Comparative Regional Economy Lecture Note 5 R 12

Comparative Regional Economy <Lecture Note 5 R > 12. 05. 14 CRE: CIS, Sub-Saharan Africa and Latin America * Some parts of this note are summary of the references for teaching purpose only. Semester: Spring 2012 Time: Monday 2: 00 -5: 00 pm Class Room: 115 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010 -4001 -8060 E-mail: yshong 123@gmail. com 1

I. Commonwealth of Independent States 2

CIS MAP 3

Joining CIS and EU Countries Armenia (1991); Azerbaijan (1993); Belarus (1991); Kazakhstan (1991); Kyrgyzstan (1991); Moldova (1994); Russia (1991); Tajikistan (1991); Ukraine (1991); Uzbekistan (1991); Associate member: Turkmenistan (associate member since 2005); Georgia (1993 outside the Council of Defense Ministers) 4

Current CIS Members 5

CIS (Commonwealth of Independent States) History The organization was founded on December 1991 by the Republic of Belarus, the Russian Federation, and Ukraine on the dissolution of the Soviet Union and the creation of CIS as a successor entity to the USSR. There are 10 member states of the Commonwealth of Independent States and one Ukraine observation. Areas of member states’ joint activities: Protecting people’s rights and freedoms Coordination foreign policy Cooperation in the formation of a common economic space, developing transport and communication systems Healthcare and environmental protection Social issues and immigration policies Fighting organized crime Cooperation in defense polices and guarding borders 6

Regional Organizations Related to CIS Although the CIS has few supranational powers, it is aimed at being more than a purely symbolic organization, nominally possessing coordinating powers in the realm of trade, finance, lawmaking, and security. It has also promoted cooperation on and cross border crime prevention. Some of the members of the CIS have established the Eurasian Economic Community with the aim of creating a full fledged common market. Associated organizations § Free trade area (CISFTA) In 1994, the CIS countries agreed to create a free trade area, but the agreements were never signed, so in 2009 a new agreement was achieved to create an FTA by the beginning of 2011. 7

§ Eurasian Economic Community The Eurasian Economic Community originated from a customs union between Belarus, Russia and Kazakhstan on the 29 March 1996. [24] It was named the EAEC on 10 October 2000[25] when Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan signed the treaty. Eur. As. EC was formally created when the treaty was finally ratified by all five member states in May 2001. Armenia, Moldova and Ukraine hold observer status. Eur. As. EC is working on establishing a common energy market and exploring the more efficient use of water in Central Asia. § Organization of Central Asian Cooperation Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan formed the OCAC in 1991 as Central Asian Commonwealth (CAC). In 1998 it became the Central Asian Economic Cooperation (CAEC), in February 2002 it was renamed to its current name. § Common Economic Space: formed in 2003, aiming at monetary union A Customs Union of Belarus, Kazakhstan and Russia was thus created in 2010 with a single market envisioned for 2012. 8

Economic Status of CIS 9

CEE and CIS Entering Crisis CEE and CIS also entered the crisis With macroeconomic and financial indicators showing more vulnerabilities relative to other emerging regions (dependence on external financing, remittances, commodities, higher private sector debt) GDP growth (annual percent change) CEE Central and Eastern Europe; CIS Commonwealth of Independent States 10

Growth Forecasts in CIS % Source: IMF 11

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Russia: Physical Map Kamchata Peninsula Russian Plain Ural Mts Kazay uplands

Introduction Russian Domain includes Russia, Belarus, Ukraine, Georgia, and Armenia (all were part of the U. S. S. R. ) Russia is the largest country (in land area) on Earth; it spans 11 time zones – Rich in resources, but has one of the harshest climates The Russian Domain has had extremely rapid political and economic change since 1990 – From centrally planned economy to capitalism – From authoritarian dictatorship to democracy – Region’s economy is weak; commitment to democracy uncertain, nationalist movements threaten stability – Ukraine, Belarus, Georgia, Armenia must build global relationships 14

Russia U. S. S. R. Russia Population: 289 million Population: 144 million Area: 22. 4 million km 2 Area: 17 million km 2 15

Russia: Land Frontiers Russia shares boundaries with twelve countries: Ukraine, Belarus, Latvia, Estonia, Finland, Norway, Mongolia, North Korea, China, Kazakhstan, Azerbaijan and Georgia. A boundary that measures 12, 880 km (8000 mi. ) stretches between the Black Sea and the Pacific ocean. In the Far East, Sakhalin Island is separated from the northernmost main island of Japan by a 40 km. (25 mi. ) strait; even narrower straits separate Japan from the Russian held Kuril Islands 16

Russia: Population Russian population is declining; from 147, 300, 000 in 1997, down to 145, 500, 000 in 2002. Russia rank 8 th in population among the countries of the world. Russia has 2. 30% of the world’s population. A little more than a century ago, Russia had twice as many inhabitants as the U. S. ; now Russia has about one half the U. S. population. 17

Russia: Resources Russia has a rich resource base. One of the most important mineral producing countries with widely scattered deposits. Russia leads the world in the production of natural gas and lead. Russia also leads the world in iron ore reserves and natural gas reserves. Russia is second in the production of platinum, tungsten, aluminum and vanadium. 18

