George Mason University Current Economic Situation in Colombia Discussion

Description

Draw on Lectures 11&12 and associated readings. The late 1980s and early 1990s were a time of dramatic reforms in Latin America that changed the trajectory of economies there for the next several decades. Most countries privatized state-owned enterprises, welcomed in foreign investment, and tried to make trade an engine of growth once again. Most also tried to diversify their export portfolio. Some countries successfully pursued international tourism as a way to increase foreign exchange. Increasing remittances helped many countries. For several countries trade with China became a major factor, especially during 2001-2015 when China was eagerly importing natural resources of all kinds. Subsequently exports to China slowed in these countries. Investment from China may have been substantial as well.Enter the coronavirus pandemic in early 2020. How was your country doing before the pandemic and how is it doing now? Begin by describing how your country fits in to the above paragraph. Then look at the current situation: in particular, how has the pandemic affected the sources of foreign exchange and the ability of your country to make payments on its international debt. Is there a debt crisis similar to the debt crisis of the 1980s? How about inflation? Take advantage of the opportunity to demonstrate that you understand the concepts covered in the lectures and the readings. [target 1100 words] My country is Colombia and the only source you can use is Franko, Patrice. The Puzzle of Latin American Economic Development. (4th ed) Rowman and Littlefield,
2019. (paper) ISBN-13: 978-1442212176

