nep-lam New Economics Papers
on Central and South America
Issue of 2013‒02‒08
eight papers chosen by
Maximo Rossi
University of the Republic

  1. Why Do Voters Dismantle Checks and Balances? By Daron Acemoglu; James A. Robinson; Ragnar Torvik
  2. Evaluating Latin America’s Commodity Dependence on China By Matt Ferchen; Alicia Garcia-Herrero; Mario Nigrinis Ospina
  3. Banking penetration in Uruguay By Santiago Fernandez de Lis; Adriana Haring; Gloria Sorensen; David Tuesta; Alfonso Ugarte
  4. How to create a financial crisis by trying to avoid one: the Brazilian 1999-financial collapse as "Macho-Monetarism" can't handle "Bubble Thy Neighbour" levels of inflows By Palma, J.G.
  5. Stress Testing Liquidity Risk: The Case of the Brazilian Banking System. By Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza
  6. Latin American Commodity Export Concentration. Is There a China Effect By K.C. Fung; Alicia Garcia-Herrero; Mario Nigrinis Ospina
  7. Environmental Kuznets Curve and Ecological Footprint: A Time Series Analysis By Marie-Sophie Hervieux; Olivier Darné
  8. Multidimensional Poverty in Colombia, 1997-2010 By Yadira, Diaz; Angulo, Roberto; Pardo, Renata

  1. By: Daron Acemoglu; James A. Robinson; Ragnar Torvik
    Abstract: Voters often dismantle constitutional checks and balances on the executive. If such checks and balances limit presidential abuses of power and rents, why do voters support their removal? We argue that by reducing politician rents, checks and balances also make it cheaper to bribe or in?uence politicians through non-electoral means. In weakly-institutionalized polities where such non-electoral in?uences, particularly by the better organized elite, are a major concern, voters may prefer a political system without checks and balances as a way of insulating politicians from these in?uences. When they do so, they are e?ectively accepting a certain amount of politician (presidential) rents in return for redistribution. We show that checks and balances are less likely to emerge when the elite is better organized and is more likely to be able to in?uence or bribe politicians, and when inequality and potential taxes are high (which makes redistribution more valuable to the majority). We also provide case study evidence from Bolivia, Ecuador and Venezuela and econometric evidence on voter attitudes from a Latin American survey consistent with the model.
    Keywords: corruption, checks and balances, political economy, redistribution, separation of powers, taxes
    JEL: H1 O17 P48
    Date: 2013–01
  2. By: Matt Ferchen; Alicia Garcia-Herrero; Mario Nigrinis Ospina
    Abstract: During the last decade, China’s growing economic importance has been considered a blessing for South America, given their still relatively high dependence on the US and commodity exports. However, this positive sentiment is starting to change. Concerns are being raised about potential adverse effects of Chinese demand for raw materials and “excessive†imports of cheap manufactured goods as substitutes of domestic production. In other words, there is a growing fear about extreme export concentration and, in turn, de-industrialization. We explore to what extent South America has become “Sinodependent†and the implications of such dependency. To that end, we create a dependency index and then assess the implications of high Chinese GDP growth rates on South American performance over the last decade. We focus on four countries (Brazil, Argentina, Chile and Peru) and four commodities (iron ore, soy, copper, and ores of non-ferrous metals). We find that each of the countries analyzed has become more exposed to Chinese demand for the commodities in question. In fact, in the past ten years, exposure to Chinese demand measured by our weighted dependency index has risen. This is much more the case for some specific countries and products such as Argentinean soy, Brazilian iron ore and soy, and Chilean copper exports. Despite this increased exposure, we find that Chinese demand has added less than 1 percentage point to GDP growth rates in these four economies in the last years. Although this contribution may be considered bellow expectations, there are secondary effects from the production and export of these commodities not fully captured by the statistics. For any given commodity, there are likely to be spin-off effects in that for any given country, one or two commodities may function as an important engine driving the domestic economy. In turn, any downturn in demand, especially if tied directly to China, would have negative implications beyond the marginal effect on GDP growth that we have calculated here. The combination of hopes and anxieties tied to South America’s decade-long boom in economic relations with China is likely to persist. The honeymoon period of South America-China economic relations may or may not be over, but what is clear is that commodities will continue to underpin the relationship for better or for worse.
