WPS6837


 Policy Research Working Paper                        6837




Can Latin America Tap the Globalization Upside?
                                Augusto de la Torre
                                 Tatiana Didier
                                  Magali Pinat




 The World Bank
 Latin America and the Caribbean Region
 Office of the Chief Economist
 April 2014
Policy Research Working Paper 6837


  Abstract
  This paper discusses the theoretical arguments in favor                            and improving its macro-financial policy frameworks.
  of and against economic globalization and, with a view                             Nonetheless, Latin America’s progress in raising the
  to ascertaining whether Latin America may be able to                               quality of its international trade integration has been
  capture the globalization upside, examines the trends                              scant. The region’s commodity-heavy trade structures and
  and salient features of Latin America’s globalization as                           relatively poor quality of trade connectivity can hinder
  compared with that of Southeast Asia. The paper focuses                            growth potential to the extent that they are less conducive
  on trade and financial integration as well as the aggregate                        to technology and learning spillovers. Moreover, Latin
  demand structures (domestic demand-driven versus                                   America’s domestic demand-driven growth pattern (a
  external demand-driven) that underpin the globalization                            reflection of relatively low domestic savings) may become
  process. It finds that Latin America is mitigating some                            an additional drag to growth by accentuating the risk of a
  bad side effects of financial globalization by moving                              low savings-low external competitiveness trap.
  toward a safer form of international financial integration




  This paper is a product of the Office of the Chief Economist, Latin America and the Caribbean Region. It is part of a larger
  effort by the World Bank to provide open access to its research and make a contribution to development policy discussions
  around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors
  may be contacted at adelatorre@worldbank.org, tdidier@worldbank.org, and mpinat@worldbank.org.




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          names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
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                   Can Latin America Tap the Globalization Upside?


                        Augusto de la Torre, Tatiana Didier, and Magali Pinat ⊕




JEL classification codes: F15, F36, F43, F62, O54

Keywords: Globalization, Trade Integration, Financial Integration, Economic Development and
Growth, Latin America


⊕
  The authors work for the World Bank as, respectively, Regional Chief Economist (adelatorre@worldbank.org),
Senior Economist (tdidier@worldbank.org) and Consultant (mpinat@worldbank.org). This paper is based on a
presentation made at a Latin American Colloquium organized by the Yale Center for the Study of Globalization and
took place at Yale University on April 4, 2013. The paper is also part of the background work for a research
program on “Latin America in an Evolving Multi-Polar World” conducted at the World Bank’s Chief Economist
Office for Latin America and the Caribbean. The views in this paper are entirely those of the authors and do not
necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.
1.         Introduction

        The world economy is not what it used to be twenty years ago. For most of the 20th
century, the world economy was characterized by high-income (North) countries acting as
“center” to a “periphery” of developing (South) countries. Think in this regard of the United
States’ influence on Latin America and the Caribbean (LAC), for example. Europe and Japan
also played such a role for a number of peripheral developing countries in the post WWII period.
However, the recent rise of emerging economies clearly suggests the need to go beyond this
center-periphery dichotomy. The previous North-South dynamics are diversifying and changing,
suggesting the rise of a much more multipolar world economy. In particular, the traditional
overlap between “center” and “North” versus “periphery” and “South” is eroding as some
emerging countries are becoming large players in the world economic landscape.

       A few statistics shed light on the magnitude and speed of these changes. Back in 1980,
the gross domestic product (GDP) in current dollars of the South (defined as all the countries
outside of the G7 and Western Europe) was around 30 percent of the world GDP. By 2011, the
South reached almost the same nominal GDP as the North, capturing nearly 50 percent of the
global GDP. The South's expansion is as striking in trade and financial flows. South countries
accounted for about 30 percent of global trade flows in 1980, whereas in 2011, they represented
around 55 percent. Similarly, South countries captured around 25 percent of global capital
inflows in 1980; by 2011, they received more than 60 percent of the total. They also became
more representative as source countries, sending almost 64 percent of global capital outflows in
2011, up from 22 percent in 1980.

        This tectonic re-configuration of the global economic landscape—particularly the move
away from the traditional pattern of high-income countries at the center and developing countries
at the periphery—has brought about significant changes to LAC. In fact, since the early 2000s
both trend and cyclical growth in LAC seems increasingly tied to developments in other South
countries. 1 For example, prior to the 2000s, the co-movement in economic activity between LAC
and China was virtually non-existent. Over the last decade, however, such co-movement has
been rising for several countries in LAC, particularly in South America. In contrast, co-
movement with the United States (with the notable exception of Mexico) and the European
Union has been on a downward trend since the late 1990s. These patterns of growth co-
movement between LAC countries and the rest of the world were put temporarily on hold during
the 2008-2009 global crisis, when economic activity across countries fell in tandem with the
epicenter of the crisis. Nonetheless, LAC along with other South countries have resumed their
higher pre-crisis growth rates and converged more quickly than the advanced world (De la Torre,
Calderon, and Didier, 2010; Didier, Hevia, and Schmukler, 2012), suggesting that their increased
growth co-movement is persistent. These growing economic linkages are driven to a significant
extent by the trade channel (Calderon, Chong, and Stein, 2007) and are associated with a
significant reconfiguration of the geographic and product structure of LAC’s trade.

       At the same time as LAC’s direct trade linkages have mutated, high commodity prices
have been observed for most of the 2000s, configuring a commodity price boom that has been

1
    See for example De la Torre, Didier, and Pienknagura (2012b).


                                                          2
not just the longest but also the most comprehensive since the 1960s—affecting almost all
commodities relevant to LAC. The strong tail winds coming from the high commodity prices
along with large volumes of capital inflows, driven at least in part by low interest rates in
advanced economies and a widespread search for yield among international investors, have
resulted in appreciated currencies across the LAC region for most of the 2000s. The fast
expansion of the services sector observed in a number of LAC countries may in fact be a
reflection of LAC’s real exchange trends and evolving external connections. In this context and
unsurprisingly so, many have raised concerns about the long-term development prospects for
LAC within this new multipolar world.

        This paper focuses on the nature and the implications for the economic development of
LAC that the emergence of this new multipolar world economy entails. Latin America is an
increasingly globalized region and its economic future depends a great deal on the quality of its
external connections. That is, LAC’s future growth will be affected not only by the quantitative
incidence of the evolving international trade and finance linkages, but also by the qualitative
nature of such linkages. To shed light on these issues, in Section 2 we start by contrasting the
performance and globalization patterns of LAC vis-à-vis the Southeast Asian economies,
particularly the so-called Asian Tigers. In Section 3, we revise the theoretical arguments on the
costs and benefits of various dimensions of globalization. In Section 4, we explore the nature of
trade connections and other macroeconomic aspects that may affect the globalization-growth
nexus. We conclude in Section 5.

2.       LAC vs. the Southeast Asian Tigers: A case for globalization?

        For development economists, the ultimate test of the benefits of globalization has to be
economic convergence—that is, the convergence of the per capita income of the less advanced
economies towards the per capita income levels of the more advanced economies. In fact, a case
for globalization would rest convincingly before the profession if one could show that the per
capita income for a developing country converges consistently and sustainably towards that of
the advanced economies as a consequence of the country’s persistent increase in its degree of
international trade and financial integration. The state of our theory and evidence does not allow
us to make that claim categorically, however. To be sure, there is a strong tendency among
economists in favor of a causal connection going from trade openness to growth, although it is
far from being a consensus. 2 The growth effects of international financial integration command
even less agreement and the views in this regard are rather tilted towards the negative. 3 In all,
and not least because of the changing nature of globalization (Lane and Milesi-Ferretti, 2008;
Baldwin and Lopez-Gonzalez, 2013) as well as the endogeneity challenges facing empirical
work, the growth enhancing effects of rising globalization have not yet been fully established—

2
 The seminal article of Frankel and Romer (1999) showed (using data for 1985) that differences in trade openness
across countries were positively associated with higher levels of GDP per capita. Others have argued, however, that
when institutional differences across countries are taken into account, there is a lack of statistical significance on the
coefficient linking trade to growth (see for instance Acemoglu et al., 2001; and Rodrik et al., 2004). The debate has
not been settled yet and a number of papers keep pondering on the question of whether trade causes growth. See for
example Dollar and Kraay (2002), Alcalá and Ciccione (2004), and Noguer and Siscart (2005).
3
 See for example Prasad, Rajan and Subramanian (2007), Aizenman and Sushko (2011), and Aizenman, Jinjarak,
and Park (2013) for recent empirical analysis of the links between financial globalization and growth.


                                                            3
i.e., in a compellingly well-identified, predictable, systematic, and robust manner—and this
likely explains why the debate between globalizers and anti-globalizers within the economics
profession remains as heated as ever. 4

       Be that as it may, if there is one place where the proponents of economic globalization
can find evidence in their favor, it is in the contrasting growth experiences of LAC and the
Southeast Asian Tigers (Hong Kong SAR, China; Singapore; the Republic of Korea; and
Taiwan, China) during the 60 years or so of the post-World War II period. The impressive
convergence of the Tigers towards the standards of living of the U.S. in this period was indeed
accompanied by a pronounced rise in their degree of international trade and financial integration.
By contrast, LAC failed to converge even as it displayed a comparatively low, albeit increasing,
degree of trade and financial globalization. Let us take a closer look at these facts.

         Figure 1 depicts the contrast in growth convergence between these two sets of countries.
In the early 1950s the (PPP-adjusted) per capita income of the Asian Tigers was merely 12
percent of that of the U.S.—only about one-third of LAC’s per capita income. It subsequently
closed the gap steadily and dramatically, catching up with LAC’s per capita income around 1980
and then continuing to rise steeply to reach the equivalent of about 80 percent of the U.S. per
capita income by 2012. In contrast, LAC’s per capita income growth relative to the U.S. over the
same period was, overall, one of stagnation. If anything, LAC’s income per capita declined
relative to that of the U.S. since the 1950s: it started at around 30 percent of that of the U.S.
during the phase of import substituting industrialization (1950-1980), lost considerable ground
relative during the “lost decade” of the 1980s, and continued to lose ground, albeit less
pronouncedly, during the Washington Consensus decade of the 1990s, so that by the end of the
1990s its per capita income stood at around 20 percent of that of the U.S.. LAC did begin a
convergence process in the 2000s but hardly managed to bring its per capita income back to the
level it had in the early 1950s.

