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Economics of Latin America & the Caribbean PowerPoint Presentation
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Economics of Latin America & the Caribbean

Economics of Latin America & the Caribbean

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Economics of Latin America & the Caribbean

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  1. Economics of Latin America & the Caribbean

  2. LISTING OF LATIN AMERICAN COUNTRIES Argentina Belize Bolivia Brazil Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Honduras Mexico Nicaragua Panama Paraguay Peru Suriname Uruguay Venezuela (other) French Guiana… a colony LISTING OF CARIBBEAN ISLAND NATIONS Anguilla - Antigua and Barbuda - Aruba - Bahamas - Barbados - Bermuda - Cayman Islands - Cuba - Dominica - Dominican Republic - Grenada - Guadeloupe (French) - Guyana - Haiti - Jamaica - Martinique (French) - Montserrat - Netherlands Antilles - Puerto Rico - Saint Kitts & Nevis - Saint Lucia - Saint Vincent & Grenadines - Trinidad and Tobago - Turks and Caicos Islands - Virgin Islands

  3. Latin America Update (2010) • In the five years between 2004-2008 Latin America’s economies grew at an annual average rate of over 5%. • Inflation remained generally low. • Credit expanded and exports boomed. • Proportion of people living in poverty fell from 44% in 2002 to 33% in 2008. • Until the fall of 2008 Latin Americans could still hope that they would escape the worst of the downturn. • But in the last three months of ‘08, Latin America saw its stock markets crash, currencies wobble and credit start to dry up. That came on top of falling exports and the plunge in the prices of the commodities it sells to the world. • Estimate: regional GDP declined 3.6% in 2009.

  4. Remittances (money being sent home by Latin Americans working abroad) has fallen sharply. • Still, the region withstood the global economic decline better than had been anticipated in 2009, and is rebounding quickly. • The regional economic powerhouse, Brazil, continued to see strong inflows of foreign direct investment even while its economic output contracted 1.2%. • The increase in commodity prices after March of 2009 helped most Latin American countries. • As a whole, the OECD expects Latin American and the Caribbean to recover modestly in 2010 and 2011, with growth of 2.2% and 3.2% respectively. • Growth in the English speaking Caribbean will be very weak to begin with, with growth returning to most of these economies only late 2010/early 2011 (tourism). • Much will depend on what happens with the Global Economy in general and the US in particular, in the second half of 2010. .

  5. Many fear that Latin America will revert to it’s dictatorial and populist past that was often characterized by the seizing of foreign assets along with fiscal and monetary irresponsibility. • This may be a concern for Venezuela, Bolivia and Ecuador, but throughout the region democracy has quickly formed deep roots. • Results from a October 2009 Latinobarómetro poll (left) indicates that the countries of Latin America may not only be diverging economically in the coming years, but we may witness political divergence as well. • Most Latin Americans see themselves as politically moderate, but they retain a yearning for strong leaders and expect the state to solve their problems.

  6. Latin Americans generally support democracy and its institutions, although many remain frustrated by the way their political systems work in practice (weak rule of law, widespread corruption and cronyism). • General risks… • Biggest risk in the region is of abandoning the recent commitment to fiscal and monetary prudence. • While most of the poorest are nowadays covered by government cash-transfer programs, those in the third to the fifth deciles of income distribution are now at risk of falling back into, or going deeper into, poverty. • Corruption is still a major obstacle…and may worsen in the short run. • Update on the Caribbean… • On October 15th, 2008 in Barbados, 13 Caribbean countries approved a new Economic Partnership Agreement (EPA) with the European Union. • The EPA involves only gradual changes to a trading relationship which goes back to colonial days. It grants almost all Caribbean exports duty-free and quota-free access to Europe. In return, the Caribbean will phase out duties on 87% of European imports by 2033.

  7. Until late 2008 these countries have had one-way access to European market (since 1975 under the Lomé Convention, and its successor, the Cotonou agreement) • Pattern of trade relations between Europe and the Caribbean was no longer in synch with the rules of the WTO. • The agreement will help the Caribbean to develop new exports, and to rely less on old staples like bananas and sugar. • US is still the largest trading partner with, and investor in, the region. • Still, the most dynamic business opportunities in the coming decade will be between countries in the region and the EU. • The big story for 2010 may be Cuba.