    Keywords: Commodity exports, Latin America, China, Dependence
    JEL: F14 F15 F41 F50
    Date: 2013–01
  3. By: Santiago Fernandez de Lis; Adriana Haring; Gloria Sorensen; David Tuesta; Alfonso Ugarte
    Abstract: In recent years, financial depth ratios in Uruguay have trended upwards, although without reaching the levels seen prior to the crisis at the start of the century. The ratio of credit to GDP in 2010 was near 18%, while the ratio of deposits exceeded 33%. However, Uruguay is still lagging behind the regional average, above all in the ratio of credit to GDP, and it is even behind a number of countries with lower levels of per capita income. By segments, credit for household consumption in Uruguay falls far short of the levels observed in more developed countries like Chile (11% of GDP) and Brazil (15% of GDP), as such credit amounts to only 3% of GDP. The segment of mortgage loans is a bit more developed - although still at low levels - at 7% of GDP. A more significant lag can be seen in corporate credit, which amounts to only 12% of GDP, whereas in countries like Chile or Brazil, it amounts to 52% and 26% of GDP, respectively. Moreover, although access to financial services in Uruguay stands at approximately the regional average, banking infrastructure - particularly in terms of ATMs and POS - is below the average of Latin America, as is the use of electronic means of payment. The underlying thesis of this study is that banking institutions must assume the role of leading a serious process of increasing banking penetration in the country. From a broad technical perspective, an understanding exists of the role played by certain non-bank financial institutions, such as savings banks, mutual societies, cooperatives and non-governmental organisations, in reaching specific population segments. However, such non-bank institutions face a number of structural limitations in becoming agents for change in a banking penetration process, such as the financing capacity and cost, economies of scale, development in risk management, professional staffing and broad supervision by regulatory bodies, among others. Our report discusses cases such as those of China, Bangladesh and India, where significant efforts have been made to develop non-bank institutions to deepen the coverage of financial services, but which ultimately face a number of obstacles. Nor should we forget the financial failures of such non-bank institutions in Latin America. Even recent experiences in Europe (such as Spain and its savings banks) show that the risks of such institutions always make themselves felt when they become too large. Hence, this analysis has sought to provide recommendations for driving deepening banking in Uruguay, focusing on both institutional factors and those inherent to the banking sector that condition the development of savings and credit markets. With regard to the institutional environment, two measures are identified that would benefit the banking penetration process of the country: strengthening the scope of information to which risk centres have access and reducing the time and cost of registering properties and guarantees. Development of the institutional pillar is essential for assuring creditors that borrowers will repay loans. Factors intrinsic to the banking sector include measures to boost access of lower income segments to financial products and services. Options are considered to enable individuals to deepen their use of the banking system to meet their transactional needs, such as making it mandatory for employers to pay wages through the financial system or implementing "low cost automatic enrolment accounts". Both measures would be strengthened by proposals for tax incentives for payments made with debit cards through VAT discounts, and by promotion of the banking correspondent model. Given the wide margin for expanding corporate credit, it is important to incentivise the penetration of loans to MSMEs, as the vast majority of the 114,000 enterprises in Uruguay are small and medium-sized and nearly a third of them do not use banking services. Bank financing could enhance enterprises' productive capacity and help grow their business and profitability, thus incentivising greater formalisation. One way of beginning to provide financing to these enterprises might be factoring, as financing through discounts on trade invoices is commonly known.One important item to be discussed as part of a comprehensive reform is the high costs borne by the banking sector in Uruguay, as the consequence of regulations that directly affect it. Several studies - particularly, a recent one by the International Monetary Fund (2011) - indicate that labour costs have the largest impact on the banking sector's financial results. The same report points out that this factor has limited the potential for growth of the banking sector in Uruguay and incentivised the appearance of non-bank financial intermediaries that are subject to less stringent regulation than the banking sector. Thus, it is important for the country's lawmakers to bear in mind these problems and be aware of the risk that such "extra costs" will limit the capacity of the banking sector to expand its services to broader segments of the population.According to the estimates of BBVA Research based on a statistical model of credit growth and potential economic growth, if Uruguay makes no reforms, the level of credit would increase from 18% of GDP in 2010 to 32.5% of GDP in 2020, owing to the demand generated by growth of the economy and to factors of convergence in financial development. The recommendations set forth in this study are conceived to be implemented jointly. It is estimated that in a conservative scenario, implementation of the proposals will lead to banking penetration, measured as the credit-to-GDP ratio, of 53.9% of GDP in the next ten years, whereas in a more optimistic scenario, it could exceed 68.4%. The foregoing is without taking into account the impact of other measures that could contribute to reducing informality in Uruguay. Hence, the impact could surpass 76% in a best-case scenario.