2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }

Unformatted Attachment Preview

Capital Flows to Latin
America
Challenges of the last several decades
Read: Franko, Ch6
Objectives
?
?
?
?
?
?
Review the history of foreign investment in Latin
America, including the history of the rejection of foreign
investment.
Review the record of privatization of SOEs in the 1990s.
Review arguments for and against foreign investment.
Consider the effects of volatile portfolio flows using the
Mexican Tequila Crisis as an example.
Review recent trends in Foreign Direct Investment (FDI)
from UN ECLAC 2019 report.
Consider the valuable role that remittances play in many
countries in Latin America.
Foreign Investment boomed in the 19th &
Early 20th Century
?
?
19th C Transportation and Communications
revolution based on railroads, steamships, and
the telegraph
Investment in railroads in Latin America
?
?
?
?
Opened in Cuba in 1838 for sugar production
Tremendous British investment in railroads in
Argentina
Transatlantic telegraph cable completed in 1866
Developing countries received a larger share of
FDI in 1914 (45%) than in 2016 (40%)
th
19 C
?
Financial Integration
“Before WWI a vibrant, free-wheeling capital
market linked financial centers in Europe, the
W. Hemisphere, Oceania, Africa & the Far
East. A 19thC reader of the Economist Mag
could track investments in American
railroads, S. African gold mines, Egyptian
govt debt, Peruvian guano, and much more”
Maurice Obstfeld (1998)
Enter – the Great Depression and then
Dependency
?
?
Disappointment with export-led growth
strategies – Depression in the U.S. and
Europe meant that markets disappeared for
Latin America.
Turn to dependency theory, anti-exports,
inward orientation, anti-foreign investment,
and nationalized foreign interests became
state enterprises.
Nationalization of key resources. Foreign
interests taken over by Latin American States.
?
?
?
?
?
Mexico nationalized petroleum in 1938 from
U.S. & British interests – PEMEX
Brazil established Petrobras in 1953
Ecopetrol – Colombia — 1951
Codelco (Copper mining in Chile) was
established in 1971
Hundreds of other SOEs were also
established during ISI years.
Then SOEs were privatized in the 1990s
– why? To recover from debt crisis.
?
?
?
?
Repatriate dollars lost to capital flight
Most were inefficient and worked as a drag
on the economy.
It was in vogue around the world.
Note exceptions: the big state oil and mineral
SOEs were not privatized for the most part –
although some were restructured. Pemex,
Codelco, Petrobras – remained SOEs.
Privatization ongoing around the world:
?
?
?
?
?
?
Under Margaret Thatcher in the UK.
Crumbling of socialism in former Soviet Union.
Began in Latin America with Pinochet in Chile
in the mid-1970s.
Many other countries in Latin America
privatizing SOEs by mid-1980s.
56% of all privatizations in 1990-94 took place
in Latin America.
Telecommunications and Banking were
particularly hot.
The pace varied
Mexico began slowly in mid-1980s, Brazil got started later and
sold Telebras in 1998 for a record $19.2 billion. Brazil still has many
SOEs. In some countries privatization has since been partially reversed.
Costs & Benefits of Privatization
?
?
?
?
?
?
Benefits
Repatriation of dollars
reduced govt debt
Helped alleviate govt
budget difficulties
Potential for increased
efficiency & productivity
Increased investment &
new technology
Hoped to broaden
ownership of productive
assets
?
?
?
?
?
Costs
With restructuring,
layoffs inevitable
Some benefit
disproportionately –
rent-seeking
Potential loss of
sovereignity to
overseas investors
Losses to some sectors
– e.g. rural, regional
The Role of Foreign Investment
?
?
?
?
Dependency theory had encouraged Latin
America to be wary of foreign investment
But in the 1990s, it flowed back in.
Privatization attracted foreign investment.
Foreign buyers provided about 75% of
privatization revenues in the mid-1990s.
In part, it was a vote of confidence in Latin
America, but it was also because of new
easier regulations.
Regulations were lifted or lessened in most countries.
Benefits of Transnational Foreign Investment
?
?
?
?
?
?
Helps to fill the savings gap and allow for
investment and growth.
Can provide foreign exchange when the
investment is made.
Tax source for government revenue.
Source of managerial, entrepreneurial, and
technological skills — innovation & productivity
increases thru imitation.
Employment – source of jobs.
An opportunity to link into the global business
environment & community.
Counterarguments
?
?
?
?
May stifle local investment. TNC profits may be
sent home, domestic firms could reinvest at home.
Provides foreign exchange initially, but imports
required for production and repatriation of profits
use up foreign exchange.
TNCs often get special tax considerations and then
may engage in “transfer pricing” shifting profits to
low tax areas.
Management, entrepreneurial skills, and
technology may not be diffused in host country.
Indigenous entrepreneurship may be stifled.
Counterarguments (cont)
?
?
?
TNCs take advantage of child labor and female
labor at lower wages in developing countries
TNCs take advantage of lax environmental
regulations in developing countries.
Foreign investments in agricultural, forests, oil
