Latin America’s Major Economies at a Turning Point

Undedited Transcript

Gary Clyde Hufbauer: So let me briefly introduce our three panelists and they will each speak individually for 10 to 15 minutes. And then for the time available, we’ll have a Q&A from up here.

So, we have three panelists who are highly distinguished. We have one former central banker, José De Gregorio, and they’re all professors as well as being policy officials. So, José is -- he’s a professor at the University of Chile, as well as being here at the Institute as a Nonresident Senior Fellow and he had been Governor of the Central Bank of Chile from 2007 to 2011. And prior to that, he was Deputy Governor. So, there’s a central banker from Chile.

And then, we have Chad Bown, the only non-central banker in today’s program, but also a professor to Washington from Brandeis. He gave up an easy life as a tenured professor and came down to the World Bank and he’s been with the Council on Economic Advisers on international trade and related issues, international trade and economics more generally. And then, he went back to the World Bank and now he’s come over sensibly to the Institute. So, that’s Chad Bown. I don’t know if he’s also simultaneously a professor someplace else, no, he’s not, not today.

But Monica de Bolle who is going to be the third speaker, I think she’s a central banker in waiting, but right now she’s on leave from the Catholic University in Rio de Janeiro. And she’s a professor with the School of Advanced International Studies, as well as being a nonresident but mainly seemingly resident fellow here at the Institute and she has numerous awards. But I give her mainly the Casandra award because any time there’s bad news about Brazil, she tells us a day in advance, so it’s always very entertaining.

So, that’s it. I think it could just come up [inaudible 00:02:27] starting with José and then Chad, and then Monica, and then we’ll have a little panel, so thank you.

[Applause]

José De Gregorio: Thanks very much. It’s a pleasure to be here talking about Latin America once again. With this change, you have to wait for the light, so we’ll try to feed you with some ideas, proof.

What I really do, I’ll say just in a brief time, it’s just to talk a little bit about -- as an interaction for all of this discussion about what’s going on in Latin America, prospects, what has happened very briefly lately. And then, I want to talk a little bit about the fiscal and monetary policy space in Latin America and what can be done in order to resume growth and what’s the role of monetary and fiscal policy.

Then of course, this week, I’ll have to make a comment on Colombia, so I’ll have to make a comment on Colombia and I have my views on Colombia and then to finish with a small final remark. I will look up these countries and many times I just take out Venezuela because Venezuela is a measure with a data with not just data, hopefully it would be just data, is a big measure but I think that [inaudible 00:03:57] six or seven, I move with it and they are roughly 90% of Latin America.

So, since I always lead this presentation, these are the latest data from 2015 on participation, on per capita GDP, all middle class with some dispersion. And the level of GDP. Of course, Mexico does still make the most of Latin America.

Now, this is a view of Latin America, the long term having the GDP handed during the crisis. Now, since when you look at the data of Latin America, it is always Brazil because it’s 40%, 50% of Latin America from time to time. So, I do something, I take the six countries -- [inaudible 0:04:47] Venezuela [inaudible 00:04:49] and take a simple -- alright, this is my commitment to do something quite simple, which is [inaudible 00:04:54].

And then, I do the same for Asia because when we do Asia, it’s always China. So, I take the seven very successful countries of Asia: China, India, Indonesia, Malaysia, Philippines, South Korea and Thailand. South Korea is not properly [inaudible 00:05:09], but I take those seven countries long term and I take the average. That’s all. It’s very simple.

So, this is not a region. It’s a weird thing. But I think that has more economic content. And what we see is that the huge growth of Asia, Latin America, very small growth. This is from year 2000 taking a little bit of speed during the commodity price boom and growing similar to Asia, then we see the slow down, we see a recovery very similar in Asia, Latin America in the first couple of years after the crisis and then we see the slow down. And this is what bothers us and we see a region that was growing at 4% and now it’s growing to much closer to 2%, the big countries.

And from 2017 on, this is the forecast, the IMF forecast, which is not very different to consensus and all forecasters on Bloomberg, so basically, that’s a forecast.

On a country by country basis, red is before on the crisis and then blue is after the crisis. What I show you is a strong coming out from the crisis but then we have slow down. We have a very sharp slow down. Argentina, Brazil in recession will expect their recovery, I won’t make any comment about Argentina [inaudible 00:06:36] is coming and Monica will talk more about Brazil, so I’ll just put them in this framework.

But Argentina and Brazil in recession, it is expected next year a better performance for Argentina and Brazil still in the 2s. So, for the case of Brazil, even less than one and Argentina growing at about two, and then we have the rest of the countries. Chile growing highly at two, Colombia also between two and three. Mexico, the same and closer to two. And Peru is the only one that’s growing close to four.

And, to make just one comment about Peru, I was looking carefully at the data and I hope the IMF agrees with me. Peru, the difference between Peru and Chile, Bolivia and Colombia that’s growing in two and Peru is growing to four is mining.

Peru, this first semester is increasing 50% the mine production because during the commodity boom, they’re invested on very huge projects, Las Bambas. They had become the second largest country to produce copper in the world. So, the growth this year in copper value added for [inaudible 00:07:53] is about 10%, so it’s 12% of GDP, so it had a bigger boost to economy activity.

Last year, if you look at non-mining GDP, total mining was about 3.3, was 2.5 without mining. And this year, the difference may be about 2 percentage points of the total year. So, it’s about the same. It’s not a big difference. And this was the result of the commodity price boom. It’s interesting because Chile and Peru are very similar in that respect. The two of them had a huge investment before the crisis, then the boom stopped and the investment boom -- and, Peru kept increasing production and Chile investment was basically to maintain production, so that’s what makes a difference in terms of GDP because well, it’s a kind of mines and the projects.

So, labor productivity, this has been very low, this is the data on productivity. You see at the right side, declining the rate of growth of labor productivity, which is one of key problems in Latin America.

So now, what has happened and what has been the main after the commodity boom mechanism for economies to grow and to resume grow has been a significant and important [inaudible 00:09:20] depreciation. Well, this is January ’13. In January ’13, 100 and then I go up to today.

So, what we see is a sharp depreciation and different timings, different countries, but a very sharp depreciation of all the currencies, the most significant was Colombia and Brazil were the countries also with the most challenging inflation front. And then, more recently, we had an appreciation basically throughout this year and with a lot of boost in confidence in Brazil and this has boost most of the currencies.

