ESADE_PoliticalEconomyLAC

Latin America — The Political Economy of The

Possible or of The Impossible?

Fiscal policy in slowdown times

Angel Melguizo

OECD Development Centre

Latin American Economies in a Globalised World

ESADE – June 3 2015

Latin American Economic Outlook

1 Short-term slowdown, medium-term reforms?

More than revenues: Fiscal policy for development 2

Latin America – Fiscal policy in slowdown times

Enabling tax reforms 3

Growth forecasts for LAC have adjusted downwards…

3 Source: OECD Economic outlook 2014. For LAC, IMF and Consensus Forecast

GDP Growth (% annual)

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%OECD Latin America and the Caribbean

Source: OECD Economic Outlook 2015, OECD Secretariat forecasts and Consensus (Venezuela) 4

GDP growth in selected LAC countries (% annual)

…with significant variation across countries

-8

-6

-4

-2

0

2

4

6

8

Argentina Brazil Chile Colombia Costa Rica Mexico Peru Venezuela

2002-2013 2014 2015 2016

Note: Output gap calculated with HP filter and IMF forecasts (April 2015)

Source: OECD Development Centre 5

2015 Cyclical position (selected countries; output gap)

The cyclical position of LAC is difficult to determine…

BRIICS

America Latina EspañaItalia

Francia

Reino Unido

AlemaniaEEUUJapon

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

Crecimiento por encima de la tendencia

6

… in fact, there are “several Latin Americas”

Argentina

The Bahamas

Barbados

Bolivia

Brazil

ChileCosta Rica

ColombiaDominican Republic

Ecuador

El Salvador

Guatemala

Honduras

Jamaica

Mexico

Nicaragua

Panama

Paraguay

Peru

Trinidad and Tobago

Uruguay

Venezuela

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04Series1ArgentinaThe BahamasBarbadosBoliviaBrazilChileColombiaCosta RicaDominican RepublicEcuadorEl SalvadorGuatemalaHondurasJamaicaMexicoNicaraguaPanamaParaguayPeruTrinidad and TobagoUruguayVenezuela

2015 Cyclical position (selected countries; output gap)


Source: OECD Development Centre

7

Less so in terms of trend growth

Argentina

Colombia

Peru

ChileCosta Rica

Brazil

Mexico

Venezuela

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

LAC 7 and Costa Rica

Cycle 2015

Argentina forecasts

Colombia forecasts

Peru forecasts

Chile forecasts

Mexico forecasts

Brazil forecasts

Costa Rica forecasts

Venezuela forecasts

2015-2017 Cyclical position - LAC (selected countries; output gap)


Source: OECD Development Centre

The Middle Income Trap is a persistent phenomenon for the entire

region

Middle Income Trap in LAC and selected OECD countries (per capita GDP, 1990 USD PPP)

Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015 8

0

5000

10000

15000

20000

25000

CHL URY ARG VEN CRI MEX COL BRA PERU DOM COR IRL ESP

1950

RB

RA

RB

RM

RA


0

5000

10000

15000

20000

25000


1980 1950

RB

RM

RA



region


region

10

0

5000

10000

15000

20000

25000


2013 1980 1950

RB

RM

RA


Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015

Latin America in Shifting Wealth: more an spectator than an actor

Contribution to global growth (%)

50%

19%

8%

4%

1%

18%

1990-1995

32%

41%

9%

6%

3%

9%

2005-2012

Economies avancées Asie émergente Amérique latine

Moyen Orient et Afrique du Nord Afrique subsaharienne Reste du monde


Productivity is not everything, but in the long run is almost everything

(P. Krugman)

Source: Melguizo, A. y J.R. Perea (2015), “Skill gaps in emerging economies: An empirical

analysis”, Working Papers, OECD Development Centre.

Labour productivity in selected Latin American and Asian countries (% of US productivity, 5-year moving average, PPP)

12

0%

10%

20%

30%

40%

50%

60%

70%

1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Chile

Corea

AL-7

Colombia

China

Mexico

The region stands out in income inequality

13 Source: OECD (2014), “Does income inequality hurt economic growth?”, Focus in Inequality and Growth.

Inequality in Chile, Mexico, the US and the OECD (Gini of income inequality)

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

1975 1980 1985 1990 1995 2000 2005 2010

Gin

i co

effi

cien

t o

f in

com

e in

equ

alit

y

Inequality is similar in OECD and Latin America before paying taxes

and getting transfers and services

14 Source: ECLAC (2014), El impacto distributivo de la accion fiscal en America Latina.

Inequality in Latin America and the OECD (Gini indexes before direct taxes, education and health services)