  8. Each year, Transparency International draws on surveys of businessmen and country experts to gauge perceptions of corruption in 180 countries around the world. It defines corruption as the abuse of public office for private gain. This year, Chad shared the bottom slot with Bangladesh. Corruption has declined significantly over the past year in a number of countries, including France, Hong Kong, Taiwan and Nigeria. Transparency International

  9. The Puzzle of Latin America Economic Development: Diversity, Trends and Conflict • The nations of Latin American and the Caribbean are engaged in programs of political and economic liberalization that may prove as historic as their struggles for independence from Spain and Portugal. • After decades of political instability, corruption, and military dictatorship, many countries in the region seem to be developing stable democracies. • Markets long protected from competition are opening to foreign trade, foreign investment, and regional cooperation. • Issue #1: The Economic Landscape • Diversity: The nations of Latin America are different from each other in many ways. Many of them also have a large amount of diversity within themselves. • Regional trends: Changing from a rural to an urban society, an increase in population, and new found deposits of natural resources. The countries have instituted different types of political structures and domestic policies.

  10. The five major issues that confront Latin American countries today: • External Balance • Credibility • Distribution • Sustainability • Role of the State • The net effect of the reforms initiated in the 1980s and 1990s may very well result in a divergence among the nations of Latin America over the next 25 years. • Those that successfully address these five issues will see their people’s fortunes rise, while those that fail will experience sub-par economic growth and political instability. • The importance of running a consistent balance of payments surplus => boost reserve of domestic financial capital. Role of national savings rate.

  11. What is the difference between economic growth and development? • Author’s definition of development: “… a process of meeting the basic human needs of the population and enhancing options for the allocation of economic resources both today and in the future to increase the choices citizens have in their daily lives.” • UN Millennium Development Goals…pgs. 14-15 • Role of technological change: the world technology frontier. • Human Development Index • “Dualism” => the rich become richer and the poor more destitute in the process of change (without access to resources, the poor often become poorer) • … the simultaneous existence of modern and traditional economics. • … complicates the policymaker’s task (must address the “social deficit”). • Todaro: “… growth must be accompanied by a change in the economic and social rules of the game.” • Therefore, economic growth is a necessary, yet not sufficient, condition for economic development.

  12. The Human Development Index (HDI) is an index combining normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide (ranges from 0 to 1 with green being greater than .85, yellow between .85 and .5 and red below .5)

  13. Growth of output must outstrip population growth to improve the resources available to people. • Tasks of policymakers in designing development policy: • They must establish a delicate balance between the external sectors and domestic macro policy. • They must be attentive to the changing nature of the global economic environment as well as preserve confidence and stability within their own economies. • To attain equitable growth, they must fashion policies to target different economic, ethnic, and gender groups. • Their policies must balance the allocation of resources between meeting the needs of the present as well as future generations (i.e. sustainable development). • Must face the challenge of deciding the extent to which each state should supplement the activities of its own markets to facilitate equitable, sustainable development.

  14. Three basic schools of thought: Development Theory • Planning Model… • a. Dependency theory: Center vs. Periphery • 2. Institutionalist Model… • a. Structuralists…asymmetric development (bottlenecks)…an economy also shaped by power and politics. • b. Heterodox theory…a flexible approach • 3. Orthodox Model… • a. Chicago School…grounded neoclassical economics • b. Washington Consensus • c. IMF

  15. Issue #2: Historical Legacies…Patterns of Unequal • & Unsustainable Growth • What were the Spaniards main goal in coming to the New World? • What kind of social and political system did they set up? • Difference between peninsulares and creoles? • Imperial trade restrictions. • What is the meaning of the terms mercantilism, monoculture and “Dutch Disease”? • Agricultural development: workers labored on a debt peonage structure => the latifundios (production for the world market … the best land … the encomieda system <repartida: quinto>) and minifundios (subsistence farming … marginal land). Model of self-sufficiency (feudal concept of manor). • Why was Brazil overlooked by the Spanish? • Independence and entry into the world economy: Most nations gained independence in the early 1800s. Followed by a period of turmoil: territorial disputes. In the 1840s, Latin America began to enter the world trade market, especially with Great Britain.