In Mexico, that’s more difficult to see Mexico. Wow, I almost press the wrong key, but this is the one. But Mexico, you see Mexico, this is the Mexican weakening of the peso. This is going up, it’s weakening. So the Mexican weakening of the peso that has, of course, caused a lot of concern has to do I would mention with monetary policy. But the peso has [inaudible 00:10:20] with the polls in the elections in the US, but with monetary policy in the case of Mexico.

So now, the same has happened with a competitiveness and really generated -- however, the depreciation of the real interest rate has not been 30%, 40% that we see in the nominal because all of them had been depreciated together. So what we see is that in the case of with the same --the [inaudible 00:10:50] graph, we have 40% for Colombia. Brazil in recent month, it has accumulated just 10%, [inaudible 00:10:57] a depression over time but now it’s 10%. Chile and Peru, not a big also depression. And Mexico, which in the multilateral exchange rate has much more weight with the US. It’s one that has been gaining a significant, more competitiveness.

What has happened, the main thing that we would expect is an adjustment in the current account. The current account have adjusted in most countries. The yellow line was the forecast in the April WEO and a year ago for Brazil and now it’s the new forecast. So, you can see what the adjustment especially for the case of Colombia and Brazil has been bigger than expected, and this is all to some extent to the depreciation, in the case of Chile, Mexico, [inaudible 00:11:48]. But this has been the two countries that had been the most focused on their adjustment. In particular, Colombia that reaches close to 7% current account deficit before the exchange rate depreciation started.

Now, most of this current account adjustment and this, I think, that is set up before the next discussion, most of this current has been import compression. We just have seen more recently in export picking up, but most of it has been the deceleration that has brought a declining investment, a decline of the imports of capital goods and a decline in imports in general. So, it has been mostly adjustment.

Now, on the policy front, on the policy front, this is, I think, that’s interesting is that fiscal policy. Fiscal policy during the crisis is pre and post-crisis for Brazil, Chile, Colombia, Mexico and Peru and the other emerging market and the big change is quite simple. Countries were [inaudible 00:12:50], this is the cyclically adjusted budget from the IMF.

So you see that most in the case of Chile was very impressive, the average emerging market was also very impressive. They move from a surplus of one to a minus two, something -- a deficit. Chile, the same. That was the strong fiscal. This is the case of Peru, a strong fiscal expansion during the crisis. But there was no reversal after the crisis. So, the countries where [inaudible 00:13:22] on the recession not as much with rolling the fiscal expansion. And this has caused some difficulties to run fiscal policy today.

I will say we are in a dramatic phase as many countries but this is particularly important. This will talk about Argentina, I don’t have the data and it’s all internal there, but [inaudible 00:13:46]. Brazil, Colombia, Mexico, relatively higher and partly [inaudible 00:13:52]. The only countries with the very strong partly deposition, Chile and Peru, but we see exactly the same here. We see that the fiscal deficit has been widening over the years. This is total -- this is with the deceleration.

So, now, the little space in fiscal policy, most countries are trying to consolidate fiscal policy in Chile, there has been some effort, there are some loss in Brazil. In Colombia, which is a country that is highly dependent on old revenues. They are trying to cover for the 2% to 3% that’s point of GDP declining in all revenues with the tax reform. So, there is not that much space.

On fiscal policy or monetary policy, monetary policy had a lot increasing inflation with the depreciation. I should shorten this, but this is all the history of inflation. What we see, Chile going up the bond close to 5% inflation, then we have the case of Brazil, they are now going to 10%, and we have the case of Colombia going to 8%. All countries with the depreciation, what would we expect? There was an increasing inflation. What we see today is a reversal and a declining inflation everywhere. Declining in expected inflation and decline in the rate of inflation.

Today, we just show because that is not the figure for today. In Colombia, that last month, Colombia was about 8%. This month Colombia, the last few years is 7.1%. They are coming down. The monthly figure is negative so inflation is coming down, expectations in Brazil, inching inflation is coming down. And, most of them, so monetary policy most likely will change sign.

What we have here is that most countries were tightening, were tightening, inflation was rising, expectations in many cases were going up and the economies were stuck in this deceleration. We saw that the most dramatic case was a Colombian case where they raised interest rate as inflation was going up very sharply. But also Brazil did it before, Chile and all countries were raising rates.

Now, most likely, rates at least will go to a neutral and in some countries, like probably Colombia and Brazil, they will start cutting probably Chile, too. Peru is not very likely. And well, the country that puzzles me as central banker a little bit is Mexico because Mexico has the lowest inflation rate in history, has a very stable inflation expectations. They are growing at 2.5%, the exchange rate should help them to boost exports and they have been hiking interest rate quite significantly.

I was looking last night at the data of Mexico. So, this is Mexico. So, here, we have a monetary policy rate that has been going up at the left side and all is at the left side except the exchange rate. This is the exchange rate and the exchange rate has been--this is October data. And for some reason the latest data that I have. So, this is the exchange rate, this is the monetary policy rate that has been hiking, and this is inflation.

And inflation [inaudible 00:17:20]. Here, the inflation has been coming down and they are -- sorry, here the inflation is coming down. This is the target, 3%. They had been since two years ago roughly below the target. Inflation expectation, this is the most amazing country are extremely stable and are very stable by the target of 3% and they have roughly 3.5% for the last many, many years that you see Mexico.

They have this with low inflation and they have the hiking. And of course, it’s kind of difficult to understand. Let me make just a couple of comments on Colombia with this, but a couple of comments on Colombia. First, the result beyond what we would like I think that the optimal result if you think from the Colombia point of view, tranquility would had been 80 for the yes and 20 for the no, and they got to half and half. And now, the half and half in favor of the no could be better than a half and half in favor of the yes because it would have been extremely divisive the issues.

There was a previous peace agreement that was -- I don’t want to make exact comparison but in the mid-’80s, a previous peace agreement in which when the paramilitars and all the killings started there. So, I think that now the big problem in perhaps if one wants to predict the politics of Colombia is that instead of being a three-way negotiation, it was a two-way negotiation, the government and the [inaudible 00:18:57], and the other half was not never in the docs.

If you read the newspapers today, yesterday, it was the first meeting between the two halves, Santos and [inaudible 00:19:08] for the first time in six years. So, there were negotiations and they [inaudible 00:19:12] together.

So, in that respect, I think that this is not to vote against peace. It’s a vote against the way it was negotiated and it was also a vote on the big, big issue and with this from the other way around in Chile is about the immunity after human right violations and people going to [inaudible 00:19:34].

