Wage compression and the decline in inequality in Latin America: Good or bad?
Eduardo Levy Yeyati, Samuel Pienknagura 10 June 2014
Latin America’s inequality has fallen, driven by a reduction in the educational wage premium. This column discusses potential driving forces behind this phenomenon and argues that while this is a positive outcome, it may reflect a deeper malaise. A preliminary evaluation suggests that supply changes are more important than de-industrialisation. But lacklustre PISA scores support a more dismal hypothesis. The premium decrease may mirror a decline in education quality.
Unlike most of the developed world, Latin America has seen a notable decline in income inequality in the last decade.
Development Education Poverty and income inequality
Latin America, education quality, skills supply
The credit cycle and vulnerabilities in emerging economies: the case of Latin America
Julián Caballero, Ugo Panizza, Andrew Powell 02 April 2014
In recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. This column argues that these phenomena are linked, and may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess. There is no systematic information on firms’ currency mismatches and hedging activities, and none that includes those of subsidiaries that may be located in other jurisdictions, preventing an accurate analysis of the true risks.
Over recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. These phenomena are linked, and in Caballero et al. (2014), we argue that they may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess.
Exchange rates Financial markets International finance
exchange rates, Latin America, carry trade, credit conditions, original sin
Latin America's fashionable scepticism: Setting the record straight
Augusto de la Torre, Eduardo Levy Yeyati, Samuel Pienknagura 12 January 2014
There is a wave of fashionable pessimism over the future growth of Latin America. This column distinguishes between two main types of concerns – related to the trend of the long-term growth, and to the cyclical vulnerabilities of the region. While the first type is partially justified, the second type is not because such concerns overlook two fundamental changes in Latin American economies. First, the de-dollarisation of financial contracts reduces the adverse effects of currency depreciations. Second, a more credible monetary policy was implemented with a substantial decline in the exchange rate pass-through to inflation.
There is a wave of fashionable pessimism over Latin America’s future. Expressions such as 'submerging economies' and 'the party is over' have become common in analysts’ and investors’ parlance and, while mainly applied to the BRICS (Brazil, Russia, India, China, and South Africa), they have also contaminated perceptions about Latin America.
Latin America, long-term growth
Are the golden years for Latin America over?
Ignacio Munyo, Ernesto Talvi 07 November 2013
In recent years, the growth rates of Latin American countries have been cooling-off in comparison to the period of 2004-08. This column argues that the cooling-off is not due to a change in external factors because these have remained favourable. Persistent economic growth can be achieved by internal transformations. It cannot be sustained solely by the external conditions.
Latin American growth is cooling –off sharply. In contrast with the 6.6% average growth rates prevailing between September 2003 and September 2008 – the pre-Lehman-crisis “Golden Years” for the region – LAC-7 GDP growth rates in 2012-13 are decelerating significantly, and reverting back to their mediocre historical average displayed over the last 20 years (see Figure 1).1 Moreover, growth rates are cooling off in almost every country in the region.
Figure 1. GDP growth in Latin America (LAC-7, real GDP growth)
Development Global economy
economic growth, Latin America
Sustaining trade reform: Institutional lessons from Peru and Argentina
Elías A. Baracat, J. Michael Finger, Julio J. Nogués, Raúl León Thorne 28 October 2013
Trade reforms must be durable if countries are to reap the benefits of international specialisation and trade. Whereas Peru has sustained the reforms it carried out in the 1990s, Argentina has introduced multiple trade restrictions in recent years. This column argues that Peru’s success is due to two factors. First, Peruvian trade reform was part of a broader reform effort. Second, by highlighting the success of Asian countries and negotiating bilateral agreements, Peru’s political leaders fostered a positive vision of Peru’s role in the world economy.
Beyond removing restrictions, trade reform in Latin American in the 1980s and 1990s was also an attempt to reform the culture of policy management, and in some countries to introduce an optimistic, ‘Asian’ perspective into trade politics. In Peru, reforms have been sustained over several changes of president. In contrast, Argentina has introduced multiple restrictions and has reverted to the ‘off-the-books’ forms of policymaking that the adoption of GATT/WTO standards by previous the leadership tried to eliminate.
Institutions and economics International trade
WTO, trade liberalisation, Latin America, reform, Argentina, Peru
Who benefits from aid for trade?