  16. What was “The Golden Age (1870-1914)”? • The Golden Age occurred inLatin America between 1870-1914 and was so called because of the increased demand for exports, the tremendous growth in population and new transportation technology. • Stalled Progress (1914-1930): During this period, the U.S. replaced Great Britain as the primary trading partner and investor of Latin America. Export led growth slowed during this period because of falling prices and because of World War I: ”scissors” effect + Engle’s Law. • The 1930s (the Great Depression): The main causes of problems in Latin America were capital flight, contracting income because of declining export prices, insular multinationals, lack of forward and backward linkages from prior development. • The 1930s was a political watershed period in Latin America with its "increased social pressure, numerous strikes, the emergence of radical parties, and nationalist rhetoric." A new development model emerges. • Issue #3: Theories, Ideas, and Opinions • Divergent Opinions: The major economic problems plaguing Latin America are low incomes, unequal income distribution, periods of hyperinflation, negative balance of payments and periodic debt crises.

  17. Many of the proposed policies are radical because the problems are so extreme that it appears minor changes in policy will not work. • Whyis Latin America underdeveloped? • Dependency theory … periphery? … center? • Harsh critics of foreign direct investment and MNCs . • 2. Mainstream interpretations … • Resource endowment…global geography. • The conventional, mainstream economists say that underdevelopment is caused by small market size, slow capital accumulation (low domestic savings), shortages of foreign exchange, unskilled labor, and poor political organization (inefficient public institutions). • Late out of the gate: no agricultural revolution, lack of an investment climate, needed transportation revolution, imperial opposition, opposition from within… difficult to catch up from behind. • Three positive effects from foreign direct investments and MNCs? • Foreign firms bring superior technology. • Increases competition in the host economy. • Foreign market access.

  18. Concepts to Define & Understand at the Beginning… • 1. Comparative advantage - def: A nation has a comparative advantage over a trading partner in the production of an item if it can produce that item at a lower unit cost than its partner. • Implications... • a. Any country can increase its income by trading, because the world market provides an opportunity to buy some goods at relative prices that are lower than those which would prevail at home in the absence of trade. • b. The smaller the country the greater this potential gain from trade, but all countries benefit to some extent. • A country will gain most by exporting commodities that it produces using its abundant factors of production most intensively, while importing those goods whose production would require more of the scarcer factors of production. • 2. Balance of Payments - Exports (X) & Imports (M) • B of P = PxX – PmM • Px = vector of prices of exports • Pm = vector of prices of imports

  19. Surplus = excess of exports over imports • Deficit = excess of imports over exports • Merchandise trade account, capital account, reserve account • Engle’s Law again => deteriorating terms of trade over time. • 3. Exchange rates - def: The price of one nation's monetary unit in terms of the monetary unit of another country. • - Foreign exchange market: A market in which buyers and sellers of bank deposits denominated in the monetary unit of many nations exchange their funds. • - Exchange rates can be allowed to fluctuate freely, can be "managed" or can be pegged to the currency of a major trading partner. • => Graph (500p:1$ or 1p:.002$) • Demand side - People who want to import Chilean goods, or travel in Chile, or others who just want to hold pesos. • … When North Americans demand more Chilean vegetables, copper, wine, or whatever, (D curve shifts right) the price of the peso will rise in terms of dollars.

  20. Supply side - those who want to import goods into Chile from the United States or hold $. (1) When Chileans demand more US cars or computers (S curve shifts right) the price (in $) of the Chilean peso will tend to decline (S of peso shifts r). Appreciation and depreciation of a currency: When country A's currency becomes more valuable relative to country B's, country A's currency is said to appreciate relative to that of country B … and country B's currency is said to depreciate relative to that of country A. Determinants of Exchange Rates: 1. What determines the relative positions of S&D curves for currency? (a) Relative price levels - constantly changing (inflation) (b) Relative rates of growth (c) Relative interest - rate levels (d) Expectations/Speculation… Example of Argentina…

  21. (e) Random daily trade and financial flows…noise (3.8 trillion per day) • Note: Market exchange rates vs. PPP rates (purchasing power parity). • 4. Domestic Absorption (A) = The national expenditures on both home-produced goods and imports. • - Not equal to B of P... • If A>GDP => trade deficit • If A<GDP => trade surplus • How does a nation pay for domestic consumption (absorption) above and beyond GDP? => Draw down domestic savings, sell domestic assets and/or borrow from abroad (increase external debt). • 5. Import Substitution Industrialization development strategy: - The substitution of domestic production for imports of foreign manufactures. • Was first explored by Latin American countries when their primary exports markets were severely disrupted, first by the Great Depression of the 1930s and subsequently by the breakdown of commercial shipping during World War II. • What are forward and backward linkages?