        LAC’s lack of convergence is not just the result of averaging. To be sure, important
heterogeneity is observed when individual LAC countries are considered. However, as shown in
Figure 2, the failure to converge is a widespread phenomenon in the region. The per capita
income of most of the smaller- and medium-sized LAC countries relative to the U.S. per capita
income has displayed a flat line-type behavior, stagnating in the 15-20 percent range, for the last
60 years (Panel A). Brazil, Mexico, Panama, and Peru constitute a group marked by high
fluctuations—the visible convergence process registered during the import substitution period
was reversed through the 1980s and 1990s, and then followed by another bout of partial
convergence since the early 2000s, which has been especially strong in the case of Panama and
Peru (Panel B). A few LAC countries (notably Argentina, Uruguay, and Venezuela) actually
diverged over most of the period, falling from a per capita income ratio of 50 percent or more in
the early 1950s to around 30 percent by the late 1990s, although Argentina and Uruguay
recovered a significant part of the lost ground in the last decade or so (Panel C). Chile is
arguably the only country in LAC that has been on a steady convergence path for a quarter of a
century, since the mid-1980s, a major turnaround that followed a long period of divergence
(1950-1985) but that nonetheless pales when compared to the convergence experience of the
4
  See for example Borensztein, De Gregorio, and Lee (1998), Rodrik (1998), Collier and Dollar (2002), Fischer
(2003), Stiglitz (2003), and Kose, Prasad, Rogoff and Wei (2006), among many others.


                                                     4
Asian Tigers (Panel D). In sum, the within region heterogeneity is not sufficient to alter the
thrust of the overall story, namely, that LAC looks like a convergence failure when compared to
the incredible convergence success of the Asian Tigers.

        Let us now turn to the contrast between LAC and the Tigers in terms of their degree of
international trade integration, which is depicted in Figure 3. The Tigers’ trade globalization (as
measured by the sum exports and imports of goods and services relative to GDP) rose
continuously from about 100 percent of GDP in the 1960 to over 300 percent by 2010 even as
their convergence process was unleashed. In contrast, LAC shows a comparatively low degree of
trade openness, albeit a rising one over the same period. In the case of the LAC-7 (Argentina,
Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), trade openness rose from only around 25
percent in the 1960s and 1970s to nearly 50 percent by 2010.

        These patterns are similar to those of financial globalization. During the late 1980s and
early 1990s LAC was particularly aggressive in implementing financial liberalization policies (as
gauged by an index that combines measures of liberalization of the capital account, the domestic
financial sector, and the stock market), reaching levels comparable to those in the advanced
economies and somewhat above those in Southeast Asia, as shown in Figure 4. Nonetheless, the
Asian Tigers vastly exceed LAC—both in terms of levels and rates of increase—when measures
of actual international financial integration are considered (Figure 5). Thus, international
financial integration (as measured by the sum of foreign assets and liabilities as a percent of
GDP) in the case of the Tigers was already hovering at a high level, around 300 percent, in the
1980s and then rose steeply to nearly 900 percent in the first decade of the 2000s. In contrast,
LAC-7 countries go from an average of about 80 percent in the 1980s and 1990s to around 130
percent in the first decade of the 2000s.

        So, what can we make of the contrasts between LAC and the Asian Tigers documented
above? For starters, there is clearly a very high correlation between a remarkable process of
economic convergence and an equally remarkable process of economic globalization in the case
of the Tigers. Prima facie, this is strongly suggestive of self-reinforcing dynamics between
economic globalization and growth, particularly when contrasted with LAC’s failure to converge
in the context of comparatively low degrees on trade and financial integration.

        However, the same data yield mixed suggestions when LAC’s experience over time is
considered by itself. During the 1950-1980 period of LAC’s inward-looking import substitution
development strategy, the data show a positive association between relatively low levels of
international integration (consistent with the inward orientation) and the lack of clear economic
convergence. Since the 1980s, however, LAC’s degree of economic globalization has been on
the rise—albeit from low levels in comparison to the Tigers—but this was associated with
economic divergence (rather than convergence) during the 1980s and 1990s and with modest
economic convergence during the last decade.

         In all, while the contrasting experience of LAC and the Asian Tigers during the post-
World War II period can in several respects be used to build a case for economic globalization, it
is far from being a slam dunk. Particularly when LAC’s experience is examined by itself over
time, the links between globalization and growth become elusive. One possible implication is



                                                5
that, more than just on quantitative measures of international economic integration, there is a
need to focus on the nature and quality of such integration. To unpack this idea better, in the next
section we briefly review the conceptual arguments for and against globalization.

3.     The theoretical pros and cons of globalization

        Globalization has bright sides (it can enhance growth and convergence) as well as dark
sides (it can handicap growth). Whether the bright sides dominate the dark sides in actuality
depends on a number of factors, such as initial conditions, non-policy related structural features
(including geography and natural endowments), and policy frameworks (including their relation
to institutional configurations and institutional changes), as well as the interactions and
interdependencies among these factors and between these factors and the evolving nature of
globalization. The key is, therefore, to distinguish the more beneficial forms of globalization
from the less beneficial ones and identify the conditions under which the upsides of globalization
can be seized and maximized and the downsides minimized or avoided entirely. This much is
clear from a brief review of the literature on the pros and cons of globalization that follows in the
rest of this section. The review focuses on the bright and dark sides of economic globalization
along three dimensions that seem to matter for growth and have the potential of explaining much
of the contrasting growth experiences of LAC and the Asian Tigers: (a) international trade
integration; (b) international financial integration; and (c) the contrasting macroeconomic
features associated with the Tigers’ external demand-driven growth versus LAC’s domestic
demand-driven growth.

       (a) International trade integration

        Consider first the bright sides of international trade integration. The main arguments may
be classified in three groups. The first concerns the benefits arising from the larger markets that
become accessible as international trade rises. This can enable the classical static efficiency gains
from trade via specialization in line with comparative advantages and relative endowments
(Ricardo, 1817; Heckscher, 1919; Ohlin, 1933). It can also facilitate the capturing of scale
economies and Marshallian-type positive externalities that may be unavailable within a small
local market and can lead to dynamic efficiency gains (Marshall, 1879, 1890; Caballero and
Lyons 1989, 1990, 1992; Chan, Chen and Cheung, 1995; Segoura, 1996). In addition,
international trade can facilitate access to better functioning input markets for producers, while
consumers can gain from access to greater product variety and higher product quality (Dixit and
Stiglitz, 1977; Krugman, 1980; Lancaster, 1990; Romer, 1990; Grossman and Helpman, 1991).

        The second group of arguments hinges on the monopoly-busting, efficiency-enhancing
effects of competition, whose role can deepen and widen as a country engages in international
trade. Competition from abroad can enhance resource allocation, among other factors by
improving the signal to noise ratio in relative prices and by raising the incentives for firms to
continuously optimize production, management, and marketing practices, so as to avoid falling
behind the completion, remain profitable, and keep or expand market share. Contestability




                                                 6
stemming from foreign competitors might also spur innovation by local firms, especially if these
firms are not too far from the technological frontier. 5

        The third group of arguments focuses on the technological diffusion and learning
spillovers that can arise from integration into the international markets for goods, services and
finance. Learning can happen by importing, as imports embody knowledge and technology. For
instance, when imports of advanced equipment are put to use in production processes, the
importer can benefit from a various forms of support, training, and advice provided by the
supplier. Learning can of course also happen by exporting, not least through the upgrading
needed to meet international product quality standards and certification requirements. Exporters
can also learn a great deal from the feedback provided by their global buyers, including on how
to innovate and improve practices and processes so to better satisfy demand niches, consistently
attain high quality, and more ably adapt to changing circumstances. The quality and intensity of
feedback, moreover, may multiply when exporters are inserted into international production
chains as both buyers and sellers. These productivity enhancing effects can be further boosted
where trading is at least in part grounded on FDI, which is itself a potentially major conduit of
technology diffusion and learning spillovers.

        It has been increasingly argued that the intensity of learning and innovation effects vary
with the type or manner of production and commercialization activities involved in international
trade. Hausmann and his coauthors (2007, 2009, 2011), for example, place the emphasis on what
countries produce in order to trade. They liken the product network or the “product space” to a
forest, and argue that economies located in the denser parts of the forest are more likely to
experience greater learning spillovers and hence productivity growth. This is presumably
because the complexity of their traded products is higher, and the economic distance between
products shorter in the denser areas. Economic distance, in turn, depends on the similarity of the
needed production capabilities, including labor skills, policy design and implementation
capacity, judicial and contract enforcement ability, etc. A short distance between products makes
it easier for firms to learn faster on how to enter into new proximate business activities by
jumping, so to speak, like monkeys in the forest, from one product (tree) to another. 6

       Others, such as Lederman and Maloney (2012), place the emphasis not so much on what
is produced but on how it is produced. The underlying notion in this case is that the same
production process in two different firm and country setups may entail very different degrees of
technology diffusion and learning spillovers—for example, the assembling of the same type of
computer in a Taiwanese firm vs. a Mexican firm. This point of view questions the tendency to

5
  Aghion et al. (2005) develop a growth model in which product market competition may raise the profits from
innovating (“escape-competition” effect) but it may also reduce innovation incentives especially for “laggards” as its
rewards to catching up are lowered (“Schumpeterian” effect). The model predicts an inverted U-shaped relationship
between competition and innovation. When competition is low, an increase in competition will raise innovation
through an “escape-competition” effect, but when it becomes intense enough it may lower innovation through the
Schumpeterian effect on “laggards.” The reason why one effect dominates when competition is low and the other
when competition is high is the composition effect on the steady-state distribution of technology gaps.
6
  Hausmann, Hwang, and Rodrik (2007) develop an index of complexity (based on the basket of goods that are
commonly exported by higher-income countries) to rank countries’ export baskets. They find a statistically
significant association between complexity and growth—i.e., countries whose export baskets rank high in their
complexity index also tend to growth faster.