    Keywords: banking penetration, financial inclusion, banking coverage
    JEL: B26 G2 G21 G28 G32
    Date: 2012–12
  4. By: Palma, J.G.
    Abstract: Brazil, as the rest of Latin America, has experienced three cycles of capital inflows since the collapse of the Bretton Woods system. The first two ended in financial crises, and at the time of writing the third one is still unfolding, although already showing considerable signs of distress. The first started with the aftermath of the oil-price increase that followed the 1973 ‘Yom Kippur’ war; consisted mostly of bank lending; and finished with Mexico’s 1982 default (and the 1980s ‘debt-crisis’). The second took place between the 1989 ‘Brady bonds’ agreement (which also marked the beginning of neo-liberal reforms in most of Latin America) and the Argentinian 2001 crisis. This second cycle saw a sharp increase in portfolio flows and a rise of FDI, and ended up with four major crises (as well as the 1997 one in East Asia) as newly-liberalised middle-income countries struggled to deal with the problems created by the absorption of those sudden surges of inflows — Mexico (1994), Brazil (1999), and two in Argentina (1995 and 2001). Finally, the third inflow-cycle began in 2003 as soon as international financial markets felt reassured by the surprisingly neoliberal orientation of President Lula’s government; this cycle intensified in 2004 with a (mostly speculative) commodity price-boom, and actually strengthened after a brief interlude following the 2008 global financial crash. The main aim of this paper is to analyse the Brazilian 1999-financial crises during the second inflow-cycle from the perspective of Keynesian/ Minskyian/ Kindlebergian financial economics. I will attempt to show that no matter how diversely the above mentioned countries tried to deal with the inflow absorption problem — and they did follow different routes, none more unique than Brazil — they invariably ended up in a major financial crisis. As a result (and despite the insistence of mainstream analysis and different ‘generation’ models of financial crises), these crises took place mostly due to factors that were ‘intrinsic’ (‘endogenous’ or ‘inherent’) to middle-income countries that opened up their capital account indiscriminately to over-liquid and excessively ‘friendly-regulated’ international financial markets. As such, these crises were both fully deserved and fairly predictable. Therefore, I shall argue that the general mechanisms that led to Brazil’s 1999-financial crisis were in essence endogenous to the workings of an economy facing i) full financial liberalisation; ii) several surges of inflows, especially immediately after the Mexican 1994 and the East Asian 1997 crises — and as a spillover of the respective rescue packages —, following a new ‘bubble thy neighbour’ speculative-strategy by international financial markets, as ever more liquid, volatile, politically-reassured, and progressively unregulated financial markets were anxiously seeking (and allowed to create artificially) new high-yield investment opportunities via a new sequential speculative-strategy; and iii) ineffective domestic financial regulation — especially lack of effective capital controls. I shall also argue that within this general framework, the specificity of the Brazilian crisis was given by having been affected by i) several external shocks; ii) by a naïve ideology directing economic reform; iii) by a exuberant (post-‘second generation’ models)-style monetarism, or ‘macho-monetarism’, that although successful in achieving initially price-stabilisation, and in avoiding that Brazil became ‘another Mexico’ (in terms of keeping Brazil away from an inflow-led Kindlebergianmania), it did so at a growing (and mostly unnecessary) cost; iv) the creation of several major financial fragilities in the banking sector (private and public) and in State finances — leading the Federal Government to sleepwalk into a Minskyian ‘Ponzi-finance’; and v) by this ‘Ponzi’ being turbo-charged by both the Government’s indiscriminate absorption of nonperforming debt, and by it paying a huge amount (mostly in the form of subsidies) in order to get the constitutional reform that would allow the President to run for a second term.
