1 IN SEARCH OF A BETTER WORLD Stabilization Policies in Developing Countries Ministry of Economy &...

1

IN SEARCH OF A BETTER IN SEARCH OF A BETTER WORLDWORLDStabilization Policies in Developing Stabilization Policies in Developing CountriesCountries

Ministry of Economy & Finance

Madrid February 2-3 2006

Javier SantisoChief Development Economist & Deputy Director

OECD Development Centre

2

11 Catching up versus falling downCatching up versus falling down

The quest for efficient stabilizationThe quest for efficient stabilization22

(c) Remittances: a new holy grail?(c) Remittances: a new holy grail?

33 ConclusionsConclusions

(a) Macroeconomic anchoring(a) Macroeconomic anchoring

(b) Stabilization funds: the lost paradise?(b) Stabilization funds: the lost paradise?

3

Growth performance in developing Growth performance in developing countries has been disappointing and countries has been disappointing and

highly volatilehighly volatile

Source: The World Bank (2006)

Growth volatility rates in the past 25 years

Latin America 2.3%

South-East Asia 2.2%

USA 2.1%

European Union 1.1%

World 1.0%

4

In Latin America, macroeconomic In Latin America, macroeconomic volatility has been a major issue…volatility has been a major issue…

Source: Hausmann/Reisen (1996)** 1970-1992

Standard Deviation of Real GDP Growth**7.9

5.34.7

4.13.4

3

2.2

0

1

2

3

4

5

6

7

8

9

MENA Sub-Saharan

Africa

LAC Other East-Asia &Pacific

South Asia East Asianmiracle

Industrialcountries

stan

dar

d d

evia

tio

n

5

……and still remains a serious concern…and still remains a serious concern…

Currernt Account Volatility (standard deviation as ratio of GDP*)

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

sta

nd

ard

de

via

tio

n/G

DP

Source: LACEA (2005)

* periods between 1970 and 2000

6

……although the situation has although the situation has improved over past yearsimproved over past years

Cyclical Volatility Estimates (standard deviations in %)

Cyclical Volatility Foreign Output Domestic Output Fixed Investment

Argentina

1870-1929 3.46 6.49 107.8

1930-1970 7.08 4.56 67.96

1971-2004 2.97 5.01 16.39

Brazil

1870-1929 3.46 4.84 37.16

1930-1970 7.08 3.25 29.56

1971-2004 2.97 2.94 15.82

Chile

1870-1929 3.46 6.25 76.05

1930-1970 7.08 7.69 64.6

1971-2004 2.97 5.35 16.1

Mexico

1870-1929 3.46 7.29 79

1930-1970 7.08 2.9 102.36

1971-2004 2.97 3.3 14.93Source: IMF (2005)

7

As a consequence per capita income As a consequence per capita income gap has increasedgap has increased

USA

High Income Countries

LAC

Lower & Middle Income0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

GD

P p

er

ca

pit

a (

co

ns

tan

t 2

00

0 U

S$

)

Source: Based World Development Indicators (2005)

8

While Latin American countries While Latin American countries experienced a decline…experienced a decline…

1950

1960

1970

1980

1990

2000/06

2000/06

1990

1980 1970

1960

1950

1950

1960

1970

1980

1990

2000/06

-4

-3

-2

-1

0

1

2

3

-30 -10 10 30 50 70 90deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Mexico Chile Brazil

Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005

9

While Latin American countries While Latin American countries experienced a decline…experienced a decline…

2000/06

1990

1980

1970 1960

1950

1950

19601970

1980

1990

2000/06

1980

1970

1960

1950

1990

2000/06

-6

-5

-4

-3

-2

-1

0

1

2

-50 0 50 100 150 200 250 300deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Venezuela ArgentinaColombia


10

……the Asian countries experienced the Asian countries experienced an historical jumpan historical jump

1950

1960

1970

1980

1990

2000/06

1950

19601970

1980

19802000/06

-2,5

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

5,5

-85 -75 -65 -55 -45deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

China India


11


The quest for efficient The quest for efficient stabilizationstabilization22





12

Stabilization through fiscal Stabilization through fiscal mechanisms is difficult…mechanisms is difficult…

* without taxes on hydrocarbonsSource: Lora (2006)