and minerals, and tourism are a special area of
concern. Minerals previously off limits as natural
patrimony.
Capital Controls on Investment Flows
?
Controls on Outflows
?
?
?
Controls are seldom effective and may increase
capital flight
Lead to corruption
Controls on Inflows
?
?
?
Receive more support from economists
If too much money can’t come in – then it can’t
suddenly go out either – esp portfolio investment
Franko discusses the dangers of portfolio
investment.
The Mexican Tequila Crisis of 1994
?
?
?
?
Highlighted the potential problems of volatile
portfolio flows.
Money flowed into Mexico in anticipation of
NAFTA agreement.
Increased the value of the Peso and choked
off exports – large current account deficit (78% of GDP) funded by capital inflows.
But political problems – social unrest in
Chiapas Jan 1994, later 2 political
assassinations and a kidnapping.
The Mexican Tequila Crisis [cont]
?
?
?
?
So the foreign inflows slowed and later turned
into outflows – reserves dropped.
“Mexico’s economic authorities failed to react
promptly and with sufficient energy” –
Sebastian Edwards, Crisis & Reform
Failed to devalue the peso because it was an
election year – borrowed $ (Tesobonos) with
short-term maturities.
Devaluation became inevitable and the
selling started.
The Mexican Tequila Crisis [cont]
?
?
?
Peso dropped from 3.3 pesos/$ to 8 pesos/$
on Dec 20 (lost more than half its value)
U.S.-IMF “bailout” – loans which were later
paid back in full
Austerity program – tight macroeconomic
policies, high interest rates, more
privatization helped Mexico to recover and
continue to attract investment.
The Mexican Tequila Crisis — Lessons
?
?
?
?
?
About 3% of GDP is enough for the current
account deficit.
Portfolio investment should be managed,
foreign direct investment encouraged.
Importance of increasing productivity to
encourage exports.
Danger of fixing the exchange rate.
Structure and maturity of the govt debt is
important.
Recent Trends in Foreign Direct Investment
(FDI) ECLAC, 2019
?
?
?
?
?
Franko Chapter 6 can be confusing – especially Fig 6.1,
p. 157, so next several slides draws on research from
ECLAC source for 2019.
China is an important source of investment. #3 after
Europe and the U.S. But it comes thru the Netherlands &
Luxembourg, so it doesn’t show up in Franko, Fig 6.1.
U.S. invests more in Mexico; Europe in Brazil & S. cone.
China has been investing in natural resources – mining,
lithium, most recently. Also soybean marketing.
China’s Belt & Road infrastructure initiative -18 countries
including 10 in Caribbean have signed on. Panama
Canal, ports in the Caribbean.
Korea is also newly relevant in Latin
America: esp Samsung, Hyundai, LG
Korea makes “greenfield” investments in manufacturing rather than mostly
mergers & acquisitions like China.
The stock of FDI in Latin America has increased in the last 20 years.
The commodity price boom from 2001-2015 inspired some of this. Note as
well the sudden drop off during the global financial crisis, but it bounced back.
Note investment in
energy & mining 2005-2011
FDI in off-shore assembly important in
Mexico, Central America, & Caribbean
?
?
?
?
?
?
Off-shore assembly
Maquila
Zona Franca or Free Zone
Export platforms
They all mean the same thing – based on the
availability of cheap labor and proximity to the U.S.
market
Initially it was in textiles, clothing, but now medical
equipment is popular – including for COVID
UNECLAC report 2018
Off-Shore Services another avenue
for FDI
?
?
?
Call centers
Business services – legal and accounting
Even research and development as in the
case of Costa Rica
FDI in the Agri-food Chain
Latin American has been attracting increasing investment
in the agri-food chain especially in the industrialization
or food processing end.
From 1990 to 2015 Latin America accounts for an increasing
share of world agro-industrial output.
FDI in the Agri-food Chain – a winwin for investors and Latin America
?
?
?
?
?
The agri-food sector is labor intensive. Adds value to
primary products.
It holds up well in economic downturns.
Demand for food will increase globally as population
grows and urbanization increases.
Latin America is well endowed with agricultural land
and is well positioned to increase food production
and processing.
TNCs especially Trans-Latins have global marketing
advantages over domestic food processing.
Transnational Food & Beverage are
attracted by:
?
?
?
?
?
Size of the domestic market
Percentage of population living in urban
areas
Demographic growth potential – expanding
middle class
Availability of cheap inputs and raw materials
Participation in a trade bloc
The Brewing Sector
?
?
?
?
Brewing is a significant part of
agro-industry – recently under
global consolidation.
Latin American beer market is now
dominated by Anheuser-Busch
InBev (Belgium-owned) and
Heineken (Netherlands)
AB InBev bought Model in 2003,
SAB Miller in 2016, Presidente
(Dominican beer) in 2012.
Alex Rodriguez is marketing
Presidente for AB InBev.
Shows the consolidation from 2000 at left to 2017 at right.
See especially AB Inbev and Heineken. “Other” has shrunk.
Remittances to Latin America from
Migrants
?
?
?
Much less dangerous/volatile than portfolio
investment.
Very significant in some countries –
especially in Central America and the
Caribbean. (34% of GDP in Haiti)