                                                          7
unduly attribute special growth-enhancing virtues to certain type of goods (say, high-tech
manufactures) over others (say, mineral commodities or services). In fact, these researchers
argue—and provide copious evidence to back their case—against the popular Sachs-Warner
(1995) “natural resource curse” claim that, on average, commodity-reliant countries
systematically grow less. They argue instead that natural resources are not destiny—whether
they turn into an actual blessing (by propelling long-term growth) or a curse (by stifling growth)
is not pre-determined, but it is rather mediated by institutions and policies which, when adequate,
can help maximize the dynamic upsides and minimize the dynamic downsides of natural
resources. 7 It is these underlying fundamentals, rather than the product itself, which help explain
the contrast between, say, oil-rich Venezuela trapped in rent-seeking dynamics and mineral-rich
yet prosperous Australia.

        A complementary way of grasping the scope for international trade-related learning
spillovers and technology diffusion is to focus on global value chains. These are part of the
ongoing mutation of globalization and reflect the greater modularity of production processes that
has been facilitated by the recent wave of technological revolution, especially in such areas as
information, communications, and inventory management. As discussed in Baldwin (2011), this
new globalization pattern involves the offshoring of certain activities—say, of back office
functions such as accounting and customer support—as well as the distribution of production
internationally (with the associated increase in trade in parts and components). Globalization of
this type is arguably driven more by the dynamic of firms’ global strategies than by traditional,
country-based comparative advantages; in fact, the ongoing cross-border firm dynamics tend to
turn comparative advantage into a multi-country process and call for a finer resolution analysis
of trade patterns that goes beyond the traditional focus on broad sectors and skill categories.
Again, the underlying notion here is that the more the economic activities of a country are
connected to global value chains—particularly to the middle range of such chains—the more the
productivity-enhancing learning and innovation effects (Didier and Pinat, 2014).

        International trade integration, however, is not free from dark sides. Latin America is the
place where these have arguably been most studied, particularly during the 1950s, 1960s and
1970s under the Latin American structuralism (associated with the ECLAC school of thought led
by Raul Prebisch) and dependency theory (a Latin American version of Marxism cum
structuralist thinking represented by, for instance, the writings of Cardoso, Faleto, and Sunkel). 8
One strand in this regard highlights the pitfalls associated with enclave-type extraction and
production modes for mineral commodities and plantation-type production modes for
agricultural commodities. These modalities of production generate little or no learning spillovers
and technology transfers and may, instead, facilitate the pillaging of resources that leave the local
economy durably damaged. They may also reinforce exploitative local institutions and boost
inequality in the distribution of income, wealth, and political power.
7
 For a broad discussion of the links between commodities and economic growth and development in the case of
Latin America, see Sinnott, Nash, and De la Torre (2010).
8
  As started in Cardoso and Faleto (1979), “a real process of dependent development does exist in some Latin
American countries. By development, in this context, we mean 'capitalist development.' This form of development,
in the periphery as well as in the center, produces as it evolves, in a cyclical way, wealth and poverty, accumulation
and shortage of capital, employment for some and unemployment for others. So, we do not mean by the notion of
'development' the achievement of a more egalitarian or more just society. These are not the consequences expected
from capitalist development, especially in peripheral economies."


                                                          8
         Another strand, and arguably one of the most enduring ones, focuses on the “natural
resource curse”. Much effort has gone into carefully testing and re-testing this thesis and there
can be no denying that commodity reliance carries significant downside risks that can materialize
into the so-called “curse.” While not destiny, the threat of a commodity curse can, in practice,
materialize and undercut growth through various channels. Sinnott et al. (2010) highlight three
possible channels: volatility, reduced scope for productivity-enhancing externalities, and
institutional degradation driven by rent seeking.

        Consider the first channel—volatility. Large commodity windfalls, by inducing a
significant appreciation of the real exchange rate, can hinder the expansion and diversification of
non-commodity tradable activities (exportables and importables). In turn, the concentration of
exports in a few commodities raises a country’s vulnerability to commodity price volatility (i.e.,
to adverse terms of trade shocks). The severity of this effect will be larger the greater the reliance
of the fiscal accounts on commodity export proceeds, unless such revenue stream is buffered by
insurance schemes, including self-insurance via stabilization funds.

        The second channel also can stem from lack of diversification. The argument in that a
commodity-dominated export structure is inherently less capable, compared to, say, high-tech
manufactures, of creating linkages, positive spillovers, and incentives to upgrade to more
differentiated, higher value-added products. Commodities cannot easily serve as “launching
pads” into industries that are friendlier to productivity growth, along the lines of Hausmann,
Hwang, and Rodrik (2007). In addition, commodity exports are not best suited to facilitate the
insertion into the knowledge- and technology-intensive sections of global value chains.

        The third channel may be activated inasmuch as a high fiscal and external dependence on
commodities can promote rent seeking behavior. These can end up corroding democratic
governance and public institutions, exacerbating the inequality of wealth and political power. All
of this may, in turn, hinder growth. This at the same time suggests that the downside risks would
be higher where the quality of institutions is lower at the outset of a commodity boom.

        Beyond the threat of a “curse”, another dark side of globalization that used to worry
dependency theorists is that, when done prematurely, trade liberalization, rather than enhancing
competition, may strengthen foreign monopoly power and destroy local industries that may
otherwise be viable. More recently, Rodrik (2005) has resurrected this sort of argument by noting
that the Washington Consensus period substantially raised competition from abroad without
offsetting policies that would have made it easier for entrepreneurs to appropriate the benefits of
new ideas and initiatives. As a result, innovation was discouraged and growth during the 1990s
in LAC dipped below that obtained in the previous decades of import substitution when,
presumably, the opposite may have occurred, that is, policies promoted local infant industry
creation but incentives were insufficiently disciplined by competition.

       (b) International financial integration

        Several arguments can support the bright sides (potential benefits for convergence) of
international financial integration. It can lead to greater access to capital at lower cost for



                                                  9
profitable projects that can lift growth. In the case of debt finance, the materialization of benefits
requires that currency and rollover risks are appropriately hedged, which implies that access to
foreign finance can be particularly beneficial when it involves long-term finance and where
currency hedges exist or, if not, if external finance goes mainly to exporting endeavors that can
match their dollar liabilities to dollar earning streams. Financial globalization can also yield
growth benefits by widening the opportunities for portfolio diversification, both through an
increased presence of foreign investors and financial intermediaries in local markets and through
the use by local issuers and investors of international financial intermediaries and markets
located outside the country. 9 Growth-friendly learning spillovers may take place, in particular,
through the presence of blue-chip international banks in local markets, as these banks can
presumably facilitate the diffusion of innovative lending technologies and first-rate managerial
practices, including with respect to risk management. Finally, financial globalization can
increase market discipline and this, even if costly and painful in the short run, can spur reform,
thereby enhancing stability and growth potential, over the long run. 10

        Much ink has gone, however, into exploring the dark sides of financial globalization
which, by potentially generating long-lasting losses via socially excessive systemic financial
instability and crises, can undercut convergence. This may be the result of wrong sequencing.
That is, the aggressive pursuit of financial market liberalization (including the de-regulation of
the domestic financial system as well as its integration into international capital markets) takes
place before a minimum threshold of institutional and local market strength is achieved in terms
of the legal framework, the regulatory system, the supervisory capacity, the accounting and
disclosure standards, the credibility and robustness of the exchange rate system, the development
of local-currency debt markets, among other factors. 11 Weak local currencies and banking
systems have indeed been found, time and again, to be ill-prepared to deal with and intermediate
prudently the surges in capital inflows, which can eventually lead to currency attacks or credit
bubbles followed by credit busts with long-lasting damage. 12 These problems are most acute in
the context of generalized currency and maturity mismatches in the balance sheets of debtors. 13
These concerns are also related to the “original sin” literature (the inability of emerging economy
sovereigns and corporates to issue long-term domestic currency-denominated debt), to the extent
that the vulnerability to crisis can increase if financial globalization proceeds before a market for
domestic currency-denominated debt has been established (Eichengreen, Hausmann, and
Panizza, 2005).


9
 Examples include the investments abroad of part of Latin American pension funds and the listing and trading of the
shares of Latin American companies abroad.
10
  Consistent with this hypothesis, Kaminsky and Schmukler (2003) find that financial liberalization is associated
with more pronounced boom-bust cycles in the short run but leads to more stable financial markets in the long run.
11
  A number of theoretical papers show that financial liberalization may be associated with crises (see, for example, ;
McKinnon and Pill, 1997; Allen and Gale, 2000; Bacchetta and van Wincoop, 2000; and Calvo and Mendoza,
2000). Empirically, several papers have found links between financial deregulation, boom-bust cycles, and banking
and balance of payments crises (see, for example, Corsetti, Pesenti, and Roubini, 1999; Demirgüç-Kunt and
Detragiache, 1999; Kaminsky and Reinhart, 1999; and Tornell and Westermann, 2005).
12
     See Hausmann and Gavin (1996) for an excellent analysis of the macroeconomic roots of banking crises.
13
  Calvo et al. (2004), for instance, show that the probability of “sudden stops” in capital inflows rises with the
degree to which liabilities are dollarized.


