Reforming Latin American Economies

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FROM CONVENTIONAL MACROECONOMICS TO A
DEVELOPMENT-FRIENDLY MACROECONOMICS
Ricardo Ffrench-Davis UNIVERSIDAD DE CHILE
CEPAL, julio 30-31, 2014
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Two development gapsGDPp/c and equity
Fuente Fondo Monetario Internacional, World
Economic Outlook Database (2012) y Banco Mundial,
World Development Indicators Database (2012).
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DEEP ECONOMIC REFORMS UNDER THE WASHINGTON
CONSENSUS APPROACH IN LATIN AMERICA

• Outstanding achievements
• Reducing inflation below one digit
• Significant improvement in fiscal
  discipline
• Sustantive export boom.

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Success in exports growth up to 2008, but meager
performance in non-exported GDP, determining
meager development. Real instability has focused
heavily on GDP directed to domestic rather than
from foreign markets this implies that effective
demand has been the most unstable. The latter
depends on domestic macroeconomics, which has
failed for the real economy. Average GDP
growth in 1990-20133,2.
Fuente Ffrench-Davis (2005) and updates based on official figures processed by ECLAC for Latin America, and IMF , World Bank and WTO for the World in constant US.
Entre paréntesis las contribuciones al crecimiento total de la economía del PIB no exportado y exportado, respectivamente. El valor agregado exportado fue estimado descontando desde las exportaciones brutas de bienes y servicios, su contenido importado. Este último se asumió igual a la participación de bienes importados de capital e intermedios en el PIB total. Para la maquila mexicana se utilizaron datos efectivos de valor agregado. Para el año 2013, el crecimiento de las exportaciones corresponde solamente al crecimiento de las exportaciones de bienes.
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Fuentes Basado en datos de CEPAL para 19 países.
(21/08/12)
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THE HARD DATA

• 1. GDP growth in 90-13 was merely 3.2p/y.
• 2.Significant instability of aggregate demand and
  RER, despite low inflation.
• 3. Only in1994, 1997,2008 2011-12 economic
  activity was close to GDP (4/23!!!). All other
  years with significant recessive gaps (RG).
• 4. Investment ratio quite low (good for 3.2!!).
  Only in 2012 GKF approaches 1970s average.

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ROLE OF STRUCTURAL HETEROGENEITY (SH)DEPRESSIVE
AND REGRESSIVE ASSYMETRIES I

• In the economic cycle, actual GDP fluctuates not
  around but below GDP. Hence, instability implies
  underutilization of the stock of capital and
  labor and of actual TFP, and a discouragement
  for capital formation usually biased against
  less trained labor and SMEs.
• Allocative capacity of the RER is distorted and
  value-added to tradables is discouraged.

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DEPRESSIVE AND REGRESSIVE ASSYMETRIES II

• The financial investor can adjust to unexpected
  changes of relative prices and expectations
  instantaneausly. The investor of GKF whose
  allocation of resources is irreversible needs
  long periods from starting to completing its
  investment. Instability favors speculative
  investment vis-a-vis productive investment.
• Rate of labor participation tends to be depressed
  by instability and the quality of employment
  worsened for the poor.

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ROLE OF MACROECONOMICS

• Stability of the price level (CPI generally).
• To generate an Aggregate Demand that moves
  closely around potential GDP (GDP).
• A Real Exchange Rate (RER), that responds to the
  evolution of relative productivitities (à la
  Balassa-Samuelson), performing as the main
  allocating signal for tradables.
• Actual cyclical fluctuations of Aggregate
  Demand and RER have depressive and regressive
  effects.

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Crucial role of Financial Liberalization Led to
a Regressive Financierism

• Weak regulation and supervision market knows.
  And deep banking crises.
• Boom in financial savings without an increase in
  domestic savings (DS crowded-out).
• Financial markets dominated by agents
  especialized in short-term finance (overnight)
  and not in GKF (over-the-decade) highly
  influential agents, which --by training and
  reward-- are away from productive investment.

