CSSN reporter Liu Yue interviewed Christian Daude, a Senior Economist at the OECD Development Center, about the economic and social situation of Latin America and about the OECD’s work in the region, as well as the burgeoning economic relationship between Latin America and China. Christian Daude coordinates the Latin American Economic Outlook for the America’s Desk of the OECD Development Center. Daude also worked for the Inter-American Central Bank and for the European central Bank as an economist before joining the OECD in 2008. His main research fields are primary macroeconomics and development economics, with a special focus on Latin America. — Interviewer: Liu Yue / Photography by Pang Junxi / Video Produced by Zhao Yue

　　LY: Welcome to the Chinese Social Science Interview Program. And here with us today is Christian Daude, head of the macro-economic analysis union, OECD development center. So, welcome.

        CD: Thank you, good morning.

　　LY: And the first question will be: please explain to us briefly the activities of the OECD in Latin America.

　　CD: Ok, so the OECD is often not associated with Latin America but actually, there are two countries that are members of the OECD which are from Latin America. One is Mexico which has been a member since 1994, and the other is Chile which entered the OECD last year in 2010. So the OECD also has member countries that are from Latin America. And also Brazil has a special status within the hands-engagement countries. It’s a big, emerging market economy. So the OECD tries to do more work, systematic work together with these countries.. And then, what we do at the OECD development centre, we work mainly with non-OECD countries and we have a governing board, a governing sector that tells us what we should work on, what issues we should look at, what policy should be coming up. And this government, governing board has 8 Latin American countries. There are 2 that are members from the OECD, Mexico and Chile, and Also Brazil. But we also have Peru, Columbia and Costa Rica. Argentina’s joining us again. So we have pretty inclusive membership from Latin America. This means also that we have a team within the development centre that works on Latin America. We write a reflection thesis, the Latin American economy outlook, every year, and we present it at the summit of the American presidents, where it is launched every year.

　　LY: Ok, so the rising commodity prices and the large capital inflows and inflationary pressures are some of the challenges Latin America faces right now. So what’s the policy phase that Latin America has to confront this recess? Which policies are the most effective ones?

　　CD: It’s a difficult question. Hahaha…

　　LY: (Hahaha…) So it’s answered by you.

　　CD: Let me first start by saying that the international crisis, the regional face of the international crisis, would, must have a stronger resilience than in the past. And some things are surprising for many analysts. But I think that because of stronger fundamental changes and macro-policies that are more sustainable, more stable, the region did not suffer from this very strong crisis. So, for example Brazil, one of the big countries, has also faced in the past very important macro-instability etc. This time, just as with China, part of the problem is that the country is growing very fast etc. The challenges that you were pointing out before, have to do in part with this strong performance during the crisis, etc. So the countries are growing, especially in South America, those that have a lot of trade and companies cooperating with China are growing at a very fast speed for this historical age. And as tried a lot of investment, capital inflows, etc. so now what is really needed probably is a mix, a policy mix, not only monetary and fiscal policy, but in general, prudential macro-policy so that can help accommodate the boom. Actually there’s a risk of high inflation, and a risk of maybe mass prices going too fast, etc. So there are risks that come along with strong growth and being very attractive to international investors.

　　LY: OK, so you talked about the OECD report, so, the report actually started by talking about the middle-class in Latin America. So, is there any conclusion and policy implication in that?

　　CD: OK. And actually, when we talk about middle-classes, we talk generally about the middle sector, the middle income sector in this economy. Why? Because what we find, we look basically at households that are not poor in a sense, in a statistic sense, but are in the middle of income distribution. And these households, we study their characteristics and what qualities they have, to deal with some of the risks they face. So these households are not very homogenous groups. They are a very heterogeneous group, so that’s why we don’t talk about a class. We say this is a middle sector. Yes?

　　LY: Ok! Get it!

　　CD: One of the most important characteristics is that these middle sectors are very vulnerable, from the economic point of view. Many of them have informal jobs. They are not that highly-educated as one sometimes thinks from the European perspective. . So they face another freeze because they’re not protected by policies, for example pensions and unemployment insurance etc. Of course, some are covered, but many of them are not covered by these policies which means that even though at a certain point of time they are not poor, they might be poor when they get old and have too little pension because their incomes can be low or they have no pension at all, or they get sick and don’t have any health insurance, etc. So, this group of people is actually important to address their needs for the public policies. Obviously this does not mean that the public policy should disregard the poor, but what we are saying is that public policies should probably integrate the more life-cycled point of view of what are the risks that these households face, because they could fall very easily back into poverty. In many countries, just because of what we were talking about before, of the strong growth, of the good macro-stability and policies, they have been able to emerge out of poverty. But any shock, any risk, any back-up could put them back in poverty. So this is one of the issues that we address. The other has to do with creating more opportunities for moving up. And here, what we look at is actually the educational policies in Latin America. Because for a very low level of in-communicate education, there has been a lot of improvement in terms of coverage and entry into primary education etc. in the 70s and 80s in the region, and some of the fruits have been seen in the last decades. But for nowadays, we need to address the issue for these middle sectors in secondary education and tertiary education because it is still very difficult to break this, I would not say a wall, but it is not easy to move up. Understand?

　　LY: Lose from the beginning, this education.

　　CD: So education is one of the issues and also because unfortunately in Latin America, still the family background, the social economic background of the family, is very important to understand the opportunities that people, the children have afterwards in their lives. For example, in the education system, there are these very not inclusive good schools, probably where the rich go. And then, there are other schools, usually public. They are not so good in quality. But just because they have obviously bigger classes etc. and lower salaries for the teachers etc. which means that they also don’t’ have the same quality of education. And this obviously creates very little opportunity to move up later in the labor market. So many things remain to be improved in the region.

