And while we're on the subject of broader LatAm macro things....

....the comment below was left under yesterday's coveted award post by reader Matthew Hawkins and it's well worth sharing with the wider, front page audience.

I've often berated those who will criticize Venezuela, Ecuador, Bolivia because of their dependency on primary exports to as the motors of their economies. The classic beef is that of Venezuela, where we're told (quite correctly) that the black stuff accounts for 90% of the country's exports. The same kind of addiction to oil is shown by Ecuador, whereas Bolivia is guilty of betting the farm on natgas and metals.

But the same people who criticize the AxisOfEvo™ countries fall over themselves to praise a country like Peru and conveniently forget that 60% of its exports are metals (mainly copper and gold, by dollar value). And the same with on-the-way-to-being-a-first-world Chile, where the same amount of exports isn't just metal, it's one freakin' metal! (yeah you guessed it, Cu). To the list we can add Colombia (coal, other hydrocarbons), Brazil (everything, esp agro), Argentina (its soya addiction is more impressive by the year) Paraguay (also soybean) etc etc.

There's a double standard in operation here. The thing is, I'm not against basing an economy on primary exports. I barb at those who criticize the AxisOfEvos but not the AmerikaFriends, but the model that most (not all) of LatAm is using for growth isn't a bad one at all. Not to put too fine a point on it, it was made in Chile in the 1990's and the others, esp. Peru and Bolivia, are now copying it successfully (with their own local adjustments, of course). The idea is to pump out the exports, tuck the money away in a reserve fund and then if commods prices drop you have a safety net, via a fund that is available for countercyclical measures that will keep the motors running through the hard times.

It still has its critics of course (as Matthew Hawkins points out) and that issue can be debated. I'm not one of those critics, but the point is that when it comes to the primary export model you can either be for it as regards South America or against it. However, criticizing one government for its model because you don't like what its president says on the world stage and then praising a friendly government for the same policy is intellectually corrupt. This is where the dumbasses enter stage right.

A final point here. I think the IMF is due some decent praise for its recent stance on Bolivia. Yeah for sure it's easy to take a potshot or two at the suited dudes because they were wrong about their diagnosis and cure for the country, but at least they have the intellectual clarity and balls to say that things are going well for Bolivia and the state of macro affairs is good. They might not put it into direct words, but the last year's worth of IMF commentaries on Bolivia have summed up to a "we were wrong and we admit it". That's because these guys go in , look at the numbers and don't try to slap an extra layer of political bias on the deal. Others try to use the same numbers in a manipulative way to kosh people over the head with prejudice. So a "YAY" for the IMF on its recent Bolivia comments. Fair dinkum, dudes.

So now to Matthew Hawkins' comment, as left behind this post yesterday. One of the smartest and clear-thinking comments that have been left here and excellent food for thought. It distilled a lot of ideas that randomly rattle around in my head and I hope it is of service to you too, esteemed IKN reader.

There is no capacity to significantly industrialize in Latin America. I would say dust off the old dependency theorists, but the rise of China's manufacturing capacity has made any industrializing-to-development attempt in Latin America very outdated. I don't think anyone will necessarily find holistically useful and contemporary solutions in any of the dependentistas. Which is not to say their analysis of the economic realities do not remain valid and important.

Which is not to say that Brazil's automotive and aerospace manufacturing is not significant, nor that other countries in the region cannot start their own manufacturing. But these sectors are not large enough to support the growth of an economy nor can they compete internationally to bring in foreign capital. They can be developed to lower the costs of certain imports and encourage economic independence (or regional interdependence).

Bolivia, Venezuela, and most Latin American countries dependent upon extractive industries are going to run into a problem 'economically'. The failure of Centellas to acknowledge the most basic tenants of South American dependency theory in his 'economic analysis' of Bolivia, demonstrates either an ideological or academic blind-spot. The 'failure' of ISI programs, as the proposed solution by many dependistas, in Latin America (highly debatable if we look at the growth numbers of the ISI period to the neoliberal period but I digress) has been used to discredit the analysis of the political-economic situation of Latin American countries. That in itself was politically motivated, as no one would have followed a neo-liberalization with its deregulation of the global markets, dropping of protections, whole-sale sell off of public assets to global investors, etc. had the dependency theorists held the political-imagination of nationalist leaders.

The fact that dependency theorists' observations remain fundamental sound and true today, and that Latin American countries have not escaped the whims of the global price of primary commodity-exports should again raise alarm bells against anyone who attempts to make this the particular problem of an individual (leftist, read:Allende) government.