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MEDIUM-TERM CYCLES OF CAPITAL FLOWS ARE
UNFRIENDLY TO GKF

• Weak direct link with domestic GKF.
• Even by FDI, because of significant MA
  (averaging about one-half of total gross FDI),
  rather than greenfield investment.
• Mid-term volatility of capital inflows has
  generated macro instability, with large output
  gaps (RG in 19/23). Outlier RER misallocates GKF,
  and RG discourages GKF,employment and SMEs.

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Capital flows and terms of trade, both
cyclical,--instead of relative productivities a
la BS-- have determined RER and Aggregate Demand
behavior in Latin America. RER medium-term
instability has tended to weaken value-added in
exports and its links with the rest of the
economy.
Latin America (19) Net capital inflows and
RER, 1990-2012 (RER index 2000100, inflows in
of GDP)
Source Authors calculations based on ECLAC
figures. Real exchange rate defined in terms of
local currency per one US.
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In fact, high real instability generates
underutilization of potential GDP, which along
with the incompleteness of the factor markets,
are significant explanations of reduced
productive investment ratios it is a depressive
and regressive dynamic effect.
Fuente Ffrench-Davis (2005) y actualizaciones,
basado en datos de CEPAL y Hofman y Tapia (2004).
Incluye Argentina, Bolivia, Brasil, Chile,
Colombia, Costa Rica, México, Perú y Venezuela.
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Real instability has also been unfriendly to the
productive sector via its negative impact on
capital formation. As a result, the investment
ratio sharply declined in the eighties and
remained low in the 90s and 2000s. Ups-and- downs
are significantly correlated with the evolution
of the recessive gap".
Fuente ECLAC data for 19 countries
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Real instability has also been unfriendly to the
productive sector via its negative impact on
capital formation. As a result, the investment
ratio sharply declined in the eighties and
remained low in the 90s and 2000s. Ups-and- downs
are significantly correlated with the evolution
of the recessive gap".
Latin America Gross Fixed Capital Formation,
1970-2013 ( GDP)
Fuente World Bank
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WHAT HAS HAPPENED DURING THE LAST CYCLE?

• In 2004-08
• In 2008-09
• In 2010-13

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The quantum of imports has grown 9.8 anually,
nearly duplicating that of exports quantum in the
last decade. Deep exchange rate policy failure.
Source Basado en CEPAL a precios de 2000.
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América Latina (19) Evolución de exportaciones e
importaciones, 2004-2013 (tasas anuales de
crecimiento)
Fuente Basado en datos del CEPAL. Corresponde a la evolución de las exportaciones e importaciones en precios constantes de 2005. Para año 2013, el crecimiento sólo es para exportaciones e importaciones de bienes. .

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Latin America (19) Terms of trade indices for
goods and services, 1990-2013 (index 2005100)
Sources Based on ECLAC for 19 countries (2013). Para 2013 son datos estimados por CEPAL.

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LATINAMERICA TODAY

• Positive macro situation in 2004-08. Placed close
  to full use of potential GDP.
• Positive terms of trade and financial shocks
  pulled-up the economy to the roof, increasing
  domestic demand (positive up to GDP!!!) and
  appreciating RER(negative overshooting). There is
  no significant structural change nor a radical
  improvement in macro-policies explaining the jump
  in actual GDP in 2010-12.
• Exports are characterized by high cyclical price
  instability.
• GKF has risen (positive), peaking since the
  1980s. Determinant variable is the elimination of
  the recessive gap. However, the 2012 peak GKF is
  still below the average of the 1970s.

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DEVELOPING LATINAMERICA

• At only one-third of the way of more advanced
  economies 2 gaps, output and equity.
• Deeper productive structural heterogeneity (SH)
  prevails in L.A. Underlies gaps focused on SMEs,
  less trained labor and informal sectors people
  born in poor households.
• Inequality is mostly built in markets and
  reinforced by weak or regressive tax systems.
• SH implies that standard N-L policies (such as WC
  in last 2 decades) instead of bringing growth and
  equity, have regressive and depressive effects.
  Heterogeneity of agents and asymmetrical effects
  are crucial.