　　LY: Ok, so I was thinking about the main topics actually in this conference we attended yesterday. Since the 1970s, Latin America actually got into the middle income trap, as they said. I mean it’s kind of like, they’re moving fast, really fast before the 1970s, but after the 1970s, half century, they just stay in the same stage. Now they aren’t moving forward anymore. I mean is it just because of the things you were talking about. I mean, maybe there are some other factors related?

　　CD: They, I think, what we were talking about is the macro-economic presentation of this and other problems. If imagined that if the middle sectors, the people who are in the middle already had this great opportunity, we would see them moving up or having very high incomes over time and this is something we don’t see. So it’s a little bit, the mirror, what happens in the family, what has happened in the whole economy. Brazil was one of the fast growing countries in the 50s, 60s and was growing actually at a very similar rate to China today. And also in a similar way, there was a process of urbanization, of industrialization and so many people in the countryside just at subsistence level were moving into manufacturing in the cities. And so what we observe is a very strong growth during that process without a lot of pressures on wages etc. This is what has happened in the 70s. And then, it suddenly stopped. Some, many of the explanations were the development model just didn’t work anymore, whether it was due to a rise inequality. This was also associated with the urbanization trend and then the discussion about the people moving to the urban sector, gaining higher salaries. Then you have the significant impression in the rural sector that was considered gaining very little above the subsistence level. So you would have a rising inequality which can create opportunity and social problems. And then this can translate into bad policies, macro-economy instability etc. This is a very complex problem, probably obviously. But it’s interesting that everything that what we’ve talked about concerning these middle sectors in terms of households obviously can also be seen from that point of view. With Latin America, it is interesting to look at the size of it and how many people there are there compared to OECD countries for example. There are lots of differences within the countries when you look at them. But in general, this middle sector’s size is very small, compared to European countries, but also to the US etc. So it is also reflecting the high income inequality that still exists in the region.

　　LY: Ok, so, I mean concerning China do you think there’s a relevant lesson we can actually learn from that?

　　CD: I think just these issues that we are talking about are somewhat related. Yes, if you think about China’s growth process, you know, it has been associated to this rapid industrialization, urbanization, people moving into the main industrial part in China from the rural sector etc. This is a very similar process to the one I was describing in Brazil. And here what you have is first, obviously, a lot of mobility because many people are moving out of poverty and moving something that will probably be this middle sector that we were talking about in Latin America. So people who are not poor, they have the capacity in general to consume, to save etc. and to advance probably, from the social point of view. But still they face a lot of risks, for example, there’s this big debate about the pension system and the social insurance etc. In China, I think, this is a very similar issue to what we see in many Latin American countries. So I think, the good and bad lessons, but the interesting thing is for China to learn from the Latin American experience.

　　LY: Yeah, that will be great. We can actually move forward. We really want to get out within ten years because they say that China has already got to the stage of middle income. We don’t want to get trapped of course.

　　CD: Haha… Of course.

　　LY: And I mean, how have the increased economic links with China affected the economic perspective of Latin America?

　　CD: China has been in the last decade, but it has been in the last twenty years, but I think it’s the last decade, it has been accelerating, and this is very important for many countries in Latin America, in terms of its trade links with China. Yes. There’s a lot of debate obviously whether this is only because China is demanding a lot of commodities, for example, copper, oil, soybeans, etc. South America is a big producer of many of these things and so there’s a certain boom in many of the economies that have a mining industry or oil etc. or even food commodities that have been growing at a very fast speed and partly because of this. There’s also a lot of import of Chinese goods to the region. And actually China is nowadays the second most important trade partner of Latin America. In investment it’s not that important, but it’s also rising. So I think there are many opportunities, but there are also obviously many challenges for some countries in the center of Latin America. For example, they have similar produce for the US market, basically clothes etc. For them, they have been competing much more with China and they have lost in this competition. This is still a problem because they are still looking at what they can produce in this new world economy where China obviously has a bigger role. But China is moving very quickly out of these products. But it has an important implication in terms of creating a new environment for Latin America. Basically, I would say that if you think about what has happened after the crisis, actually part of what you have observed today is some countries, basically South America, growing at a much faster rate than Central America, or even Mexico to a certain extent. It can be explained with how they were integrated with China commercially. Yes. So it has explained an increasingly important role even from a macro-economic point of view for the regions. 

　　LY: Ok, so think about the cooperation between the OECD and especially Latin America, I mean how about that right now? I mean what is the basic content of that?

　　CD: There have been three years organizing the seminar ILAS, a very interesting activity for us because we think there’s a lot of learning that Latin America can do from China’s experience, and also China can learn from Latin America. And to use our report as a tool to have this discussion, to get what is useful for us is very important. From that point of view, it has been now translating our report and organizing this conference for three years. We look forward for this to continue and maybe to foster a more ambitious partnership. We go that way step by step.

　　LY: Ok, so the OECD is looking forward to more cooperation with the whole Chinese Academy of Social Sciences. Actually, we are looking forward to that as well.

　　CD: Definitely the OECD is very happy to work with China on many issues. And it has been challenging for our organization, but an interesting challenge to be more engaged with China in general on the global issues that our organization works on. For example, the content of the G20 etc. But this means that we are obviously working very closely and are very interested to do more with China and with CASS in particular.

　　LY: Ok, thank you. That will be all. Thank you for your effort.

　　CD: Thank you very much.　

  　 LY: Here is Liu Yue from the Chinese Academy of Social Science. I hope you enjoyed the program today and hope you can join us next time.