So, I think that from the point of view of politics, they have a chance to have a very much broader agreement for peace and maybe more durable. And, now from an economic point of view, it’s a big loss. It’s a big loss because there will be a lot of uncertainty. I don’t think that their discussion about the peace dividend will make very much of a difference, because now de facto, there is a lot of much more tranquility than 10 years ago in Colombia, so that won’t be a big deal.

By the way, we have a government, very unpopular, popularity will decline even further and they were trying to pass a tax reform. And, I think that the first casualty will be the tax reform. And so, there will be more perhaps economic cost than social and political cost of the discussion.

Let me ask [inaudible 00:20:26] some point. This is what I thought that is one thing that there has been in the case of Latin America and we would expect that was been a declining confidence. Governments are extremely unpopular and all governments are extremely unpopular.

And, we have two countries that are going through a huge change and this is Brazil and Argentina, and we’re expecting that Venezuela will follow through at some point. And, we see that in the case of Brazil, we see a big increase in business confidence after the impeachment of Dilma Rousseff. But I always say that all my friends in Latin America tell me how you did you do it in the early ’90s because Chile was extremely successful in reducing inflation, consolidating their budget and growing a lot in the first half of the ’90s. And people say, “Well, how can you do it?”

And, I think that it’s not comparable. It’s not comparable because Chile in 1990 was a sound economy. It has a decent fiscal account. It was an economy with slow distortions with a lot of reforms already implemented. In the case of Brazil and Argentina, they have huge [inaudible 00:21:38]. So it will take them some time in order to recover. I think that they are much closer or they are in between what was Chile in ’73, which is a huge economic mess closer to Venezuela today perhaps with a huge economic mess and with a very costly stabilization then were the worst in the ’90s.

And I think that the big challenge in these countries although I won’t refer is how to--whether the country and all the adjustment that they are doing, how long it will take time for growth to resume because that’s key for public support and for not derailing the needed adjustment.

So, thanks.

[Applause]

Chad Bown: So, thank you for the opportunity to be here today. My name is Chad Bown. I’m a Senior Fellow here at Peterson. Think about this, I guess, as a trade policy sandwich, so we’re going to have--macro is the--and central banking is the bread in either side and in the middle is something completely different.

So the title of my talk is Latin America’s Trade Policy Outlook, but it’s probably better to think about it is trade policy opportunities because I’m not sure what the potential for these are, but there’s a lot of things out there for Latin America certainly to be thinking about at this particular transformative moment.

So, the first slide I wanted to put up there is my only slide about actual real economic activity. The rest of it is going to be policy. And so, this is trade flows. Volumes on the top, imports on the left, exports on the right, I believe and import and export prices on the bottom. And, this is monthly data.

Latin America, the region is red, so I tried to pull that out. And the other regions up there are the basically--or the other groupings of countries are the advanced economies and then other groups of emerging markets, Central and Eastern Europe, Africa, Middle East and emerging Asia.

And what you can see from looking at the import volume data is Latin America, the red line again, and that’s the upper left panel. It doesn’t look that bad and in fact, is doing better than a lot of other areas. You can, I guess as a reference point, you can see the crisis there in 2008 and ’09.

In the upper right panel, when you look at their export volumes, they actually seem to be doing better than many of the other groups of countries.

So, in the topic of the trade slowdown, that seems to be happening right now and I’m not going to get into great detail about this particular but it is certainly a topic that’s been out there. Where you can see this happening I think especially for Latin America is in the bottom right, which is their export prices. And so, to the extent that they’re heavily concentrated in commodities especially where they were talking about food stops or copper or even some steel production by Brazil, Argentina, et cetera, falling world prices for their exports is certainly at the higher end and that’s what we’re seeing there.

But what I want to focus mostly today, that’s the last slide that I have on actual trade and economic activity. The rest of it is on policy and that’s what I wanted to focus on. And I’m basically going to walk us through three different sets of policies to think about.

The first is essentially what is Latin America’s external stance, their external level of openness, vis-à-vis the rest of the world. So, I’m going to show you, at some point, how integrated Latin America is in and amongst itself with other countries in the region. There’s substantial heterogeneity across Latin America with the respect to just how open they are to countries that aren’t in the region: United States, Europe, Japan, China, et cetera. And I think it’s going to be very important to tease out.

I will get into the issue of their FTAs, their Free Trade Agreements and their tariff preferences basically to show the heterogeneity that exists there also because I think this is part of the point. And then, at the end, I’m going to return to the question of what are the opportunities out there that Latin America could be participating in today in terms of new outward sets of trade negotiations that they’re not currently taking advantage of, but are actually going on and they could be part of if they chose to.

All right, so this is just a chart to basically show you what average external tariff. So this is MFN tariff’s rates. This is if you are a US exporter and you want to sell your goods into Brazil, this is the average tariff that you would pay or to Argentina, sort of have a common external trade policy under MERCOSUR, the countries that aren’t in any agreement with them. Those are the first two bars in the left.

The applied tariff that you have to pay, that’s the black bar. The gray bar sitting on top of that is what’s referred to as their tariff overhang. That’s the amount by which these countries could actually increase their tariff towards the rest of the world without running afoul of anything under the WTO. So, the first thing you notice, wow, Argentina and Brazil under MERCOSUR, their applied rates are relatively high, 13%, 13.5%, much higher than other comparison countries even in Latin America. Peru is at 3%. Colombia, Mexico, Chile is at 6%. Colombia and Mexico, 7% or 8% around there. Argentina and Brazil, much, much higher.

Then you’re taking into consideration that wow, they could actually increase their tariffs. They could more than double them. Their binding rates are their legal commitments to the international community are in the neighborhood of 30% or so. So that allows for a lot of policy uncertainty. They actually haven’t taken on a whole lot of legal commitments at the WTO.

And, on the right-hand side this just points out, so the middle is the G20, all of which have tariffs that are much lower with perhaps the exception of India and then Korea as well, but Korea has got a lot of Free Trade Agreements. These are again the tariffs that are bound and applied under the WTO. Tariffs for other East Asian countries that are maybe comparisons: Philippines, Taiwan, Thailand also typically much lower as well.