Far more important than official development
assistance: Franko notes that in 2013
remittances to Latin America were 3 times
ODA.
Remittances from selected countries
Country
Remittances in 2017
USD millions
Remittances as a % of
GDP
Mexico
28,771
2.5%
El Salvador
5,043
18.4%
Guatemala
8,192
11.6%
Honduras
4,305
19.0%
Nicaragua
1,391
10.2%
Dominican Republic
5,912
7.9%
Haiti
2,836
33.9%
Remittances can help to drive economic growth in countries like these.
Very important to the families that receive them.
Also an important source of foreign exchange (to buy imported goods).
Where do Latin American migrants
work?
?
?
?
About 75% of the remittances come from the
U.S.
Spain is another primary destination for
migrants and source of remittances
Other migrants work within the region –
interesting article about a sudden influx of
Haitian immigrants in Chile.
Who receives remittances?
?
?
?
?
18% of all adults in Mexico
23% of adults in Central America
14% in Ecuador
Most are women (according to Franko)– they
receive remittances from husbands, sons,
and fathers
Summary
?
?
After the debt crisis, most countries in Latin
America embraced foreign investment, but
lessons were learned about the dangers of
portfolio investment.
Recent trends in FDI in Latin Am include
?
?
?
?
Importance of China & Korea
Off-shore assembly & services
FDI in the Agri-food chain
The importance of remittances as a source of
foreign capital
Trade Liberalization, Export
Promotion, Trade with China,
& Tourism
Read: Franko Ch7, pp. 198-232
Franko Ch6, pp. 171-174 on China
Objectives
?
?
?
?
Examine how Latin America turned to trade to
climb out of the debt crisis in the 1990s.
Consider the growth of regional trade
agreements in the 1990s to boost trade.
Consider the natural resource export boom to
China during 2001-2015.
Examine how the growth of tourism, which is
like an export, helped earn foreign exchange
in many countries.
Introduction
?
?
?
By the mid-1980s, countries in Latin America,
struggling through the debt crisis, began to
recognize that outward-oriented Asian
countries dealt better with the debt crisis.
Chile and Mexico had some early success
with trade liberalization.
Out of necessity countries had to find ways to
export more and make debt payments.
Chronology of Trade Reform, 198595
?
So one by one at first, countries in Latin
America liberalized their trade regimes. By
1989-1990 most countries had climbed on
the trade reform bandwagon.
Objective of Trade Reform –
To make trade an engine of growth by:
?
?
?
?
?
1) exploiting comparative advantage
2) lower consumer prices
3) reduce “rent-seeking activity” – the
resources wasted by seeking a privilege
(such as an import license)
4) take advantage of the much larger world
market
5) openness facilitates technology transfer
Elements of trade reform
?
Reduction of the
average tariff
level
?
Reduction of
tariff dispersion.
(High tariff
dispersion
reflects
privileges for
special
interests.)
Elements of trade reform (cont)
?
?
?
Reduction in non-tariff barriers – quotas &
prohibitions
Exchange rate policy – devaluation of the
official exchange rate to encourage exports
Export promotion programs
?
Exports from
Latin America
increased
(1983-1998)
?
More from
some
countries than
from others
Globalization 1983-1998
?
But exports
increased more
in the world
overall than
they did on
average in Latin
America.
Trade reform is not easy
?
?
?
?
?
Trade reforms have short-run costs that affect
some groups harder.
Open economies can be more vulnerable to
fluctuations like trade disturbances and sudden
changes in capital flows.
Even in the long run, some groups lose.
So –> trade reforms must show early benefits
and affect growing segments of the population to
be successful.
So while in theory “free trade” makes sense, in
practice it’s politically difficult.
Determinants of Successful Trade
Liberalization Policies
?
?
Exports expand rapidly.
Productivity increases rapidly.
?
?
?
?
?
So that wages can increase
So that export prices are competitive
Trade deficits are not too large.
Unemployment is low.
Real wages increase.
Composition of Exports (1965-1999)
?
Share of primary products in total exports was
reduced from 60.1% in 1965 to 34.1% by 1999.
Regional Trade Agreements in Latin
America
?
?
?
?
?
Regional agreements help to establish a larger and
dependable market for a country’s goods.
They can be a step along the learning curve towards
increased international marketing.
Are these agreements “trade creating” or “trade
diverting?” It depends.
e.g. NAFTA diverted textile trade between U.S. and
Caribbean to U.S. and Mexico – was it more efficient
with Caribbean?
New trade agreements in Latin America are much
less protectionist than their forbears.
Regional Trade Agreements
?
?
?
?
The Community of Andean Nations: Bolivia,
Colombia, Ecuador, Venezuela & Peru
The Central American Common Market &
CAFTA
NAFTA (1994) U.S., Mexico, Canada — Now
called U.S.-Mexico-Canada Agreement, or
USMCA
Mercosur (1991) the Southern Cone, Brazil,
Argentina, Paraguay, Uruguay
Trade agreements – 4 categories
?
?
?
?
1) Free trade area – actually not completely
free trade, but preferential status for member
countries
2) Customs union – adds a common tariff
3) Common market – harmonized economic
