Globalization and Latin America
The Honorable Marta Lucia Ramirez
Minister of Commerce
Colombia
As we enter into a new century, economists and policy-makers from around the world have been assessing what are the real benefits from globalization. This question rises as a consequence of the financial turmoil in the Asian economies, which some analysts have called "the crisis of the globalization." Others have referred to it as "the development crisis."
I personally prefer the latter definition because the Asian Crisis in 1997 spread more intensively in the developing world, affecting developing economies from South East Asia, Central Europe and Latin America.
Nevertheless, globalization offers opportunities to developing countries and other actors in the global economy. We have to look back 40 years ago when the world markets were less open with high tariffs and full of trade barriers and export development in our countries was stagnated. Latin America and Asian countries underwent import substitution processes more focused on the domestic market and less export oriented, which contributed to the construction of an industrial base but limited sources of growth. Fortunately, this model was of an industrial base but limited sources of growth. Fortunately, this model was shifted to an outward strategy through a drastic reduction in barriers to international trade and other structural reforms enabling developing countries to grow in a faster manner.
It is clear that developing economies, especially small and medium size ones, with limited internal markets, lie their possibilities of rapid growth in export-oriented production. The experience from past decades shows that countries, which had grown at rapid rates, of 7% to 8% or more per year, had relied on strong export growth, with exports expanding at a faster rate than GDP.
Other studies have shown that open economies grow between 2 and 2.5 percentage points faster than close economies, and in the case of developing countries, 1.33 percentage points faster. Furthermore, these economies have better macroeconomic performance, higher investment rates and a more dynamic private sector playing a central role as engine of growth.
Globalization means access to a wide variety of consumption goods, new technologies and knowledge. It also means access to new ideas in business management, international trade practices, production technologies which have positive effects in productivity and competitiveness.
Over the past 50 years, growth in global trade has outpaced growth in global output. Between 1948 and 1997, world trade grew seventeen-fold, whilst world output multiplied by a factor of 6. In addition, between 1973 and 1996, foreign direct investment inflows increased from US$21.5 billion to US$350 billion, that is, 16-fold. FDI stock multiplied by a factor of 19 over the same period.
As a result of this process, developing countries have increased its share in world goods trade. In fact, in 1997 developing countries exports to the world were 78 times higher than in 1948 and its share in world exports grew to 29%.
However, globalization has side effects, which include macroeconomic and financial volatility as well as it poses challenges on inequality and job security. On risk from globalization comes from the fact that a more interdependent world economy significantly raises the risk of contagion among economies when a financial shock comes up. The speed of knock-on effects increases when the financial markets are more integrated.
In parallel, international demand falls as well as commodities prices; the most affected being those developing countries that are highly dependent on oil, coffee, coal, timber, copper as their main source of export revenues. This was the case of Venezuela, Ecuador, Chile, Indonesia, Russia, and Colombia 2 years ago when the contagion of the Asia crisis took place.
Some countries are seeking more flexible labor markets and regulation in order to upgrade competitiveness in a globalized world. Nowadays, labor income is the main source of earnings for the majority of population in most countries.
Other area of major concern related with the effects of globalization is income distribution. As the production processes evolve to a more sophisticated stage, the need for more skilled and educated work force increases. Currently, 76.2% of world exports are manufactured goods, this implies a major portion of human resources working in sectors more advanced than agriculture and subsequently more specialized and knowledge demanding. Unskilled workers are increasingly being left out and with less capability to survive in a competitive environment. This situation enhances inequality, especially in developing countries and increases the gap between poor and rich.
Undoubtedly, globalization creates problems and demands adjustments. This situation poses a major challenge for policy-makers in developing countries who have to redress the unbalances of globalization without going back to old fashion models such as protectionism and economic isolation.