                                                         10
         However, the dark sides of financial globalization can take place not only because of
weaknesses in the local financial systems, but also because of significant imperfections of
international financial markets themselves. Large fluctuations in capital flows that are optimal
and rational from the point of view of individual asset and bank managers can be “excessive,”
and even lethal, from the social point of view if driven by significant un-internalized
externalities, whether pecuniary, informational, behavioral, or interconnectedness externalities. 14
Excessive volatility of international financial flows can also arise as a result of non-rational
mood swings driven by momentum (noise) traders in a context where rational arbitrageurs are
unable to offset them due to, say, collateral constraints or coordination failures. To the extent that
this sort of maladies obtain, the process of financial globalization may be unfriendly to systemic
stability and convergence. 15

         (c) External demand versus domestic demand driven growth

         The discussion in Sections 3a and 3b above implies that the East Asian Tigers may have
been able to achieve a greater degree of convergence in large part because they managed to
maximize the bright sides of globalization while minimizing its dark sides. In contrast, LAC’s
institutional and policy frameworks tended to open too much scope for the dark sides of
globalization. A complementary way of looking at the international economic integration is to
focus on whether such globalization process is underpinned by certain domestic macroeconomic
features—such as an external demand-driven growth model vs. a domestic demand-driven one—
that may constrain the potential upsides or amplify the likelihood of the downsides of
globalization. This is the focus of this section.

         Under an approach that takes into account the aggregate demand structure, even if
globalization were managed so as to mitigate its downsides, it may not yield significant growth
dividends, especially for the smaller economies, unless supported by an export-led growth
model, at least during a significant part of the development process. This argument is reminiscent
of the debate launched by Dooley, Folkerts-Landau, and Garber (2004) on “Bretton Woods II”
and the discussion of currency undervaluation as a driver of growth. The authors argue that the
development strategy for the countries in the periphery goes through an export-led growth
supported by undervalued exchange rates, capital controls and accumulation of financial claims
on the center. In a related vein, Rodrik (2008) argues that maintaining a competitive real
exchange rate is tantamount to a policy of across-the-board protection in favor of tradable
activities, the expansion of which is beneficial to growth due to positive externalities that are not
present in non-tradable activities. Similarly, Levy Yeyati et al. (2013) focus on exchange
intervention policy geared at keeping or enhancing external competitiveness and find that such

14
   For a comprehensive analysis of market imperfections and frictions that can lead to constrained inefficient
systemic financial instability, see De la Torre and Ize (2010).
15
   Imperfections of international financial markets call attention to gaps in the international financial architecture.
For a discussion of reform issues concerning the international financial architecture see Eichengreen (1999). In
addition to insufficient standardization of regulation and supervision across countries, salient gaps in the
international financial architecture are found in such crucial areas as contagion—i.e., the absence of an international
liquidity facility to mitigate ripple effects unwarranted by fundamentals in the markets for sovereign bonds (see
Calvo, 2001), and default—i.e., the lack of a functional framework for dealing efficiently with sovereign debt
defaults (see Krueger, 2001).


                                                         11
policy is associated with better growth performance, although the transmission channel between
the exchange rate and growth is via higher investment, rather than via increased exports.

        De la Torre and Ize (2014) develop this type of argument more formally by linking
savings, the real exchange rate, and growth. The core of the argument is as follows: an external
demand-driven growth pattern is manifested in systematic current account surpluses, as the
production of tradables (i.e., the production of exports and import substitutes) reduces the need
for imports and leads to an excess of exports over actual imports. Such surpluses are the other
side of the coin of high domestic savings, which constitute a fundamental factor that creates a
bias in favor of more competitive real exchange rate than otherwise. A competitive real exchange
rate, in turn, tilts production incentives in favor of tradables which, compared to nontradables,
may be more conducive to learning spillovers and technology diffusion effects. Hence, an
external demand-driven growth model (such as the one that characterized the growth miracle of
the East Asian Tigers) is friendlier to productivity growth than a domestic demand-driven growth
(such as the one that has characterized LAC, and not just during the import-substitution period).

4.     LAC’s changing patterns of globalization

        The previous section surveyed the conceptual arguments that link economic globalization
to growth. The underlying thesis was that what matters for growth is not so much the quantitative
degree of globalization per se but rather the type and quality of globalization. Some forms of
international economic integration may be more beneficial to per capita income convergence
than others. In this section, we compare and contrast LAC to the Asian Tigers along various
proxy measures of globalization quality. By better characterizing the nature of LAC’s economic
globalization process, this comparison should help frame the question of this paper, namely,
whether LAC is becoming better able to tap the globalization upside. Of course, empirically
assessing the quality of globalization is intrinsically hard, not least because of lack of data.
Hence, our assessment is subject to significant limitations and caveats. We hope to sketch,
nonetheless, salient features of the evolving nature of LAC’s economic globalization, using the
Asian Tigers as well as four Southeast Asian middle-income countries (Indonesia, Malaysia,
Philippines, and Thailand) as a benchmark. The result is a nuanced—and perhaps less
pessimistic than many may expect—view of where LAC stands.

       This section is divided into three subsections. The first examines LAC progression
towards a more robust and resilient form of international financial integration. The second
characterizes the evolving nature of LAC’s international trade linkages. The third explores some
dimensions of LAC’s domestic demand-driven growth pattern in contrast with the Asian
external-demand driven growth model.

       (a) A more robust form of financial globalization

        Broadly stated, the main claim of this subsection is that, while the volatility of capital
flows remains high (and may be actually increasingly under the influence of global factors, i.e.,
factors beyond the control of domestic policies in LAC), LAC has been evolving over the past
decade or so towards a much safer form of international financial integration. Let us elaborate on
the main ingredients of this claim.



                                               12
         Consider first two key features in the evolving nature of international financial
integration. One is the rising dominance of gross capital flows, not just among advanced
economies, but also to and from emerging markets (Broner et al, 2013). Net capital flows can be
decomposed into the gross flows by foreign (non-resident) investors and the gross flows by
domestic residents. The cases of Brazil and Chile are shown in Figure 6. It is clear from that
figure that there is a threshold year (2002 in the case of Brazil and 1993 in the case of Chile)
after which net capital flows decouple substantially from the flows driven by either foreign or
domestic investors. Both gross flows grow in absolute size and tend to move in opposite
directions when measured as inflows, so that net capital flows remain relatively stable. Prior to
the threshold year, net capital flows tracked closely the flows driven by foreigners. Indeed,
foreign investors ran most of the show as capital flow movements by residents where relatively
small. 16 After the threshold year, by contrast, financial globalization became a two-way street,
with residents augmenting their investments abroad, not only reflecting the accumulation of
international reserves but also private investments abroad, and this happens even as foreigners
increase their presence in local markets, especially though foreign direct investments (FDI). The
size of gross flows now swamps that of net flows in most of the financially globalized emerging
markets, including a number of LAC countries, with the additional complication that fluctuations
in gross flows are much larger than those in net flows.

        The second feature is the rising role of the international asset management industry
(particularly mutual funds, pension funds, and hedge funds) relative to that of banks in moving
portfolio (non-FDI) capital flows across borders. For the LAC-7 countries, bank-intermediated
flows, which used to represent around 50 percent of total inflows by foreigners in the 1980s,
represented only about 12 percent during the 2003-2011 period. The rising relevance of asset
managers (non-banks) in cross border flows is a phenomenon that has been amply documented
and studied elsewhere. 17 A notable trait of this phenomenon is that capital market-based (as
opposed to bank-based) flows has not reduced financial volatility—as many had initially
hoped—but has rather amplified the pro-cyclicality of financial flows to emerging markets. This
reflects to some extent a complex set of market imperfections and incentives that tend to tilt
international financial intermediation towards herd behavior focused on short-term horizons and
where being able to exit rapidly from emerging market exposure dominates over patient analysis
of fundamentals.

       Partly as a reflection of the features discussed above, internationally integrated financial
markets are increasingly responding to global rather than country-specific factors. 18 The
troublesome implication of this being, of course, that in addition to coping with possibly

16
  When data for a greater set of LAC countries are examined, however, prior to the respective threshold years and in
times of domestic stress or crises, the flight capital engineered by domestic residents tended to join the retrenchment
by foreigner investors.
17
   De la Torre, Ize, and Schmukler (2011) and Didier and Schmukler (2014) document that there has been a
transition in LAC from mostly bank-based financial systems to more diverse and interconnected ones, where capital
markets have gained space, institutional investors (such as mutual and hedge funds) have played a more central role,
and the number and sophistication of participants has increased.
18
  This point is argued and documented in, for instance, in Kose, Otrok, and Prasad (2008) and De la Torre, Didier,
and Pienknagura (2012a).


                                                         13
heightened inherent volatility in capital flows, an emerging economy that is immersed in
international financial markets has to deal with the fact that the quality of its domestic policies
carries less weight (relative to global factors) in determining how investors treat that country,
especially in times of global turmoil. Figure 7 illustrates this point. It shows in the first panel,
that, over the past decade, global factors have accounted for an increasing fraction of the returns
to emerging market assets (equities, currencies, and sovereign bonds), especially during turbulent
times. Moreover, as shown in the second panel, the contribution of global risk aversion (as
measured by the VIX) to LAC’s equity price movements has tended to rise sharply relative to
other common factors (such as the movements in the S&P Index) during periods of stress, as was
the case during the peak of the global financial crisis in late 2008 and early 2009.

         Notwithstanding the rising relevance of global factors and the seemingly greater inherent
volatility in cross border flows (particularly portfolio flows), the good news is that LAC has been
steadily strengthening its capacity to deal with volatile capital flows. This has been basically due
to a fundamental improvement—a veritable silent revolution—in the region’s “macro-financial
immune system”, whereby what used to be shock amplifiers (weak currencies, weak fiscal
processes, and weak banking systems) have been turned into shock absorbers (credible and
flexible currencies, more resilient fiscal processes, better regulated and stronger banking
systems). 19

         In fact, in LAC’s not too distant past, financial crises were to a large extent self-
inflicted—the result of weak fiscal and monetary policy frameworks amplified by internationally
integrated but fragile domestic financial systems. 20 Even when the initial disturbance was
exogenous—as was, for instance, the 1998 Russian crisis—LAC’s macroeconomic and financial
vulnerabilities were such that the domestic ripple effects of the external disturbance were
substantially magnified. The scope for macro policy maneuvering was heavily constrained and
policy responses tended to be pro-cyclical. For instance, the fear of letting the exchange rate
depreciate reflected the constraints imposed by the widespread debt dollarization, and
consequently, the resulting lack of exchange rate flexibility implied that central bankers had to
raise interest rates in bad times in an effort to contain capital flight. The amplification
phenomenon was thus a sort of trap: domestic weaknesses magnified external shocks and capital
flows tended to react pro-cyclically in the face of such weaknesses; the interplay of these factors
further induced macroeconomic policies to respond pro-cyclically, which in turn exacerbated the
initial magnification effects.

