Mercosur: Macroeconomic Perspectives

Transcription

1 Mercosur: Macroeconomic Perspectives Daniel Heymann Montevideo, 9 de Octubre de 2006

2 Introduction General considerations: Wide macroeconomic swings. Large oscillations in trade flows, often cause of frictions. Macro policies managed with little regard for spillovers on partners. Difficult to identify sense of direction of Mercosur as economic project. However; notion that countries stand to gain from trying to "grow together. Region in a phase of macroeconomic recovery. It seems appropriate to reconsider the medium term prospects. Contents: brief analysis of regional macroeconomic interactions, and a discussion in broad terms of incentives and restrictions for macroeconomic cooperation in the specific conditions of the region.

3 Main themes: The lack of a shared perspective about the role of Mercosur for the growth of the economies has limited the perception of the project as a valuable and "permanent" undertaking. Macro spillovers have mainly originated in fluctuations associated with crises where sustainability was put into question. On several occasions, the countries have shown differences in their approach to policies. Uncertainties about benefits of integration and doubts about the incentives and reliability of the partners have induced centrifugal forces.

4 Main themes (cont): Development of common views about the growth strategies of the economies, and the role assigned to the regional agreement would have to proceed pari passu with advances in macro cooperation. If conditions, possibility of non-trivial activity of searching for a certain convergence of "models" of analysis and policy-making and establishment of routines of joint reviews of macro evolution. Why coordinate : forward-looking question; answer depends crucially of future of real integration.

5 Motives for coordination Substantial variability in trade. Possibility of expectational effects Historical spillovers sizeable, certainly asymmetric, but non-negligible even for Brazil, in some episodes. Mechanisms and intensity of spillovers hard to forecast, but likely to be more prominent if integration proceeds. In this case, important to somehow separate macro and real matters, to be addressed with specific actions/policies. Dealing with macro regionally may improve the assignment of instruments to problems, and reduce frictions.

6 Motives for cordination Regional and country-specific variability mainly associated with crises. Crisis prevention and, in the event, crisis management have regional elements. Require medium-term perspective (sustainability). Coordination in Mercosur: not fine tuning, but working together to avoid boom-bust cycles (recognizing that, if past experience is relevant, no economy of the region can be sure to be immunized or isolated from them). Coordination particularly difficult in crises (before and after eruption). Investments in policy interaction, development of common views before the fact important to facilitate cooperative responses.

7 The regional macroeconomic performance Agents have faced difficulties in identifying "permanent" levels of income and sustainable spending. Consequence, and probable cause, of large fluctuations. Variable perceptions about the "relative size" of the economies and about their growth potential. Indications drawn from changes in dollar values of GDP. Realized and expected values related to the aggregate demand in terms of tradables. When large volume of financial contracts denominated in foreign currencies, debt sustainability closely linked to the performance of the dollar value of incomes. Similar picture emerges from the evolution of real GDP.

8 ARGENTINA: Phase diagram of per capita GDP at constant dollars of y(t) y(t-1)

9 ARGENTINA: Histogram of per capita GDP at constant dollars of Frecuency Mean 6800 Median 6500 Maximum Minimum Dollars

10 BRAZIL: Phase diagram of per capita GDP at constant dollars of y(t) y(t-1)

11 URUGUAY: Phase diagram of per capita GDP at constant dollars of y(t) y(t-1)

12 PARAGUAY: Phase diagram of per capita GDP at constant dollars of y(t) y(t-1)

13 BRAZIL: Histogram of per capita GDP at constant dollars of Frecuency Mean 3600 Media 3500 Maximum 5200 Minimum Dollars

14 URUGUAY: Histogram of per capita GDP at constant dollars of Frecuency Mean 4800 Median 4300 Maximum 7300 Minimum Dollars

15 PARAGUAY: Histogram of per capita GDP at constant dollars of Frecuency Mean 1900 Media 1800 Maximum 3300 Minimum Dollars

16 ARGENTINA: GDP at constant pr ices and r ecur sive tr ends Hodrick-P rescott trend calculated with data up to:

17 BRAZIL: GDP at constant pr ices and r ecur sive tr ends Hodrick-P rescott trend calculated with data up to:

18 URUGUAY: GDP at constant pr ices and recur sive tr ends Hodrick-P rescott trend calculated with data up to:

19 PARAGUAY: GDP at constant pr ices and r ecur sive tr ends Hodrick-P rescott trend calculated with data up to:

20 The regional macroeconomic performance Economies have large "structural" asymmetries but, when measured in current (dollar) magnitudes, "relative sizes" of the economies have varied considerably. In several moments during the nineties, the economy of Argentina appeared to be around half the size of that of Brazil; the ratio of GDPs fell to 22% in GDP Of Uruguay: around 7% of Argentine GDP in 1994 and 1999, 12% in Differences in macro behavior probably related to the patterns of movements in international terms of trade and in capital flows were observed for each country.