Bolivia: English media acting predicably again

In an amazing, stunning, incredible turn of events, the IMF praised Bolivia's economy to the rafters yesterday. Check out the dozens of Spanish language news stories available on the speech given by IMF bigwig Gilbert Terrier right here. As for content, here's a typical bit translated from the Reuters note.

Gilbert said that, inside a Latin America that has responded better to the (financial) crisis than the industrialized nations, Bolivia stands out with the highest projected growth rate for 2009 of 3.2%, in contrast to Mexico that is heading for a close of negative 7.5%.

"Bolivia has applied successful macroeconomic policies. Its savings and reserves now permit it to apply a countercyclical policy we we suggest it should continue to face any further extrernal economic shocks in the future", he said.

Amongst the successes of Bolivian policy, he highlighted the savings made in the bonanza times of high priced primary goods instead of having spent nearly all the income as other regional countries have done."

The brass-necked bullshittery of the IMF knows no bounds. Anyone with an inkling of economic nous about Bolivia knows that the country managed to increase its international currency reserves to its current all-time record of U$8.5Bn due to one simple policy change, namely the nationalization of the hydrocarbons (i.e. natgas) industry. Now do you remember back in 2005 and 2006 when the world and his wife was decrying this Evo-led policy move? How it would never work? The very same IMF neolib assholes saying it would all end in tears?

So here we are three years later, going through the worst financial crisis in modern times, and the policies of Evo Morales' government are getting praise from those who would have led the country down the path to total ruin. The IMF really deserves this week's coveted award for this one.

But finally, please note how many stories about the IMF's praise for Evo's Bolivia and its macro policy have been published by English language media: Zero. Amazingly..... stunningly... incredibly......

Chile: It helps to have smart friends

Armen Kouyoumdjian is the dude in question and when it comes to analysis of Chile's macro situation (or any other South American country when he put his mind to it, for that matter) there's no better independent voice out there. Armen's been kind enough to allow me to reproduce his weekly missive on the blog here today. If you want to join his list send him a mail (address below) and tell him Otto sent you...and say please, cos I consider being on his list a privilege, not a right.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

CRISIS IMPACT ON CHILEAN FISCAL RESULTS

An Analysis of the First Quarter 2009 results

By Armen Kouyoumdjian

kouyvina (AT) cmet.net

June 12, 2009

The news that Chile’s GDP was negative for two quarters and fell even sharper during April means that the country is in recession according to the generally accepted principles of economic analysis. However, the authorities have refused to use the term, adding another element to my description of “management by negation”.

There is one aspect where figures do not lie, because contrary to many other vague macro-economic statistics (such as GDP, Unemployment or Inflation), it reflects a more or less precise accounting exercise. This refers to the fiscal accounts, for which first quarter 2009 figures were published in late April, and I have only now gotten round to processing them.

PARTICULAR FACTORS Even though budgetary figures may be precise, their presentation has become exceedingly hard to fathom in recent years. The reasons include combining current, fixed and financial transactions in the final results, and allow Hacienda advisors to come up with somewhat distorted final figures. Still, the raw material is there and it can tell us a lot. Another statistic which tells us a lot about the crisis in Chile, but is not financial, are the 20,000 homeless people who seek shelter each night in Santiago alone, and that figure only relates to those staying in the hostels of one such charity, the Hogar de Cristo.

The first quarter of 2009 figures should not be projected for the full year, because they incorporate some aspects which are unlikely to persist for the whole of the year. They include the impact of the exchange rate on both revenue and expenditure denominated n foreign currency. In the first quarter of 2008, the exchange rate averaged 454 pesos per U$. The equivalent figure for 2009 was 581 pesos. Discounting inflation, the real peso value of the dollar increased by 22 % on a year-on-year basis.

The other variable which marked a strong change was the price of copper. From an average of U$ 3.54/lb. in January-March 2008, the price dropped 56 % to just U$ 1.56 this year. It has averaged U$ 2.03 in April/May and is now over U$ 2.30.

One aspect which does look as if it will continue all year is the increase in expenditure, because it is an electoral year. One has to take this with a pinch of salt as announcements and actions are separated by the Chilean bureaucratic Colorado Canyon (the U$ 1 bn capitalisation of CODELCO, part and parcel of the U$ 3bn “stimulation plan” announced ages ago, is still under discussion).

There is not much point comparing the first quarter results to the draft budget for 2009 announced at the end of October last year. This is not so much because we only have one quarter’s figures, but the hypotheses contained therein on growth, inflation, copper price and the exchange rate have long since lost their meaning.

