FROM CONVENTIONAL MACROECONOMICS TO A DEVELOPMENT-FRIENDLY MACROECONOMICS

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FROM CONVENTIONAL MACROECONOMICS TO A DEVELOPMENT-FRIENDLY

MACROECONOMICS

Ricardo Ffrench-Davis

UNIVERSIDAD DE CHILE

CEPAL, julio 30-31, 2014

Two development gaps:GDPp/c and equity

2Fuente: Fondo Monetario Internacional, World Economic Outlook Database (2012) y Banco Mundial, World Development Indicators Database (2012).

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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Latin America (19) and World: Exports and economic growth, 1990-2012(annual average rates of growth, %))

Latin America (19) WorldGDP Exports Non -exported GDP GDP Exports

3.3 8.4 2.5 2.9 6.2(1.1) (2,2)

1.4 5.1 0.7 3.3 4.9(0.9) (0.6)

5.4 6.8 5.0 3.4 7.5(1.3) (4.0)

2.9 2.3 3.2 1.9 3.2(0.5) (2,4)

1990-1997

1998-2003

2004-2008

2009-2013

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 1990-2013=3,2%.

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.

Fuentes: Basado en datos de CEPAL para 19 países. (21/08/12)

THE HARD DATA

• 1. GDP growth in 90-13 was merely 3.2%p/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 M&A

(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 B&S-- 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.

Source: Author’s calculations based on ECLAC figures. Real exchange rate defined in terms of local currency per one US$.

Latin America (19): Net capital inflows and RER, 1990-2012(RER index 2000=100, inflows in % of GDP)

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-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

10,0

14,0

15,0

16,0

17,0

18,0

19,0

20,0

21,0

22,0

23,0

24,0

25,0

26,0

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Bre

ch

a d

e p

rod

uc

to (

% d

el P

IB*)

Ta

sa

de

inv

ers

ión

(%

PIB

)

América Latina (9): Brecha de producto y tasa de inversión bruta 1970-2009

Tasa de inversión Brecha de producto

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.

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.

14Fuente: ECLAC data for 19 countries

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".

15Fuente: World Bank

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)

WHAT HAS HAPPENED DURING THE LAST CYCLE?

• In 2004-08

• In 2008-09

• In 2010-13

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Source: Basado en CEPAL a precios de 2000.

The quantum of imports has grown 9.8% anually, nearly duplicating that of exports quantum in the last decade. Deep exchange rate policy failure.

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18Fuente: 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..

América Latina (19): Evolución de exportaciones e importaciones, 2004-2013(tasas anuales de crecimiento)

19Sources: Based on ECLAC for 19 countries (2013). Para 2013 son datos estimados por CEPAL.

Latin America (19): Terms of trade indices for goods and services, 1990-2013(index 2005=100)

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.

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

22Fuentes: 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.

PIBpc a PPC: Chile como porcentaje de EE.UU, G-7 y América Latina, 1973-2012

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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.

CHILE: GDP Growth, 1974-2013(average annual rates, %)

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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 74-13=4,2%

  GDP Exports Rest of GDP 1974-89 2,9 10,7 1,61990-98 7,1 9,9 6,5

1999-2013 3,9 4,4 3,8

1974-89 2,9 10,7 1,61990-2013 5,1 6,5 4,7

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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.27