21 Volatility of terms of trade LATIN AMERICA: Volatility of international terms of trade and capital flows. 1981/ Venezuela 25 Guatemala 20 El Salvador BRAZIL Ecuador Colombia Mexico Bolivia Honduras PARAGUAY Costa Rica Chile Panama Dominican Rep Peru Nicaragua Haiti URUGUAY ARGENTINA Volatility of capital flows

22 LATIN AMERICA: Volatility of international terms of trade and capital flows. 1990/2003 Volatility of terms of trade 35 Venezuela BRAZIL Chile 10 Panama Colombia Honduras Guatemala / PARAGUAY Bolivia Nicaragua El Salvador Costa Rica Peru 5 Dominican Rep Mexico Haiti ARGENTINA Ecuador URUGUAY Volatility of capital flows

23 The regional macroeconomic performance Different features of the crises experienced by different economies. However, common element: fluctuations do not seem ups and downs generated by recurrent shocks drawn from given distributions. Probable interaction between macro fluctuations and changing views about longer term economic prospects. Likelihood that shocks and fluctuations have had a nonrecurrent component: care required when trying to identify and project "stylized facts".

24 The regional macroeconomic performance In one way or another, fluctuations mostly associated with crises where sustainability of contracts and policy commitments in question. Sustainability issues especially visible for (high) government debts. Different features and responses in recent years.

25 The regional macroeconomic performance Clearly asymmetric spillovers through the exchange of goods. However, even Brazil seems to have experienced impacts as neighbors went through large fluctuations. Between 1990 and 1994, Argentina multiplied its purchases from Brazil by six; about 11% of the exports of Brazil in In , Argentine bilateral imports declined by about two thirds; 9% of the Brazilian total exports in the starting year. Rise of Argentine bilateral exports between 1993 and 1998 was nearly 40% of total value in the initial year. Movements in intra-regional trade followed fluctuations in the aggregate performance of the economies, but also specific features. Shares of imports from the partners in the total imports of the countries showed large changes, in both directions.

26 ARGENTINA: Imports from Brazil as a share of total imports and trend (percentage)

27 BRAZIL: Imports from Argentina as a share of total imports and trend (percentage)

28 The regional macroeconomic performance Large changes in the pattern of trade by sector. In ,share in imports of partner increased for a wide range of products for both Argentina and Brazil. Since late nineties, large number of Argentine activities reduced presence in Brazilian market, while share of Brazilian goods in Argentine imports increased.

29 The regional macroeconomic performance Evidence suggests parameters of equation for Brazilian imports from Argentina have not shown large changes. The movements in those flows can be represented as responses to the changing macro outlook of Brazil. In Argentine import function, possible to identify a structural break. Difficult to establish whether jump in levels or drop in the exchange rate elasticity of imports. Value of Argentine imports from Brazil in 2003 similar to that observed in 1997, when (for a roughly similar level of real GDP) the real exchange rate was considerably lower.

30 Macroeconomic interactions in states of transition Features and direction of the integration project remain to be defined in a way that the countries perceive as contributing to growth of their economies. Motives and conditions for some type of joint work in the macroeconomic field cannot be separated from "real" elements. Existence of interdependences may induce agents to watch the other economies and react to their evolution. It does not automatically generate concrete demand and supply of coordinated or cooperative policy activities. Formal pronouncements by themselves would not generate concrete cooperation. Probably required: common perception that "neighborhood effects" are and will be important for each economy; that policy interactions will recur over time and can generate significant individual benefits.

31 Macroeconomic interactions in states of transition Macro interdependences will be clearly asymmetric. Thus, incentives to engage in concrete policy interactions. However, similar asymmetry from that concerning participation in buildup of an integration project. Again: reference to existence of real perceived gains for all parties. Important to develop common views on macroeconomic (and other) issues. Practices and routines of macro cooperation require long run perspective. Requires progressive" view of integration as part of each country's growth strategy. Otherwise, incentives for either inaction or "differentiation" are likely to dominate. This has been apparent in the recent experience of Mercosur.