Heterogeneity within countries also, yes. This I’m going to show you just a couple of countries. Brazil, you tend to see it still. Relatively high tariffs in manufacturing, textiles, apparel, footwear, Brazil in processed food, less obviously in animals and vegetables, and agriculture. But tariffs that are still relatively high, so textiles and footwear somewhere between 20% and 30%. This suggests that there are still a lot of traditional trade policy negotiations that we weren’t really talking about anymore amongst the United States, Europe. Tariff cutting that Brazil and other countries in Latin America could still engage in productively. And this is going to be important and we’ll come back to this.

And, as a comparison, the tariffs for Mexico again, this is not Mexico’s tariffs under NAFTA toward the United States. This is Mexico’s tariffs toward its non-FTA partners are much lower. They’re still relatively high in certain sectors. There’s heterogeneity there, but they’re much lower than Brazil.

You can’t see this but think of this as the heat map. The shaded in areas are the countries that have extensive preferences toward each other and typically under Free Trade Agreements. Though, a lot of these agreements are not 100% coverage in terms of products.

And what you see is in the upper left, this is MERCOSUR and Bolivia, Ecuador and those countries, a lot of preferences toward each other but not a lot of preferences toward everybody else in Latin America with some exceptions, there’s an FTA with Mexico but not towards Central America.

And in the far right columns, those are potential Free Trade Agreements preferences with countries outside of the region: United States, EU, Japan. And so, when you look at Argentina and Brazil, none of that. No FTAs with the major economies, they’re outside of the region.

As you go down the rows and you start to look at countries like Mexico, Colombia, Chile, Peru, the Pacific Alliance countries, the Central America countries, what you see is, yeah, they have a lot of FTAs with each other, fine, they have some FTAs with the Argentinas and the Brazils and the MERCOSURs and the countries in the left. But what they all have in common is FTAs with at least the United States, also the EU and increasingly Japan. So you have really two different worlds broadly speaking in Latin America. You have those that have gone beyond to the Latin American Free Trade Agreements, but have also started to liberalize externally through FTAs with the United States, Europe and increasingly Japan as well.

So, how did we end up there? How did we end up with countries, some groups being relatively more open to the external world through their tariffs and in some countries not? So, which did we end up with having this sort of the building block effects versus the stumbling blocks and this dates back to some very important work that my colleague, Caroline Freund and coauthors developed over the years.

So, this chart plots three pieces of information that for countries on the left-hand side that have signed to FTAs with the United States. The red square, that’s what their tariff was in 1995. The circle, the non-shaded circle is what their average tariff was, their MFN tariff toward the rest of the world was five years before they signed an FTA with the United States. And then, the shaded circle, the black circle is what their MFN tariff is today or 2014, the most recent data.

And what you can see is by and large, a steady downward progression. In 1995, a lot of these countries had tariffs that were above 10%. They reduced them a bit basically right before signing an FTA with United States. But then once they’ve signed the FTA with United States, they’ve cut their tariffs not only toward United States but toward the rest of the world on an MFN and nondiscriminatory basis as well, and that’s really served as this business building block effect arguably.

And the countries on the right-hand side, the Argentina, Brazil, Venezuela, Ecuador, et cetera, they haven’t done that. Their tariffs today are essentially what they were in 1995 for the most part. They haven’t done additional liberalization relative to where they were even 20 years ago.

And so, we saw a lot of--in José’s charts, a lot of movements in various policy things. In the left-hand side, what you see since 1995 is basically that story for Argentina and Brazil, tariffs toward the rest of the world basically flat, tariffs toward each other through the MERCOSUR FTA getting down to zero, but toward the rest of the world, not moving.

Now, in a recent paper with a colleague in Peru, Patricia Tovar, one of my former colleagues at Brandeis, we looked at this question of what happened in MERCOSUR in the 1990s. And what we argue in that paper is really to some extent, MERCOSUR is not even a Free Trade Agreement, let alone a customs union. And we do that by examining these temporary trade barrier policies of antidumping, safeguards, countervailing duties, import restrictions that don’t show up in the general tariff data, they’re separate trade policy barriers.

And what you see when you look at that data is Argentina, why are they not in FTA, Argentina tends to use a lot of these sorts of import restrictions against Brazil. So there isn’t even really internal free trade in the MERCOSUR block. And then externally, Argentina uses antidumping against imports of, I don’t know, some widget from China and Brazil uses antidumping on imports of some other completely different widget from the United States or Europe. So there’s a lack of a coordination vis-à-vis third countries as well.

So, if that’s the case, they’re not really exploiting, to the extent possible, their common external trade policy, which is what you have otherwise in a customs union. So, that makes you step back and say, “Well, why form a customs union?” If part of the argument is -- there are certainly a number of different arguments for why you form a customs union. One of which is to increase the market scale for which you can achieve greater economies of scale and spread out your fixed cost, fine, there’s benefits there.

But one of the other arguments, and again, if we date back to what the European experience starting in the 1950s was with the European economic community, European community, European Union, you take a number of relatively smaller countries, you put them together and they form a bigger negotiating block against other countries, the United States. They haven’t done that. Brazil and Argentina by failing to coordinate their trade policies, vis-à-vis third country every time each one of them receives a shock, they respond independently, they don’t act in concert, they aren’t able to exploit that joint potential market power that they might otherwise have.

So that’s part of the story there and there’s other examples that we can go through again. So, then that leads to the question, what are some of some of Latin America missing out on in today’s trade negotiations that they could be more actively participating in? What is out there the opportunities that are going on right now? Well, we already have one agreement that’s potentially happened, so it’s signed. We’re still waiting for it to get implemented, but this does include a significant fraction of the Pacific Alliance countries at least: Chile, Peru and Mexico, maybe Colombia down the line.

So, what is this thing? Well, there are reductions in tariffs but that’s not really what this type of agreement is about. This is all about new disciplines such as government procurements, state-owned enterprises, investment, SPS, TBT, transparent--lots and lots of new rules and provisions going well beyond traditional tariffs. And these are the new issue areas that especially the United States and other high-income countries are interested in negotiating over. Most of Latin America is not yet there.

What else? Well, again, this is important to point out for folks that don’t follow the intricate weaves of trade policy negotiations all that closely. As Gary told us almost a year ago, Doha is dead. We’re not doing Doha anymore. It’s gone. So, if you’re waiting for it to pick up again, you’re going to miss the boat. What we’re doing instead, the negotiators out there, they’re turning to this plurilateral agreements.

So, the first one to get accomplished was the updating of the Information Technology Agreement. The first Information Technology Agreement that was signed in 1996 included eventually a number of Latin American countries but was never signed on to by Argentina, Brazil, Mexico.