        Over the past fifteen years or so, however, and partly in response to the painful lessons
learned through the recurrent crises suffered in the 1980s and 1990s, a number of LAC countries
have moved towards a safer form of international financial integration while implementing a
silent revolution in their macro-financial frameworks. Consider first the overall form of
international financial integration, as depicted in Figure 8. The figure shows that LAC has
switched the structure of its external net liability positions from debt to equity, becoming more

19
  Using a short-run growth model with quarterly data for LAC-7 countries, Corbo and Schmidt-Hebbel (2010) find
that whereas domestic fiscal and monetary policies amplified the recession experienced in the late-1990s, they
actually softened the recession experienced in 2008-2009.
20
   A discussion and review of the literature on the unequal blessings of safe versus unsafe forms of financial
globalization, see De la Torre, Levy Yeyati and Schmukler (2002).


                                                     14
Asia-like in this regard. More specifically, LAC has gone from being a large net debtor to
becoming a net creditor vis-à-vis the rest of the world in debt contracts. This reflects a dual
process of external deleveraging—whereby external debt, mainly of the public sector, has been
reduced or replaced by domestic and local currency-denominated debt—and accumulation of
international reserves. The region has thus been able to significantly reduce aggregate rollover
risk and the threat of a spiral of exchange rate depreciations and capital flight. 21 Instead, a
depreciation of the currency now actually produces capital gains for LAC, at least for its
sovereigns (Didier, Hevia, and Schmukler 2012; De la Torre, Levy Yeyati, and Pienknagura,
2013b). Even as the region became a net creditor to the rest of the world in debt contacts, it has
also become a more active user of foreign equity finance, which has led to a rising net debtor
position in risk-sharing equity contracts (particularly FDI) vis-à-vis the rest of the world.

       At the same time, several of the larger LAC countries moved towards more resilient
macro-financial policy frameworks. For starters, fiscal institutions improved and the fiscal
process became more viable (even if it has not become frankly counter-cyclical), as reflected in
improved primary balances, lower debt-to-GDP ratios, and a less risky composition of debt. 22
Also, the soundness of banking systems have improved—they exhibit profitability, regulatory
standards, and capital, provisions and liquidity buffers that are stronger than in comparable
middle-income regions. 23

        By far, however, the greatest improvement in LAC’s macro-financial immune system
took place in the monetary policy field, where much more robust policy frameworks have been
established and grounded on credible and professionally managed central banks. In particular,
inflation-targeting regimes that feature flexible exchange rates have consolidated in Brazil,
Chile, Colombia, Mexico, and Peru, and are being implemented in other countries (e.g.,
Uruguay, Guatemala). In fact, with nearly 80 percent of LAC’s GDP now located in countries
with monetary policy frameworks based on inflation targeting (Figure 9). These countries are
able to not only keep low and stable inflation more effectively, but also enjoy a wider scope for
using monetary policy counter-cyclically—to stimulate (dampen) aggregate demand when output
falls behind (expands above) its potential. This was clearly evidenced during the 2007-2012
period, where policy interest rates in LAC moved to dampen the domestic business cycles, which
were for much of the period decoupled from the business cycles of the advanced economies. In
contrast, as shown in Figure 10, interest rates moved in a pro-cyclical fashion in times of
adversity during the 1990s. The counter-cyclical use of the monetary policy interest rate during
the mentioned period represents for LAC a break with its history.

21
  See De la Torre, Calderon, and Didier (2010), Gourinchas, Govillot, and Rey (2010), Didier, Hevia, and
Schmukler (2012), and Gourinchas, Rey, and Truempler (2012).
22
  Greater discipline in fiscal policy, along with enhanced debt management systems, contributed to reductions in
government debt burdens in LAC and improvements in the currency, interest rate, and term structure of such debts,
with salutary collateral effects on the deepening of local currency debt markets. In fact, many economies in the
region had improved their over fiscal stance previous to the global crisis and had thus acquired fiscal space to design
and implement packages to counteract the contraction in the world economy. See De la Torre, Calderón, and Didier
(2010) and Didier, Hevia, and Schmukler (2012) for greater details on these developments.
23
   See De la Torre, Ize and Schmukler (2011) for a detailed analysis of the improvements in LAC banking systems’
stability and regulatory and supervisory standards. While LAC countries seem to have mitigated the downsides of
financial integration (instability), it is unclear whether the region is tapping its upside effects (development).


                                                         15
        Moreover, having overcome to a significant extent the fear of exchange rate depreciation,
inflation-targeting countries in LAC are better prepared to savor—arguably for the first time in
their history—the complementary shock-absorption benefits of exchange rate flexibility. 24 These
benefits could not be fully seized during the 2008-2009 crisis because of its globally systemic
nature (there was nowhere to export the recession to, despite the sharp currency depreciations)
but may be seized going forward to the extent that external demand is not contracting. In
particular, a depreciation of the currency can, in the face shrinking capital inflows, help to keep
the external current account under control and, at the same time, boost domestic output and
employment counter-cyclically, by not just encouraging exports but also the production of goods
and services for the local market. Whether the elasticity of supply in the region is strong enough
for these positive effects to significantly materialize is, of course, yet to be seen and some room
for doubt is warranted. In addition, a depreciation of the currency can, by quickly adjusting the
relative values of foreign and domestic assets, mitigate capital outflows, including by promoting
“bargain hunting” inflows.

        Two fundamental changes explain why inflation-targeting LAC countries can now
embrace currency depreciations without fear in times of cyclical downturns. The first is the de-
dollarization of financial contracts, depicted in Figure 11, which has substantially reduced the
adverse (solvency) effects of currency depreciations on the balance sheets of debtors
(households, firms, government). The second, depicted in Figure 12, is the substantial decline in
the so called “exchange rate pass through”, a decline that reflects a more credible monetary
policy that is better able to coordinate expectations in a forward looking manner—i.e., around
the inflation target pre-announced by the central bank—thereby breaking the old tendency for
prices and wages to be set in a backward looking manner—i.e., indexed to past inflation and
devaluation.

         Given this fundamentally changed macro-financial policy setup, the depreciations of
LAC currencies should no longer be interpreted as a sign of financial distress and harbinger of a
crisis. They should rather be seen, at least for the inflation-targeting LAC countries, as a salutary
part of a more efficient and employment-friendly process of macroeconomic adjustment to a
downturn induced by adverse external developments. Indeed, a case can be made that externally-
driven economic slowdowns or recessions in the region will increasingly look more like the
down phases of run-of-the-mill business cycles typical of advanced economies. In this sense, the
tendency to analyze LAC’s macro-financial vulnerability today using categories that were
applicable to the LAC of the 1990s is flawed, for it ignores the institutional and policy
reconfiguration that led to a much improved macro-financial immune system. 25

24
   Inflation-targeting central banks in LAC do intervene in foreign exchange markets, which may raise doubts as to
whether currencies are truly flexible. But the nature of such interventions has radically changed. Much of the
intervention is to mitigate excess exchanger rate volatility. This is a crucial change relative to the past, when
interventions tended to defend the indefensible—central banks forced to buy dear the dollars that they foolishly sold
cheap in a futile effort to sustain an unviable peg. Inflation-targeting central bankers now intervene not to fight
against fundamentals but mainly to mitigate excess volatility—they buy dollars (accumulate international reserves)
when the exchange rate is deemed overvalued relative to its equilibrium level, and sell dollars (draw down
international reserves) when it is undervalued (De la Torre, Levy-Yeyati, and Pienknagura, 2013b).
25
  Of course, not all, not even most, countries in the region partake of the improved macro-financial resiliency
described in this section. While inflation targeting LAC countries jointly account for 70-80 percent of LAC’s


                                                        16
        In sum, a safer integration into the global financial system, underpinned by the
consolidation of sound macro-financial policy frameworks and the associated build-up of
buffers, has been at the core of LAC’s financial globalization patterns, reducing the
vulnerabilities associated with the downside of greater financial globalization.

        (b) Trade quality and globalization

        LAC’s trade structure and patterns have undergone significant transformations over the
past decades, partly reflecting the trade liberalization processes of the late 1980s and 1990s and a
series of free trade agreements (such as NAFTA, CAFTA, and Mercosur). Most recently, the
rising role of China and other emerging countries in the global economy has been arguably an
important driving force at the margin of changes in LAC international trade patterns. The
question for this paper is whether such changes are evolving in the direction of greater trade
quality—that is, in the type of trade that goes beyond the generation of static efficiency gains
(associated with the comparative advantages grounded on relative factor endowments) and is
more likely to deliver dynamic gains, particularly via learning spillovers and technology
diffusion, thereby lifting the long-run of per capita income.

        Measuring trade quality is an inherently difficult task, which is in practice aggravated by
the dearth in adequate data. This section, nonetheless, aims at providing a first approximation in
this direction. It explores the evolving nature of LAC’s international trade integration by
presenting evidence that may be linked, albeit indirectly, to trade quality—including measures of
concentration (lack of diversity), complexity, degree of intra-industry trade, and connectivity to
international trade networks and value chains. Throughout the discussion and where feasible, we
highlight the contrast between Southeast Asia and LAC.

        There has been a clear trend in the region since the early 2000s towards greater
concentration of exports in commodities. This reverses the trend of the previous four decades,
where the basket of LAC exports was becoming more diversified (Figure 13). The rise in
concentration is not surprising inasmuch as it reflects the super-cycle of (mineral and
agricultural) commodity prices and the commodity-intensive growth pattern in China and other
emerging economies, on the one hand, and LAC’s natural resource abundance, on the other.
Therefore, at its core, the recent re-primarization of LAC’s export structure is a manifestation of
specialization according to comparative advantage forces. Whichever gains such specialization
delivered, they were dramatically boosted by the sharp increase in the purchasing power of
LAC’s output driven by an unusually strong and long lasting improvement in terms of trade. 26
This said, the fact remains that—to put it in terms commonly used by CEPAL economists—LAC
has been joining the global trade system of 21st century with an export structure (commodity-
based) of the 19th century, and this has given rise to the concern about the potential


population and GDP, they represent only a small fraction of the total number of countries in the region. Non-
inflation targeting countries have a much reduced capacity to adverse external shocks, including those stemming
from capital flow volatility.
26
  Sinnott et al. (2010) show that the recent boom in commodity prices has been the longest and most comprehensive
one—it virtually covers all the commodities that matter to LAC—since the 1960s.