Tax Revenue as GDP percentages (2004)simple averages; including social security

05

10152025303540

per

cen

t

13

……so is stabilization through reserves…so is stabilization through reserves…

Reserves in % GDP

0%

20%

40%

60%

80%

100%

120%

Source: Economist Intelligence Unit (2006) and World Bank (GDP 2004)

Reserves in bn US$818.9

0

50

100

150

200

250

300

China SouthKorea

India Singapore Malaysia Thailand Poland CzechRepublic

SaudiArabia

Venezuela SouthAfrica

Chile Colombia Pakistan

14

Developing countries following this Developing countries following this strategy face social costs and economic strategy face social costs and economic

arbitragearbitrage

According to Guidotti-Greenspan rule, liquid reserves should equal a country’s foreign liabilities.

This strategy implies costs arising from spread between private sector’s cost of short-term borrowing abroad and the yield Central Banks earn on liquid foreign assets.

According to Rodrik (2005), social costs of holding reserves can amount to 1% of developing countries’ GDP (assuming spread of 5%).

This amount is roughly the same as the projected gains for developing nations from successful conclusion of the Doha negotiations.

“Insurance premium” to stabilise a country through reserves may therefore outweigh expected benefits.

Contrary to what has happened, strategy should be to increase reserves AND simultaneously reduce short-term liabilities.

15

Stabilization through financial market Stabilization through financial market access in local currencies is for a lucky access in local currencies is for a lucky

few…few…

Country Date Issued MaturityAmount issued

(mill. US$)

Argentina Dec-96 Dec-98 250

Argentina Feb-97 Feb-07 500

Argentina Jun-97 Jul-49 500

Argentina Jul-97 Jul-49 500

Argentina Jun-01 Sep-08 931

Uruguay Oct-03 Oct-06 290

Uruguay Aug-04 Feb-06 250

Colombia Feb-05 Oct-15 325

Brazil Sep-05 Jan-16 1479

Colombia Nov-05 Mar-10 500

Source: BIS (2005)

16







17

Latin American growth is linked to the Latin American growth is linked to the performance of primary products…performance of primary products…

Source: BBVAbased on national statistics

2004

Venezuela 83%

Peru 71%

Chile 60%

Colombia 46%

Argentina 38%

Brazil 30%

Mexico 14%

Latam 31%

Total exports

Export of commodities/

-1%

0%

1%

2%

3%

4%

5%

6%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-30%

-20%

-10%

0%

10%

20%

30%GDP and BBVA-MAP Latam

GDP growth rate

BBVA-MAP growth rate

Correlation = 0,65

Source: BBVA; BBVA-MAP Latam index monitors the trading prices of commodities in the region

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5%

10%

15%

20%

25%

30%

35%

40%

45%

Cap

ital G

oods

(U

SA

)C

apita

l Goo

ds (

US

A)

Oil

Oil

Gas

(U

SA

)G

as (

US

A)

Cof

fee

Cof

fee

Tin

Tin

Alu

min

ium

Alu

min

ium

Cop

per

Cop

per

Ban

anas

Ban

anas

Silv

erS

ilver

Zin

cZ

inc

Shr

imp

Shr

imp

Soy

Soy

Sug

arS

ugar

Gol

dG

old

Con

sum

er G

oods

(U

SA

)C

onsu

mer

Goo

ds (

US

A)

Pro

duct

ion

Goo

ds (

US

A)

Pro

duct

ion

Goo

ds (

US

A)

Est

imat

ed d

evia

tio

n o

f th

e an

nu

al c

han

ge

rate

Source: CAF (2004)

……where price volatility where price volatility is particularly highis particularly high

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Changes in commodity prices have a Changes in commodity prices have a large impact on the public budget…large impact on the public budget…

Source: Based on J.P. Morgan (2005)* using average WTI forecast of crude oil price of US$ 56.25

Impact of higher oil prices for net oil exporters in 2006

0

2

4

6

8

10

12

14

Venezuela Russia Ecuador Colombia Mexico

% o

f G

DP

Impact of US$ 1 change in fiscalaccounts

Estimated fiscal windfall* relativeto budget assumption of 2006

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……but countries have varying success in but countries have varying success in using this revenue for macroeconomic using this revenue for macroeconomic

stabilizationstabilization

Colombia, Mexico, Russia (4.5)Colombia, Mexico, Russia (4.5)