Russia: Regions The Ural Mountains: – Iron, ferro alloys, copper, aluminum, potash, asbestos, magnesium, low grade coal The Volga Urals and West Siberian Plain: – Petroleum and natural gas The Caucasus Caspian Region: – Petroleum, natural gas, nonferrous metals Middle Asia: – Coal, copper, iron, natural gas, oil, sulfur, lead, zinc, aluminum, uranium, ferro alloys, phosphate, asbestos, mercury, sodium sulfate. More than 90% of Russia’s coal reserves are found in Asiatic CIS. 19

Russia: History Highlights 1462: Establishment of the Grand Duchy of Muscovy. Period of eastward expansion by the Cossacks. 1682 1725: Czar Peter the Great 1760 1796: Czarina Catherine the Great Period of colonialism, imperialism. Major expansions in quest of warm water ports. 1917: Russian Revolution, establishment of Communist government, formation of the USSR. 1979: USSR invasion of Afghanistan, again in quest of a warm water port. 1991: Collapse of the USSR, political reorganization, formation of the Commonwealth of Independent States. 20

Russia: Political Geography In 1991, the Union of Soviet Socialist Republics (USSR) was succeeded by the Commonwealth of Independent States (CIS), which included all the former Soviet republics except Lithuania, Latvia, Estonia, and Georgia; these proclaimed their independence. Following the devolution of the Soviet Union, the map of the Russian Federation comprises 22 federal republics and two federal cities, Moscow and St Petersburg Based on relative location, Russia’s internal republics are classified into five groups: § § The Republics of the Heartland: Mordoviya, Chuvashiya, Mariy el, Tatarstan, Udmirtiya, Bashkortostan, and the Urals Republic The Republics of the Caucasian Periphery: Dagestan, Chechnya, Ingushetiya, North Ossetia, Kabardino Balkariya, Karachayevo Cherkisiya, Adygeya, and Kalmykiya 21

§ § § The Republics of the Southeast: Altaya, Khakasiya, Buryatiya, Tyva, Promorskiy Kray (Maritime Republic) The Republics of the North: Kareliya, Komi, Sakha (Yakutiya) Yevreskaya (Jewish) Autonomous Region Following the election of Vladimir Putin as President in March 2000, one of his first moves was to turn Russia into “a single economic and legal space. ” He issued a presidential decree which divided Russia’s 89 republics and regions into seven new “federal districts. ”: Central (Moscow), Far Eastern (Khabarovsk), North Caucasus (Rostov na Donu), Northwest (St. Petersburg), Siberia (Novosibirsk), Urals (Yekaterinburg), and Volga (Nizhny Novgorod). 22

The Fall of the USSR December 1991 CPSU formally dismantled Commonwealth of Independent States (CIS): Loosely organized Gorbachev resigns as President of USSR. Soviet Union ceases to exist. 1991 1999 Boris Yeltsin dissolved parliament in 1993: New parliament, New constitution. Formed Commonwealth of Independent States of CIS Shock Therapy for Economy 11 of 15 former Soviet Republics join CIS 23

1999 2008 • Vladimir Putin appointed President in 1999 (won re election twice) • Forcefully dealt with Chechnya • Tightened Grip of government on Economy • Restricted Voting Rights and Liberties 24

Economic Status of Armenia, the Kyrgyz, Tajikistan, Russia and the CIS Per capita GDP US$ 2008 Average real GDP growth 2000 07 percent Real GDP Growth 2008 percent Real GDP growth 2009 percent Armenia 3877 11. 8 6. 8 14. 4 Kyrgyz Republic 958 4. 5 7. 6 2. 3 Tajikistan 702 8. 7 7. 9 3. 4 Russian Federation 11870 7. 0 5. 6 7. 9 CIS 7855 7. 7 5. 5 6. 6 25

Importance of Remittances to Low Income CIS Economies (2008) Remittances US$ Remittances as percent millions percent of GDP of imports Armenia 1062 9 22 Georgia 732 6 12 Kyrgyz Republic 1205 23 25 Moldova 1897 31 39 Tajikistan 2670 52 94 26

Fiscal performance 27

External Public Debts 28

Economic Crisis and Low Income CIS All three countries suffered an external shock. Remittances fell by nearly a third in dollar terms in 2009, from 2008 levels, in all three countries, because of recession in Russian construction industry and depreciation of the Russian rouble. Exports fell by 32 percent in Armenia and 16 percent in Kyrgyz Republic. Armenia suffered a large fall in FDI. Unlike middle income CIS, these economies did not suffer a reversal of private capital inflows, because they had attracted very little short term capital prior to the crisis. Adjustment to the external shock was via compression of imports, which fell by 24 27 percent in dollar terms in 2009. 29

External Shock and Real Output Armenia was hit very hard, with real GDP falling 14 percent in 2009. KY and Tajikistan suffered a slowdown but avoided recession. Private investment fell sharply in Armenia and Tajikistan: in Armenia this was a large component of aggregate demand prior to the crisis, which is one of the main reasons why the recession was so severe. Private consumption fell in all three countries, because the fall in remittances cut household incomes. Real exchange rate depreciation dampened the impact of lower remittances on household incomes and shifted much of the burden of adjustment to lower private consumer demand to imported consumer goods, thereby avoiding severe falls in demand for non traded goods; this is partly why KY and Tajikistan avoided recession. 30