policies, eg. Agricultural protection and Social
policies, labor policies, etc
4) economic union – includes same monetary
policy and common currency.
Each step (1-4) from previous slide and below,
moves the region toward “ever closer union.”
Much enthusiasm for trade
agreements in early 1990s
?
But many stumbling blocks arose.
?
Trade agreements require long
negotiations and much frustration.
?
Political opposition can be fierce.
?
Enthusiasm began to wane by the mid1990s.
Source: Franko 4th ed, p. 201
China’s demand for
Latin America’s resources
?
?
Trade agreements helped to increase trade
and increase individual countries’ reliance on
trade as a source of income, as we saw in
the table in the last slide.
But tremendous growth in China and China’s
appetite for raw materials and higher quality
food (i.e. beef, milk products, pork) also
increased demand for Latin America’s
commodities – especially 2001-2015.
China Real GDP growth, 1995-2018
16
14
12
10
8
6
4
2
0
Six percent real GDP growth is outstanding – China’s record is incredible!
China’s demand for
Latin America’s resources
?
?
?
?
Franko address exports to China in Ch 6, pp.
171-174 and Ch 7, pp. 207-210.
As China grew and built huge cities, the Chinese
needed iron ore, copper, and other minerals.
As incomes and demand for meat grew in China,
so did the demand for soybeans and other
agricultural goods.
China’s appetite for iron ore grew from 70 million
metric tons in 2000 to 932 million metric tons in
2014. (This was critical for Brazil.)
China’s demand for
Latin America’s resources
?
?
?
Similarly in copper, China’s purchases rose
from 12.6% to 40.1% of world imports. Chile
produces about 1/3 of world’s copper.
Other key exports to China from Latin
America: crude oil, soybeans, lithium, tin,
bauxite (for aluminum), nickel.
Countries that became heavily dependent on
exports to China: Argentina, Brazil, Chile,
Colombia, Costa Rica, Peru, and Venezuela.
Iron ore, cfr spot ($/dmtu)
Real 2010 Price
Copper ($/mt)
Real 2010 Price
160.00
9000.00
140.00
8000.00
120.00
7000.00
6000.00
100.00
5000.00
80.00
4000.00
60.00
3000.00
1000.00
0.00
0.00
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2000.00
20.00
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
40.00
Energy
Real 2010 Prices
Coffee & Cocoa
Real 2010 Prices
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
7.00
6.00
5.00
4.00
3.00
2018
2016
2014
2012
2010
2008
2006
2004
2002
1998
2000
Natural gas index (2010=100)
1.00
0.00
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Crude oil, average ($/bbl)
1996
1994
1992
1990
1988
1986
1984
1982
1980
2.00
Cocoa ($/kg)
Coffee, Arabica ($/kg)
As had happened in the past, commodity prices boomed and later fell.
Soybeans ($/mt)
Sugar, world ($/kg)
Real 2010 Price
600.00
1.20
500.00
1.00
400.00
0.80
300.00
0.60
200.00
0.20
0.00
0.00
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
100.00
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0.40
Beef & Chicken
Real 2010 Prices
6.00
See charts on Blackboard
For additional commodities
5.00
4.00
3.00
2.00
1.00
0.00
Beef ($/kg)
Source:
https://www.worldbank.org/en/research/commodity-markets
Chicken ($/kg)
Source: Franko 4th edition,
p. 208.
Note: Brazil, Uruguay, Argentine produce soybeans.
Venezuela, Ecuador, Mexico produce oil.
Chile and Peru produce copper.
China’s demand for
Latin America’s resources
?
?
?
?
When exports increase, export taxes
increase and the government budget
becomes dependent on those exports.
It’s difficult to resist spending more when
times are good.
Consumers with extra income to spend buy
more imports.
It’s important for countries to build up foreign
exchange reserves for the end of good times.
Source: Franko 4th edition, p. 174
Tourism is also
like an export
International
Tourist
Arrivals
1995-2018
Argentina
Brazil
DR
Chile
Cuba
Peru
Costa Rica
Ecuador
https://databank.worldbank.org/source/
world-development-indicators
Panama
Nicaragua
?
?
?
Mexico is on a
separate graph
because the scale is
much larger
From about 2013
international tourism
in Mexico exploded.
(Think Cancún!)
But it also grew
rapidly in many other
Latin American
countries.
Mexico
Tourist arrivals
45,000,000
40,000,000
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000

https://databank.worldbank.org/source/world-development-indicators
While tourism is big
in absolute numbers
in Mexico, it’s more
significant to the
economies of several
other countries.
Which countries are most dependent
on tourism?
?
From the previous table, those that have the
largest % of tourism receipts to GDP:
?
?
?
?
?
?
?
The Dominican Republic
Panama
Costa Rica
Nicaragua
Haiti
Like exports, tourism brings in foreign exchange
that can be used to purchase imports.
But tourism was hit hard by the coronavirus.
In Summary:
?
?
?
Reforms in the 1990s set the stage in Latin
America for a more outward orientation in the
years to follow.
Regional trade agreements pursued in the
early to mid-1990s, and an increased
demand from China for natural resources
also boosted exports from Latin America.
Investment in tourism, in the last few decades
has also increased dependence on foreign
demand.

Purchase answer to see full
attachment

Explanation & Answer:
4 pages

Tags:
communication

finance

Economy

User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.