The new one so far has very, very few Latin American countries participating. So where are the major economies there? Again, this is 201 new products. It’s about 3% of all statistical code, so it sounds like a small number, but it’s not, $1.3 trillion in trade. It’s got lots of cool IT gadgets in there, videogame consoles, headphones. Health care, cutting tariffs to zero on MRI machines, CAT scanners, pacemakers, things that might bring down health care cost for public health officials. Lots of intermediate inputs, why is that important? Well, we go back and look at a country like Brazil’s tariffs, not only does it have relatively high tariffs. Here, I split out the tariffs within a sector by whether these are on final goods or intermediate inputs.

So, we’re used to seeing this phenomenon of tariff escalation happening for countries everywhere around the world, higher tariffs on final goods done on intermediate inputs. But that being said, you still see relatively high tariffs in these countries on intermediate inputs themselves, and that really discourages global supply chain activity from forming. So you still see relatively higher, not higher than final goods tariffs but tariffs that are well above zero, well above 10%, 15% in textiles, footwear, transportation equipments, et cetera.

Two last sets of negotiations that they could be participating in and then I’ll stop. There’s an ongoing set of negotiations for environmental goods, so potentially, cutting tariffs on clean energy products, solar panels, wind turbines, air pollution control measures, solid waste, wastewater treatment to address environmental concerns, climate change. Estimated covering roughly $1 billion in trade, just the critical mass of countries that are negotiating so far. But again, the major economies of Latin America, not there, potentially missing an opportunity.

And then, finally, also, the Trade in Services Agreement. This is ongoing as well. And all of these countries have needs for major service sector reform and that could be tied to additional liberalization, again, same sort of story. Well, you haven’t--and in this case, a number of--or additional Latin American countries that are at the table and part of the negotiations, some of the key players like Argentina and Brazil aren’t there yet.

Thanks.

[Applause]

Monica de Bolle: All right, so, thank you. Good afternoon I guess to everybody. I’m going to talk a bit about Brazil and I want to start by saying to Gary that I’m going to try not to be as much of a Casandra this time. Let’s see how successful I do on that note.

So, the question is, is Brazil at a turning point? And, last week, we had a discussion on Global Economic Prospects by Dave Stockton and he used the very nice image to characterize the global economy as a driverless car in a slow lane.

Brazil has been a driverless car at a precipice or approaching a precipice very dangerously, and here are the numbers of the precipice. So, the economy contracted by an estimated or is expected to have contracted by an estimated 7% in 2015 and 2016. In per capita terms that translates into a contraction of about 10%. Unemployment is up to nearly 12%, 12 million people have lost their jobs and real incomes are falling steadily.

I think we came to say with a fair amount of confidence that I won’t make any remarks about the driver, but there is a driver and that driver now is approaching what looks like a slow lane for Brazil. So, it does look as if we are at a turning point and there will be a recovery. The question of course is how intense and how fast that recovery is likely to be. And on that, I have to be Casandra, Gary, and say that it’s unlikely to be very rapid or very intense precisely for some of the reasons that José himself has already talked about. Brazil has a number of very, very serious structural issues.

These structural issues are best illustrated and they’re not confined to fiscal issues. So, back in March of 2006, the Institute produced a PIIE briefing, a policy briefing authored by Olivier Blanchard and Adam Posen. And in one chapter of that policy briefing, I outlined what I saw as Brazil’s main fiscal challenges at that time. These numbers have changed somewhat now. This is the debt to GDP ratio under various scenarios. I won’t go into the scenarios, but please focus on the blue line up there because that blue line is really where the country was heading or in other words, the driverless car was heading to the precipice.

So, we had this growing debt to GDP ratio that looked unstoppable at that point. And because this was before the impeachment process, this was before the suspension of Rousseff, this was at a time when the country really had no leadership. It looked as if this problem was really only going to be solved by inflation if it was going to be solved by anything at all.

So, this was the picture that we had back then. Since then, we’ve had a change in government. So, as I said, we have a new driver driving this car. And, what this government has done is announce a series of policy measures to address fiscal issues, but also to address a number of other issues. I’ll focus on the fiscal and I’ll talk a bit about the others in a second.

The first and most important aspect I guess of this policy effort is--and it’s going to be voted on today. So today happens to be the day that this one particular pillar of the policy effort is going to be voted by Congress, is the introduction of an expenditure cap.

So, Brazil has this issue and it’s been a longstanding issue that only 10% of the expenditures in the budget are actually under the government’s control. All the remaining expenditures are actually indexed or constitutionally mandated or answer to other things that the government has absolutely no control over.

So, what the expenditure cap aims to do is to actually increase the ability of the government to control spending and this increase according to the text of the legislation of the expenditure cap, which is actually a constitutional amendment that needs to be done in Brazil would now encompass rather than 10% of expenditures, some 49% of expenditures. So it’s quite a significant change. And hence why the Brazilian government has been very insistent that passing this particular constitutional amendment is key to changing that to GDP graph that I just showed you and that to GDP trajectory.

Now, of course, the expenditure cap as it stands still leaves out 51% of total spending, which is not covered by the ceiling. The ceiling by the way is a ceiling on growth of spending and that growth on spending would be limited to the inflation of the past year, so that in real terms at some point, you’re not going to get any expenditure growth for 49% of the budget, but there’s 51% which is not under the ceiling. Of that, more than half of that is actually Social Security, which is why Social Security reform is the second pillar up there on this list of reforms.

Social Security reform of course is very contentious, it’s contentious anywhere. The government does want to put forth this proposal by the end of the year, we’re in October, the end of the year is nigh and hence, there’s a question here about the politics of this and whether this is actually feasible. Nonetheless, for the moment, we would have coverage for 49% but not the 51%.

So, this raises a question, which is a question that I have been raising and have been trying to think through, which is would Brazil also need a debt ceiling? Is a debt ceiling something that might be able to address this loophole of 51% in spending that is currently not covered by the expenditure ceiling.

So Social Security reform as I mentioned, then there’s a plan on concessions, PPPs and privatization that the government has announced, and a renewed focus on trade, though what that exactly means as Chad was showing is still up in the air. As Chad just showed us, there are a number of initiatives that Brazil is completely out of or completely isolated from.

The caveats, the policies and the reform effort that I was just discussing on restoring medium term fiscal sustainability, they’re focused on the medium term. So, the issue here is how do you address that chart that I showed you from our March 2016 PIIE briefing. And thus, how you revert that situation rather than how do you bring the economy out of this deep slump at this very moment. So, that’s what most of the reform effort is focused on.