Private Investment and FDI in Armenia, Kyrgyz Republic and Tajikistan: 2007 -2009 2007 2008 2009 Armenia Private Investment (% of GDP) FDI (dollar millions) 32. 9 701 38. 9 929 30. 8 458 Kyrgyz Republic Private Investment (% of GDP) FDI (dollar millions) 16. 5 208 16. 3 265 19. 1 140 Tajikistan Private Investment (% of GDP) FDI (dollar millions) 7. 0 160 6. 0 300 1. 0 35 31

II. Sub-Sahara Africa 32

Geography of Sub-Saharan Africa 33

Climate Map of Sub-Saharan Africa 34

Vegitation More grassland than tropical rainforest. Tropical rainforest (Selva) is different from jungle. There is very little jungle. 35

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Major Religions • Diffusion • Source areas • Colonization – Missionaries • Rapid growth of Islam 37

Historical Tragedy of Africa Slave Trade − Estimated 12 million were taken from Africa and sent to the Western Hemisphere from 1500 1870. − Enslaved Africans sent to Europe, North Africa, Southwest Asia 38

Legacies of Colonialism and Conflict European Colonization − Before the arrival of Europeans, Sub Saharan Africa had a complex pattern of kingdoms, states, and tribal societies. − It took Europeans centuries to gain control of this region. − The Disease Factor • Malaria and other tropical diseases made it difficult for Europeans to establish colonies. • Quinine made colonization possible. • The wealth of the region made colonization desirable. − The Scramble for Africa • Berlin Conference of 1884: 13 European countries divided and traded Sub Saharan Africa; no African nations • Ethiopia remained unconquered 39

European Colonization in 1913 40

Development Performance in SSA ❑ 1950 s & 1960 s Africa: large endowments of natural resources expected to encounter higher rates of economic growth in post independence period. ❑ After Independence SSA: the most heavily indebted countries • Debt Crisis (late 1970 s ~ beginning of the 1970 s) –cease lending to SSA • Industrialized Western countries : protectionist trade policies +recessions in their own economy • Declining living standards + rising OECD trade barriers ❑ Annual GDP Growth Rate SSA: 1. 7% over 1980 90, 2. 1% over 1970 97 (growth in agriculture) 41

❑ Annual GDP Growth Rate SSA: 1. 7% over 1980 90, 2. 1% over 1970 97 (growth in agriculture) East Asia: 7. 8% over 1980 90, 9. 9% over 1970 97 (growth in industry) ❑ Real GDP Growth SSA: 3% in the late 1970 s 1% in the following decade ❑ GDP Per Capita SSA: decline since the early 1980 s HPAEs: maintain positive per capita growth rates since 1960 s 42

Overview of Development Performance in SSA African countries had relatively large endowments of natural resources and hence were expected to encounter significantly higher rates of economic growth in the post independence period. In Sub Saharan Africa ended up being the poorest, most heavily indebted countries in the world. Poverty is still escalating while many African countries continue to spend more on debt repayments than they do on health care for their people. The debt crisis in the late 1970 s prompted the private sector to cease lending to SSA countries by the beginning of the 1980 s. The decade of the 1980 s was a period of a hostile global environment for Africa as the industrialized Western countries began to resort to increasingly protectionist trade policies while the oil shocks induced recessions in their own economies. African nations soon faced rising OECD trade barriers in addition to declining living standards. 43

Growth Much of the SSA growth was in agriculture, most East Asian growth was in industry. In SSA, real GDP growth has seen a general decline from about 3% in the late 1970 s to about 1% in the following decade, recovering only slightly in the 1990 s. GDP per capita has been declining since the early 1980 s. Capital Investment and FDI In SSA as the investment rate declined in the 1980 s, productivity fell sharply and had a negative impact on growth. Contribution of education, although lower than East Asia, has been similar to that of South Asia. The contribution of physical capital is very strong in East Asia than in South Asia and even negative in SSA. For most African countries, various strategies to attract FDIs have not succeeded insofar as in the absence of large domestic markets, investors are attracted mainly by the potential to extract low processed products and export to industrialized countries in Europe and North America. 44

Trade and Industrialization East Asian economies successfully undertook the transition from import substitution to export led industrialization between 1960 1975 when SSA was deeply entangled into ISI. What is noteworthy is that East Asia economies undertook the critical transition when the world economy was extremely conducive to trade and exports and, more importantly, when the international division of labor was experiencing a drastic shift. Industrialization and Technology Countries such as Botswana, Cote d'Ivoire, and Kenya invested productively in agriculture, but other African countries turned away from their primary export base. In contrast to Southeast Asia, foreign exchange shortages hampered industrialization efforts. Because protection and other policies insulated manufacturing from the disciplines of the markets, it was possible to start industries and employ technologies that were not always closely related to the resource and factor endowments in Africa. 45

Gross National Savings (GN Savings in % of GDP) and Investment (in % of GDP) in SSA Source: International Monetary Fund, World Economic Outlook Database, September 2005 Savings rates in Africa (16% of GDP) have followed an erratic trend and remained lower than investment rates (19% of GDP). 46