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CHILE HAS REACHED ONLY 43 OF THE GDPpc OF THE
G-7
Fuentes FMI, World Economic Outlook Database
(2012) Banco Mundial, World Development
Indicators (2012) Centro de Microdatos
Universidad de Chile (2009), G7 incluye EE.UU,
Japón, Reino Unido, Alemania, Francia, Canadá e
Italia.
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PIBpc a PPC Chile como porcentaje de EE.UU,
G-7 y América Latina, 1973-2012
Año Estados Unidos G-7 América Latina
1973 23 29 82
1989 21 25 91
1997 29 34 128
2012 36 43 146
Fuente Los niveles PIBpc a PPA se anclaron de acuerdo a las estimaciones del Fondo Monetario Internacional para las 4 columnas en el año 2012, y se estimaron los niveles para los años anteriores en base a las tasas de variación real del PIB per cápita presentadas por el Banco Central de Chile para Chile para el resto de los países se utilizaron las tasas reportadas por el Banco Mundial hasta 2011 FMI y CEPAL para 2012. Fuente Los niveles PIBpc a PPA se anclaron de acuerdo a las estimaciones del Fondo Monetario Internacional para las 4 columnas en el año 2012, y se estimaron los niveles para los años anteriores en base a las tasas de variación real del PIB per cápita presentadas por el Banco Central de Chile para Chile para el resto de los países se utilizaron las tasas reportadas por el Banco Mundial hasta 2011 FMI y CEPAL para 2012. Fuente Los niveles PIBpc a PPA se anclaron de acuerdo a las estimaciones del Fondo Monetario Internacional para las 4 columnas en el año 2012, y se estimaron los niveles para los años anteriores en base a las tasas de variación real del PIB per cápita presentadas por el Banco Central de Chile para Chile para el resto de los países se utilizaron las tasas reportadas por el Banco Mundial hasta 2011 FMI y CEPAL para 2012. Fuente Los niveles PIBpc a PPA se anclaron de acuerdo a las estimaciones del Fondo Monetario Internacional para las 4 columnas en el año 2012, y se estimaron los niveles para los años anteriores en base a las tasas de variación real del PIB per cápita presentadas por el Banco Central de Chile para Chile para el resto de los países se utilizaron las tasas reportadas por el Banco Mundial hasta 2011 FMI y CEPAL para 2012.
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CHILE GDP Growth, 1974-2013(average annual
rates, )
  GDP Exports Rest of GDP
1974-89 2,9 10,7 1,6
1990-98 7,1 9,9 6,5
1999-2013 3,9 4,4 3,8

1974-89 2,9 10,7 1,6
1990-2013 5,1 6,5 4,7
Sources Basado en R. Ffrench-Davis (2014), Chile
Entre el Neoliberalismo y el Crecimiento con
Equidad, JCSáez Editor, quinta edición,
Santiago. Actualizado en base a datos del Banco
Central de Chile, base móvil encadenada serie
2008. Cifras provisionales para 2013. Prom
74-134,2
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Sources Based on Central Bank figures in prices
of 2003. From 2009 growth rates of chained series
were used. Exports and imports cover volume
(quantum) of goods and services. The horizontal
lines correspond to the simple average of the
growth rates in the period 2005-13 imports and
exports show an annual average of 10.3 and 3.0.
respectively.
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A PROGRESSIVE POLICY APPROACH

• 1.To take account of great Structural
  Heterogeneity of diverse
• agents or factors heterogeneity of their
  productivities, their
• access to markets, and their capacity to respond
  to policy
• changes and reforms.
• 2. Asymmetries in the capacity to respond to
  market signals were
• enhanced by W Concensus (neo-liberal) policies
  with the pro-
• cyclical bias of financierism (cause of the
  global crisis).
• 3. Compensate or counter the asymmetric effects
  a) seeking to
• avoid abrupt changes in capital flows and terms
  of trade, b)
• leveling off capacities with reforms of domestic
  capital markets
• and labour training, and c) impose coordination
  in domestic
• macro policies and rebalance of its objectives.