                                                       17
materialization of the dark sides (as discussed in Section 3a above) of a commodity-dependent
growth model.

        One worry with this commodity-driven trend towards greater export product
concentration (away from export diversification) is that the commodity bonanza may be tilting
LAC’s productive structure further in the direction of lower complexity, thereby potentially
hindering productivity growth. As noted earlier, while complexity is fiendishly difficult to gauge,
Hausmann and his coauthors have provided a measure of a country’s economic complexity
which, while fraught with problems, is suggestive and allows for consistent international
comparisons. 27 This index puts LAC at the bottom in comparison to the Southeast Asian
emerging economies over the last decade. Moreover, it indicates that economic complexity has
been declining in LAC during the recent period of commodity bonanza, though it has been
increasing in East Asia (Figure 14).

        Another worry is that the region’s recent reliance on high commodity prices may have
engendered Dutch Disease-type symptoms, whereby an appreciation of the real exchange rate
has been stifling the diversification of tradable production activities, again with adverse
implications for long-term growth. The trend towards concentration in export baskets shown in
Figure 13 certainly suggests that something of this sort may be at work, although caveats are
needed in at least three respects. First, Figure 13 most likely overstates the degree to which
export product concentration has risen because it is not calculated on the basis of volumes but in
terms of constant-dollar values. 28 As a result, it does not eliminate relative price (terms of trade)
effects. Second, heterogeneity is significant within LAC countries. As argued by Hausmann
(2003), there is a major difference between Venezuela, on the one hand, where oil exports are, so
to speak, the only game in town, and countries like Brazil and Colombia, which have
experienced substantial terms of trade gains and yet display a significantly greater degree of
export diversification. Beyond these latter countries lies Mexico, an oil exporter that also has one
of the highest index of export product diversification in the region. Third, the rise in export
concentration during the recent commodity bonanza, however, has not led to a reduction of the
number of exports. As shown in Table 1, the number of exports for most of the larger LAC
countries has not only not declined, but it has increased in some cases. Moreover, the LAC
countries reported in Table 1 export a surprisingly high number of goods, relative to the potential
maximum number of products as classified by the Standard International Trade Classification
Revision 3 at the 6-digit level.

       Be that as it may, another worry about LAC’s trade comes from the fact that there is little
evidence suggesting that intra-industry trade (IIT) has been playing a significant growth-
enhancing role for LAC. As suggested by many in the literature, the degree of IIT between two
countries can be used as a proxy for technology diffusion and knowledge spillovers. 29 In Figure

27
  The measure of complexity in Hausmann et al (2011) takes into account, among other things, the number of
products a country exports (“diversity”) and the number of countries that export those products (“ubiquity”). Japan
and Germany, at the top of the complexity ranking, export many goods that are of low ubiquity and that are
produced by highly diversified countries.
28
  Data on trade volumes are not available in sufficient disaggregated detail to calculate export product concentration
indices.
29
     See, for example, Bernstein and Nadiri (1988), Helpman and Krugman (1989), and Badinger and Egger (2010).


                                                         18
15 we measure IIT using the adjusted Grubel-Lloyd Index, which ranges from zero (pure inter-
industry trade) and one (pure intra-industry trade). 30 While the share of IIT has risen in most
LAC countries over the past 20 years, it is still substantially below that observed in the Southeast
Asian economies. 31 Moreover, the gap has not systematically declined, although Mexico appears
as an important exception. Within LAC, the Caribbean and Central American countries typically
show a higher degree of IIT than South American countries. Nonetheless, the countries in LAC
that exhibit a relatively high degree of trade openness are the ones with relatively lower levels of
IIT.

        By contrast, the growth miracle of the East Asian Tigers (Hong Kong SAR, China; the
Republic of Korea; Singapore; and Taiwan, China) was associated high degrees of intra-industry
trade. Indeed, Urata (1993) stresses that vertical intra-industry trade in particular characterized to
a large extent the trade dynamics in certain sectors, and especially so for machinery. This type of
development came at later stages for other Southeast Asian middle-income countries (Indonesia,
Malaysia, Philippines, and Thailand). Underlying this LAC-East Asia contrast is, of course, the
difference in overall composition of exports and imports. The LAC-7 countries (Argentina,
Brazil, Chile, Colombia, Mexico, Peru, and Venezuela) typically export natural resource-
intensive goods and import manufacturing goods, mostly non-natural resource intensive ones.
The majority of East Asian economies, on the other hand, import and export manufactured
goods.

       A different yet related way to gauge the quality of international trade focuses on the
manner and extent to which a country is inserted into global value chains (GVCs). Such insertion
may have important positive spillover effects. UNCTAD’s 2011 World Investment Report
emphasizes that, in addition to being an important driver of trade flows around the world, GVCs
chains can bring direct benefits (employment generation, direct local value added, and export
generation) as well as, and perhaps more importantly, indirect benefits. These can not only
catalyze technology and knowledge enhancement but also capacity building and economic
development more widely, thus having the potential to lead to virtuous circles.

        As insertion in GVCs is done via firms, we present comparative data on multinational
corporations (MNCs) with headquarters in Latin America (the so-called “multilatinas”) and those
from Southeast Asian countries in Figure 16. The main message of this figure is that the activity
of Latin American MNCs abroad tends to be mainly of a “horizontal” nature—that is, they cross
borders mainly to set up subsidiaries that sell the same product that the parent company sells at
home. This suggests that the key motives for LAC MNCs to move abroad are either to diversify
country risk or to take advantage of larger markets for their products. MNCs from the Southeast
Asian middle-income economies, in contrast, tend to move operations abroad mainly to build or
join GVCs, by going either upstream or downstream. This may be of greater significance
considering the results in Didier and Pinat (2014) that suggest that countries that have stronger


30
   This measure is adjusted by the overall trade balance. In order to capture the degree of IIT at a more vertical level,
a rough classification of industries, at the 2-digit sector level, is used. For further details, see Grubel-Lloyd (1975).
31
  For an early discussion of intra-industry trade in the context of the rising connections between LAC and China,
see De la Torre, Didier, and Pienknagura (2012b).


                                                          19
export linkages to GVCs—particularly to the intermediate regions of such chains—tend to
display stronger growth performance.

         As a final approximation to the nature and quality of LAC’s evolving pattern of
international trade integration we present novel results from an ongoing research program at the
Chief Economist Office of Latin America and the Caribbean at the World Bank which uses
network approach. 32 Figure 17 shows the density map in the trade networks of East Asia Pacific
(EAP) and LAC. The density of a node in this map depends positively on the number of
neighboring countries and the economic distance between countries. The node density is
translated into colors using a red-green-blue scheme (from the highest to the lowest density). It is
worth pointing out that the sample countries included in the density map affects the density of
maps themselves, making it harder to directly compare node density across different graphs. 33
Still, some features are still comparable across maps as highlighted below.

        For starters, the differences between the two regions are remarkable. The trade network
of East Asia is much denser than that of LAC. While all countries are fully connected with all
other countries within the East Asian cluster (as indicated by a network density measure of 1.0
for this cluster), countries in the LAC cluster are not as fully integrated with each other (the
network density measure for this cluster is 0.87). The graphs also suggest that whereas trade
connections within the East Asia Pacific are multidirectional and intense in every direction, those
within the LAC network tend to be mainly bi-directional, especially with the US. In other words,
triads of trade connections are typically observed at higher frequency in the East Asian than in
the LAC network. These type of connectivity observed in the East Asian network suggests strong
feedback effects, whereby the strong trade within the East Asian region boosts the strength of
trading with the global trade centers and vice versa. LAC countries, by contrast, do not seem
significantly to leverage intra-regional trade to boost their connections to the global trade
network or vice versa. The proximity of the nodes—a proxy of the extent of clustering effects in
the networks—indicate that trade interconnectivity and neighborhood-type effects in the EAP
network involves most countries within the region (a visual depiction of the so-called “Asia
Factory”) and other central players (China, Japan and the US). In the case of LAC, clustering
effects are weaker. The only clear clustering is around the US and, to a lesser extent, around the
South Cone, with China appearing in this neighborhood.

        Another interesting contrast in these two networks is the relative importance of different
countries. In the EAP network, not only are all countries connected among themselves but
virtually all the countries (and not just the US, Japan, and China) in the network appear as
equally central players (as dense nodes where density rises as the color goes from green to
yellow to orange and to red). In contrast, aside from the US, there are no other dense nodes in the
LAC network, with the modest exception of Brazil. China appears as part of the LAC network in
2011 with a relatively weak density, comparable to that of Japan. Interestingly, European

32
 This research will be featured in the 2015 World Bank LCR Regional Flagship Report. More details available at
www.worldbank.org/laceconomist.
33
  The countries in each of the two trade networks (LAC and EAP) in Figure 17 include all countries of each region
as well as such central players in the global trade network—USA, China, Japan—and in the case of Latin America,
some Western European countries (proxied by Germany, UK, and France) that are also important players in these
regional trade networks.


                                                       20
countries are not as strong players in the LAC trade network as may be expected. In fact, the
dispersion from a measure of network centrality is zero in the EAP cluster and much higher,
0.17, in the LAC cluster.