Of course, fiscal reform as we know has all these good implications in the medium term but it can be contractionary in the short term especially if you’re going ahead with a very ambitious Social Security reform program, which does envisage a significant reduction in benefits. So, there is an issue there.

The investments, which are tied to privatizations and the concessions plan that the government is proposing are not expected to materialize until late 2017 or early 2018, which means they won’t be helpful either in the short term in terms of helping out the economy.

So, bottom line is there’s no immediate short-term relief and not really the prospect of a strong rebound by any stretch of the imagination. So, the current projection that looks outward into the medium and long term, and sort of sees very slight growth in 2017, increasing gradually and very slowly to 2% by say 2020 or 2021 seems about right to me. And thereafter, it is also very difficult to see how Brazil actually grows beyond that limit because the potential for growth in Brazil is really very limited by a number of structural issues that are not or haven’t been addressed.

Additional challenges that Brazil faces, state debts for a number of reasons have grown massively in the last few years and this has had to do with some tax breaks that were introduced under the Rousseff administration. These tax breaks were quite massive because they were cumulative over time. When we look at the average and what they’ve implied for 2015, 2016 and 2017, on average, these tax breaks mean something like a loss of 2% of GDP in revenues, which is very substantial annually. So this is an annual impact on the budget.

There is no discussion in Brazil, at the moment, about reverting these tax breaks. They’ve been made into law by the Rousseff government and there’s no discussion about reverting these tax breaks. This is an issue that is very politically charged in Brazil and hence why it isn’t being discussed. But for my part, I think it should be discussed because it also has a lot to do with the state of some national finances.

Many of these tax breaks were taxes that actually went to states as revenues and hence had a big impact and the tax breaks themselves had a very big impact on some national finances. And apart from that, Brazilian states, over the last few years, have run up huge payroll bills and massive debts that now have brought them to their knees. And, the state of Rio is just an example because the Olympics sort of brought that to the fore, but there are many other states in Brazil, which are facing the same problems and these states are asking for debt relief from the government in a situation where the government is tied up trying to implement these fiscal reforms.

The second point is one that I always--it’s very dear to my heart because it’s something that I have focused a lot of my time and research on, which is the role of public banks. Public banks in Brazil are very distortionary. I have a policy brief published here by the Peterson Institute that looks at the state-owned BNDES, the Brazil’s public development bank.

And, effectively, one of the effects that you see from public banks in Brazil is that they create this massive distortion in financial markets where you see the red line there, that’s directed credit rates, these are subsidized rates that public banks provide credit at. And then, the blue line are the market rates that prevail and you can see the massive difference that exist between these two.

And, the market is pretty much segmented half and half. So you have about half the banking system being public banks and lending rates being determined by these subsidized lines and the other half being private banks and hence market-determined rates.

And then, there’s a question of what do you do about trade. This is something that’s been on the government’s agenda. They have been discussing MERCOSUR. They have been discussing regional integration. The question is, there are so many internal issues to resolve that I fear the external agenda might be sidetracked and many of the things that Chad was discussing and pointing out may not actually get a lot of attention because of that.

So, finally, just a couple of points on monetary policy. José was mentioning this and he specifically talked about Colombia and how fast inflation has fallen into Colombia as a result of several factors including exchange rates and currency strengthening.

This is more or less what is likely to happen in Brazil over the next three months. Right now, inflation is still fairly high. It’s at 8.8%. Tomorrow when new inflation numbers come out, but when we look at projections going forward, it looks like inflation can fall very fast and it looks like they can fall very fast to the end of the year. The central bank projects inflation at 7.3% by the end of 2016. That may be a little bit on the low side but it’s not unreasonable to assume that it’s going to be somewhere between 7.5% and 8%. And will continue falling thereafter especially given the kind of scenario that we have for labor markets where wages will continue to fall as a result of the labor market situation and the fact that the labor market situation will continue to be very dramatic despite whatever weak recovery the country manages to achieve.

Of course, easing monetary policy or easing interest rates under these conditions is somewhat tricky especially for a country like Brazil that’s had lots of problems with monetary policy credibility. Since as I said, inflation is likely to continue falling and some of these fiscal reforms will actually get passed. In particular, the expenditure ceiling, there’s hope that the Central Bank will start on easing cycle relatively soon as it well should. Because as things stand at the moment, passive monetary policy has really led to very tight monetary conditions.

So, the Central Bank’s policy rate has been kept at 14.25% but inflation expectations, this is since the beginning of the year, 12-month inflation expectations have been falling steadily as you can see from this chart, which basically means that real interest rates are rising. And they’ve risen to about 8.5%, which when you think about it is very massive especially in a country that’s still undergoing so many problems as Brazil is.

So, this is just to lay out a few of sort of the landscape of what Brazil is looking like at this point. There are certainly room here for improvement and this government has now the intent on doing several things which will be very important in that regard, but we can’t lose sight of the fact that this transition is going to be extremely difficult and the timing for it is very, very short.

This government only really has two years to implement this very ambitious reform agenda. Come 2018, there will be new elections in Brazil. And, I won’t go very much into politics, I just want to say that the elections, the 2018 elections in Brazil are wide open at this point. So, you could very much end up in a scenario where come 2018, there’s a new government in place that decides to reverse all of these policies especially because for the Brazilian population at large, the effects of these reforms won’t be felt within the next two years.

So, let me end there. Thank you.

[Applause]

Gary Clyde Hufbauer: Thanks. Thanks for a very spectacular presentation. Is this on or off?

Male Speaker: No.

Gary Clyde Hufbauer: No, it’s not on. Well, [inaudible 00:55:56] turn it on I guess.

Male Speaker: It’s on.

Gary Clyde Hufbauer: It’s on now. Good. Well, I’m going to take the chairman’s prerogative of not asking a question. And so, please ask a question, Bill Cline.

Bill Cline: Well, thank you for these excellent presentations. I have a question about a couple of charts. José, I was looking at your real exchange rate picture and I didn’t see what I see when I do my real exchange rate. In fact, of exchange rate picture for Brazil, which is this collapse of the exchange rate as you get to last year and the impeachment and so forth. And then, almost the entire recovery of the real effective exchange rate since then, those are my numbers. I think if you take the--anyway, so, one question I have is at least the collapse of the exchange rate offered a source of potential dynamism in the export sector that could perhaps make up for the collapse of the commodity prices, et cetera. Query, is this impeachment recovery of the exchange rate too much of a good thing and may be lightening up on the monetary tightness could help make sure that is eased a bit and that you still get some exchange rate stimulus?