Foreign Aid as a Catalyst for Development Source: OECD Development Centre / African Development Banks, 2008 47

International Trade and Competitiveness ❑ SSA Africa’s share in world trade has been falling since 1980. SSA’s competitiveness in world markets has been eroded in the last three decades. Its poor external performance Trade as a percentage of GDP: Nigeria 21. 5%, South Africa 20. 7% 48

Economic Development in Africa-Political Economy Roots of African Poverty − Environmental limitations and slavery − Failed Development Policies Economic nationalism: inefficient, often corrupt governments took over large segments of economy − Corruption Kleptocracy: a state in which corruption is so institutionalized that politicians and government bureaucrats siphon off huge percentage of country’s wealth 49

Links to the World Economy − Most African exports are to EU or to U. S. − Low connectivity: few phones and TVs (40/1000 people) Multinational providers now competing for mobile phone customers. − Aid Versus Investment: More aid than investment; Poverty and political instability discourage investment. − Debt Relief / Debt Crises: World Bank/IMF will reduce debt for countries with “unsustainable” debt burdens. Savings can be used for basic services. 50

Global Linkages: Aid Dependency 51

Structural Causes of Underdevelopment in Africa Tropical climate Natural environmental factor Epidemics (e. g. Malaria) Barren soil Lack of water resources Civil war (racial and religious dispute) Corruption and Inefficient structure Politico social factor Lack of leadership Lack of people’s will for development (Continued) 52

Mono cultural economic structure Failure of Industrialization Poor environment for Investment Econo Industrial factors Small market size High transportation costs Weak agricultural basis Underdeveloped financial and capital market Poor education environment Human Capital Insufficient human capital Brain drain Export price fluctuations of primary goods External factors Deterioration of Terms of trade (TOT) Disconnection from world market (Inland countries) 53

African countries classifications follow IMF categories: Oil Exporting Countries: Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, and Nigeria. Middle-Income Countries: Botswana, Cape Verde, Lesotho, Mauritius, Namibia, Seychelles, South Africa, Swaziland. Low-Income Countries: Benin, Burkina Faso, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda, Zambia. Fragile Countries: Burundi, Central African Republic, Comoros, Democratic Republic of Congo, Côte d'Ivoire, Eritrea, the Gambia, Guinea Bissau, Liberia, São Tomé and Príncipe, Sierra Leone, and Togo. Growth figures for Zimbabwe and Somalia are not included in most IMF metrics. 54

Trends Prior to the Crisis The Africa region experienced strong economic growth in recent years, averaging 6. 5% per year between 2002 and 2007. Growth was facilitated by macroeconomic reforms and driven by high external demand for primary commodities, notably oil and minerals. Trade was bolstered by steady growth in industrialized countries and explosive growth in emerging economic powerhouses such as China and India. Demand for African commodities drove an investment surge in many countries, with foreign direct investment (FDI) stocks nearly doubling between 2003 and 2007. Net private capital inflows—including FDI, remittances, portfolio flows, and other sources—are thought to have quadrupled between 2000 and 2008. These changes followed decades of post independence economic stagnation. 55

While Africa’s recent growth was driven by the global commodity boom, many other factors contributed as well. Both net oil exporters and oil importers experienced growth of over 5% between 2004 and 2008, and investment extended beyond traditional foreign interests in extractive industries. The IMF reported in 2008 that Africa’s “fast growers are a diverse group, including resource rich and landlocked countries and resource poor countries that have not had large gains in their terms of trade. ” 56

SSA Countries’ Economic Indicators Real GDP Growth Rate Consumer Price % Current Account/GDP 2007 2008 2009 e 2010 f Sub Sahara 7. 0 5. 5 1. 3 4. 1 6. 8 11. 9 10. 5 7. 3 0. 2 -3. 7 -2. 7 North East 10. 4 8. 7 5. 4 6. 0 11. 2 18. 7 21. 0 7. 4 -10. 1 -8. 1 -9. 0 -9. 2 Ethiopia 11. 5 11. 6 7. 5 7. 0 15. 8 25. 3 36. 4 5. 1 4. 5 5. 6 9. 3 Sudan 10. 2 6. 8 4. 0 5. 5 8. 0 14. 3 11. 0 9. 0 12. 5 9. 0 11. 2 9. 1 Central 7. 3 5. 8 4. 3 5. 1 9. 1 11. 9 14. 9 8. 2 4. 8 8. 1 8. 9 9. 4 Congo D. R. 6. 3 6. 2 2. 7 5. 4 16. 7 18. 0 39. 2 14. 6 1. 5 15. 3 14. 6 23. 7 Kenya 7. 1 1. 7 2. 5 4. 0 9. 8 13. 1 12. 0 7. 8 4. 1 6. 8 8. 1 6. 3 Tanzania 7. 1 7. 4 5. 0 5. 6 7. 0 10. 3 10. 6 4. 9 9. 0 9. 7 9. 9 9. 1 Uganda 8. 4 9. 0 7. 0 6. 8 7. 3 14. 2 10. 8 3. 1 3. 2 5. 5 5. 7 South 11. 6 8. 5 0. 0 6. 1 7. 6 12. 6 11. 0 10. 8 6. 3 0. 2 6. 3 3. 8 Angola 20. 3 13. 2 0. 2 9. 3 12. 2 12. 5 14. 0 15. 4 15. 9 7. 5 3. 4 2. 2 Zimbabwe 6. 9 14. 1 3. 7 6. 0 72. 7 156. 2 9. 0 12. 0 10. 7 29. 5 21. 4 19. 9 Middle west 5. 8 5. 3 2. 6 4. 4 4. 5 10. 1 8. 8 6. 6 8. 0 9. 3 1. 4 4. 3 Ghana 5. 7 7. 3 4. 5 5. 0 10. 7 16. 5 18. 5 10. 2 12. 0 18. 7 12. 7 15. 4 Nigeria 7. 0 6. 0 2. 9 5. 0 5. 4 11. 6 12. 0 8. 8 18. 8 20. 4 6. 9 13. 8 South Africa 5. 1 3. 1 -2. 2 1. 7 7. 1 11. 5 7. 2 6. 2 -7. 3 -7. 4 -5. 0 -6. 5 Non oil producing 5. 3 4. 7 1. 4 3. 3 6. 3 10. 8 8. 9 5. 7 5. 2 7. 1 5. 7 7. 3 Oil producing 7. 8 6. 1 2. 2 5. 1 5. 5 9. 4 7. 8 14. 9 0. 9 6. 2 57 Note: e means estimation, f means forecast Source: IMF.