Latin-American countries started structural reforms since mid 80's. Their governments did not find another way out to cope with debt crisis problems, but to turn into deeper transformations, including a real integration with the rest of the world. In this context, several reforms were implemented aimed at opening the economies, increase participation o the private sector, regional and international trade integration, and promotion of democracy.
In the financial sector, reforms aimed at improving the allocation of domestic and external savings and restructuring the framework of financial intermediation. Pension system reform was introduced and today, eight countries have private funded pension accounts, which have replaced public funded pension systems.
Tax reforms lowered taxes, streamlined the administrative process of taxation and increased revenues. Trade reforms have been an important area in Latin America over the past 15 years. Every country in the region has undertaken major tariff reductions and has eliminated trade barriers, lessening the average tariff rate from 40% in mid 80's to 11% today. Additionally, trade liberalization was accompanied by an open regionalism initiative to improve trade links within the region. In the 90's, 22 new regional trade agreements were concluded and a dozen more are on the table of negotiations.
These reforms resulted in increased Latin-American exports to the world, which rose significantly between 1991 and 1998 by 88% and almost tripled the rate in the 1980-1990 period, amounting to 32%. Inflation fell from nearly 200% in 1990 to 9.6% in 1999. Real GDP annual average growth rate increased from 1.6% between 1981-1990 to 3.2% between 1991 and 1999.
FDI inflows rose from an annual average of US$14 billion in 1990-1994 to US$75 billion estimated for 1999, reflecting the strong confidence of international investors in our countries. According to UNCTAD's world investment figures, Latin America is about to take the place of South East Asia as main recipient of FDI in the developing world.
The contagion of the Asian crisis arrived in Latin America in 1998 when the region's output growth decelerated to 3.4% from 6.6% in the previous year. Ecuador, Venezuela, Brazil, and Colombia were the main economies affected. In 1999, preliminary estimations have shown that the region's GDP did not grow reflecting to some extent that the region entered into a recession. This was the case of Colombia, which entered into a deep recession, recording a 5% real GDP fall. However, current estimations show optimism and fast recovery for this year with an estimated 4% GDP growth.
These impressive results are one side of the coin. The other side shows that strong, stable and equitable growth in Latin America in a goal, which remains outstanding. Despite these reforms, Latin America grew at a slow pace compared with the growth experienced in other regions where similar reforms were also implemented. That is the case of Asia and Newly industrialized Asian Economies -NIAE's. According with IMF's data, while Latin America's annual average growth is estimated at 3.3%, while Asia will stand at 7.3% and NIAE's at 5.5%.
The above differences partially derive from structural contrasts between Latin-American and Asian economies. The reason behind a lesser growth for Latin America versus Asian countries over the last 20 years originates in the way reforms have been implemented. In this regard, I would like to highlight three key elements: technology, education, and investment.
Technology is a stepping-stone to every process of industrialization. Experiences in the United States, Europe and Japan show enough evidence of that. In the case of Asia, particularly Southeast Asia, its success has been clearly associated with the absorption of technology from more advanced countries, and with their own efforts to adopt, modify and gradually master the technical know-how involved. This has not been the case in Latin America, with the exception of Mexico and Brazil, in many other developing countries and in whole regions such as Africa.
This draws my attention to the second element: education. To the extent that technology advances, a more skilled and well-educated work force is needed. Widespread educational and learning policies were an additional key strategy to upgrade human resources in Asia and introduce Asian work force into new technologies. Therefore, technology and educational reforms must be at the core not at the edge of development policies. We must learn this valuable lesson from Southeast Asia.
Investment is another key element in development. Foreign direct investment not only means access to technology for recipients countries but also means growth and export opportunities. Albeit, Latin America has been in the recent years a sort of magnet for FDI inflows, these resources have been mainly focused on privatization programs and on deregulated service sectors, rather than on export oriented sectors. In contrast, FDI to Asia has been focused on high-tech sectors such as microelectronics, software, hardware and telecommunications equipment which have contributed to export expansion, value added generation and job creation.
