Download Macroeconomic Policies for Sustainable and Resilient  Growth in Northern and Central Asia Almaty, Kazakhstan

Macroeconomic Policies for Sustainable and Resilient Growth in Northern and Central Asia
Almaty, Kazakhstan
August 27‐28 2013
Aldo Caliari
Rethinking Bretton Woods Project
Center of Concern
From diversification to macroeconomic stability: Concentration of productive structure hinders macroeconomic stability:
•‐‐macroeconomic stability and a diversified productive fabric are two sides of the same coin and deterioration in one can trigger a vicious cycle of fast deterioration that will inevitably engulf the other •“The lack of productive diversification makes the terms of trade volatility become in a direct way volatility of fundamental variables that affect the external sector. Dependence on a few export products prevent a softening of volatility through diversification of risk implicit in a diversified export structure. Thus, the low productive development becomes in a direct way a source of macroeconomic volatility.” (Frenkel and Fanelli 1994) •UNDP’s recent finding: countries with more diversified export structures proved more capable of weathering the shocks from the Great Recession in 2008‐09 (UNDP, 2011)
•Asia lost 18 per cent of export revenues in 2009, whereas regions with higher export concentration ratios (CIS, the Middle East and Africa) lost more than 30 per cent.
•East Asia’s growth declined by 1.4 per cent whereas South Asia actually increased growth. CIS went from 4.1 % growth to 5.3 % contraction.
From macroeconomic stability to diversification? • Experience of Africa since the 1980s: extended policy reforms, improved stability, • But lackluster performance on diversification
• Link neither direct nor assured. Macroeconomic policies can be neutral to diversification with little or no role beyond mere stabilization
• Is ME policy irrelevant ? • Recognize role of other policies • ME balance can be achieved in different ways, some are pro‐diversification and some are not
Stylized facts
On Diversity of structure
•High (and growing) presence of commodities in export basket
•High and growing export concentration (low diversity of production)
•De‐industrialization
•“Servicification”
On Macroeconomic performance
Growth
Public debt (to exports)
Inflation
[Fiscal balances / Current account balances ]
Theoretical approach to model • Structuralism  diversification of the production structure matters for macroeconomic stability.
•  dualist
• national economies in the “periphery,” exhibit enclaves of progress coexisting alongside backward areas • “high productivity in the primary export sector, and low in a relatively inefficient sector producing agricultural and manufactured goods for domestic consumption”
• high productivity enclaves are disconnected from the rest of the
economy
• inequality in profits, reinforced over time “interaction of a static element, the structural inequality (heterogeneity) and a dynamic
one, the differentiated productivity and income accruing to the unequal sectors, is what produces an inherent tendency in the system, even during an industrialization stage”
Nurkse
‐‐Comparative advantage:
‐‐Terms of trade and financing for development (direction to savings, voluntary or involuntary)
‐‐Role of public finances: Taxation as a way to forcedly prevent savings from going into consumption
‐‐Balance of payments not a constraint to development
‐‐Where does additional revenue go?
‐‐”Balanced growth”
‐‐”Disguised unemployment”
ME policies: how can they be relevant to diversification
Exchange rate: Positive impacts of undervalued ER : •Evidence of growth episodes associated to sizable and sustainable RER depreciation. Operative channel: impact on tradable sector, especially industry. Depreciation relieves institutional and market failures of which otherwise tradables suffer in developing countries. (Rodrik)
•Channel by which undervalued RER stimulates growth are increases in aggregate savings and technological change, both relying on impact on increased production of tradables, especially manufactures (increasing returns , higher productivity, supportive of tech development and learning by doing). (Gala)
Negative impacts of overvalued ER (explored in context of resource‐based economies):
•Appreciation of RER leads to increase in prices that squeezes profits in traded activities such as manufacturing using non‐traded products as inputs. (Sachs and Warner)
•Dominant resource –based sector causes currency to appreciate, reducing profitability of other exports (Gylfason; Page)
•Increase of natural resource income akin to foreign transfer that raises wages and decreases relative productivity of other industries, making them move abroad. (Krugman)
ME policies: how can they be relevant to diversification (II)
Fiscal policies: •RER depreciation would support all tradables. In a resource‐exporting economy, would also boost that sector. So, pushes manufacturing and non‐traditional exports up but may preserve imbalance with natural resources sector (which would keep adding to offsetting pressure
towards appreciation of currency)
•Consistent with structuralist dualism: equalized boost to all tradables would widen gulf between more and less profitable sectors
•(ESCAP): impact of commodity boom on trajectories of LDCs depends on whether price shifts will alter incentives within each economy toward or way from increasing diversification and modernization.