Real GDP Growth in Middle East and African Countries Middle East/North Africa Sub-Saharan Africa Source: World Economic Outlook Database April 2010 58

Africa: FDI Inflows (Value and Percentage of Gross Fixed Capital Formation, 1995 2008) 59

Change in African GDP Per Capita Source: IMF. Regional Economic Outlook Database, April 2009 60

In many countries, productivity increased and domestic investment improved, in part due to remittances from African workers overseas. Domestic demand also grew, notably in telecommunications as mobile phone and internet use spread rapidly. - Recent growth has been aided by policy reforms, as many African governments have improved economic governance through better banking regulations, oversight mechanisms, and fiscal restraint, which brought down inflation, encouraged private investment, and instilled greater macroeconomic stability. International debt relief programs may have contributed to these trends. The rate of armed conflict has also declined since the start of the decade, making some countries and the region more attractive to foreign investment. 61

Common Challenges: Diversify to Raise Exports Source: OECD Development Centre, UN Comtrade, 2008 In 2007, only 12 increased export volume by 5 percent or more. Between 2002 and 2006, 29 African countries have further specialized. The 10 less diversified countries are all oil exporters. The 5 most diversified are Morocco, Tunisia, South Africa, Tanzania and Senegal. Diversification should be fostered to sustain growth and fight against rising import costs. 62

The Global Competitiveness Index (GCI) 2008/09: Ranks for Africa’s 3 Best & 3 Worst Ranking in 2008 09(out of 134 countries) e. g. Burundi: Strengths: macro stability and health/primary education. Weaknesses: institutions, technological readiness, market size. 63

Global Competitiveness Index Scores for Four African and Four non-African Countries (2008 -2009) 64

Improving the Competitiveness of African Economies Short-term Policy Reforms: Keeping markets open to trade Increasing access to finance through market enabling policies Long-term Reforms: Infrastructure remains one of the top constraints to businesses in Africa, especially energy and transport Education and Health: higher education and training; improved healthcare systems key for Africa’s productive potential More examples of effective institutions; good governance and strong and visionary leadership may still be improved. 65

Development Challenges Economic development is constrained in many countries by numerous structural factors, including a lack of technological investment in agriculture; limited communications and transportation infrastructure; high population growth; high ratios of foreign debt to national income; and the burden of disease. Many countries rely on external aid to balance their budgets and provide basic services. Unrest and instability continue in many areas, and few states constitute transparent and representative democratic regimes. 66

African exports are the least diversified of all developing regions. Many African economies remain reliant on primary commodity exports, which has rendered them vulnerable to external shocks. Natural resource extraction, while effective at creating growth and drawing foreign investment, is also associated with high levels of corruption, labor exploitation, environmental degradation, and internal displacement. During recent periods of high resource revenues, oil- and mineralproducing countries failed to use such revenues to further increase productivity, significantly diversify their economies, or improve social services. Simultaneously, windfall profits may have contributed to already endemic corruption in some countries. 67

Capital Inflows to Africa Source: IMF Regional Economic Outlook ( Sub Saharan Africa) April 2009 68

Fiscal and Trade Balances Fiscal Balances Current Account Balances Source: International Monetary Fund Regional Economic Outlook database, April 2009. 69

Recent Development Amid signs that the global economy is emerging from the worldwide recession of late 2008 and 2009, African economies appear to be recovering from the crisis with the potential to significantly increase growth rates in the coming year. Many African governments, particularly those of resource-rich and middle-income countries, lessened the economic blow of the recession by implementing economic stimulus and/or financial sector rescue packages. Sizable assistance by international financial institutions, with U. S. support, also played an important stabilizing role. Still, the drop in economic growth experienced in most African countries in 2008 and 2009 is thought to have significantly negatively affected African countries’ ability to make progress in reducing poverty. 70