0.2

0.3

0.4

0.5

0.6A

RG

BO

L

BR

A

CH

L

CO

L

CR

I

ECU

SLV

HN

D

MEX NIC

PA

N

PA

R

PER

DO

M

UR

Y

OEC

D

Redistribution in Latin America is much weaker

15

Inequality in Latin America and the OECD (Gini indexes before and after direct taxes, education and health services)

0.2

0.3

0.4

0.5

0.6A

RG

BO

L

BR

A

CH

L

CO

L

CR

I

ECU

SLV

HN

D

MEX NIC

PA

N

PA

R

PER

DO

M

UR

Y

OEC

D

Market income Disposable extended income

Source: ECLAC (2014), El impacto distributivo de la accion fiscal en America Latina.

16

Macroeconomic outlook: some policy implications

• Short-term measures to face the slowdown:

• Recover fiscal space through tax base expansion and

expenditure containment

• Countercyclical monetary policy

• Long-term policies to expand potential growth

• The political economy of reforms: is the momentum over after 14

presidential elections 2012-2014?




Latin America - fiscal policy in times of economic slowdown


Education

Infrastructures

Fiscal policy

Fiscal policy for development – I. Education

Public expenditure has converged with OECD average …

18

Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015, with data from UNESCO Institute for Statistics

Public expenditure in education by category, LAC and OECD (% GDP, circa 2012)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

PAN PER GTM SLV ECU PRY CRI COL CHL DOM MEX VEN BOL BRA ARG ALC OCDE

Secundaria

Primaria

Pre-primaria


…there are still challenges related to quality and equity

Performance and equity in secondary education

HKG

MAC

CHL

FIN

KOR

MEX

ARG

BRA

COL

CRI

PER

URY

OtrosOCDE

AL

350

400

450

500

550

600

650

0 5 10 15 20 25 30 35 40 45 50

Porcentaje de variación del desempeño en matemáticas explicado por el estatus económico, social y cultural del estudiante y de la escuela

Desempeño en matemáticas, puntos de PISA 2012

Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015, with data from PISA database


It is critical to invest in education for work

20

Firms that consider the lack of adequately trained workforce a key constraint to their performance (% formal firms, circa 2010)

35.9

22.3 21.5 20.9

17.414.8

13.6

0

5

10

15

20

25

30

35

40

América Latina yel Caribe

África Sub-sahariana

Asia-Este yPacífico

Media mundial Asia-Sur OCDE Europa-Este yAsia-Central

%

Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015


Lack of or inadequate skills represents an important restriction

Firms that consider the lack of adequately trained workforce a key constraint to their performance – LAC and OECD (% formal firms, circa 2010)

0

10

20

30

40

50

60

70

80

BRA ARG PRY COL CRI BOL DOM ALC ECU GTM MEX SLV PER HND BLZ VEN NIC JAM PANOCDEKOR

21 Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015


Sector-specific skill development policies are crucial

Firms that consider the lack of adequately trained workforce a key constraint to their performance – Colombia (% formal firms, circa 2010)

0

5

10

15

20

25

30

35

40

45

50

Metalesbásicos

Metaleselaborados

Maquinaria Alimentación Automoción Productosquímicos

Textil Muebles

22 Source: OECD-CAF-ECLAC (2014), Latin American Economic Outlook 2015


High informality is reflects low productivity...

Source: BID, IDB Labor Markets and Social Security Information System (SIMS)

Labor informality in Latin America

(% workers 15-64 years old who do not contribute to a pension scheme, circa 2013)

ALC-19, 55%

0

10

20

30

40

50

60

70

80

90

HND NIC BOL GTM PER PRY SLV MEX ECU VEN DOM COL JAM ARG PAN BRA CHL CRI URY

23


… concentrated over self-employed, SMEs and low & middle income

Labor informality in Latin America, by occupation and income (% workers 15-64 years old who do not contribute to pension scheme, LAC-19, circa 2010)

Source: Bosch, M., A. Melguizo and C. Pagés (2013), Better pensions, better jobs. IADB 24

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Pequeña (2-5) Mediana (6-50)

Grande (50 +)

0%

20%

40%

60%

80%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Independientes (cuenta propia y patrones) Asalariados


Particularly among middle-income workers (middle class)

Informality in middle income households in Latin America (% households without contributing members, circa 2010)

Source: Lustig , N.and A. Melguizo (2015), How middle class are middle-income households in Latin

America?. VoxLACEA , May 20, 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

URY CRI BRA MEX COL PER BOL SLV GTM

Vulnerable Clase media

25

Fiscal policy for development – II. Infrastructure

Latin America has underinvested for decades

26 Source: Carranza, L., C. Daude and A. Melguizo (2014), “Public investment and fiscal sustainability in Latin America:

Incompatible goals?” , Journal of Economic Studies, vol.41, n.1, pp.29-50

Infrastructure investment in selected economies of Latin America (% GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%19

80

198

2

198

4

198

6

198

8

199

0

1992

199

4

199

6

199

8

200

0

200

2

2004

200

6

Total Publica

Infrastructure trends in Latin America (the good)

In Colombia and especially Chile the increase in private infrastructure investment

has more than compensated the reduction in public investment.