  22. The Big Mac Index (7/2009) The Big Mac index is based on the theory of “purchasing-power parity”. Under PPP, exchange rates should adjust to equalize the price of a common basket of goods and services across countries. Our basket is the Big Mac. Video Clip Econ. 4132

  23. - Emerging from the war with fledgling industries, countries like Argentina, Brazil, Columbia, and Mexico began systematically to sustain these manufactures by erecting tariffs and other barriers to trade-competing imports from the US. • Latin America developed import substitution regimes with a multitude of protective techniques that were later emulated by other developing countries. • Conditions for success: • (1) Identify large domestic markets, as indicated by substantial imports over the years. • (2) Ensure that the technologies of production can be mastered by local manufacturers or that foreign investors are willing to supply technology, management, and capital (joint ventures). • (3) Erect protective barriers - Either tariffs or quotas on imports, to overcome the probably high initial cost of local production and make it profitable for potential investors in the target industries (“infant” industry argument). • First targets => Consumer goods industries (processed foods, beverages, textiles, clothing, and footwear)… have technologies easily obtained and mastered by domestic producers.

  24. (4) Keep an overvalued exchange rate => Imports are cheap (intermediate inputs are cheap) and exports are expensive to foreigners (reduced dependence of foreign markets for economic well-being: Foreigners just won't buy your products). • (5) SOEs… and why? Key industries vs. natural resources (p. 62). • (6) Role of MNCs? Subject to restrictions (p. 67). • Marked change in national economic policy began in the 1950s: • Following the end of the WWII, most Latin American governments formulated clear policies to foster "import-substituting industrialization". • - Governments improved the region's transport system and expanded the infrastructure for electricity and water. • - Governments helped finance local industry and welcomed foreign corporations willing to establish factories in certain industries.

  25. - Still the strategy failed to resolve the Latin American tendency to import more than it could export. - In fact the import strategy contributed to the problem because the new factories were dependent on foreign suppliers for machines, spare parts and intermediate products. - As the policy ran its course, domestic markets became exhausted... if economic growth was to be sustained at home, then foreign debts had to be incurred (keep political promises). (4) Eventually, many developing nations faced a breakdown… (run out of loans and must reduce exchange rates). - When this occurred the wealthy and powerful were the first to know: domestic currency will exchange into a larger number of foreign currency per unit. Economic reality => the national currency must depreciate => Capital flight: Causes the domestic currency to depreciate rapidly. In other words: this strategy ended with a crisis. - Devaluation typically reduces imports and increases exports but in the import trade strategy environment, the dependency on imported goods made the demand for foreign goods inelastic => imports did not fall yet became more expensive to obtain. - Also, reducing imports would mean reduced employment (populist politicians would not accept) => net result: worsening of the balance of payments/foreign exchange problems.

  26. [a] Government felt compelled to borrow as much as possible from external sources (plus to print money to pay their domestic bills). • (5) In addition, levels of efficiency in the new industrial plants were sometimes rather low: due to limited size of the home market. • … Many producers used technology designed to produce high volumes of output (higher than Latin American countries could support) • … Many firms operated at capacity levels below 50%! • (6) Under the ISI regimes governments introduced productive tariffs and quotas (or total ban on certain imports) to protect domestic producers and in some instances domestic producers had monopoly status => little incentive to improve management or labor practices so the prices of local manufactures rose well above international prices. • [a] Also, very powerful domestic interests resisted dismantling tariffs and quotas that protected their favored status.

  27. (7) Next, the rate of job creation was much lower than had been hoped for… - largely because of the rapid growth of the labor force (from both urban migration and high rates of population increase). - Also, the problem was made worse because the technology incorporated in domestic industry was often capital-intensive even though more labor-intensive techniques were available. (8) Finally, the import-substitution strategy and associated domestic growth was bound to slow down eventually because of small markets without hope of exports (due to overvalued exchange rate). … but it worked for a while (5.5% growth: 1950 – 1980) 6. Export oriented trade policy & development strategy: (outward looking trade strategy or the “neoliberal agenda”) - Allows a nation to realize, as fully as possible, the inherent gains from their comparative advantage through free markets. - Often means primary-export-led growth (drawbacks: volatile price swings…and limited revenue upside due to Engel’s Law). - Starting in the 1960s there were the beginnings of an intellectual return to free trade thinking and attempts were made to encourage Latin American countries to export more to the developed countries.

