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FROM REGRESSIVE FINANCIERISM TO PROGRESSIVE PRODUCTIVISM

Ricardo Ffrench-Davis

UNIVERSIDAD DE CHILE

CEPAL:LAC-UE ECONOMIC FORUM, 2013January 21,2013

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Fuente: Ffrench-Davis (2005) y actualizaciones, sobre la base de cifras oficiales de América Latina, y FMI y OMC para el mundo en dólares constantes.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.

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)

3.1 2.6 3.3 2.3 3.2(0.5) (2.5)

1990-1997

1998-2003

2004-2008

2009-2012

Success in exports growth up to 2008, but meager performance in non-exported GDP. Real instability has focused heavily on GDP directed to domestic markets rather than to 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.

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Financial Liberalization in LA Ledto a Regressive “Financierism”

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 (“overdecade”: crucial role of 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 link with domestic GKF.• Even by FDI, because of a surge in

M&A, rather than greenfield investment.

Volatile capital inflows have generated macro instability, with large output gaps between actual and potential GDP. 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 dollars

Fuente: Ffrench-Davis (2005) and updates based on ECLAC (2012) for 19 countries. 5

Real instability of volatile financial flows and of terms of trade Real instability of volatile financial flows and of terms of trade have led fluctuations in aggregate demand that generate changes in have led fluctuations in aggregate demand that generate changes in GDP. That is possible GDP. That is possible onlyonly if potential GDP is being underutilized. if potential GDP is being underutilized.

7Fuente: 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".

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-4,0

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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.

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• Predomina la creencia, equivocada, de que la autoridad económica no tiene capacidad de afectar el tipo de cambio, pues sería ir “contra el mercado”. El argumento central alternativo es que hay segmentos diferentes en el mercado y se trata de operar a favor del segmento más relevante para el desarrollo productivo (esto es, el de productores de transables). Se evita así que agentes cortoplacistas o shocks transitorios de términos de intercambio lleven el tipo de cambio de corto plazo fuera de niveles sostenibles a mediano plazo. Por lo tanto, implica una intervención a favor del mercado más relevante para el crecimiento económico.

• En breve, la permanencia de una política de tasa libre-libre implica la renuncia a hacer política macroeconómica sostenible.

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Sources: Based on ECLAC for 19 countries. 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 2004-11; imports and exports show an annual average of 9.8% and 5.4%, respectively.

Sources: Based on ECLAC for 19 countries. 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 2004-11; imports and exports show an annual average of 9.8% and 5.4%, respectively.

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Four severe expresions of the costly consequences of financierism for EE

• Unstable real exchange rates, led by pro-cyclical capital flows and terms of trade.

• Large capital inflows and financial domestic savings with low capital formation. Poor “financing for development” à la Monterrey.

• Aggregate demand and economic activity extremely dependent on swinging (roller coaster) external shocks.

• Insufficient compensatory financing, frequently with pro-cyclical conditionality.

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 are stressed by neo-liberal policies with the pro-cyclical bias of financierism.

3. Compensate or counter 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 c) impose coordination in domestic macro policies and rebalance of its objectives.

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13Sources: Based on ECLAC for 19 countries (2012)

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Double divergence in economic development

Sources: IMF, World Economic Outlook Database (2012), World Development Indicators (2012). G7 includes: USA, Japan, United Kingdom, Germany, France, Canada and Italy.