Chile Colombia

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public

Public and total investment in infrastructure (% of nominal GDP)


Infrastructure trends in Latin America (the good)

Source: Carranza, L., C. Daude and A. Melguizo (2014), “Public investment and fiscal sustainability in Latin America:


Argentina, Brazil and Mexico drive the regional trend.

Argentina Brazil

0.0%

1.0%

2.0%

3.0%

4.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public


Infrastructure trends in Latin America (the bad)




Infrastructure trends in Latin America (and the ugly)

good)

Peru is an extreme case: for its low level at the start of the period of analysis and also

the collapse in total investment flows in the late 1980s.

Mexico Peru

0.0%

1.0%

2.0%

3.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public

0.0%

1.0%

2.0%

3.0%

4.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Total Public


Infrastructure trends in Latin America (and the ugly)





Heightened in periods of fiscal consolidation

30

Public investment in infrastructure and fiscal balance in LAC (% GDP)

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%1

980

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

2000

200

2

200

4

200

6

Inversion (izda) Saldo (dcha)




Transport and energy are the bulk of the gap

31

Source: Balmaseda, M. et al (2010), “Infrastructure patterns in emerging markets: An empirical analysis with a focus on Latin

America” , Global Economic and Construction Outlook, June, pp. 25-31, CEMEX Economic Analysis

Infrastructure gap in LAC and emerging economies (%)

Carreteras pavimentadas Energía eléctrica

0%

40%

80%

120%

160%

200%

240%

280%

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

LatAm MAX-min LatAm

Asia

Eastern Europe

0%

20%

40%

60%

80%

100%

120%

140%

160%

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

LatAm MAX-MIN LatAm

Asia

Eastern Europe

• Expansion of fiscal rules in Latin America:

• Budget balance rules (all except Brazil) & second rules (expenditure or

debt)

• Escape clauses and correction mechanisms in case of non-compliance

32

Fiscal rule

Country

Argentina 2000-2008 2000-2008

Brazil 2000-2013 2000-2013

Chile 2001-2013

Colombia 2000-2013 2011-2013

Costa Rica 2001-2013

Ecuador 2010-2013 2003-2009 2003-2009

Jamaica 2010-2013 2010-2013

Mexico 2006-2013

Panama 2002-2003, 2009-2013 2002-2003, 2009-2013

Peru 2000-2013 2000-2013

Expenditure rule Revenue rule Budget balance rule Debt rule

Number of countries using fiscal rules Countries with fiscal rules and date of validity


Can fiscal rules help? Getting the story right

0

5

10

15

20

25

30

35

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LATAM OECD

Source: Alberola, Kataryniuk, Melguizo y Orozco (2015), “The long (and unfinished) march towards fiscal policy stabilization in

Latin America: The role of financial conditions and fiscal rules”, Bank of Span working paper, forthcoming

Fiscal policy by country

• Procyclicality of fiscal policy in Argentina, Uruguay and (weakly) Mexico

• Improvement in the 2000s in Brazil, Chile, Colombia, Costa Rica, Peru and, to

a lesser extent, Mexico

33

Fiscal stance by country


Latin Americas in terms of stabilization policies

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Argentina Brasil Chile Colombia CostaRica

México Perú Uruguay

Full sample First half Second half



THE WHOLE PICTURE: fiSCAL RULES

34

Evolution of the coefficient of the gap in a rolling-window regression (FE estimation)


Fiscal rules seem to help (or reflect preferences)…

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

With FC With FC, no FR With FC + FR



• Main fiscal policy options on fiscal frameworks (budgets, rules and

institutions) and infrastructure investment:

• Golden rule: targets on the current balance excluding capital

expenditures

• Accounting: exclude from the fiscal targets the operations of

commercially-run public enterprises

• Macro-fiscal rule: legislation forcing the accumulation of savings during

the good times, in order to generate the fiscal space to maintain public

investment during economic downturns

Work in progress


… less progress in expenditure composition

Fiscal policy for development – III. Taxes

Not only revenues, but also revenues…

36

Tax collection in LAC and OECD (% GDP, 1990-2013)

