LATIN AMERICA 2040

Achieving a More Inclusive and Prosperous Society

Caracas, Venezuela July 12, 2012

LATIN AMERICAN STRENGTHS What is different about this study?

Long-term perspective 30 years Uses a model of global economy Draws lessons from Asian experience Does not offer projections but scenarios Focuses on range of multi-generational issues and links across them

LATIN AMERICAN STRENGTHS Structure of Presentation

Long-term Trends: Contrast with Asia (Kohli) Future Scenarios (Loser)

LATIN AMERICAN STRENGTHS Latin Americas Strengths

Latin America is arguably the most richly endowed developing region of the world: Vast areas of fertile land Abundant water resources Amazonia worlds largest tropical forest Harvest of the oceans Mineral resources Close physical proximity to North American and Europe Strong historical performance until 1980 Income levels relative to the US rose from 12% in 1965 to 17.7% in 1981 A middle-income region by 1980 Regional infrastructure investments (Pan American highway)

RECENT ECONOMIC AND POLITICAL Poverty Conditions are Improving DEVELOPMENTS

60

50

40

25.8
30

25.8 21.9 20.4 19.9

Poor Indigent
19.1 17.6

20

10

22.5 18.6 18.6 12.8 13.1 12.3 12.8

0 1980 1990 1999 2008 2009 2010 2011

RECENT ECONOMIC AND POLITICAL Education Expenditure is Average DEVELOPMENTS

RECENT ECONOMIC AND POLITICAL School DEVELOPMENTS Attendance Disparities

RECENT ECONOMIC AND POLITICAL Low Achievement in Science DEVELOPMENTS

RECENT ECONOMIC AND POLITICAL Low Levels of Tertiary Graduates DEVELOPMENTS in Science

RECENT ECONOMIC AND POLITICAL Equality in DEVELOPMENTS Public Education Spending

RECENT ECONOMIC AND POLITICAL Recent Economic and DEVELOPMENTS Political Developments
Average economic growth of 4.7% in 2003-08 (4% 2003-11) Not accompanied with inflation or external imbalances Absolute poverty and inequities have declined noticeably in Brazil and Mexico during last decade The global financial crisis affected Latin America only moderately compared to the OECD countries V-shaped recovery Higher commodity prices have helped to drive growth

Per capita income Income and (1994=100)

140.0 135.0 130.0 125.0 120.0 115.0 110.0

Commodity Prices

Per capita income (1994=100)

105.0
100.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

250.0 200.0 150.0 100.0 50.0

All Commodities

0.0

1997M1 1997M6 1997M11 1998M4 1998M9 1999M2 1999M7 1999M12 2000M5 2000M10 2001M3 2001M8 2002M1 2002M6 2002M11 2003M4 2003M9 2004M2 2004M7 2004M12 2005M5 2005M10 2006M3 2006M8 2007M1 2007M6 2007M11 2008M4 2008M9 2009M2 2009M7 2009M12 2010M05 2010M10 2011M03 2011M08 2012M01

All Commodities

12

Long-term EAST ASIA COMPARED TOTrends: GDP Growth Lagging

7

Latin America

World
3

Emerging and Dev. WOrld

Long-term EAST ASIA COMPARED TOTrends: Losing to Other Emerging Markets

Latin America has essentially been stagnant relative to the rest of the world since the 1980s Latin Americas share of developing country GDP: 1981: 31%; 2009: 20% Latin Americas share of global GDP: 1965: 5.6%; 2005: 5.7%

Long-term EAST ASIA COMPARED TOTrends: Losing to Other Emerging Markets

Long-term Trends: Worlds Highest LATIN AMERICAN WEAKNESSES Disparities and Inequities
60.0 55.0 50.0
Gini coefficient

Evolution of the Gini Coefficient (in %)

53.2

60
44.7 45.0 40.0 35.0 30.0 25.0 33.6 38.9 38.9 39.1

55 50
32.2

45 40

20.0 High Income Europe and Central Asia South Asia North Africa East Asia and Sub-Saharan Latin America and the the Pacific Africa and the Middle East Caribbean