African Political Instability Some effective multi party representative democracies – – Botswana Mauritius Republic of South Africa Tanzania Cases of Extreme Political Instability in Africa § Failed state: Somalia, without a real government for almost two decades; continuing turmoil, crisis in June/July 2009? § International Conflict: Ethiopia and Eritrea; Currently, spill over tendencies from Somalia 71

§ Internal conflict: Nigeria and the petroleum rich states Chad: continuing struggle for control of oil wealth Sudan: Darfur and the Southern Provinces Rwanda: Genocide § Lower level frictions: Kenya Zimbabwe Break down of control of the government and effectiveness of the legal judiciary system: Corruption, economic crime Disintegrating law and order: robbery, murder, etc. 72

Effects of Political Instability on Development Political Effects Threatens institutions, Generates risk and uncertainty, and - Creates the potential for vicious downward spirals into disruption, chaos, civil conflict, death and destruction Economic effects Reduces savings, as well as foreign and domestic investment Reduces or destroys investment in human capital Reduces legitimacy of a government, obstructing effective policy formulation and implementation for the long term Greater vulnerability of government then promotes patronage payments and corruption rather than long range approaches to policy Taxation may be distorted to benefit supporters of government rather than being aimed at equity fir the longer term Pattern of public expenditures may be deformed, reduced, inefficient and ineffective 73

4. Reduces legitimacy of a government, obstructing effective policy formulation and implementation for the long term 5. Greater vulnerability of government then promotes patronage payments and corruption rather than long range approaches to policy 6. Taxation may be distorted to benefit supporters of government rather than being aimed at equity fir the longer term 7. Pattern of public expenditures may be deformed, reduced, inefficient and ineffective 74

III. Latin America 75

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The Global North, Global South (and Global East) 78

Global South 85% of the World’s People 20% of the world’s wealth 79

Colonization of LAC The first period of Spanish conquest from 1492 to 1570 established a military presence leading to the destruction/assimilation of native civilizations, a religious presence (Christianization), and a basic administrative presence in Latin America. The second period from 1570 to 1700 saw the official establishment of many settlements by Spanish colonists (regular citizens). The third period during the 18 th century was a time of reform and political reorganization in the colonies that lead to revolt, many countries eventually secured independence from the Europian colonial powers. 80

Spanish and Portuguese Exploration, 1400 -1600 81

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The Colombian Exchange • “Columbian Exchange”—transfer of peoples, animals, plants and diseases between the New and Old Worlds • Inhabitants of the New World lacked immunity for Old World diseases. Diseases overwhelmed native populations. – Smallpox, measles, malaria, yellow fever • Vast exchange of plants and animals which changed diets in both regions – New World staples—maize, potatoes and cassava – Old World staples—wheat, olives, rice, bananas, etc. • European livestock dramatically impacted the New World – Horse—increased the efficiency of hunters (buffalo) and the military capacity of warriors 83

Latin America Economic Characteristics Diverse economies Disparity of income distribution NAFTA member Subsistence farming Plantation agriculture Deforestation Oil resources Ecuador, Venezuela, Mexico Diverse mineral resources 84

Latin America-Introduction Latin America has 17 countries Colonized by Spain & Portugal (Iberian countries) Large, diverse populations • 490 million people total • Indian and African presence • 75% of the people live in cities • Several megacities (more than 10 million people) Industrialization & development grew since 1960 s • Free Trade Area of the Americas (FTAA) proposes to integrate economies of Latin America, North America and the Caribbean (except Cuba) • Natural resource extraction remains important 85

Dependent Economic Growth Development Strategies Import substitution: policies that foster domestic industry by imposing inflated tariffs on all imported goods Most Latin American countries are “middle income” Extreme poverty in the region, however Industrialization Manufacturing emphasized since 1960 s Growth poles: planned industrial centers Maquiladoras (assemby plants) and Foreign Investment Maquiladoras: Mexican assembly plants lining U. S. border (Over millions employes) 86

Economic and Social Development Primary Exports Latin America specialized in commodities into the 1950 s Bananas, coffee, cacao, grains, tin, rubber, petroleum, etc. Agricultural Production Since 1960 s, agriculture has become more diversified and mechanized. Machinery, hybrid crops, chemical fertilizers, pesticides, make agriculture very productive Mining and Forestry Products Silver, zinc, copper, iron ore, bauxite, gold, oil, gas Mexico, Venezuela, Ecuador export oil Mining becoming mechanized, laying off workers Logging Exportation of wood pulp provide short term cash infusion Plantation forests of introduced species replace diverse native forests 87

Economic and Social Development Latin America in the Global Economy Expansion of European capitalism created Latin American condition of underdevelopment Creates prosperous cores and dependent, poor peripheries Increased economic integration within Latin America and dominance of U. S. market Neo liberalism as Globalization Stress privatization, export production, and few restrictions on imports Benefits include increased trade and more favorable terms for debt repayment; most political leaders are embracing it Some signs of discontent with neo liberalism and support for reduction of poverty and inequality 88

