FROM CONVENTIONAL MACROECONOMICS TO A DEVELOPMENT-FRIENDLY MACROECONOMICS

1. FROM CONVENTIONAL MACROECONOMICS TO A DEVELOPMENT-FRIENDLY MACROECONOMICS Ricardo Ffrench-Davis UNIVERSIDAD DE CHILE CEPAL, julio 30-31, 2014 1

2. Twodevelopment gaps:GDPp/c and equity Fuente: Fondo Monetario Internacional, World Economic Outlook Database (2012) y Banco Mundial, World Development Indicators Database (2012).

3. 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.

4. Latin America (19) and World: Exports and economic growth, 1990-2012 (annual average rates of growth, %)) Latin America (19) World GDP Exports Non -exported GDP GDP Exports 2.5 3.3 8.4 2.9 6.2 1990-1997 (1.1) (2,2) 1.4 5.1 0.7 3.3 4.9 1998-2003 (0.9) (0.6) 5.4 6.8 5.0 3.4 7.5 2004-2008 (1.3) (4.0) 2.9 2.3 3.2 1.9 3.2 2009-2013 (0.5) (2,4) 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%.

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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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. Latin America (19): Net capital inflows and RER, 1990-2012 (RER index 2000=100, inflows in % of GDP) Source: Author’s calculations based on ECLAC figures. Real exchange rate defined in terms of local currency per one US$.

13. 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.

14. 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

15. 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

16. WHAT HAS HAPPENED DURING THE LAST CYCLE? • In 2004-08 • In 2008-09 • In 2010-13

17. 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.

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

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

20. 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.

21. 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.

22. 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.

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

24. CHILE: GDP Growth, 1974-2013(averageannualrates, %) 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% 24

25. 25 25 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.

27. 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 enhancedby 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.