REVENUE SIDE Looking at current revenue, which consists mainly of taxes, these plunged by 37.3 % in the first quarter, to a total of U$ 7.64 bn. Though some of the drop was due to temporary reductions or suspension of taxes on fuels and stamp duty for instance, other items truly reflect a very sick economy in terms of growth.

No tax reflects economic activity better than VAT. Revenue from that source accounted for no less than 38 % of current income, and fell by 20.5 % in real terms (all percentages mentioned in this report, in accordance with Chilean accounting principles, are in real terms).

Revenue from copper and other mining activities saw the sharpest drop, falling by 92 %, and ending up at just 3.4 % of revenue. In fact, they reverted to form, and maybe now people will believe me when I say that in most years, the Chilean state gets more out of the nasty habit of smoking than from copper. No wonder, in the country with the highest per capita expenditure on cigarette and drink, as previously mentioned. In fact, tobacco taxes brought in $ 248 million during the quarter, 70 % more than copper, and bucked the trend with a 6.5 % increase. A combination of less driving and lower taxes meant that on the other hand, fuel duties brought-in 13.9 % less, at U$ 314 million. Lower imports and statutory reductions under Free Trade Agreements meant that customs revenues dropped by 48.6 %. Income tax, another good measure of economic activity, and which accounted for 29.5 % of revenue, saw its yield reduced by 25.2 %.

There is a puzzling increase of 8.4 % in the revenue from state social security contributions, which at first glance does not square up with the increase in unemployment. The only explanation I can think of is the move of lower paid workers from private health coverage to the less expensive state FONASA scheme.

Non-current revenue only brought in an additional U$ 57 million.

Some time in the near future, if it has not already been said, some (or several) authorities will insist that the deterioration of public finances is mainly due to the fall in copper. This argument, which is older than the Tibetan Book of the Dead, once again stands no scrutiny. In the first quarter of 2009, the Treasury received U$ 2.2 bn less from copper. This represents less than half the total loss in revenue (U$ 4.54 bn).

Like all of us stupid savers, public finances also bore the brunt of the drop in interest rates on the country’s savings. These dropped by 77 % to U$ 257 million. As of March 31^st, consolidated Treasury savings amounted to U$ 23.4 bn.

EXPENDITURE SIDE The analysis of the expenditure side of the equation is more complicated, because we have an important element of non-current items. Starting with current expenses, these increased by 15.3 % in the first quarter, with all items showing an increase, led by purchases of goods and services (+ 20.5 %) and subsidies & donations (+ 17.7 %). The 14.9 % increase in the interest bill (itself a modest U$ 255 million, almost exactly equal to the revenue on savings), is most probably due to the higher peso cost of servicing dollar debt, as mentioned earlier.

To the U$ 7.18 bn of current expenditure, one has to add U$ 1.55 bn of non-financial investments and transfers. The amount of investment, at U$ 922 million, jumps by 57.3 %, though transfers to other entities also shows a 57.5 % increase. It remains to be seen how much of that money has actually been spent at the receiving end. The official report mentions a 73 % increase for housing, 52 % for public works and 45 % for public security.

Combining current and investment outlays, total expenditure increased by 21.3 % in the first quarter.

BALANCE AND OUTLOOK On the basis described above, there was a quarterly deficit of U$ 1.1 bn or 0.7 % of GDP. Under the circumvoluted methodology of Hacienda, they still aim for a balanced budget for the full year.

Excellent paper from CEPAL

Click here to get your download copy of a 36 page English language macroeconomics report from CEPAL (the LatAm economics people) that shows how the present financial crisis is affecting the region. Here's the abstract to give you a taste:

This paper addresses a fundamental question regarding the current crisis
and its effects on Latin America, namely, will the effects of the crisis be
different or of the same type that the region has witnessed in past?
The answer provided in the paper, on the basis of past crises episodes and
currently available information, is that this crisis is a ‘repeat.’ That is, it is
“Old wine in New Goatskins.” This conclusion is underpinned by two
fundamental ideas. First, the evidence shows that the impact of financial
crises on the region is closely related to the degree to which external
finance becomes scarce and costly, and to the magnitude of the disruption
in international trade channels. Second, financial crises have had deep and
protracted effects on the economies of the region, independently of
idiosyncratic features and initial conditions. The available evidence and
the unprecedented magnitude of the current shock do not warrant the
belief that the effects of this crisis will be any different from those that
have whiplashed the region in the past.

It's a really good job of work done and a boon for a dude like me. From now on I can just reference this work for its great comparative charts and data instead of crunching it myself. A readable, factual and well researched paper. Highly recommended and a great source material, too.