Algeria (3.5)Algeria (3.5)

Nigeria (2.5)Nigeria (2.5)

Chad, Ecuador, Chad, Ecuador, Venezuela (1)Venezuela (1)

55

44

33

22

11

00

Source: Own estimates and J.P. Morgan (2006)Scale runs from 0 (bad) to 5 (very good)

Oil revenues are captured in stabilization funds while money is spent on debt repayment, investment projects, or stabilization programmes

Oil revenues above budget assumption are channelled into stabilization fund while some portion is used to finance larger public budget

Newly set-up stabilization fund has so far financed deficits rather than being used to build up savings

Stabilization funds are either not utilised (Venezuela) or financial resources are used to support the budget rather than to repay debt

Chad has defied The World Bank by changing in 2006 its laws on managing petroleum revenues, to gain more freedom on spending it.

21

IN PRACTICE:

When prices soar, funds are dropped (Zambia in 1970s with mineral fund)

When they go up or down, the orgy of domestic spending continues (Venezuela after 1974)

Institutions are key stabilisers (Lynn, 1997)

IN THEORY

When commodity prices are high revenues are set aside

When prices go down, funds are used to cushion the blow

Commodity shocks have the same impacts

……success stories are raresuccess stories are rare

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AND THEIR CONSEQUENCES:

Sharp appreciations and loss of competitiveness

Wasteful government spending and cronyism

Civil war in an African country varies from less than 1% to nearly 25% depending on resources (Collier, 2002)

COMMODITY BONANZAS…

Sudden inflow of dollar-denominated revenues

Rent-seeking behaviour in weak institutional contexts

Military spending and conflict propensity

The paradox of plentyThe paradox of plenty

23

Beyond economics: resource rents Beyond economics: resource rents countries show lower democracy scorescountries show lower democracy scores

Period Sample High Natural

Rents Countries

1970 3.29 (4.16) 0.96 (2.56)

1974 3.08 (4.22) 0.89 (2.56)

1978 3.18 (4.28) 1.32 (3.09)

1982 3.43 (4.29) 1.76 (3.41)

1986 3.72 (4.35) 1.28 (3.08)

1990 4.52 (4.27) 1.89 (3.49)

1994 5.29 (3.96) 2.00 (3.48)

1998 5.26 (3.98) 1.92 (3.43)

1970-1998 4.03 (4.26) 1.46 (3.11)

Source: Based on Collier and Hoeffler (2005)Range: 0 (low) to 10 (high)

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One way of fostering growth is One way of fostering growth is through cluster approaches…through cluster approaches…

Gas, Bolivia

Aluminum, Venezuela

Oil, Ecuador

Minerals , Bolivia

Flowers, Ecuador

Minerals, Peru

Wood , Bolivia

Iron, Venezuela

Shrimp, Ecuador

Soy , Bolivia

Bananas, Ecuador

Asparagus, Peru

Fruits, Colombia

Oil, Venezuela

Coffee, Colombia

Flowers, Colombia

Fish Flour, Peru

0.00.02.02.0 3.03.0 0.00.01.01.0

Average growth rate of certain regional clusters (1998)

Source: CAF (2004)

25

……but success has so far been limitedbut success has so far been limited

Country Cluster

Exploitation and Export, minimum processing

Processing and export, import substitutions and public goods delivery

Export of some of the goods and services that are substituted

Export of processed refined products, inputs, machines and services associated to the cluster. The firms of the country associated to the cluster start to invest abroad

Bolivia Gas 10 0 0 0 Wood 10 7 2 2 Minerals 10 4 4 0 Soy 10 8 4 2 Colombia Coffee 10 8 8 4 Flowers 10 10 10 5 Fruits 10 10 8 1 Ecuador Bananas 10 10 2 2 Shrimp 10 9 2 2 Flowers 10 5 2 2 Oil 6 3 2 2 Peru Asparagus 10 9 1 8 Fish Flower 10 5 3 2 Minerals 10 2 1 7 Venezuela Aluminum 10 0 0 0 Iron 10 5 4 1 Oil 10 8 5 5