    Keywords: ‘Endogenous’ financial crisis, ‘Second generation’ models, Neo-liberal economic reforms, Ideology, Financial liberalisation, Capital controls, Systemic market failures, Latin America, East Asia, Keynes, Minsky and Kindleberger
    JEL: D7 D81 F21 F32 F4 G15 G28 G38 H12 L51 N2 O16
    Date: 2013–01–29
  5. By: Benjamin M. Tabak; Solange M. Guerra; Rodrigo C. Miranda; Sergio Rubens S. de Souza
    Abstract: This paper discusses the effects of the recent financial crisis on the Brazilian banking system. It discusses how liquidity risks have risen during the crisis and preventive measures that were taken in order to cope with these risks. It presents the liquidity stress testing approach that is under use in the Central Bank of Brazil and results from a survey on liquidity stress testing that has been applied to banks that operate in the Brazilian banking system.
    Date: 2012–12
  6. By: K.C. Fung; Alicia Garcia-Herrero; Mario Nigrinis Ospina
    Abstract: Given that commodity export concentration is likely to be unhelpful for economic development, we then ask the question of whether Latin America has been experiencing a more pronounced concentration of such exports. We then use different indicators to measure such concentration. Our measurements show that there may be an increase of commodity concentration exports in the last few years of this decade. This phenomenon leads us to ask the question: is the rise of China partly responsible for such an increase? We then ran formal regressions trying to explain an index of commodity export concentration across countries and over time. We control for standard explanatory variables including the relative price index of commodities, the endowment of commodities, the income effects and the quality of infrastructure. We test our hypothesis for alternative periods and using different econometric methodologies. Our results seem to indicate that there is some evidence of the China effect, i.e. the growing importance of China is positively and significantly related to increased commodity export concentration.
    Keywords: Export concentration, China economic rise, Latin America de-industrialization
    JEL: F14 F43
    Date: 2013–01
  7. By: Marie-Sophie Hervieux (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: In this paper we examine the Environmental Kuznets Curve (EKC) hypothesis using the Ecological Footprint (EF), a more comprehensive indicator of environmental degradation, through a time-series analysis for 15 countries covering the 1961-2007 period. We rst test the EKC hypothesis from traditional linear, quadratic and cubic functions, with standard and logarithmic speci cations. The EKC hypothesis is only supported for Chile and Uruguay with the quadratic functional form. We also nd that most of the countries exhibit a positive linear relationship between the EF and GDP. Finally, we study the long-term relationship between the EF and GDP. The results show evidence of long-term relationship between income and EF for some countries (Brazil, Chile, China, and Uruguay). More particularly, Spain displays a cubic relationship, in an N-shaped function form.
    Keywords: Environmental Kuznets Curve ; Ecological Footprint
    Date: 2013–01–28
  8. By: Yadira, Diaz; Angulo, Roberto; Pardo, Renata
    Abstract: This paper presents the Colombian Multidimensional Poverty Index (CMPI), an initiative of the National Planning Department based on the methodology of Alkire and Foster (2010). The proposed index for Colombia is composed of five dimensions: education of household members; childhood and youth conditions; health; employment; and access to household utilities and living conditions. A nested weighting structure was used, where each dimension is equally weighted, as is each indicator within each dimension. Analysis of the results demonstrates that multidimensional poverty in Colombia decreased between 1997 and 2010. Multidimensional poverty rates decreased in both urban and rural areas, but imbalances remain. As well as calculating the incidence of multidimensional poverty, we also calculate measures of the poverty gap and the severity of poverty. The reduction in severity is larger than the reduction in the gap, suggesting that the depth of poverty among the poorest has been reduced through targeting. In addition, this paper presents some public policy applications of the CMPI.
    Date: 2013–01–25

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