The Commodities Super Cycle in South America Macroeconomic

The Commodities Super Cycle in South America: Macroeconomic and Distributional Aspects Augusto de la Washington DC - Mar 2016 Torre

A veritable commodity super cycle Commodity Prices Indices – Base Jan. 2002=100 Source: Bloomberg. 2

…and the most “comprehensive” in recorded recent history for the region… LAC-7 Economies: Share of Commodities Experiencing a Boom share LAC commodities in boom % 100 LAC-7 commodity index in boom LAC-7 commodity index in bust 80 60 40 20 0 Jan Ma Sep Jan Ma Sep -62 y- -66 -69 y- -73 -76 y- -80 -83 y- -87 -90 y- -94 -97 y- -01 -04 y- -08 64 71 78 85 92 99 06 Source: Natural Resources in Latin America and the Caribbean: Beyond Booms and Busts, World Bank, 2010. 3

LAC’s dependency on commodities is pronounced, particular in productive structure and fiscal terms Primary sector as share of GDP (%) 16. 3 61. 6 Comm Exports share Total 66. 8 Exports (%) 4. 7 HHI Index Comm Exports 0. 15 0. 08 LAC Developed Comm Revenues share on Total Fiscal Revenues (%) 15. 6 Comm Exports share in GDP (%) 16. 5 9. 4 4. 7 23. 8 Comm Revenues 6. 2 share of GDP (%) Source: Natural Resources in Latin America and the Caribbean: Beyond Booms and Busts, World Bank, 2010. 4

Commodity prices have driven much of the growth fluctuations in LAC… LAC: The Predictive Power of External Factors Source: Jobs, Wages and the Latin American Slowdown, World Bank, October 2015. 5

…as well as the evolution of the terms of trade, especially in South America: Terms of Trade and Commodity Prices Simple Averages, Index Base 2003 q 1=100 Notes: South America includes Argentina, Brazil, Chile, Colombia, and Peru. Sources: IMF and national sources. 6

Terms of trade generally moved in opposite directions in the north and south of the region LAC: Terms of Trade Source: ECLAC. 7

Thus, LAC’s economic activity has bifurcated, with SA following China/commodities and MCC the US… SA: Following the China Cycle MCC: Following the US Cycle Notes: . SA includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru and Uruguay. MCC includes Costa Rica, Dominican Republic, El Salvador, Guatemala, Jamaica, and México. Sources: Bloomberg and national statistics. 8

The spending effect of the TOT super cycle was powerful throughout South America… South America: Domestic Demand Terms of Trade LAC: Change in Domestic Demand Terms of Trade, 2005 -2011 Notes: Panel A shows the simple averages of Argentina, Brazil, Chile, Colombia, Peru, and Uruguay. Sources: WDI and national sources 9

…and it drove the RER – strong, sustained appreciations in the boom followed by major depreciations in the slowdown South America: Real Exchange Rate and Terms of Trade Simple Averages, Index Base 2003 q 1=100 Notes: South America includes Argentina, Brazil, Chile, Colombia, and Peru. Sources: IMF’s IFS and national sources. 10

The sharp decline in the manufacturing share of GDP is not independent of the real appreciations during the boom… South America: Manufacturing Share in GDP Notes: South America includes Argentina, Brazil, Chile, Colombia, and Peru. Sources: IMF’s IFS and national sources. 11

…nor is the lack of vigor in LAC’s participation in GVCs, especially in the middle ranges of GVCs Exports of Intermediate Goods as Percent of Total Exports in Three GVCs Upstream and Downstream Participation in GVCs, 2011 Notes: GVCs in Panel A are (i) apparel and footwear; (ii) electronics; and (iii) automobiles and motorcycles. Source: Latin America and the Rising South: Changing World, Changing Priorities. World Bank, 2015. 12

In addition, the spending effect of the TOT bonanza was progressive during the boom LAC: Real Wage Growth by Sector and Skill Level for Terms of Trade Winners and Losers (2002 to 2011) Notas: Cambios en el promedio simple de salarios entre países, por sector, y nivel educativo entre 2002 y 2011. Td. I Ganadores son: Argentina, Brasil, Chile, Colombia, Ecuador, Perú; Tdi No ganadores son: México, Paraguay y Uruguay. Fuentes: LCRCE basado en SEDLAC. 13