Source: Osmel Manzano, 2006

Development Level of natural resource clusters in the Andean region (0=low, 10=high)

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27

Remittances have grown stronger Remittances have grown stronger than official flows and FDI…than official flows and FDI…

0

20

40

60

80

100

120

140

160

180

Year 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Rem ittances

Official flows

FDI

0

0.5

1

1.5

2

2.5

3

3.5

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Remittances

Official flows

FDI

in absolute terms…

…and as a percentage of GDP

Source: Guiliano and Ruiz-Arranz, IMF (2005)

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……largely outweighing the inflow of largely outweighing the inflow of capital through development assistancecapital through development assistance

Source: Based on OECD and World Bank (2006)

Percentage change between 1995 and 2004175.9%

55.1%

33.9%

-20.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

Workers remittances Foreign directinvestment

Official developmentassistance

Private debt andportfolio equity

in bn of US$

0

20

40

60

80

100

120

140

160

180

Workersremittances

Foreign directinvestment

Official developmentassistance

Private debt andportfolio equity

bn

US

$

1995

2004

29

Remittances flows are particularly Remittances flows are particularly strong towards low-income countries…strong towards low-income countries…

Source: Based on OECD and The World Bank (2006)

Share of GDP

31.1

27.1

25.8

24.8

22.5

20.4

17.4

17.2

16.2

15.5

13.5

13.2

12.4

12.4

12.1

11.9

11.7

11.7

11.3

10

0 5 10 15 20 25 30 35

Tonga

Moldova

Lesotho

Haiti

Bosnia and Herzegovina

Jordan

Jamaica

Serbia and Montenegro

EI Salvador

Honduras

Philippines

Dominican Rep.

Lebanon

Samoa

Tajikistan

Nicaragua

Albania

Nepal

Kiribati

Yemen, Rep.

Billions of Dollars

21.7

21.3

18.1

12.7

11.6

6.9

6.8

6.5

6.4

4.2

4.1

3.9

3.6

3.4

3.3

3.2

3.2

3.2

3

2.8

0 5 10 15 20 25

India

China

Mexico

France

Philippines

Spain

Belgium

Germany

United Kingdom

Morocco

Serbia

Pakistan

Brazil

Bangladesh

Egypt, Arab Rep.

Portugal

Vietnam

Colombia

United States

Nigeria

30

……having a large impact on a country’s having a large impact on a country’s indebtedness classificationindebtedness classification

Source: Based on The World Bank (2005); data: 2003

Indebtedness classification including and excluding remittances

732

257

145178

124

355

208

114 11682

0

100

200

300

400

500

600

700

800

Lebanon Ecuador Morocco El Salvador Guatemala

deb

t in

% o

f ex

po

rts

excluding remittances

including remittances

31

Although remittances seem to have a Although remittances seem to have a pro-cyclical effect in 2/3 of developing pro-cyclical effect in 2/3 of developing

countries…countries…

-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

Lebanon

Slovak Republic

Poland

Benin

Ethiopia

Argentina

Pakistan

Nigeria

Brazil

Honduras

Indonesia

Eritrea

Dominica

Vanuatu

Oman

Mali

Togo

Kenya

Cote d Ivoire

Morocco

Maldives

Turkey

Nepal

Thailand

Papua New Guinea

Dominican Republic

Estonia

Russia

Albania

Yemen, Rep. of

Country Correlations between theCyclical Components of Remittancesand GDP (1975-2002)

Source: Giuliano/Arranz (2005)

32

……there is also evidence that remittance there is also evidence that remittance flows can act counter-cyclicalyflows can act counter-cyclicaly

Source: Based on The World Bank (2006)Note: in a 5 year interval, red denotes year of external shock

Remittances as a share of personal consumption, two years before and two years after financial crisis

1.2

0.5

1.5

1.1

0.5

1.7

2.0

1.4

2.02.1

1.0

1.81.9

1.1

2.0

0

0.5

1

1.5

2

2.5

Mexico Indonesia Thailand

Remittances as a percentage of private consumption, two years before and two years after natural disaster

3.8

7.9

5.7 5.24.2

8.9 8.4

5.54.4

10.49.6

5.64.7

11.3 11.3

7.7

5.1

10.8

15.5

8.4

0

2

4

6

8

10

12

14

16

18

Bangladesh Dominican Republic Haiti Honduras

pe

rce

nt

Remittances as a share of personal consumption, two years before and two years after political conflict