        The evidence discussed above lead to a rather disheartening assessment: Latin America
as a whole does not seem to sufficiently progressing toward greater trade quality—i.e., a type or
international trade that, by maximizing technology diffusion and learning spillovers, is
supportive of long-term per capita income convergence. Nonetheless, it would be an
exaggeration to conclude that there are no bright spots. There are some, in fact, in at least two
respects. First, the quality of institutions in many (not all) of the major commodity exporters in
LAC has been on an improving trend, which significantly raises the odds that the most egregious
manifestations of commodity-related rent seeking behavior can be held in check. The caveat in
this regard is, however, that deepening of fiscal decentralization in many LAC countries may
complicate collective action around strategic national objectives in the management of
commodity wealth.

        Second, there is some evidence that certain commodity sectors are benefiting from
technological innovation and generating linkages, value upgrading and employment. For
instance, there is evidence of increases in value-added, clustering effects, and cross-sectoral
linkages in the agricultural sector in Argentina, Chile, and Uruguay, as well as the salmon
farming in Chile. 34 A recent case study of metal commodities also suggests some positive
spillovers and upgrading in the metal commodity industries in the region. The share of LAC in
metal global trade has expanded over time due to both inter-product upgrade and intra-product
quality improvement. 35 A study of Peruvian gold mines found rather extensive linkages to local
areas with the use of local labor and other inputs. 36 Anecdotal evidence suggests strong clustering
effects around CODELCO, the copper mining giant in Chile. In sum, there is spotty but robust
evidence that LAC has been not only moving towards the production of more sophisticated and
higher-valued-added products within its natural resource based industries but clustering and
production chains are being developed.

           (c) External versus internal demand-based globalization patterns

        In this section we explore evidence related to issue discussed in Section 3c, namely, the
contrasting aggregate demand structures that have underpinned the economic globalization
processes in LAC and Southeast Asia. This is of interest to the extent that an external demand-
driven pattern may have some virtues vis-à-vis a domestic demand-driven one when it comes to
fostering long-term growth. That would be the case if the relatively high domestic saving rate
that is necessarily associated to an external demand-reliant pattern fosters growth, in particular,
by sustaining a relatively more competitive real exchange rate. While this section does not
establish the actual domestic savings-real exchange rate-growth causal links, it shows
comparative data for LAC-SAM (South America and Mexico) and the four Southeast Asian


34
     See Valdes and Foster (2003), Regunaga (2010), and O'Ryan et al. (2011).
35
     See Mandel (2009).
36
     See Aragón and Rud (2009).


                                                         21
emerging economies (Indonesia, Malaysia, Philippines, and Thailand) to document that the two
regions show in effect a sharp contrast in these key variables.

        Figure 18 shows the marked difference in the structure of aggregate demand, which is
clearly tilted in favor of domestic demand in the case of Mexico and South American countries
(LAC-SAM) and much more reliant on external demand in the East Asian emerging
economies. 37 Domestic demand is not only much higher in LAC-SAM but it has been on the rise
over the past decade and is at present around 105 percent of GDP. In the Southeast Asian
middle-income countries, by contrast, it has been low and stable over the same period, at below
95 percent of GDP. The persistence of this structural feature in spite of the commodity export
bonanza indicates that LAC systematically metabolizes favorable external conditions into
domestic demand dynamics. LAC’s globalization and growth patterns are clearly not like those
in East Asia and are unlikely to become more Asian-like in the foreseeable future. If anything, it
is more likely for the structure of aggregate demand in East Asian emerging economies to
become more LAC-like as per-capita income and consumption in the former rises. 38

        However, contrary to popular belief, the strong expansion of domestic demand in LAC
over the last decade was not an overriding consumption story. Real investment grew faster than
private consumption and significantly in excess of real GDP in the LAC-SAM countries (Figure
19). Real investment LAC-SAM is now around 24 percent of GDP, compared to around 25
percent in the Southeast Asian economies. And as the second panel in Figure 19 shows, the
closing of the traditional investment gap has been a feature of many LAC-SAM countries, with
the notable exceptions of Brazil and Bolivia. While the sustainability and quality of these higher
investment rates in LAC are a different matter that requires more analysis, it is worth stressing
that investment dynamics played a larger role in LAC’s growth in the past decade than
commonly believed.

       The flipside of LAC-SAM´s domestic demand-led growth is a tendency toward current
account deficits, which started to emerge, following modest surpluses, already in 2008, despite
the continued commodity export bonanza (Figure 20). For all of the debate about the commodity
boom in the 2000s, the fact is that the current account surpluses in LAC´s commodity exporters
was in most cases rather short lived—the surpluses were virtually gone by mid-2008 and only
temporarily recovered in 2009 as an undesired consequence of the global trade collapse. By
2011, only Bolivia and Venezuela (2 out of the 11 Latin American commodity exporters)
displayed a current account balance in positive territory. This said, however, LAC’s current
account deficits in the recent past have been mainly financed by FDI and have hence been
driven by relatively large factor payments abroad, mainly dividend payments (i.e., the trade
37
  We use real values for GDP as well as for its components, in which each component is deflated by its respective
deflator. Since real variables are sensitive to the choice of base year, we use national accounts data collected by the
U.N. Statistics Office and reported in the same base year, making real values comparable across countries. Working
with these real values is essential to get an accurate picture of aggregate demand dynamics in times of significant
changes in terms of trade. For example, when terms of trade rise, the share of investment to GDP will be
underestimated by nominal variables because the denominator (GDP) contains exports, whose prices are rising fast,
while the numerator (investment) will be typically intensive in imports, whose price are falling relative to the price
of exports.
38
  For a more detailed discussion of the LAC versus EAP aggregate demand structures see De la Torre, Levy Yeyati,
and Pienknagura (2013a).


                                                         22
balance has tended to be in surplus). The East Asian emerging economies, by contrast,
consistently generate current account surpluses, while net FDI inflows tend to be comparatively
small and so are factor payments abroad.

        Behind these contrasts in aggregate demand and current account structures and trends is,
of course, a marked difference in domestic savings rate. While East Asian countries have a
domestic saving typically superior to 30% of GDP, LAC countries save well below this
threshold, with the exception of Venezuela (Figure 21, Panel A). Ongoing research by De la
Torre and Ize (2014) documents that, once appropriately benchmarked, most LAC countries
suffer from a significant “domestic savings gap” while the East Asian economies tend to have
“excess domestic savings”. That is, LAC countries save on average less than countries with
similar structural characteristics (such as size, demographics, natural resource abundance),
whereas East Asian countries have relatively larger domestic savings rates. Moreover, the
authors argue, the low domestic savings rate in LAC is associated with an “external
competitiveness gap” (that is, relatively more appreciated equilibrium real exchange rates),
which, in turn, seems to be a non-trivial part of the story of the comparatively low productivity
growth performance in the LAC region. The Economist’s Big Mac Index, shown in Panel B of
Figure 21, provides clear evidence that currencies in Asia are notably depreciated, whereas
currencies in LAC are notably appreciated, relative to what would be expected given their
income per capita. 39

        During the last decade, the underlying drag on growth stemming from low domestic
savings was offset by the commodity price bonanza and the backdrop of abundant international
liquidity. These favorable tail winds enabled LAC to compensate for its historically low savings
ratios and helped fuel growth. At the same time, however, the region’s low domestic savings
rates offered little scope for attenuating upward pressures on the real exchange rate of the
region’s commodity exporters, and thus their capacity to lean against the winds of commodity
specialization was limited from a macroeconomic perspective. Domestic demand dynamics thus
favored non-tradable over tradable production and, absent productivity-oriented structural
reforms, this may weaken growth vigor in the years to come.

5.       Concluding remarks

        The ultimate test of the benefits of economic globalization has to be per capita income
convergence. Hopes that LAC’s growth prospects were finally changing for the better emerged
before the global financial crisis. During 2002-2008, several LAC countries recorded Asian-style
growth rates partly on the strength not just of favorable external conditions (low interest rates,
abundant liquidity, and high commodity prices. Enabling and reinforcing this performance were
several domestic factors, including a significant reduction in macro-financial vulnerability,
important steps forward in the social equity agenda (i.e., significant poverty reduction, a decline
in inequality, the rise of the middle class), and, with a few exceptions, further consolidation of


39
  Figure 21 controls for GDP per capita to account for the well-known fact that the real exchange rate tends to be
more appreciated as countries become richer. This likely reflects the Balassa-Samuelson effect, whereby, and to the
extent that productivity rises faster in tradables than in non-tradables, the price level will be higher (and the real
exchange rate more appreciated) in the more advanced, richer economies.


                                                         23
democratic institutions. However, since 2010 the uninspiring growth performance for much of
the region has raised questions about the sustainability of the mentioned achievements.

        In this paper we discussed the theoretical arguments and provided some empirical
evidence on the pros and cons of an increasingly globalized LAC region. While LAC seems to
have learned to deal with some bad side effects of financial globalization by moving towards a
safer form of international financial integration and improving its macro-financial policy
frameworks, progress towards increasing the quality of international trade integration has been
scant. LAC remains a region with concentrated export baskets—South American countries in
particular. LAC’s commodity-heavy trade structures and relatively weak quality of trade
connectivity may hinder growth potential to the extent that they are less conducive to technology
and learning spillovers. Moreover, LAC's domestic demand-driven growth pattern (which
reflects to some extent low domestic saving rates) may become an additional drag on long-term
growth by accentuating the risk of a low savings-low external competitiveness trap.

         Thus, the challenge for LAC is to decidedly undertake productivity-oriented reforms and,
to the extent feasible, seek to reduce its domestic savings gap. LAC would need to put a
premium on efforts to boost fiscal savings and maximize productivity gains. The overriding
challenge in the growth front for LAC’s policymakers is actually to harness the opportunities
afforded by deeper and broader links to the global economy. This is essentially a question on
how to best learn (to improve business processes, adopt new technologies, diversify and connect,
etc.) through enhanced international trade and financial integration. Seizing the moment requires
well-designed policies, adequately tailored to the circumstances of individual countries but not
necessarily numerous or unduly complex, in order to ignite growth. Once ignited, growth would
have to be sustained through perseverant and major reform efforts aimed at eliminating well-
known obstacles that undercut efficient resource allocation.