  28. - Stimulus here was the budding success of the Asian Tigers or NICs (Newly Industrialized Countries: Hong Kong, Korea, Singapore and Taiwan) who were successfully penetrating MDNs’ (More Developed Nations’) markets. - Encouraged by the advice of the World Bank, several governments including those of Brazil and Colombia began to reduce levels of domestic protection and to give incentives to export producers. [a] By 1970 this had become an accepted way of sustaining industrial expansion. Conditions for Success: (1) Maintain an exchange rate that helps make it profitable for domestic producers to sell their crops, manufactures, and services on world markets. The lower the exchange rates, the more desirable the nation’s products will be to foreigners. * As exchange rate decreases => exports rise while imports fall => goal: to get nation to run a balance of payments surplus => give them foreign currency to service and reduce external debt. (2) It may be necessary to subsidize some exports to induce manufacturers and farmers to invest in capacity for the export market (infant industry argument again).

  29. (3) If governments want producers to turn towards world markets, they must reduce the relative attractiveness of production for the domestic markets => reduce high protective tariffs for favored industries, eliminate quotas on imports and reduce regulations. • Hyperinflation - Inflation (absolute increase in price level) at very high rates of usually 200 percent or more prevailing for at least one year (table on page 108). • … Caused by one factor…government printing too much money to pay its bills (Seniorage…or, quantitative easing). • … Why is it bad? • A. Uncertainty and therefore higher risk => less investment (both from domestic and international sources). Induces the outflow of financial capital and reduces FDI. The poor flee to dollars. • B. Functions of money destroyed... store of value, unit of accounting, unit of exchange. … No lubricant to machinery of economy => friction=> slows down (people revert to barter). C. Encourages speculation... Diverts effort away from production.

  30. D. But why do it? Effectively a tax without increasing official tax rates: government uses money right after it is printed thereby using it when it has the greatest purchasing power... those who receive it later have reduced purchasing power therefore have transferred, unknowingly, some of the purchasing power which would have been theirs to the government (inflation tax). … especially impacts the poor. … it is not understood, so most citizens don’t blame government. E. Solution... New currency or abandon currency ($...El Salvador and Ecuador have done; plus the US $ accepted almost everywhere). 8. The International Monetary Fund (IMF): What is it? - International role of IMF is to extend emergency credit (Short Term!) to member nations who get in trouble. - Critics=> IMF tool of MDNs lying in wait to get control of the nation's economic policies and reshape them in a monetarist, market oriented, conservative model. - Problem: Has had a standard package that includes: [1] Monetary & Fiscal restraint.

  31. … Monetary restraint reduces domestic demand and reins in inflation (also ties politicians’ hands so they can’t use seniorage). … Government spending reduced (reduce size and involvement of government). Create fiscal prudence by bringing the federal budget in balance. [2] Currency Devaluation… Goal: Reduce excess demand and to reorient the structure of national production away from imports and toward exports (with low import content; a comparative advantage… often focused on labor intensive manufactured goods and primary products). … also reduces appeal of capital flight. [3] Cut subsidies and other trade impediments (tariffs, quotas, rules & regulations) => open up economy to global market forces. [4] Limit on wage rate increases… in countries with high inflation there are also price controls to help break inflation psychology [structural inflation]… Argentina, Brazil and Peru. [5] Overhaul tax structure to reduce loopholes for wealthy and to make more efficient.Note: There’s been little progress on this one.

  32. - All subject to periodic review: If they haven't followed guidelines they lose additional funding or must accept and even more stringent set of guidelines. • => funding is received in installments over period of the loan. • Capital flight: A rapid and massive conversion of domestic currency for that of a major international reserve currency and movement of that reserve currency out of the country to an off-shore financial haven. • - When devaluation is about to occur, the wealthy and powerful are the first to know. • - The overvalued exchange rate means that just before crisis point the domestic currency will exchange into a larger number of foreign currency per unit. • - Economic reality => the national currency must depreciate => capital flight: helps to depreciate the domestic currency rapidly in a short period of time (depletion of reserve account). • - This often creates volatile financial markets, increases risk, increases interest rates, social unrest and reduces economic growth. • - It is also followed by a period of inflation (… actually stagflation). • - Psychology imbedded in wealthy Latin culture to have one financial foot in and one financial foot out of home country (keep a house and bank account in Miami).

