPES) ss pueden adquinr a los distrrbuidores locales o d~rectamentea traves de: Publicaciones de las Naciones Unidas Seccion de Ventas - DC-2-0853 Fax (212)963-3489 E-mall: [email protected] Nueva York. NY. 10017 Estados Unrdos

Publicaciones de las Nacrones Un~das Secclon de Ventas. Fax (22)917-0027 Palais des Nations 1211 Gmebra 10 Suiza Un~dadde Distnbucion CEPAL Cas~lla179-D Fax (562)208-1946 E-mall: [email protected] Santiago de Chile

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Publ~catfonsof the Economic Commissron for Lath America and the Caribbean (ECMC) and those of the Lafrn American and the Caribbean Institute for Economrc and Socral Plannrng (ILPESJ can be ordered from your local distnbutor or drrectly through: UnitedNatrons Publrcations Sales Sections, DC-2-0853 Fax (212)963-3489 E-mail: [email protected] New York, NY, 10017 USA

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