Diversification and Macro Policy Coordination Challenges: An Illustration with the Experience of Argentina 23-214 Columbia IPD and Renmin University of China Conference Beijing August 29, 215
Motivation Two big issues: Diversification How can natural resource rich-economies escape from Dutch diseases and promote economic development? Exploitation of learning spillovers How can they develop non-resource tradable sectors with larger learning spillovers, that also incorporate the labor force in the functioning of the system?
Real Exchange Rate Policies Role of RER Policies for Economic Development (Guzman-Ocampo-Stiglitz 215) Challenges Illustration: The Case of Argentina 23-214 (Guzman-Reyes 214)
The Case for Stable and Competitive RER Policies In the presence of learning spillovers, free markets would provide suboptimal solution Under-investment in sectors associated with spillovers If those sectors could be perfectly identified, if it was possible to implement direct subsidies, and if there were no political economy problems that affected the determination of subsidy policies, then there would exist a set of taxes, subsidies, and transfers that would be Pareto-efficient But if those conditions are not present, there is a role for Stable and Competitive RER Policies
The Case for SCRER Policies SCRER policy can enhance economic diversification through two main channels: It makes investment in the tradable sector more profitable It makes investment in the tradable sector less uncertain Growing literature shows that long-term growth is positively associated with the capacity to guarantee a competitive exchange rate
The Case for a Competitive RER Channeling the benefits to the right sectors Competitive RER policies also benefit the traditional export sectors Exchange rate policy alone may fail to encourage diversification Taxes of traditional commodity production (including export taxes) should be part of the policy package Creating de facto a system of multiple effective exchange rates
The Case for a Competitive RER Channeling the benefits to the right sectors General proposition: sectors with negative externalities or with less learning spillovers should be more heavily taxed This tax policy channels the benefits to the right sectors, and generates the revenues for running industrial policies that are complementary of SCRER policies Industrial policies as provision of credit to non-resource sectors (possibly through development banks), investments in infrastructure, education, and R&D, that would increase the elasticity of the aggregate supply to the RER
Policy Coordination challenges SCRER must be continued until the infants grow Continuity of SCRER requires coordination with fiscal and monetary policies Unsustainable macro policies could create inflationary pressures, that would affect RER stability and would make the RER less competitive
The economy in 22 GDP growth rate: -1.9% Unemployment rate 2% Utilization of capital 55% Large devaluation not followed by proportional pass-through competitive RER
23-27 Competitive RER Boosts exports Hence it boosts employment Amplification effects through recovery of aggregate consumption Demand-led growth strategy No inflationary pressures due to excess of supply capacity
28-211 International conditions get worse (global financial crisis) Persistence of demand-led growth strategy Strategy centered on consumption, not investment Common argument from policymakers: demand determines productivity growth (supermultiplier) No evidence in favor of a supermultiplier; if it existed, there would never be a binding budget constraint Inconsistencies appear to reveal Looming bottlenecks in energy sector Private capital outflows Attacked through exchange rate controls Exchange rate and public utilities used as nominal anchors
212-onwards Inconsistencies reveal at increasing pace Demand did not create equivalent supply Outcomes: Inflationary pressures Real exchange rate appreciation Exports stagnate GDP growth declines Falling foreign reserves Return to stop-and-go pattern Overall, no significant structural transformation Economy still not diversified; high dependence on soy beam exports
GDP (current international $, in millions) Growth (in %) GDP: levels and growth rates 6, 23-27: 8.8 12 5, 8.8 9. 9.2 8.5 8.7 1 4, 8 3, 6 2, 4 1, 2 23 24 25 26 27 28 29 21 211 212 213
GDP (current international $, in millions) Growth (in %) GDP: levels and growth rates 6, 23-27: 8.8 28-211: 6.4 12 5, 8.8 9. 9.2 8.5 8.7 9.2 8.9 1 4, 3, 6.8 8 6 2, 4 1,.9 2 23 24 25 26 27 28 29 21 211 212 213
GDP (current international $, in millions) Growth (in %) GDP: levels and growth rates 6, 23-27: 8.8 28-211: 6.4 212-213: 2.4 12 5, 8.8 9. 9.2 8.5 8.7 9.2 8.9 1 4, 3, 6.8 8 6 2, 3. 4 1,.9 1.9 2 23 24 25 26 27 28 29 21 211 212 213
Consumption (current international $, in millions) Growth (in %) Consumption: levels and growth rates 3, 23-27: 8.6 28-211: 6.6 212: 4.4 12 1.7 25, 9.5 8.9 9. 9. 1 2, 8.2 7.8 8 6.5 15, 6 4.4 1, 4 5, 2 23 24 25 26 27 28 29 21 211 212.5