These aspects have a strong incidence in the trade flows within regions. For example, Asia has a different composition than Latin America in its world trade not only in the trade by partner but also in the trade by product. In 1998 45% of total Asian exports went to the Asian region and another 25% went to North America. IN addition 75% of intra-Asian exports and 93% of Asian exports to North America were manufactured products. However due to the economic crisis trade within Asia has declined and in 1998 intra-regional exports fell by 17% to US$576.3 billion, which was slightly superior to 1994 export level.
In contrast, the main destination of Latin American exports is not the region itself. In 1998, 54% of total Latin American exports went to North America, especially the United States, and only 20% was explained by intra-regional exports. Intra-Latin American trade is more diversified than intra-Asian trade in the sense that an important share of it corresponds to agricultural and mining trade. Each sector accounts for 20% of the total intra-regional exports, while trade in manufactured goods accounts for 58%. In 1998 total intra-regional exports were US$56.7 billion and Latin America's export to the world US$275.5 billion.
In spite of these figures and recognizing that trade within Asia is more manufactured and value added based that trade within Latin America, intra-manufactured and value added based that trade within Latin America, intra-Latin American trade is gaining ground in the export-oriented strategies in their countries. The fact that several regional trade agreements were signed in the 1990's and new ones are under negotiations are examples of the commitment which Latin-American countries have in increasing trade links with their neighbors.
The share of intra-trade in total trade since 1994 is increasing and its rate of growth outpaced the intra-Asian trend. Between 1994 and 1998 intra-Latin American trade grew by 48% from US$38.4 billion to US$56.8 billion, while intra-Asian trade grew by 7.5% from US 536 billion to US$576 billion. This means an annual average rate of growth of 10% and 2% for Latin America and Asia respectively. If we take off the effects on trade of the Asian crisis, that is, without counting 1998's trade figures, intra-Latin American trade annual average rate of growth goes up to 16% and Asian rate of growth goes up to only 9%.
In the final part of my speech, I would like to provide you with a deeper insight of the situation in Colombia and how we are tackling all these challenges. Between 1970 and 1997, the Colombian economy grew at a yearly growth rate of 4%. In 1998, this trend was reverted and the economy only registered a 0.6% growth. Last year, a fall of all production activities took place, reflecting in a negative 5% GDP growth.
This dramatic growth decrease was due to the severe internal demand fall. Factors such as asset's price reductions - mainly housing - the high interest rates that prevailed from 1995 to 1998 and the unemployment increases, contributed to a significant disposable income decline.
Moreover, the 1998 external shock and the deceleration of the Colombian economy caused a 27% fall in imports in 1999. On the other hand, exports reached 6.4% growth, due to the high oil prices and the recovery of some industrial goods. This environment induced an adjustment of external accounts and a reduction in the current account deficit from 5.5% of GDP in 1998 to 1.2% in 1999.
The macroeconomic policies launched by the National Government have as a main goal, the return of the Colombian economy to a path of sustained growth along with an unemployment decrease. This measure also required an improvement of the fiscal accounts and the recuperation of the financial system. Through the implementation of these policies, the government intends to achieve a recovery of the economy, through higher private investment, which will in turn, be benefited by an overall improvement of credit conditions and lower interest rtes. The strong adjustments involved in the economic recovery program have already delivered the first positive results during the last quarter of 1999.
It should be emphasized that inflation has reduced sharply, reaching only one digit (9.2%) for the first tie in decades. We have also corrected the balance of payments deficit and the real exchange rate by means of a decrease in inflation and nominal devaluation.
In addition, the Central Government has also implemented an austerity program, which has allowed the reduction of pressures on interest rates, favoring the subsequent fall. High interest rates were the result of the maintenance of the exchange band and the sustaining of a restrictive monetary policy. Nonetheless, the elimination of the band in September last year allowed the removal of foreign exchange strains and further encouraged the interest rate fall.