Early 1990s 35 0

Late 1990s

Early 2000s

Mid - 2000s

Long-term WEAKNESSES LATIN AMERICAN Trends: Mired in Middle Income Trap

LATIN AMERICANIncome Trap? What is Middle WEAKNESSES

Countries stagnate for long periods after reaching middle income status Inability to converge with advanced economies Short periods of growth offset by periods of decline Unable to compete with low income (low wage) economies in manufacturing and unable to compete with advanced economies in high skills innovations Unable to restructure: inability to move resources from low productivity to high productive activities Lack of specialization, higher level skills Small size of middle class

LATIN AMERICAN WEAKNESSES What is different in (East) Asia?

Political leaders intensely focused on economic issues
Pragmatism in policy making not driven by ideology Worlds highest growth rates Much greater emphasis on human development and meritocracy in education Equitable distribution of income and assets Much more open economies (trade to GDP ratio of 160% for NICs vs. 42%) Much higher savings (50% vs. 25% of GDP) and investment rates than LAC (including infrastructure) Deeper financial systems Fast growing middle-class Dynamism and can do spirit of private sector

LATIN AMERICAN WEAKNESSES Latin Americas Weakness

High income inequality Virtually stagnant total factor productivity Low savings and physical capital accumulation Poor infrastructure Low growth rates Informality, among the highest

2030: LIKELY OUTCOME WITH REVERSAL OF 2040: Likely Outcome with PAST TRENDS Reversal of Past Trends

Business as Usual 2009

Global GDP (US$ trill, 2009) Latin America GDP (US$ trill, 2009)

Convergence 2040 184.6 24.7

7% growth 2040 188.8 28.9

2040 168.4 8.5

53 3.36

ratio to Global GDP

Non-LAC GDP per capita (US$, 2009) Latin America GDP per capita (US$, 2009) ratio to Global GDP per capita

0.063
8458 5915 0.739

0.051
19675 12318 0.636

0.134
19675 35501 1.832

0.153
19675 41853 2.160

Latin America needs higher growth rates to increase its share of global GDP With 7% growth, Latin America can achieve aboveaverage GDP per capita

2030: LIKELY OUTCOME WITH BUSINESS AS 2040: Likely Outcome with USUAL Reversal of Trends-6%
Share of LATAM in World GDP
18% 16% 14% 45000 40000 35000

Per Capita Income- Alternative Scenarios(market ER)

12%
Share in GDP 30000 10% 8% 6% 4% 2% 0% 2009 2015 2020 2030 2040 LATAM BAU LATAM High Growth LATAM Converg PC Income 25000 20000 15000 10000 5000 0 2009 2015 2020 2030 2040

World Excluding LATAM LATAM BAU LATAM Converg

GDP per capita growth rate of 1%-3% World outpaces Latin America

WHAT THEMES Pillars Three ARE NEEDED?

1.) More inclusion

2.) Higher productivity

3.) Greater competition and openness

WHAT ACTIONS ARE NEEDED? More Inclusion

Striving for a more inclusive society is not a tradeoff between equity and growth, but a win-win Necessary actions: Removal of numerous current structural inequalities Providing access to quality education and other public services including rural infrastructure Breaking the current economic dominance by entrenched vested interests Ensuring jobs and finance to those who are left at the margins of the society
Quality of Education 2008 Infrastructure 2008
5 4.5 7 4 6 3.5 5 3 4 2.5 3 2 1.5 2 1 1 0.5 0 0

WHAT WILL IT TAKE? Higher Productivity

Total and Productivity Technology Readiness (10 year Globalof Doing Business Ease Competitive Index InvestmentFactor Savings 2008 comparative rankings 2010 2009-2010 average)

More emphasis is required on:

Improved human capital Much higher investment rates Economic competitiveness Continuous improvements in total factor productivity Better business environment More innovation and technological development

160 7 40.0 140 6 6 35.0 140 5 120 5 30.0 120 4 4 25.0 100 100 3 20.03 80 80 15.02 2 60 10.01 1 6040 20 5.00 40 0 0.0 20 0