16.9

0.7

16.9

2.9

12.7

3.2

17.0

1.0

12.3

0.8

0

2

4

6

8

10

12

14

16

18

Albania Sierra Leone

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Remittances flows could even grow Remittances flows could even grow further through adequate policy further through adequate policy

measuresmeasures

Source: The World Bank (2006)* assuming reduction of transactions cost to 2-5% and elimination of dual exchange rates

Estimated increase in formal remittances through transactions cost reduction

122

99

73

55 54

0

20

40

60

80

100

120

140

Sub-Saharan Africa Latin America and theCaribbean

Eastern Europe andCentral Asia

South Asia All developingcountries

perc

ent

34

The central issue for developing The central issue for developing countries:countries:

Transaction costs but not in all Transaction costs but not in all countriescountries

Remittances costs in Mexico (%, for 200 USD)

13.0

7.37.4

9.2

8.1

2000

2001

2002

2003

2004

Source: Pew Hispanic Center

Remittances costs in Latin America * (%, 200 USD)

12.111.3

10.68.9 8.6 8.2

7.3 7.3 7.3 6.9 6.4 5.8 5.6 5.4

7.9

Cu

ba

Re

p.

Do

min

ica

na

Jam

aic

a

Ha

iti

Ve

ne

zue

la

Bo

livia

Mé

xico

Ho

nd

ura

s

Gu

ate

ma

la

Nic

ara

gu

a

Co

lom

bia

El S

alv

ad

or

Pe

ru

Ecu

ad

or

Ave

rag

e

* From USA; 2004

Source: PEW Hispanic Center

35

Uses of remittances in Mexico in 2004% of total

Source: Fomin y Pew Hispanic Center

78.0

7.0 5.0 4.0 1.0 1.0

ConsummerGoods

Education Savings Others Investment Households

The central issue for developing The central issue for developing countries: How to capitalize countries: How to capitalize

remittances’ bonanza?remittances’ bonanza?

36

More remittances channeled through formal financial systems in order to increase the potential tax base of the recipient country.

More competition, combined with appropriate legislations and institutions, in order to reduce transaction costs: -60% between USA and Mexico since 2000.

More interconnected banking systems between OECD and non OECD countries in order to facilitate the access to credit in low income countries.

Trans-national systems of guarantees in order to facilitate the access to credit for durable goods.

Banking accounts in hard currencies in recipient countries in order to transfer the exchange rate risk, and highly remunerate in order to incentive savings and capital accumulation in low income countries.

Banking accounts in sending countries highly remunerated (spread with the market covered by the State as ODA?), if the previous option is not technically feasible (second best option).

The central issue for developing The central issue for developing countries: How to capitalize countries: How to capitalize

remittances’ bonanza?remittances’ bonanza?

37







38

European countries experienced an European countries experienced an impressive catching up process …impressive catching up process …

2000/06

1990

1960

1970

1980

1950

1990

2000/06

1980

1970

1960

1950

2000/06

1990

1980

1970

1960

1950

-3,5

-2,5

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

0 50 100 150 200 250deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Spain Portugal Italy


39

… … which invite to focus on some of which invite to focus on some of the key drivers of their success the key drivers of their success

storiesstories European anchoring and sound macro-economic policies have been

major drivers of the impressive Spanish catching up.

Interestingly Spain has been a major recipient of remittances: Spanish emigrants had a positive impact in the development of Spanish financial sector.

What could be the lessons of the Made in Spain for developing countries? Highly remunerated banking accounts in hard currencies for recipient countries? A Policy Dialogue activity in order to share experiences between bankers and policy makers.

Spain is a major sending country of remittances (3,4 billons of Euros in 2004 according to the Banco de España), most of them towards 3 countries (Ecuador, Colombia and Morocco) and at the same time Spanish private institutions are major financial operators in Latin America.

A window of opportunity for innovative development finance based on public private partnerships and co-development finance?

40

Thank youThank youfor your attention!for your attention!

1 IN SEARCH OF A BETTER WORLD Stabilization Policies in Developing Countries Ministry of Economy &...

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