Source: OECD-CIAT-ECLAC-IDB (2015), Revenue Statistics in Latin America and the Caribbean

0

5

10

15

20

25

30

35

40

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Diferencia (A-B) ALC (20)¹ (A) OCDE (34)² (B)


Commodity dependence remains excessive

37

Fiscal revenues from non-renewable resources (USD billion and % GDP, 2013)

0 20 40 60 80 100 120

Bolivia (Est.Plur. de)

Perú

Chile

Argentina

Ecuador

Colombia

Venezuela (Rep. Bol. de)

Brasil

México

Como % del PIB

PEMEX8.0

14.2

2.8

2.1

1.8

12.1

5.1

12.2

2.4


Tax collection in Latin America and the Caribbean and the OECD (%GDP, 2013)


Most economies have low levels of tax collection…

38

0

10

20

30

40



… particularly direct taxes and SS contributions

39

Tax structure in LAC and OECD (% of tax revenues, 2012)


- 40 -

Margen en otros impuestos para financiar salud y

pensiones

Tax collection on consumption and SS contributions in LAC (% GDP, circa 2012)


Room for raise collection and improve structure

40

ARG

BRB

BOL

BRA

CHL

COL CRIDOM

ECU

SLV

GTM HND

JAMMEX

NIC

PAN

PRY

PER

URY

VEN

ALC

0

2

4

6

8

10

12

14

16

0 2 4 6 8 10 12

Impuestos generales sobre el

consumo

Contribuciones y aportes


41


Tax policy: a few policy implications

• The outlook for convergence in collection is not favorable (slowdown

and lower revenues from commodities)

• LAC is below OECD average (even when we consider private

contributions and natural resources)

• A few countries are correctly weighing in structural fiscal reforms to

strenghthen expenditure capacity

• Need to identify the use of resources

• For natural resources it is important to establish mechanisms to

translate temporary booms into actual and durable development




Latin America - fiscal policy in times of economic slowdown


The political economy of structural tax reform is particularly defying:

low fiscal morale…

43

Fiscal morale in LAC and OECD (Do you think that cheating in tax declarations is justifiable?, 2010)

Source: OECD-ECLAC (2011), Latin American Economic Outlook 2012.

0%

10%

20%

30%

40%

50%

60%

70%

América Latina OCDE

Nunca justificable

Justificable

44

… and general absence of clear mandates in the results of presidential

elections

Note: Favorable tweets to Neves or Rouseff according to geographic location

Source: FT

Neves 48%

Rouseff 52%

Success in this area requires to communicate the future use of

resources and improve its management.

45

Legitimacy Tax are too high More redistribution

Education + - +/-

Middle sectors +/+ -/- -/-

Public services

(educ., health)+ - +

POUM +/+ - -

Meritocracyn.a. - +

Source: OECD (2010), Latin American Economic Outllook 2011. How middle-class in Latin America?

Fiscal policy, social mobility and democracy in Latin America

Attitudes towards democracy

(% support and satisfaction)

Distribution of political preferences

(0 extreme left, 1 extreme right)

Attitudes towards democracy

0%

10%

20%

30%

40%

50%

60%

70%

80%

1 2 3 4 5

Perceived Income Quintile

Support for democracy Satisfaction with functioning of democracy

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0 1 2 3 4 5 6 7 8 9 10

Freq

uenc

y

Left - Right self-reported preferences

Q1 Q2-Q4 Q5


The middle sectors could be an agent for change: support of

democracy, politically moderate…

Fiscal policy, social mobility and democracy in Latin America

Fiscal policy

30

35

40

45

50

55

60

Q1 Q2 Q3 Q4 Q5

"Good Citizens pay their taxes"(percentage of respondents who agree)

25

30

35

40

45

50

Q1 Q2 Q3 Q4 Q5

"Taxes are too high"(percentage of respondents who agree)

25

27

29

31

33

35

37

Q1 Q2 Q3 Q4 Q5

"Tax evasion is never justified"(percentage of respondents who agree)

0

20

40

60

80

100

Q1 Q2 Q3 Q4 Q5

Satisfaction with health services

Satisfied Not satisfied No Access


… higher tax morale. But unsatisfied!

Latin America – Fiscal policy in slowdown times: conclusions

48

• Latin America should improve its fiscal policy, not only to tackle the

economic slowdown, but also to strenghthen potential growth

• The majority of productive development policies (education,

infrastructure, …) require sizeable resources

• Structural tax reform needs to be framed within an empowered social

contract

• We cannot wait any longer

¡Gracias!

[email protected]

ESADE_PoliticalEconomyLAC

Economy & Finance

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