## Saving Latin America's Unprecedented Income Windfall

_IMF Blog, May 20, 2013_

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## Bibliographic details
- Authors: Gustavo Adler, Nicols Magud
- Published: May 20, 2013

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### The recent terms-of-trade boom in historical perspective
- The commodity price boom beginning around 2002 produced large terms-of-trade shocks concentrated in the 1970s and the 2000s.
- The recent boom is "sizable" and not much larger than the 1970s booms, but is considerably larger than booms in other regions; only comparable to oil-exporting countries in the Middle East and North Africa.
- The associated income windfall in the recent episode has been much larger than in the past because of a higher degree of trade openness and a longer duration of the boom.
- The recent boom raised income close to 15 percent per year (income has been 15 percent higher than it would have been without the terms-of-trade shock).
- Country-specific windfalls:
  - Venezuela: increase of 30 percent per year.
  - Bolivia: increase of 20 percent per year.
  - Chile: increase of 20 percent per year.
  - Brazil: significantly lower windfall estimates (relative position noted).
  - Mexico and Uruguay: terms-of-trade changes during the last decade do not qualify, under the authors’ definition, as booms.

### Saving patterns and the question of effort
- Aggregate saving rates comparison:
  - Median saving rate increased by about 4-5 percentage points of GDP in the recent episode.
  - In past episodes, median saving rates increased by about 2-3 percentage points of GDP.
- Investment behavior:
  - Investment rose by about 5 percentage points of GDP in the recent episode, in contrast with past episodes.
  - The increase in investment has contributed to a gradual weakening of current account balances.
- Marginal saving rates (increase in saving as a proportion of the estimated windfall):
  - Estimates indicate commodity exporters have saved less of the windfall in the recent episode than in past episodes.
  - Latin America’s saving effort is low compared with countries with a similar income windfall (oil-exporting countries in the Middle East).
  - Efforts to save the windfall have gradually declined following the 2008–09 crisis.
- Composition of saving:
  - A growing share of the windfall is devoted to domestic (physical) capital formation rather than to improving countries’ international asset position (increasing saving abroad).
  - This compositional shift has affected post-boom real income differently than in past episodes and contributed to current account weakening.

### Implications for post-boom income and policy-relevant results
- Econometric evidence:
  - A simple econometric exercise points to a high payoff from saving the windfall during the boom in terms of raising post-boom income.
  - The composition of windfall saving matters: allocating the extra income to foreign asset accumulation appears to deliver higher post-boom income than when invested domestically.
  - The result could reflect benefits of a stronger net foreign assets position or costs from misallocating domestic resources during the boom; the distinction remains an open question.
  - This payoff from foreign asset accumulation seems to have been especially true for Latin America in the past.

### Conclusions and policy implications
- The improved public and external balance sheets observed in the region may reflect mainly the sheer size of the income windfall from the latest terms-of-trade boom, rather than a greater effort to save it.
- With signs of:
  - further softening of saving rates,
  - weakening external current account balances,
  a closer look into saving and investment patterns may be desirable to secure higher post-boom income.
- Policy-relevant considerations:
  - Strengthen incentives or mechanisms to increase the marginal saving of income windfalls.
  - Consider the composition of saving (foreign asset accumulation versus domestic investment) given its differential association with post-boom income outcomes.
  - Monitor the post-2008–09 decline in saving effort and its implications for external balances.

*Gustavo Adler, Nicolás Magud — May 20, 2013 (IMF blog post "Saving Latin America's Unprecedented Income Windfall")*

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## References

- [https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-termsoftradebooms-chart1.jpg](https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-termsoftradebooms-chart1.jpg)
- [https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-income-windfalls-chart2.jpg](https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-income-windfalls-chart2.jpg)
- [https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-windfall-savings-chart3.jpg](https://www.imf.org/wp-content/uploads/2013/05/eng-whd-reo-spring-windfall-savings-chart3.jpg)

_Source: https://www.imf.org/en/blogs/articles/2013/05/20/saving-latin-americas-unprecedented-income-windfall_