(rankings from 1 to 177)

High Income NICs Latin America

Investment Devloping East Asia

China Savings India

1980

1990

2000

2007

Greater Competition WHAT WILL IT TAKE? and Openness

Closer links with fast growing Asia Dismantling of remaining barriers to trade and investment Reasoning: The vast majority of Latin American economies are too small on their own to attain economies of scale Greater openness is needed to take advantage of the positive neighborhood effects Latin America must gradually reduce its dependence on the slow growing economies of North America and Europe Dismantling barriers to trade with and investment from global markets will help to curb the current monopolistic power of large companies
Trade/GDP ratio (adjusted for population)
160 140 120 100 80 60 40 20 0

THE ROLE CAF (1) The Role ofOF CAF

Champion the new vision of Latin America

Realign CAF operations to support above vision by adopting Inclusion and Growth as the two fundamental objectives of all CAF activities

THE ROLE CAF (2) The Role ofOF CAF

To promote inclusion: Advocate policies that tackle structural inequities Support faster development of rural infrastructure, low cost housing, (affordable) mobile telecommunications, rural finance Support basic education to address ethnic and gender inequality

To promote growth: Continue emphasis on national and regional infrastructure development Focus on tertiary (private) education Support innovation and technology hubs Foster greater competition within countries Redouble efforts to support regional cooperation (including physical connectivity) Act as intellectual bridge between Asia and Latin America

THE REGION COMPARES WELL WITH EMERGING REGIONS, BUT NOT ADVANCED ECONOMIES (GDP P. CAPITA PPP , US$, 2010))
18,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000

16,000
14,000 12,000 10,000 8,000 6,000 4,000 2,000

5,000
0 0
Latin America Advanced Economies NICs

30PPP

WHERE DOES LA STAND

Infrastructure
7 6 5 4 3 2 1 0 6 5 4

Quality of Education

3 2 1 0

Technology Readiness
7 6 5 4 3 2 1 0 0 20 40 60

Ease of Doing Business comparative rankings 2010 (177)

80
100 120 140

Productivity and Competitiveness

Total Factor Productivity
1400 6

Global Competitiveness Index

1200

1000

800 3 600 2 400 1 200 0 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Latin America NICs China Advanced Economies India

33

Informality and Economic Development/

INVESTMENT AND SAVINGS (10 YEAR AVERAGE)

40

40

35

35

30

30

25

25

20

20

15

15

10

10

0 High Income Asia NICs Developing Africa Savings Latin America

Investment

Investment

Savings

GINI COEFICIENT- SELECTED REGIONS

60
60.0 55.0 50.0
Gini coefficient

55

53.2

50

44.7 45.0 40.0 35.0 30.0 33.6 38.9 38.9 39.1

45

40

32.2

35

30
25.0 20.0 High Income Europe and Central Asia South Asia North Africa East Asia and Sub-Saharan Latin America and the the Pacific Africa and the Middle East Caribbean

25

20
1985-1990 1991-1995 1996-2000 2001-2005 2006-2010

United States

Av LATAM

AvChIn

VARIOUS COUNTRIES PICKED UP IN RECENT YEARS GDP PC

240.0 220.0

200.0

China India Uruguay

180.0

Peru Argentina adjusted

Korea
160.0 Colombia Brazil

140.0

Turkey Chile Mexico

120.0

Japan United States

100.0

80.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

37

VARIOUS COUNTRIES PICKED UP IN RECENT YEARS

160.0

150.0

140.0

130.0

Peru Argentina adjusted Colombia

120.0

Brazil Chile Venezuela

110.0

Mexico
100.0

90.0

80.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

38

GDP GROWTH RATES -PAST AND PROJECTED

Country Panama Peru Argentina(official) Dominican Republic Uruguay Paraguay
Argentina corrected

2007-11 8.8 7.2 7.1 6.7 5.8 5.3 5.1 4.8 4.5 4.5 4.3 4.2 4.2 3.9 3.7 3.5 3.0 2.7 2.1 1.6 1.5 0.6 0.1 3.8