Declining terms of trade for manufactures create incentives for countries to boost production and trade of same products they already produce.
Proposing a model
1) Y – (C + I + G ) = X‐M
2) Expand the external sector thus:
Y – (C + I + G ) = [ Proposing a model (II)
Discussion confined to diversification of exports alone not consistent with Nurkse’s “balanced growth”
Can we build on this model to diversity of production for domestic consumption?
Important: “balanced growth” need not be detrimental to export sector.
Also important: Greater labor intensity in industrialized sector vs. natural resource sector acquires renewed importance: Employment impacts of undervalued RER can be traced back to increased intensity of labor in industrialized goods sector [either more labor intensive techniques or reallocation of labor and investment towards labor‐
intensive tradables]
But  only true if , and to the extent, that tradables sector getting the boost is the industrialized one With industrial sector being more labor intensive, greater portion of additional revenue will accrue to wages. Spending generates additional demand for non‐tradables and thus introduce demand conditions for viability of new industries, in turn inviting new investment. But  only true if export‐related income accrues to wages. Such additional wage becomes the increase in the size of the market
Mobilization of “disguised savings” fulfilled if labor in lower productivity activities moves to higher productivity ones. It DOES NOT matter if higher productivity activities are for export or domestic market. Some issues
Question: Can domestic sector really be bolstered in the face of an existing export sector? •Again, “dualist economy “ assumption tells us that high productivity in export sector coexists with lower productivity in domestic industries. •So investment flowing into domestic industries would be accompanied by proportionally greater flows of investment into export sectors, thus maintaining imbalance. •That won’t be enough to stop non‐tradable sector diversification. Goal of increasing cluster of domestic industries can still be achieved, as these will still develop.
•But we can see that the assumption that strengthening of domestic industries could happen without detriment to export sector has its limits.
•Fiscal policy, again, essential to bridge productivity gap, in this case through “public overhead” –
infrastructure facilities that boost productivity across economy
•Additional income will boost domestic market size. But, if capacity to increase production is not there, or lags, inflation will ensue (eroding RER undervaluation). If additional wages go into imported, rather than domestic, goods, they will drive imbalance.
•Way out: Wise use of taxation policy on wages? But real wages already low given undervalued RER Questions: •Would expansionary scenario (compared with alternative ones of lower labor‐intensity sectors) offset effects? •Will infrastructure higher productivity generate benefits that complement those purely coming from wage increase?
Conclusions
• Need to think about diversification as part and parcel of macroeconomic stability
• Macroeconomic policies can achieve objective of macro stability in a number of ways, but those are not irrelevant to what happens to the diversity of the productive structure (some will be more pro‐
diversification than others).
• Macroeconomic policies should not be considered neutral to diversification. • And they can be oriented to support diversification by orienting them to management of relative prices among different sectors
Africa scenario
• Africa: Improved stability
In last two decades, moved from being most volatile and indebted
Output growth: in 2012, almost 12 countries posted 6 % growth rate for more than 6 years
Debt service (As share of exports): lowest of all regions of the world
Inflation : significantly reduced and much more predictable
• …but increased concentration of production
Export concentration Manufacturing value added consistently declining even if industry value added (which includes non‐ag natural resources) fared better
Africa’s manufacturing and industry VA
Africa’s ag and services VA
Africa: Inflation
Africa : debt service
Africa: GDP growth