  33. Evaluating and Comparing Economies: • Need some definitions before we go on... • Institution: Institutions are rules of the society that structure the interaction among people. • - Are made up of formal rules and regulations. • - And informal rules as well at times (important in LA!). • - They are the informed ways by which people deal with each other every day → norms of behavior. • - Institutions, collectively, are the framework within which all of human interaction... political, social and economic... takes place. • Economy: The economy of a society is comprised of institutions that perform economic functions. These institutions are structured and behave according to established working rules. • Philosophical Basis for an Economy: A viewpoint which specifies the place of an individual within society; an ideal state of political, social and economic reality to serve as a set of ultimate goals for society; and a general program suggesting broad policy measures that will guide society from its actual conditions toward the ideal reality. This economic philosophy will be multidimensional in the sense that social, political, and cultural, as well as economic elements are contained therein.

  34. 1. Capitalism → Adam Smith - dominance of "the invisible hand" in guiding economic activity. Limited role of government (provide public goods and define the rules of the game). A “process” ideology. B. Institutional Economics: 1. While there is no hierarchy of importance in the tenets of institutional economics, one of the most important for our purposes is that... [a] Economies are fluid rather than static. [b] The second tenet is that one can understand an economy only within its historical context. - The constellation of factors shaping an economy is unique. - A corollary to this tenet is that what might work for one nation might not work for some other due to historical inconsistencies. [c] Third, the values of a nation's people can be understood best by studying the philosophical/religious underpinnings of its culture. - Old and new philosophies alter attitudes that may subsequently lead to a change in work rules and therefore institutions.

  35. [d] A fourth general tenet is that the values, institutions and work rules which operate in one nation will not necessarily function in another nation. - A corollary tenet is that values, institutions and work rules which functioned in the past may not function in the future. G. C. Allen: "One of the most common fallacies in the minds of academics, or the citizenry of a nation, is that once a trend is established it will persist indefinitely." [e] Finally, the basic structure and performance of an economy are influenced by the dynamics of the society's social and political structure. 4. This broad theory is based upon the interrelationship between a society's beliefs, power structures, and working rules of institutions. [a] The theory can be used to explain the nature and evolution of economic systems. [b] Changes in working rules can modify institutions or create new ones, with the economy evolving in the process. [c] The philosophical basis accepted by authorities and the economy's performance determines whether the working rules are retained, modified, or replaced.

  36. 5. Working rules... • - Establish the boundaries of economic activity between institutions. • 6. Principal institutions... • - Socially determined: not inherent. • [a] Instrumental in establishing and coordinating most production and distribution patterns of behavior, and giving meaning and durability to routine activities. • [b] Significant features: Origin, the activities participants perform, working rules governing them, their impact on the economy, and the philosophical basis for these activities and rules. • 7. Behavior of the economy... • - Three components: How it is organized to resolve the economic problem(s) (what, when, how, for whom), institutional change, and performance. • In describing how each society is organized to resolve its economic problem, three questions need to be addressed:

  37. 1. How is the resource allocation decision organized... [a] Centralized (state control) or decentralized (markets) or some combination. Decision making rules and institutions. 2. What are the rules regarding ownership and control over productive resources? - In each economy the rules differ...even where similar, differing restrictions exist. 3. What type of social process has been adopted for coordinating information and for making production and distribution decisions? - Including markets, traditional mechanism, or some form of economic planning. II. Evaluating and Comparing Economies: - The performance of an economy is influenced by goals and priorities established by authorities and by environmental factors such as technology, natural resource endowment, and international economic and political factors... all interrelate.