32 Macroeconomic interactions in states of transition In order to move forward:perception that regional agreement can be an instrument to widen concrete productive opportunities for individual economies. It may involve outlining, at least implicitly, elements of a common development strategy. Identifying areas of complementarities between the economies (and, particularly, those that may strengthen the export potential of each economy towards third markets). Incentives to advance towards a deeper integration would emerge from the anticipated gains in taking advantage of those complementarities. The existence of a concrete long-run view may induce the emergence of specific demands for coordination, which would not otherwise appear.

33 Macroeconomic interactions in states of transition Disincentives to seriously engage in an exercise of progressive integration if participants are skeptical about the future performance of the others and unclear about the real effects of closer interaction. Project of deepening integration has large exit costs, in fact and by design. Willingness to make such an "irreversible investment" would depend on the expectation of gains large enough to offset the preference for flexibility. Conversely, governments would be reluctant to "undo" formally an already existent regional arrangement even if they have doubts about the future gains to be derived from it. Bias toward the statu quo may lead to stalemates, where integration remains stagnant and, in practice, is not assumed as a concrete joint project. Breaking this stalemate seems to require a long-run perspective.

34 Macroeconomic interactions in states of transition Search of a reasonably predictable, sustainable trend seems task of major macroeconomic significance for the economies. Crucial element for the prevention of crises: defining a path on which "permanent" levels of income and spending are reasonably well defined. Important both at national and regional levels.

35 Macroeconomic interactions in states of transition Willingness to make commitments seems to require some degree of confidence on the macro management of the partners and a certain commonality of views about macro strategies. "Strategic coordination" would then have to go in parallel (or before) "instrumental coordination. In the nineties, macro approaches and criteria of the Argentine and the Brazilian authorities were different, and this showed when one of the economies experienced difficulties. Afterwards: less asymmetry regarding monetary systems, and generalized shifts in fiscal policies to generate substantial primary surpluses. However, the general definition of policies and their design and implementation have remained strictly domestic businesses, and there remain visible differences in views on macro management..

36 Macroeconomic interactions in states of transition Macro interdependences: large movements in real exchange rates have caused significant spillovers. Sometimes cause for trade and investment frictions. However, forward-looking identification of sustainable intra-regional real exchange rates for policy purposes seems very difficult.

37 Macroeconomic cooperation in states of transition European analogy: argument that formal promises among regional partners can serve as commitment devices for national policies. Not obviously applicable in Mercosur, at least in (long) transition. Strengthening of public finances and low inflations have contributed to generate a certain confidence on macro policies over short horizons. Accumulation of reputation through observed performance a likely mechanism to extend those horizons. Suggestions that regional funds can provide first lines of defense against disturbances. Placing some actual resources under "regional" administration may establish a specific context for cooperation activities and signal the willingness to deal with the macroeconomic aspects of integration.

38 Concluding remarks Mercosur in a state of transition in several ways. Region has just emerged from a period of macroeconomic crises, but still difficult to identify the new trends. The trade patterns within the region have changed, and this has been a source of frictions. The crucial condition is likely to be whether the different countries come to perceive integration as a practical instrument for growth, in order to exploit concrete opportunities generated by proximity and specific productive complementarities. In addition, a progressive integration would appear to require the view that a process of continued development for a single country may be limited if the region as a whole does not advance. Otherwise, centrifugal forces and a sense that Mercosur has no clear economic purpose may prevail.

39 Concluding remarks Macroeconomic policies and behavior cannot be isolated from the general choices ahead. Macro imbalances contributed to induce the instabilities and the frustrations about the integration process. Main question ahead: not which could be the "macro components" of an ongoing integration project, but whether there will be a "common approach" to growth, which would include macroeconomics as an important part.

40 Concluding remarks Simple general logic for coordination: existence of macro spillovers would open "exchange opportunities" in policy-making and lead to concerted policy actions. But coordination activities will not happen automatically: there have to be investments in "mutual knowledge and confidence-building. Development of conditions for meaningful coordination related to search for more or less common vision of medium-term path of sustainable growth. A non-trivial task.

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