From June of 1998, nominal interest rates have sustained a falling tendency, which in turn has favored the recovery of the economy. In such manner, the nominal lending rate has gone from 47.7% in October of 1998, to 26.4% in December of 1999.
The measures above described, have allowed us to reach a competitive exchange rate that has benefited export levels reaching over US$1.5 million surplus in the trade balance.
In addition, several structural adjustments have been necessary to guarantee the sustainability of the long-term fiscal policy and the promotion of the private sector as a dynamic force of the economy. I should stress the positive contribution of policies such as the creation of the Territorial Pension Fund, the promulgation of the Housing and the Economy Recovery Laws. We have also taken measures oriented towards the re-establishment of the housing credit, the improvement of private disposable income, and the building and production sector's recovery.
On the other hand, the tax reform (Law 488 of 1998) has sought to boost tax revenues through a higher value added tax base and a tax rate reduction from 16% to 15% since November 1999. Similarly, the Tax and Customs Office has improved its actions towards evasion and increased its fight against smuggling.
On the other hand, some additional measures within the adjustment program are pending Congress approval. On top of the agenda, we have the Constitutional Reform whose main objective is to limit territorial transfer payments. Other measures aim to reform the Pension and Social Security System and the rationalization of expenditure at the Central and Territorial government levels.
For the current year, the economy is expected to recover, leading to an estimated 3% GDP growth, 10% inflation, a private investment growth of 3%, and a reduction of the non-financial public sector deficit of 3.6% of GDP. Exports are forecast to grow 10%, imports would reach 18%; thus, diminishing current account deficit to 2.6% of GDP.
Furthermore, the Government has committed with the IMF to implement public sector structural reforms that will lead to an expenditure reduction in the medium term, and a lesser fiscal deficit.
As we face new challenges within an increasingly integrated world, by the end of 1998, the Colombian Government emphasized the role of the export sector as the driving engine of the economy. For this reason, Pastrana Government is leading important initiatives together with the private sector in order to promote a private sector in order to promote a private activities more focused in the international markets.
Looking for that goal, we have been promoting twice in a year a general meeting between government and the private sector, lead by the president of Colombia in order to check where we are, what our working plan could be, what are the governmental compromises and what are the industry commitments in order to have a more competitive country and more competitive goods and services for the international markets.
The entrepreneur's commitments included Agreements with government to improve productivity with the support of Technology Development Centers. The Government also commits to foster the productive activity, through a more transparent legal framework, the reduction of procedures, tariff policies, export promotion and the flight against unfair trade practices, among others.
To develop a competitive environment, we have been working on a national and on a local field. National policies thorough the different representatives of the different industries. The local strategy through a Regional Foreign Trade and competitiveness committees with the participation of local authorities, namely governors and majors, the local business sector, local universities and the National Government.
The Ministry of Foreign Trade has recently set up the Investment Project Bank that will support those strategic projects with a high impact on regional export competitiveness. All projects must be a key part of a Regional or State Strategic Plan, in order to prioritize feasible and competitive-focused projects. Enhance Colombia's productivity and competitiveness is a goal not only for government but also for the private sector, workers and the academic community.
Our Export Strategic Plan was established as a state policy for the next ten years, seeking to increase and diversify the goods and services export offer according to world demand. Another crucial objection is to stimulate higher levels of foreign direct investment and technology transfer to the manufactured sector and services. This will undoubtedly result in a more competitive export environment and the development of a stronger export culture.
As I mentioned before, in order to follow up on these initiatives, President Pastrana has committed to present this policy's results biannually to the country, in the National Productivity and Competitiveness Forums. Two national forums have already taken place, and the next one will be held in August.
As you may see, our goals are ambitious but achievable. Indeed, we are working hard to position Colombia in the van of competitiveness. In the short run, we expect to see our country among the top three competitive countries in Latin America and to recover the good economic policies that characterized our countries' economy during the 80's lost decade in Latin America.