  38. - How the economy performs, relative to stated goals and priorities (prevailing norm), determine which other economic, social or political policies are necessary. - Evaluating and comparing economies cannot be purely objective. … Conclusions influenced by the analyst’s point of view... the comparor’s norm. A. Evaluating the performance of an economy... 1. An economy's performance can be defined in many ways, depending upon the performance criteria, methods of measurement and weights attached to each criterion when overall performance is calculated (the performance index). - The choice of criteria is up to the analyst (you!). 2. Four steps to follow: a. The analyst’s definition of performance. b. The identification of performance criteria. c. The choice of performance indicators for each criterion.

  39. d. The compilation of a performance index for cross-comparisons. • … Includes weighting - must be made explicit (you will not be expected to do this) • e. Need for a “benchmark” country. • 3. Criterion examples: • Economic growth (change in GDP or GDP per capita) • Economic stability (low inflation, stable exchange rate, low unemployment, lack of deficits, etc.) • International balance of trade, external debt, and currency values • Income distribution... Lorenz Curve (Gini Coefficient) • World Atlas of Income Inequality • Quality of life: e.g. Human Development Index (United Nations) • … other indices: Corruption, Competitiveness, Economic Freedom

  40. Approach in writing a course paper on a country (ideal)… Mexico 1. Introduction.: Start with overview of country/issue plus some current statistics.

  41. Population: 108.7  m (2007) • Population growth: 1.2% (average, 2003-2007) • Land area: 1.9m sq km (about three times the size of Texas) • Currency… Mexican peso (Ps): 12.95 pesos to the dollar (Feb. 2010) • GDP: US$ bn; market exchange rate: $893.4 US$ bn; purchasing power parity:   $1,345.8 • GDP growth: 3.3 % (average, 2003-2007) • GDP per head GDP per head (US$; market exchange rate)   $8,219 • GDP per head (US$; purchasing power parity)   $12,381 • Inflation:  4.2 % (average, 2003-2007)

  42. Background:Mexico was ruled by the Partido Revolucionario Institucional (PRI) and its predecessor, the Partido Revolucionario Nacional (PRN), between 1929 and 2000. Once strongly nationalist and interventionist, the leaders of PRI governments in the 1990s embraced free-market policies and economic liberalization. Following the victory in July 2000 of Vicente Fox Quesada, the presidential candidate of the centre-right party, the Partido Acción Nacional (PAN), changes to the political system are slowly taking place. The PRI remained the largest party in Congress during the Fox years, but it became less enthusiastic about free-market policies. Current president: Felipe Calderon (PAN). • Political structure:The political system is presidential, bicameral (Senate and Chamber of Deputies) and federal (32 states). The president is elected every six years; Mr. Calderon took office in December 2006. The 500 members of the Chamber of Deputies are elected every three years, 300 from single-member districts and 200 by proportional representation. Three-quarters of Senate members are elected directly for a six-year term with the remaining one-quarter elected by proportional representation.

  43. 2. History … be brief. • - philosophical basis (prevailing norm) • - identify principal institutions in the social, political and economic spheres • - discuss notable working rules of these institutions • 3. Methodology (more on this below): Explicitly state your comparor’s norm … contrast with prevailing norm. Define your performance criteria, consistent with your comparor’s norm, and provide the data on your chosen country/issue and your benchmark country. • 4. Behavior/Analysis of economy (recent). • 5. Evaluation from point of view of your performance criteria…benchmark country for comparison. • 6. Conclusion… • - what can you now say about this country/issue? • do some forecasting: where are things going from here? • 7. Footnote/Endnotes

  44. I have already chosen Mexico as my primary country… • My benchmark country will be Argentina. • Comparor’s norm: I think the standard of living is important and strongly correlated with good social indicators (healthy diet, access to health care, good sanitation, access to education, etc.). Since inflation has been a problem in the past…and can devastate purchasing power…that stable, relatively low inflation is a must to maintain a productive economic environment. Finally, to compete in the global economy I think access to technology is crucial for the people. • Performance criteria: The amount of income per person in real dollar/peso terms will measure standard of living. The change in national prices each year will measure inflation. Finally, the availability and spread of advance technology will lead to the ability to compete in the global marketplace. • Performance indicators: • 1. Inflation, GDP deflator (annual %) • 2. GNI per capita, PPP (current international $) • 3. Fixed line and mobile phone subscribers (per 1,000 people)

  45. Mexican Inflation in Comparison to Argentina's Mexican Inflation in Comparison to Argentina's

  46. Mexican Gross National Income per capita (in current international dollars: PPP)