Friday, July 19, 2013

Latin America and the new stage of global economy recovery

It seems that a new round of adjustment is under way in the global economy. Concerning the emerging economies it considers Lower commodity prices , capital outflow , and lower economy growth rates in the BRIC country group (4,3% on average, down from 5% for 2013)as the more relevant variables of what such a new stage look like. Besides, advanced economies have different growth paths. While the USA economy keep moving forward, with 1,8% expected GDP growth for 2013, and 2,4% GDP growth for 2014( ,the EU economy is still deep into the recessionary territory, (-0,6% for 2013,IMF )while Japan is pushing hard with its three arrow strategy for improving its growth prospect (2% in 2013,IMF). An Interesting feature in this stage, is that among the top ten higher economy growth for 2013, seven economies are from Latin America. It follows ,that this continent is doing what just a few expected it would be possible: Making the role of the main engine for global growth. Having said that some questions arises also: ¿Did Latin America took advantage of the first stage ?,¿ Is it over the chance of getting healthy economy growth rates with lower commodity prices?. a.- Fist the first. Latin America and the missed opportunity hypothesis. There is evidence which suggest that such hypothesis do not fully apply to the case. In its May 20th report, the IMF ´s global economy forum have an article (Adler y Maqud “ Saving Latin America´s unprecedented income windfall), which shows that the recent term of trade shocks (2000), while important has not been more so than the one of the seventies (1970).What it is different this time , deals with the use of those resources: More investment in capital equipment , less investment in foreign financial asset as saving for changing conditions in the economic cycle, and more consumption (Chile, Brazil). In the Chilean economy case, to keep the pace of the current public expenditures level with lower copper prices than current ones, would have mean an VAT of 23% instead of the actual 19%. On this regard, Brazilian economy has been on the critical watch because of its higher consumption bias following this windfall income effects, but it is important to keep in mind that Brazil has additional sources of incomes other than just commodity prices. For example new sources of oil supply in the Atlantic ocean and its expected higher revenues. Thus, it looks that overall there has been stronger preference for improving potential output and future higher rates of economic growth, instead of a passive approach of wait and see.- b.- Is it over the chance of moving through with lower commodity prices?.Latin America´s growth over the past decade has been driven by Physical capital and labor. Productivity has increased although below other fast growth regions. In the years 2010-2013 labor and capital accumulation contribute 3¾ percentage points to Latin America annual GDP growth, while total productivity Factor contribute by ¾ percentage points, therefore the chances of sustainable GDP growth goes along with higher productivity, (Werner, A , after a golden decade, Can Latin America keep its luster?)May 6th 2013 IMF direct),fiscal saving and structural reforms to improve competitiveness. All of which is not out of the policy makers priorities , at least in those economies which so far have the lead.

Friday, July 05, 2013

Foreign direct investment: Its impact in the Chilean economy

Foreign Direct Investment has been an important source for economic growth in Latin America and other countries in the world. Whether it is in services, banking, mining, information technologies, manufacturing, retail or transportation, FDI have important advantages such as the access to new technologies, new management models, “know how” for productive process , and a better approach to R&D in private firms. Some Latin America countries, have made huge progress in the competitiveness index, because of foreign investment in new technologies (Costa Rica),or financial services (Chile).- The implications of FDI are wide and relevant. A recent research done by the Chilean Ministry of Economy concerning the impact of FDI in the economy ,got interesting results: a.- Firms with foreign investor participation ,pay wages 130% higher than their national counterparts.- b.- 15% of higher employment rate between 2009-2011 , was because of FDI incoming flows c.- 18% of GDP increases and 30% of investment (2009-2011),was because of FDI flows into the Chilean economy ( due to the global financial recession, the Chilean economy GDP growth was -1% in 2009, and 3,6% on average in that period).- So , It is in the best interest of domestic economies to support policies and the institutional framework aimed at keeping the incentive to invest in Emerging economies . FDI is link to more and better business opportunities, higher employment and welfare increases.- The expectations in Chile is for further FDI flows in the near future. The average GDP growth expectation of 4,5-5% for the next years ,imply a strong incentives for investment opportunities in energy (the environment protection requirements should definitively be clarified soon) , infrastructure, private health, and banking sector. In Latin America, there also good opportunities in those economies whose GDP expectation is on the rise, such as those ones working out the transpacific partnership agreement .