Economic and Social Development Dollarization Country adopts (in whole or in part) the U. S. dollar as its official currency Full dollarization – U. S. dollar becomes only currency Until 2000, Panama was the only fully dollarized Latin American country, Ecuador also became fully dollarized in 2000, El Salvador considering Limited dollarization more common strategy U. S. dollars circulate with country’s national currency Tends to reduce inflation, eliminate fears of currency devaluation, and reduce costs of trade 89

Major Obstacles Recurrent economic and political crises which have affected the rate of development of all countries in the region; Uneven access to technology has resulted in unbalanced digital inclusion in most countries; Insufficient investments in human resource development and academic research; Low quality of the programs offered by Latin American university, particularly in the field of communications; The reduced number of research projects and specialized publica tions on Public Relations. 90

1 Economic Development By the 1960 s, Latin America faced growing competition from African and Asian nations. To reduce dependence on imported goods, many governments encore aged the development of local industries. This policy, called import substitution, had mixed success. Over the past 60 years, large areas of land were opened up to farming Much of the best farmland belonged to agribusiness. Commercial agriculture increased the need to import food. In the 1980 s, the region was rocked by economic crisis. In the 1990 s, free trade organizations, such as NAFTA, open Latin American economies to larger markets. The mutual support and expand markets of these organizations did bring some economic growth around 2000. 91

Latin American Industrial Competitiveness Performance of LAC (Latin American Countries) Despite its lead in terms of industrial development (and its location advantages for export proximity and historical links with US the largest market for developing world exports), LAC’s response has been much less vigorous than that of East Asia. Export success in LAC has been highly concentrated, with a few major success combined with many others losing market shares. This suggests that it was not liberalization as such that drove its export acceleration but other, more country specific, factors. 92

The structure of exports in LAC is less conductive to long term growth than in East Asia. Most of the growth was in RB, products growing slowly in world trade. Success in dynamic HT products was confined to a tiny few. In fact, the integrated production systems that drove export growth in East Asia largely bypassed LAC, even of the served US markets. The few outstanding success in LAC in manufactured exports face severe competitive challenges. Export activity is often delinked from local industry and capabilities, and the competitive base will be eroded unless these links are greatly strengthened. While this is also true of some East Asian countries, others have built impressive local capabilities and even the weaker ones are acutely conscious of the need to develop local capabilities and are investing in doing so more assiduously than the leaders in LAC. 93

Status of Latin America and Caribbean Macro Conditions Improved Macroeconomic indicators show positive signs in Latin America and Caribbean. Inflation has been brought down to single digit levels in most countries where double digit rates were common in the 1990 s. The region as a whole ran a trade surplus for the last three years, reaching $45 billion in 2005 • Debt service ratio to Gross national income has also fallen by 2. 6 percent to 8. 8 percent in 2005 compared to 2000. Latin America and the Caribbean: the most urbanized developing region Urban populations are expected to grow by 1. 8 percent a year through 2030. Most of this increase will occur in developing regions. No region is more urbanized than Latin America and Caribbean. 94

In 2005, 77 percent of the region’s population lived in urban areas – almost as high income economies’. Infrastructure projects with private participation Between 1990 2005, Latin America and the Caribbean had the highest investment in infrastructure projects with private participation. • The region accounted for more than 40 percent of total investment in infrastructure projects with private participation • Three Latin American and Caribbean countries – Argentina, Brazil, and Mexico, are among the top five countries with total investment in infrastructure projects with private participation, 1990 2005. 95

Population and GNI Per Capita in LAC Population millions 2005 GNI per capita (dollar) 2005 Argentina 39 4, 470 Bolivia 9 1, 010 Brazil 186 3, 550 Chile 16 5, 870 Colombia 46 2, 290 Costa Rica 4 4, 700 Cuba 11 . . Dominican Republic 9 2, 460 Ecuador 13 2, 620 El Salvador 7 2, 450 Guatemala 13 2, 400 Haiti 9 450 Honduras 7 1, 120 Jamaica 3 3, 390 Mexico 103 7, 310 Nicaragua 5 950 Panama 3 4, 630 Paraguay 6 1, 040 Peru 28 2, 650 Trinidad and Tobago 1 10, 300 Uruguay 3 4, 360 Venezuela, RB 27 4, 820 Source: World Bank, 2007 World Development Indicators database, April 2007. 96

Decreasing Unemployment in LAC LATIN AMERICA AND THE CARIBBEAN: UNEMPLOYMENT RATE Percent Source: ECLAC 97

Latin American Deficient Productivity Growth % Source: Loayza, Fajnzylber, and Calderon (2002) 99

LAC Remittances by Country LATIN AMERICA AND THE CARIBBEAN: REMITTANCES, 2007 (Millions of dollars and percentages of GDP) 23 979 millions Source: ECLAC 100

Latin American leaders were not able to integrate the society for the sake of a new vision of the nation. In crisis, they were not able to mobilize the national sentiments toward the national endeavors and goals. Instead, many Latin American policy practitioners and political philosophers focused on the fallacy of capitalism, and wished to build a welfare state following the European model even before their countries reached the equivalent level of development to make it meaningful and possible. Little efforts have been made to educate the people, and allow higher social mobility. Many Latin American countries invest in higher education more than basic education. This means government education policy does not consider the higher social mobility and national integration as its national objectives. This worsens the dualism of the society and distrust among the different social classes. 101