2012-13 7.0 5.6 4.0 4.3 4.0 3.2 1.5 4.5 4.0 5.0 3.1 4.4 3.5 3.6 3.2 3.5 3.9 2.0 3.7 7.4 2.3 1.2 1.0 3.8
39

Colombia Costa Rica Bolivia Ecuador Chile Brazil Venezuela Guatemala Honduras Nicaragua Trinidad and Tobago Mexico Haiti El Salvador Barbados Jamaica Latin America

PUBLIC DEBT TO GDP IS DECLINING, WHILE THAT OF THE ADVANCED COUNTRIES GROWS

Public Debt Ratio to GDP (in%)

120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012
40

Brazil Mexico Argentina LATAM Adv. G-20

Human Development Index/ I Norway Australia Netherlands

Per Capita Income- PPP US$/ I 1 Qatar 88,222 2 Luxembourg 3 Singapore 81,466 56,694

1 2 3

United States
New Zealand Canada Ireland

4 Norway
5 6 Brunei Darussalam United Arab Emirates

51,959
48,333 47,439 46,860

4
5 6 1st Quartile 7

7 United States

Liechtenstein
Germany Sweden Chile Argentina Uruguay Mexico Peru Venezuela Ecuador Brazil Colombia China South Africa India Congo D R (last) Source: UNDP-Human Development Reports-2011

8 Hong Kong SAR

9 Switzerland 10 Netherlands 44 Argentina 45 Chile 48 Mexico 57 Uruguay 80 Venezuela 73 Brazil 83 South Africa 84 Colombia 87 Peru 101 Ecuador 123 China 134 India 187 Congo D R Source: IMF-WEO-Sept 2011

45,944
41,950 40,973 15,901 15,040 14,406 14,339 12,048 11,273 10,518 9,593 9,358 7,828 7,544 3,408 329

8
9 10 53 58 61 62 2nd Quartile 72 77 80 84 86 93 95 3rd Quartile 128 182 4th Quartile

41

Ease of Doing Business Rank/ Singapore Hong Kong, China New Zealand United States Denmark Norway United Kingdom Korea, Rep.

Competitiveness Rank/ 1 Switzerland 2 Singapore 3 Sweden 4 Finland 5 United States 6 Germany 7 Netherlands 8 Denmark

Corruption Perception/ 1 New Zealand 2 Denmark 3 Finland 4 Sweden 5 Singapore 6 Norway 7 Netherlands 8 Australia

Economic Freedom/ L 1 Hong Kong 2 Singapore 2 Australia 4 New Zealand 5 Switzerland 6 Canada 7 Ireland 8 Denmark 1 2 3 4 5 6 1st Quartile 7 8

Iceland
Ireland South Africa Peru Colombia Chile Mexico Panama Uruguay China Argentina Brazil India Ecuador Venezuela, R.B. Chad (last) Source: World Bank 2011

9 Japan
10 United Kingdom 35 China 41 Chile 42 Panama 43 South Africa 53 Brazil 61 India 90 Mexico 91 Peru 113 Colombia 126 Argentina 132 Ecuador 130 Venezuela 177 Chad 183

9 Switzerland
10 Canada 26 Chile 31 Uruguay 49 Cuba 50 South Africa 53 Brazil 56 Colombia 58 Peru 67 India 68 Mexico 85 Argentina 101 Bolivia 124 Ecuador 142 Venezuela Somalia(last)

8 United States
10 Bahrain 22 Chile 25 Peru 61 Colombia 64 Mexico 73 Panama 80 South Africa 80 Brazil 95 India 100 China 100 Argentina 118 Bolivia 120 Ecuador 172 Venezuela 182 North Korea Source: Heritage Foundation 2011

9
10 11 41 45 47 2nd Quartile 61 75 113 124 3rd Quartile 135 137 147 158 4th Quartile 175 179

Source: World Economic Forum Source: Transparency 2011 International 2010

42