By the way, the other really dramatic thing that’s happened in the last year is about an 18% is what I’d put it as the decline in the Mexican peso from the Trump Effect, that basically it’s off 14% of real effective terms, other [inaudible 00:57:47] are up of 4%, so Trump has hit Mexico worth about 18%. So, one could ask the same kind of story, well, if he’s not elected, then is that going to be rebound and how does that factor into the external sector?

And, my question on Monica’s chart, I can’t really understand how the private sector could pay 50% interest rates if they don’t get BNDES access. But boy, they must be pretty profitable if they can pay those interest rates. Is that really what that rate was?

Gary Clyde Hufbauer: Okay, José first and then Monica.

José De Gregorio: Yeah, regarding the real exchange rate, there was a large, huge collapse in Brazil and then there has been a reversion, I would like to compare the data. These are BIES data and they’re the same as the IFS roughly, so there’s very little difference.

Now, because of the case of the Brazil, one of the cases include there has been some--

Bill Cline: [Inaudible 00:58:52] that there was an [inaudible 00:58:53]?

José De Gregorio: Let’s get the agreement. [Inaudible 00:58:58] depreciation.

Bill Cline: Well, that’s maybe the problem.

José De Gregorio: Yeah, I look it in a Latin way, going [inaudible 00:59:04] depreciation and what you call recovery is because recovery has some sense of normality, so I don’t know. So, up is the depreciation and all countries had this chart depreciation from 2013 and Brazil very sharp, nominally 100% in real terms, 30%, 40% and it has reverted this year. It has appreciated this year.

Now, of course, all these has got some effect on export and we saw from Chad that--but it has still in the context a very--a low, low growth and low overall export growth and that’s why the adjustment has come through imports.

Now, I agree with you that there’s a lot of Trump Effect in the Mexican peso. Now, that leads me to another puzzle. Well, there are two issues. First is what will happen after the elections and nobody knows because the only lesson from the Colombian case is that those that are winning in the polls do not win in the actual election, so it’s quite very uncertain what’s going on.

But this is that. But then, it leads me to another puzzle, why should monetary policy look at something that is so contaminated with political volatility? So, it’s the--I don’t know.

Gary Clyde Hufbauer: Monica.

Monica de Bolle: So, let me make just one quick remark on exchange rates in manufacturing or exchange rate in exports. We actually did see a rebound, a very slight one, but some rebound in Brazilian manufacturing and export manufacturing in particular when we were having--when we were going through the currency weakening phase. So, the pre-impeachment, but while there were still a lot of uncertainty about whether or not the impeachment was actually going to happen.

Since then, the strengthening of the currency as you rightly observed has actually led to a reversal of that. So, we have already seen again manufacturing contracting once again where at least giving up the gains that it had while we were having that bout of currency weakening. So yeah, this is very much a concern.

And I think at this point, the post-impeachment exchange rate rally has indeed been too much of a good thing. And this is why I think the balance between exchange rate monetary policy and where things are in Brazil right now is just wrong. So, easing really needs to start fast and I hope the central bank moves fast on easing because things are off. They’re completely unbalanced.

On private sector rates, yes, that is what the private sector pays. Believe it. It’s been that way for years. They have creeped up recently as that chart showed. What’s been happening in Brazil actually for some time is that as companies have run up more debt, those that only borrow locally and thus borrow at those astronomically high interest rates -- what has happened to them throughout the recession is that many of these companies have, in order to remain current on their debt service obligations, because of these high rates, they have gone into tax arrears.

So, the fact that you have all of these distortions in the financial sector in Brazil actually has some very bad fiscal implications because one of the things that’s happened over the last year -- and it’s been observed over the last year -- is that the last 12 months at least, is that every time you look at monthly outturns for revenues in Brazil. They continuously surprise on the negative side. And the reason for it is exactly what I said. I mean, you have these very high rates, you have these very high levels of debt service payments and companies just preferring to keep current on that and running very high tax arrears.

So, resolving these distortions, which is really not obvious, how you do it, given that as you also observed, if you have no BNDES, what happens to long-term credit in Brazil? It goes down to zero basically, so you can’t have that situation. But how do you transition from where we are now, which is this level or inordinate distortion to something that is more normal because this is completely abnormal when you look across the board and across the emerging market spectrum.

Gary Clyde Hufbauer: Our master of [inaudible 01:03:58] has just come, Adam, and so, I’m going to ask you Adam, we’ve got a couple of people who like to ask questions whether people could go quietly and get their lunch or whether you want them to [inaudible 01:04:09].

Adam Posen: Sure. Why don’t we do that? It’s a good suggestion, Gary. If people are willing to not be too energetic at hitting the food line, we can continue the questioning while lunch happens. Just a reminder that in 15 minutes, Federico Sturzenegger from the Central Bank of Argentina will be joining us to give an additional point of view in Latin America, but thank you, Gary.

So, somebody be brave and get lunch or I’ll do it, but who’s next for the question? Gary is in charge.

Gary Clyde Hufbauer: I think--let me see who’s next and then the gentleman back there.

Male Speaker: Thank you. Thank you for the presentation. I have questions for Chad and for Monica.

For Chad, on the graphs of tariffs, I would assume you use the trade-weighted averages there.

Chad Bown: Yeah. So those are just simple averages across countries. So there are the six-digit products and just thinking about the MFN rates.

Male Speaker: Okay, so just nominal average.

Chad Bown: Yeah.

Male Speaker: Okay. I just wanted to comment that intra-MERCOSUR trade, especially in the agricultural area that there are many people don’t talk about or don’t know about, it’s zero, the applied and that doesn’t show much there and the importance of Argentina and Brazil’s trade and vice versa. Yes, there is a lot as you mentioned use of antidumping. There’s not much coordination between the two. I don’t know if this should exist. And that, if you want to develop on that, in a customs union, I don’t know if that should exist.

I wonder based on what the priorities are for each country and their own products, if they’re all the same, then, I would assume that in those cases, for trade remedies will be the same but if not, I would assume not necessarily and I don’t think that would be an abnormal thing to happen. I just want you to comment on that if you could.

And I guess for Monica, with regards to public banks, would you assume when you say that they’re distortive? I can understand your argument especially with regard to interest rates. But as we know in Brazil, they’re the only resource for long-term lending. And the question is, now if we get rid of them, would the market take care of that? And, if that happens, would that be at the 40% level or at a more palatable level? If you could comment on that also. Thank you.