                                               24
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      Publication.
Urata, S., 1993. Japanese Foreign Direct Investment and Its Effects on Foreign Trade in Asia. in
      T. Ito and A. O. Krueger, eds., Trade and Protectionism. Chicago, IL: Chicago University
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Valdès, A., and W. Foster, 2003. Special safeguards for developing country agriculture: a
      proposal for WTO negotiations. World Trade Review 2(1), 5-32.




                                              29
             Figure 1: Contrasting Convergence Paths in LAC and Southeast Asia




Note: This figure shows the aggregated regional GDP per capita relative to that of the United States. The regional
GDP is calculated as a weighted average of the per capita income of countries within each region. The Southeast
Asian Tigers include Hong Kong SAR, China; Singapore; the Republic of Korea; and Taiwan, China. Sources:
Authors’ calculations based on Penn World Tables, WDI, and Maddison (2009).




                                                       30
                           Figure 2: Convergence within Latin America

                      A. Flatliners                                         B. Fluctuating




                  C. Nose Divers                                       D. Semi-Converging




Sources: Authors’ calculations based on Penn World Tables, WDI, and Maddison (2009).




                                                     31
                              Figure 3: The Degree of Trade Openness




Note: The Southeast Asian Tigers include Hong Kong SAR, China; Singapore; and the Republic of Korea. The LAC-
7 countries include Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: WDI.




                                                     32
                       Figure 4: The Degree of De Jure Financial Openness




Note: The de jure financial liberalization index is calculated as the simple average of three indices—degree
liberalization of the capital account, domestic financial sector, and stock market—and it ranges between 1 (closed
economy) and 3 (full liberalization). Southeast Asian Tigers includes Hong Kong SAR, China; the Republic of
Korea; and Taiwan, China. LAC-6 includes Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Sources:
Kaminsky and Schmukler (2003) updated subsequently in de la Torre and Schmukler (2007).




                                                       33
                     Figure 5: The Degree of De Facto Financial Openness




Note: Southeast Asian Tigers includes Hong Kong SAR, China; Singapore; the Republic of Korea; and Taiwan,
China. LAC-6 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: Authors’
calculations based on Lane and Milesi-Ferretti (2007).




                                                   34
                     Figure 6: Gross and Net Capital Flows in Brazil and Chile




Note: Capital inflows by residents include reserves. Source: Authors’ calculations based on IMF’s BOP Statistics.




                                                        35
                    Figure 7: The Role of Global Factors in Emerging Markets

                           Panel A. Principal Component of EM Assets Returns




                     Panel B. MSCI Latam w.r.t. VIX and S&P500: VIX Coefficient




Note: In Panel A, a principal component is estimated for the monthly returns on equities, foreign exchange spot
contracts, and CDS sovereign spreads. Then, country-specific returns for each asset class are regressed on its
associated first principal component in order to get an R-squared. The average R-squared across emerging
economies is reported. In Panel B, we report the VIX coefficient from a regression of the MSCI Latam Index against
the VIX and the S&P500 index. Source: de la Torre, Didier, and Pienknagura (2012).




                                                       36
             Figure 8: Net Debt and Equity Positions vis-à-vis the Rest of the World




Note: The net equity position, vis-à-vis the rest of the world (ROW), is the sum of net foreign direct investment assets
and net portfolio equity assets. The net debt position, vis-à-vis ROW, is the sum of debt assets and international
reserves minus debt liabilities. These ratios have been calculated at the country level and then simple averages by
region are reported. LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. The
Southeast Asian MICs include Indonesia, Malaysia, Philippines, and Thailand. The Southeast Asian Tigers include
Hong Kong SAR, China; Singapore; the Republic of Korea; and Taiwan, China. Source: Authors’ calculations
based on Lane and Milesi-Ferretti (2007).




                                                          37
            Figure 9: Monetary Policy Regimes in LAC




Source: Authors’ calculations based on Ilzetzki, Reinhart and Rogoff (2011).




                                      38
             Figure 10: Monetary Policy Rates in LAC’s Main Inflation Targeters




Note: In the top panel, the money market rates are reported. The following crises episodes have been selected for
Panel A: October 1997 (Brazil), April 1998(Chile and Colombia), February 1995 (Mexico), and August 1998
(Peru). Source: Authors’ calculations based on IFS and Bloomberg.




                                                       39
                  Figure 11: Loan and Deposit Dollarization in Latin America

                                        Panel A. Loan Dollarization




                                       Panel B. Deposit Dollarization




Notes: Panel A shows foreign currency denominated loans as share of total loans between 2000 and 2009. Panel B
shows the extent of deposit dollarization as share of total deposits averaged over the same period. Weighted
averages using 2010 GDP are reported. In Panel A, LAC-5 includes Argentina, Chile, Mexico, Peru, and Uruguay;
and Ex-LAC dollarized economies include Argentina, Bolivia, Costa Rica, Peru, and Uruguay. In Panel B, LAC-6
includes Argentina, Chile, Colombia, Mexico, Peru, and Uruguay, and Ex-LAC dollarized economies include
Bolivia, Costa Rica, Peru, and Uruguay. Source: De la Torre, Levy-Yeyati, and, Pienknagura (2013b) based on
Levy-Yeyati (2006) and Didier and Schmukler (2014).




                                                      40
Figure 12: Exchange Rate Pass-Through Estimates for Selected Middle-Income Countries




Note: Pass-through coefficients were derived from country regressions of annual inflation as dependent variable on
lagged inflation, annual change in the nominal effective exchange rate, and a measure of output gap. SEA MICs
stands for Southeast Asia Middle Income countries. Source: de la Torre, Levy-Yeyati, and Pienknagura (2013b).




                                                       41
                          Figure 13: Export Product Concentration in LAC




Note: The following LAC countries are included in the regional average: Argentina, Brazil, Chile, Colombia,
Mexico, Peru, and Venezuela. Source: Sinnott et al. (2009).




                                                       42
                                   Figure 14: Economic Complexity




Note: The Southeast Asian Tigers include Hong Kong SAR, China; the Republic of Korea; and Singapore; East
Asian Middle Income Countries include Indonesia, Malaysia, Philippines, and Thailand; LAC-7 includes Argentina,
Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: Hausmann et al. (2011).




                                                      43
                           Figure 15: The Degree of Inter-Industry Trade

              Panel A. Southeast Asia                                   Panel B. Latin America




                          Panel C. Intra-Industry Trade versus Trade Openness




Note: The degree of intra-industry trade is measured with the Grubel-Lloyd Index, which ranges from zero (pure
inter-industry trade) to one (pure intra-industry trade). In Panel C, the degree of trade openness is measured as
exports plus imports as a ratio of GDP. Source: Authors’ calculations based on Comtrade.




                                                       44
                  Figure 16: Types of Subsidiaries of Multinational Corporations




Note: These statistics use the latest available information of multinational corporations in 2011. The classification
into upstream, downstream, and horizontal subsidiaries relies on the input-output matrix for the United States. A
subsidiary is defined as downstream if the parent company’s sector is a net supplier of the subsidiary’s sector. A
subsidiary is defined as upstream if the subsidiary’s sector is a net supplier of the parent company’s sector. SEA
MICs stands for Southeast Asian Middle Income countries and include Indonesia, Malaysia, Philippines, and
Thailand. LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. Source: Lederman,
Messina, Pienknagura, and Rigolini (2013).




                                                        45
                               Figure 17: International Trade Networks

                             Panel A. East Asian Pacific Trade Cluster in 2011




                          Density = 1; Closure = 1; Dispersion of Centrality = 0


                                     Panel B. LAC Trade Cluster in 2011




                     Density = 0.87; Closure = 0.91; Dispersion of Centrality = 0.17


Note: The density maps show the density of regional trade networks based on export data in 2011. The links
correspond to exports from one country to another as a percentage of the source country’s total exports. Below each
map, some network measures characterize the network. Density is the number of links over the total number of
connections possible; Closure is the number of triads in the network as a share of the maximum number of triads
possible; and the Dispersion of Centrality is the standard deviation of the measure of Density. Source: Authors’
calculations based on IMF’s DOTS.




                                                        46
                                   Figure 18: Composition of Demand

                                         Panel A. Domestic Demand




                                          Panel B. External Demand




Note: The group of South American countries excludes Venezuela. SEA MICs stands for Southeast Asian Middle
Income countries and include Indonesia, Malaysia, Philippines, Thailand, and the Republic of Korea. Sources: de la
Torre, Levy-Yeyati, and Pienknagura (2013a).




                                                       47
                                       Figure 19: Investment Rates

                                         Panel A. Regional Averages




                                             Panel B. By Country




Note: The group of South American countries excludes Venezuela. SEA MICs stands for Southeast Asian Middle
Income countries and include Indonesia, Malaysia, Philippines, Thailand, and the Republic of Korea. Sources: de la
Torre, Levy-Yeyati, and Pienknagura (2013a).




                                                       48
                   Figure 20: Composition and Financing of External Balances

                               Panel A. Composition of the Current Account




                                Panel B. Financing of the Current Account




Note: LAC-6 includes Argentina, Brazil, Chile, Colombia, Mexico, and Peru. SEA MICs includes Indonesia, the
Republic of Korea, Malaysia, Philippines, and Thailand. Sources: de la Torre, Levy-Yeyati, and Pienknagura
(2013a).




                                                      49
           Figure 21: Domestic Saving and External Competitiveness

                              Panel A. Domestic Saving Rate




           Panel B. The Economist’s Big Mac Index and Per Capita Income




Source: Authors’ calculations based on WDI and the Economist Intelligence Unit.




                                              50
               Table 1: Number of Exported Products by Selected LAC Countries

                                 Out of a Maximum of 1033 Different Products

                                                               2002            2012
                               Mexico                           974             983
                               Brazil                           985             977
                               Argentina                        965             930
                               Colombia                         923             913
                               Peru                             872             911
                               Chile                            916             899
                               Uruguay                          673             717
                               Simple Average                   901             904

Note: The statistics in this figure considers the maximum disaggregation of products at the SITC Rev. 3 6-digit level
based on detailed trade data. Source: Authors’ calculations based on Comtrade.




                                                         51