In % of GDP Gross Domestic Fixed Investment: levels and composition 35 3 Machinery and equipment Construction Material transport Total investment 25 2 18 2 22 23 15 14 1 5 23 24 25 26 27 28 29 21 211 212
In % of GDP Gross Domestic Fixed Investment: levels and composition 35 3 Machinery and equipment Construction Material transport Total investment 25 2 18 2 22 23 23 21 23 24 15 14 1 5 23 24 25 26 27 28 29 21 211 212
In % of GDP Gross Domestic Fixed Investment: levels and composition 35 3 Machinery and equipment Construction Material transport Total investment 25 2 18 2 22 23 23 21 23 24 23 15 14 1 5 23 24 25 26 27 28 29 21 211 212
Share of unemployed (in % of labor force) 2 21 22 23 24-I 24-II 25-I 25-II 26-I 26-II 27-I 27-II 28-I 28-II 29-I 29-II 21-I 21-II 211-I 211-II 212-I Duration of unemployment (in months) Unemployment: Rates and Duration 2-3.9% 14 12 15 1 8 1 6 5-44.5% 4 2
Share of unemployed (in % of labor force) 2 21 22 23 24-I 24-II 25-I 25-II 26-I 26-II 27-I 27-II 28-I 28-II 29-I 29-II 21-I 21-II 211-I 211-II 212-I Duration of unemployment (in months) Unemployment: Rates and Duration 2-3.9% +7.6% 14 12 15 1 8 1 6 5-44.5% 4-21.4% 2
Utilization of installed capacity (in %) Utilization of capital 69.7 72.8 73.7 74. 64.9 +13.9% Average 23-27: 71. 23 24 25 26 27 28 29 21 211 212 213
Utilization of installed capacity (in %) Utilization of capital 69.7 72.8 73.7 74. 74.8 72.8 77.7 78.8 64.9 +13.9% +6.4% Average 23-27: 71. Average 28-211: 76. 23 24 25 26 27 28 29 21 211 212 213
Utilization of installed capacity (in %) Utilization of capital 69.7 72.8 73.7 74. 74.8 72.8 77.7 78.8 74.5 72.7 64.9 +13.9% +6.4% -7.7% Average 23-27: 71. Average 28-211: 76. 212-213: 73.6 23 24 25 26 27 28 29 21 211 212 213
In % of GDP Public Spending 4 35 3 25 Consumption expenditure Figurative rates 25.1 24.1 23.8 26.2 Government investment Total Government spending 28.4 24.7 23.3 3.1 31.7 35.7 2 15 1 5 23 24 25 26 27 28 29 21 211 212
In millions of pesos Growth (in %) Money Supply 5, 45, 4, Monetary base Money supply Money supply annual growth rate (right axis) 48.2 6 5 35, 4 3, 25, 2, 15, 24.1 25.1 22.8 17.9 12.8 22. 32.9 32.7 3. 3 2 1, 1 5, 23 24 25 26 27 28 29 21 211 212 213
CPI inflation rate (in %) Inflation 45 4 Private estimations 23-27 11.7 9.7 Official inflation 35 3 25 2 15 1 5 23 24 25 26 27 28 29 21 211 212 213
CPI inflation rate (in %) Inflation 45 4 35 Private estimations 23-27 11.7 9.7 28-211 22.5 8.8 Official inflation 3 25 2 15 1 5 23 24 25 26 27 28 29 21 211 212 213
CPI inflation rate (in %) Inflation 45 4 35 Private estimations Official inflation 23-27 11.7 9.7 28-211 22.5 8.8 212-213 24.2 1.3 3 25 2 15 1 5 23 24 25 26 27 28 29 21 211 212 213
In % Interest Rates 5 Nominal interest rate CPI Inflation rate Real interest rate 23-27 7.2 11.7-9.7 4 3 2 1-1 23 24 25 26 27 28 29 21 211 212 213-2 -3
In % Interest Rates 5 4 Nominal interest rate CPI Inflation rate Real interest rate 23-27 7.2 11.7-9.7 28-211 12.4 22.5-8.8 212-213 15.8 24.2-1.3 3 2 1-1 23 24 25 26 27 28 29 21 211 212 213-2 -3
Real exchange rate (Index 23 = 1) Real Exchange Rate 18 16 Official Real Exchange Rate Private estimations 14 12 1 8 1 113 93 6 4 2 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213
Real exchange rate (Index 23 = 1) Real Exchange Rate 18 16 Official Real Exchange Rate Private estimations 14 12 1 1 126 8 6 65 4 2 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213
Real exchange rate (Index 23 = 1) Real Exchange Rate 18 16 Official Real Exchange Rate Private estimations 15 14 12 1 1 8 6 61 4 2 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213
Share in total taxes revenue (in %) Composition of Taxes Income and capital gains tax Property tax Domestic goods and services On international trade Social security Provincial taxes 17.7 15.2 19.2 4.8 13. 11.7 41.4 32.9 2.5 14.4 8. 19.3 1993-22 23-27 28-211 212
In millions of US$ Foreign Reserves 6, 5, +361% 4, 3, 2, 1, Average: 23-27: 23,517 M 23 24 25 26 27 28 29 21 211 212 213
In millions of US$ Foreign Reserves 6, +.5% 5, +361% 4, 3, 2, 1, Average: 23-27: 23,517 M 28-211: 48,568 M 23 24 25 26 27 28 29 21 211 212 213
In millions of US$ Foreign Reserves 6, 5, +361% +.5% -33.4% 4, 3, 2, 1, Average: 23-27: 23,517 M 28-211: 48,568 M 212-213: 41,856 M 23 24 25 26 27 28 29 21 211 212 213
Index (24 = 1) Exports and Terms of Trade 21 Exports price Exports quantiy Terms of trade 19 17 15 13 11 9 7 In the last six years, the volume of exports has barely moved 5 2 21 22 23 24 25 26 27 28 29 21 211 212 213
Conclusions SCRER sets (some of) the necessary conditions for diversification of the resource sector But a successful implementation requires some conditions Coordination with other macro policies is one of them Lack of coordination may impede the continuation of SCRER for the period of time that the infants need to grow The recent Argentina experience is an example of a SCRER that could not be continued