Philipp Hühne, Birgit Meyer, Peter Nunnenkamp 31 July 2013
One of the few areas where multilateral trade talks are making progress is the so-called Aid-for-Trade Initiative designed to remove frictional barriers to trade such as in transportation, communication and energy infrastructure. This column discusses research suggesting that both donors and recipients benefit from the aid. Aid-for-Trade, however, seems to best promote the exports of middle-income countries rather than, for instance, sub-Saharan African ones.
Donors are widely believed to use aid as a means to foster their own commercial interest (e.g., Berthélemy 2006, Hoeffler and Outram 2011). Nevertheless, assessments of the Aid-for-Trade initiative have largely ignored so far that exporters in the donor countries may be among the main beneficiaries.1 Furthermore, there is limited theoretical guidance with respect to the relative strength of the effects of Aid-for-Trade on recipient versus donor exports.
Development International trade
Africa, Latin America, aid, East Asia
Four decades of terms-of-trade booms
Gustavo Adler, Nicolas Magud 04 July 2013
Commodity exporters have been both blessed and cursed by the boom-and-bust nature of commodity-price and demand swings. This column presents a new metric that computes the additional income arising from changes in the real purchasing value of output as a result of changes in relative prices. Focusing on Latin America, it’s clear that although its recent terms-of-trade boom is of similar magnitude to that seen in the 1970s, the associated income windfall has been much larger. The current weakening of external current-account balances in Latin America – even if driven by higher domestic investment – warrants close monitoring.
Throughout history, commodity exporters have been blessed and cursed by the boom-and-bust nature of commodity-price and demand swings (see Spatafora and Tytell 2009).
International finance International trade
Latin America, commodities, boom and bust, current-account balance
Save more to improve infrastructure in Latin America and the Caribbean
Eduardo Cavallo 03 April 2013
Latin America and the Caribbean have less infrastructure than the rest of the world. What they have is also of much poorer quality. This column argues that to reap the rewards of good infrastructure, Latin American and Caribbean countries must increase both investment and saving over the long-term by creating institutional capacity, strengthening the rule of law, and building stable macroeconomic-policy frameworks. It won’t be easy.
Saving and investment, like the chicken and the egg, involve circular causality. But regardless of causality, there is no doubt that Latin America and the Caribbean need more of both.
That the region has an infrastructure problem hardly requires an explanation:
- There is a gap in terms of the quality and quantity of the stock of physical infrastructure in Latin America and the Caribbean compared with:
- The region’s needs.
- The advanced economies.
- The emerging Asian countries.
The infrastructure gap is visible in:
Latin America, investment, Caribbean, savings
The trend reversal in income inequality and returns to education: How bad is this good news for Latin America?
Augusto de la Torre, Julián Messina 07 March 2013
The last decade has seen unprecedented economic and social achievements in Latin America. This column investigates the relationship between changes in the labour market and the drop in income inequality across the continent. There is certainly room for more research to help us better understand Latin America’s spectacular decline in income inequality, but what is clear is that the good news is tempered by the fact that the specialisation of the region’s economies are relatively low in skill intensity and therefore productivity.
Latin America witnessed unprecedented economic and social achievements during the last decade. In particular, the year 2003 appears as an important inflexion point for the region’s economic history, a point that we have highlighted in several World Bank publications1. Specifically, moderate poverty (less than US$4 purchasing power parity per capita, which leveled around 45% of total population during the 1990s and until 2003, steadily falls to less than 30% by 2011, allowing more than 70 million Latin Americans to leave poverty in less than a decade.
education, income inequality, Latin America
Why scarce small and medium enterprise financing hinders growth in Latin America: A role for public policies
Rolando Avendaño, Niels Boehm, Elisa Calza 27 January 2013
Small and medium-sized enterprises provide the vast majority of employment in developing countries and are keystones in the productive structures of emerging economies. This column argues that the growth of such firms is being hindered by scarce financing. Looking at Latin America, it is clear that public financial institutions are increasingly important in meeting credit demands. If emerging economies want to see long-term growth, there needs to be a comprehensive approach to reducing the ‘traditional’ barriers to small and medium enterprise financing.
Small and medium enterprises represent a significant share of emerging economies’ business fabric. Nevertheless, they continue to face multiple challenges in meeting their financing needs. Public financial institutions have come to play an active role in addressing these financing gaps through new operational mechanisms and adapted instruments.
Latin America, Finance, SMEs