Monica de Bolle: Thank you.

Gary Clyde Hufbauer: Let me ask this other gentleman to ask his question because, I think, at that point, we’ll probably have to wrap up.

Arturo: Thank you, Gary. It’s Arturo [inaudible 01:07:36] from Merck University. Looking at the likelihood of trade policy developments in Latin America, the way I see it and see if you agree or disagree. If in the next two to three years, the US and Europe are basically closed for business, then I think the options are as follows for Latin America. One, for the Pacific Alliance countries to either do nothing much or really to focus on themselves and deepen the agreement into the kind of common market with free movement of labor and capital and so on that they had hoped to reach.

And for the non-Pacific Alliance countries, the options it seems to me are three. One is to do nothing. The other is to join the Pacific Alliance, which may be the only thing really going anywhere. And the third thing is unilateral disarmament. And there are certainly countries like Argentina and Brazil, which unilaterally arm themselves, so maybe the best thing is for them to just undo all the damage that has been done to trade liberalization unilaterally. What do you think?

Gary Clyde Hufbauer: Monica, why don’t you go first and then Chad has a couple of trade questions?

Monica de Bolle: Okay. So, [inaudible 01:08:59], on your question on capital markets BNDES, where will the interest rate end up? I think that’s one key thing that hasn’t been properly thought out. I mean, there have been a number of proposals out there of how you actually make subsidized rates closer to market rates and how you could link them over time. I’ve been one proponent of that that you could actually gradually link what we call the long-term interest rate which is not market set, but determined by the Monetary Council to the policy rate and how you could do that over time and do it gradually.

But you’re absolutely right that once you start retrenching, it’s kind of a chicken and egg problem what we have in Brazil because BNDES has become so big that it’s become the only game in town for a lot of people or even for a lot of companies. But that’s hugely damaging to the system so you have to do something to BNDES. But as soon as you do something, that will mean that a lot of long-term credit is going to disappear.

Finding that middle ground when you’re in this kind of corner solution scenario is a challenge and is very, very difficult, and it’s something that we should be moving the discussion towards. One way to think about it is more or less what the current government is currently doing. Focus BNDES on infrastructure, take everything else out of BNDES and hope for the best. In other words, hope that at some point, that will induce some kind of spontaneous markets to develop.

And, as you do that, you would use for the infrastructure side, introduce long-term infrastructure bonds and that kind of thing, which could actually start generating some impetus for the formation of long-term credit markets. The problem again in this whole line of thinking sort of hits the wall is when you think about Brazil’s very high level of interest rates because at the end of the day, who’s going to be interested in infrastructure bonds if you can get any short-term bill earning 14.25% interest plus a little bit.

So, there’s a big Gordian knot here that needs to be resolved and it hasn’t yet been properly thought out. That’s I guess the best answer I can give you at this point. But rest assured that it’s certainly an issue that interest many people including myself and that some of us are actively thinking about these things.

Just one quick comment on Arturo’s question, I completely agree with you. I think there’s a disarmament problem that needs to take place and I think both countries, Argentina and Brazil are moving towards disarmament. The question is, how much progress can these two make given the internal problems that they’re facing.

Gary Clyde Hufbauer: Chad.

Chad Bown: And I’ll just be quick. I don’t have much to say on the internal politics of it but what I can say is as an economist, when we think about Free Trade Agreements and free trade areas and customs unions, we sort of take countries at their word. And so, when you actually look into the details of policies and you find that it’s far from the case that they’re actually coordinating and applying zero tariffs on imports from each other, and then coordinating their external trade policy. It can help us understand why some of the benefits that were projected perhaps that materialize under these agreements haven’t actually done so.

And I think this potentially speaks to--if they’re not even actually able to cooperate on very simple things like their external trade policy, getting cooperation on even deeper issues and these are the deeper issues that are coming up in the new sorts of trade agreements and regulation, and product safety standards, and health safety standards. It doesn’t bode well I guess is what I would say.

So, I think this helps to shed light a little bit on the lack of cooperation that we’re seeing between these countries and that either speaks for the need for them to step back and reassess and figure out institutionally how they need to cooperate better. Or perhaps even more, take an even bigger step back and reassess whether going down this path was really worthwhile or whether they might want to choose some separate arrangement.

Gary Clyde Hufbauer: Let me wrap up with a final question for Monica and José. Dave Stockton and his friends at the Fed together with our lethargic economic economy have given us tremendous asset prices here in the US, a great stock market, good housing values. So, I’m wondering Monica whether Brazil with this lethargic real outlook, but you’re wish list on the monetary side could do the same even though the Brazilian stock market’s already risen 50% this last year, maybe it’s got another 50% or 100% to go in that.

I’ll ask José since Chile went to these storms quite a while ago whether there has been a big asset inflation in Chile, and then we’ll all get our lunch.

Monica de Bolle: Okay. Well, there certainly been this--as you’ve pointed out--this massive market rally on the back of prospects, impeachment prospects, government change prospects and so on and so forth. Certainly, some of it has been exaggerated and perhaps there will be some correction once we have an equilibrium, which I think, we’re not there yet given what I said about monetary conditions, exchange rates and also asset prices. I think things are somewhat off in Brazil at the moment.

But I do see just to give the positive note, I do see given that the fiscal effort is taking place and given that the fiscal reforms are likely to go through, there is a chance that that equilibrium will be found and that asset price inflation, which currently is a bit of a problem I’d say will actually subside.

José De Gregorio: Yeah. I don’t know. I’m very humble regarding asset prices. I always [inaudible 01:15:39] so as the--but so, I would say that to high to low or it was their [inaudible 01:15:46], one thing, just two reflections on asset prices. The first is that most of the changes in asset prices around the world and in emerging market has been affected by changes in currencies rather than in domestic price.

So, we have to look a little bit after the currency adjustment, so when you have a year with a very strong [inaudible 01:16:06] and most of Latin economies, you of course have a very good stock market. They may be a little bit of overpriced but just look at the good side of this. They may be overpriced so they are not cheap on that [inaudible 01:16:19], so the capital flows that is, of course, the capital inflows are of course is a challenge that in a [inaudible 01:16:27] of low interest rate, the low returns may face most emerging markets.

Gary Clyde Hufbauer: Thanks very much for this terrific panel.

[Applause]