The end of the commodity bonanza unleashed the “great deceleration” – sharper than expected… LAC: Real GDP Growth Rates – Forecast and Realized The Great Slowdown Source: Consensus Forecasts. 14

… and disproportionately pronounced by international comparison Growth Rates: International Comparison Source: Consensus Forecasts and IMF’s WEO. 15

The adjustment is far from complete: The countries within SA that have maintained a relatively higher growth rate… LAC: Real GDP Growth Rates, by Country Group Simple Averages Notas: SA Bajo Crecimiento incluye Argentina, Brasil, y Ecuador; SA Alto Crecimiento incluye Colombia, Perú and Uruguay. MCC incluye Costa Rica, Republica Dominicana, y México. Fuentes: Consensus Forecasts y WEO del FMI. 16

…are those who have been able to keep aggregate demand up, particularly consumption… Contributions to Growth by Demand Component Simple Averages, 2014 Q 2 -2015 Q 1 The contribution to growth of the construction sector and government consumption peaked in the SA-Low Growth group 2 years before it did in the SA-High Growth group Notas: SA Bajo Crecimiento incluye Argentina, Brasil, y Ecuador; SA Alto Crecimiento incluye Colombia, Perú and Uruguay. MCC incluye Costa Rica, Republica Dominicana, y México. Fuentes: Fuentes nacionales. 17

…partly due to stronger fiscal positions, but at the expense of widening current account deficits SA: Fiscal Balances by Country Group Simple Averages SA: Current Account Balances by Country Group Simple Averages Notas: SA Bajo Crecimiento incluye Argentina, Brasil, y Ecuador; SA Alto Crecimiento incluye Colombia, Perú and Uruguay. MCC incluye Costa Rica, Republica Dominicana, y México. Fuentes: WEO del FMI y fuentes nacionales. 18

The pain is filtering into labor markets, where net employment generation and real wages have stalled… Changes in Employment and Real Wage Growth Rates (Circa 2005 - 2011) (2011 -2014) Notas: SA Bajo Crecimiento incluye Argentina y Brasil; SA Alto Crecimiento incluye Colombia, Perú, y Uruguay. Fuentes: LCRCE basado en LABLAC. 19

…and major quantity adjustments are taking place in the market for unskilled labor… South America: Real Wages for Skilled and Unskilled Workers South America: Skilled and Unskilled Employment Rates - The market for unskilled labor has been adjusting more via quantities - Income inequality could rise more than wage inequality Notas: Promedios simples para Brasil y Perú. Las líneas solidas representan la tendencia lineal. Fuentes: LCRCE basado en LABLAC. 20

…with many simply leaving the labor force, especially among young and uneducated males Change in Labor Force Participation (Circa 2005 - 2011) Change in Labor Force Participation (2011 -2014) Ongoing adjustments in the labor markets are most likely to be regressive Notas: SA Bajo Crecimiento incluye Argentina y Brasil; SA Alto Crecimiento incluye Colombia, Perú, y Uruguay. Fuentes: LCRCE basado en LABLAC. 21

Final thoughts § Commodity prices have first-order macroeconomic and distributional effects in LAC, particularly South America, and give rise to major macro policy challenges Saving rates (structural and at the margin) are key in determining the persistence and amplification effects on aggregate spending… Ø … and, through it, on the real exchange rate, cost of capital, and wage inequality Ø § “Excessive” spending effects can undercut LR growth even if the worse of the resource curse (unrestrained rent seeking/institutional corrosion) are avoided Transitory but large real appreciations during the boom can have permanent adverse effects on tradable production and diversification Ø The bust of a commodity price bubble can dismantle macroeconomic stability Ø § The extent of the great deceleration and the associated adjustment pains are not independent of the gravity of sins committed during the boom Ø The challenge for macro policy is not to avoid adjustment but to reach the “new normal” at a minimum social cost § The premium on fiscal prudence and saving rises with the degree of economic dependence on commodities, which is likely to stay for years to come 22

Thank you!