The private sector of the region has been largely passive in coping with the globalization challenge. many more companies in Latin America tend to stay under protection and keep their current markets only. The underdeveloped nature of capitalist entrepreneurship in Latin America may be ascribed to the legacies of the former imperial Spain and Portugal who themselves did not abandon their mercantilist feudal system until 20 th century. Regional integration was approached as a political objective, not as an economic reality. Although integration endeavors have a long history in Latin America, its integration scope tended to be limited exclusively to its own regional boundary. 102

- The current boom provides more room than ever for Latin American governments to implement any costly programs for sustainable development. Governments should be able to mobilize the nation for the common vision of national development. They should invest on basic education and R&D, and they should implement policies particularly to upgrade competitiveness by both public and private initiatives. This should include soft (education, economic and social contexts of equal opportunities, and to competition based market system) and hard infrastructural investments to facilitate industrial and regional development. The development of the civil society is indispensable as the last resort. It should influence political leadership to play its role for social integration, and oversee government activities to ensure the integrity of public institutions. 103

Regional integration may neither be the sufficient condition, nor the necessary condition for Latin American countries to prosper in the future. The functional integration can be enhanced only by the improved intraregional hard infrastructure and business interaction schemes, which lag far behind desired. 104

IV. Comparison 105

Poverty Trends 1981 1987 1993 1996 2001 Sub Saharan Africa 41. 6 46. 8 44. 1 45. 6 46. 4 Latin America and Caribbean 9. 7 10. 9 11. 3 10. 7 9. 5 South Asia 51. 5 45. 0 40. 1 36. 6 31. 3 East Asia 57. 7 28. 0 24. 9 16. 6 14. 9 Income poverty 1 (Headcount) Sources: 1. Chen & Ravallion (2004): Table 2; based on international poverty line ($1. 08 1993 PPP) 106

GDP Growth by Region Source: IMF. World Economic Outlook, April 2009 107

Global Comparisons of Trade Openness and GDP p. c. 1980 1984 1985 1989 1990 1994 1995 1999 2000 4 Sub Saharan Africa 55. 4 53. 0 54. 8 60. 1 65. 3 Latin America and Caribbean 27. 3 29. 2 32. 0 39. 3 43. 4 South Asia 19. 2 17. 8 22. 4 27. 5 32. 6 East Asia 29. 2 36. 6 50. 7 59. 8 73. 9 Sub Saharan Africa 1. 2 0. 2 2. 0 0. 8 1. 5 Latin America and Caribbean 0. 8 0. 3 1. 7 0. 9 0. 8 South Asia 3. 2 3. 6 2. 8 4. 0 3. 7 East Asia 5. 7 6. 2 7. 7 5. 4 6. 5 Trade openness 1: (X+M)/GDP Growth of GDP per capita (average annual)3 (. . not available) Sources: 1. World Bank World Development Indicators, 2005 (calculated from current US$ estimates) 2. World Bank World Development Indicators, 2005 (own calculations) 3. World Bank World Development Indicators, 2005 (average annual %) 108

Social Factors Russia United States Population 144 million 290 Growth Rate 0. 3% 0. 92% Life Expectancy 67. 66 77. 14 Infant mortality 19. 51/1000 6. 75/1000 Literacy rate 99. 6% 97% Area 17, 075, 200 km 2 9, 629, 091 km 2 Exports $104. 6 billion $687 billion Imports $60. 7 billion $1. 165 trillion Agriculture 5. 8% 2% Industry 34. 6% 18% Service 59. 6% 80% 109

Economic Factors GDP per capita Russia United States $1. 35 trillion $10. 4 trillion $9, 300 $37, 600 GDP growth rate 4. 2% 2. 45% Index of Economic Freedom Rank 135 th 6 th Corruption Rank 71 st 16 th 110

Comparison of SSA and LAC Population (million) GDP/capita (median level) GDP Growth rate (%) Industrialization SSA LAC 658 515 1, 500 (Absolute poverty ratio is 40%) 3, 000 (Absolute poverty ratio is 10%) 5 6, recently higher than LAC 4 5 Primary sector dominant The same, but more industrialized Political economy Started with colonization. After WWII, independent, but many internal wars Started with colonization. From 19 C independent. Dependency theory and guerilla wars Diplomacy and economic relations Close to Europe. Increasing Close to the U. S. regional cooperation. High ODA Regional cooperation dependency. Recently draws has been increasing. more interests of industrialized countries than LAC 111

Volatility of GDP Per Capita Growth by Region Periods Regions Latin America East Asia and the Pacific Middle East South Asia and North Africa Sub Saharan Africa 1960 2006 1. 46 0. 80 1. 77 1. 00 3. 26 1980 2006 3. 16 0. 30 2. 63 0. 46 …. 1990 2006 1. 50 0. 31 0. 73 0. 49 4. 16 1991 2001 1. 70 0. 36 0. 76 0. 50 3. 21 Note: Volatility was computed using the coefficient of variation. Source: On the basis of ECLAC data and World Bank Development Indicators (2008). 112

Cereal Yields by World Region, 1960 -2005 113

Land Productivity in Developed and Developing Countries 114

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