From “Financieristic” to Real Macroeconomics

The successful control of inflation and budget deficits has been a generalized trend among Latin America Countries (LAC) in the last two decades. However, this achievement has not mirrored in comparable advances in other economic and social areas in that period. Growth rates in these countries has been diverging from developed economies, worsening its already-unsatisfactory social indicators. One of the main causes of this poor performance is the absence of a comprehensive approach to macroeconomics, beyond the emphasis in inflation and government deficits. The consideration of the real side of the economy has been underscored in LAC. This paper stresses that macroeconomic policies must go beyond the “financieristic approach” by incorporating a productive point of view. Thus, efficient macroeconomic policies should contribute to: i) raise the use of the available productive capacity; ii) foster capital formation; and iii) increase productivity by improvements in factors quality and allocation efficiency. These policies will make a more efficient contribution to economic development when: i) the impact over productive development is taken into account; ii) macroeconomic as well as social balances are integrated at the same level; and iii) the implied trends resulting from policies are sustainable in time. All over the paper, the experience of Latin American countries is taken as a paradigmatic case representative of a “financieristic approach” to macroeconomic policy-making. In the first part of the study, the mainstream view is reviewed. Its emphasis in inflation and fiscal balances, though historically justified in LAC, tends to omit the overall macroeconomic environment for producers. This includes other decisive variables such as aggregate demand, interest rates and exchange rates. An alternative approximation towards macroeconomic balances should embrace a third pillar named the productive side of the economy. Efforts must be oriented to reach a high rate of utilization of productive capacity, avoiding sharp stop-and-go settings that inevitably means lower average use of factors and lower average productivity. Volatility characterizing LAC adds extra complications, since there is an asymmetry in the business cycle: while the production frontier poses a limit to recovery of actual GDP, only temporarily actual GDP can exceed potential GDP by small margins, in recessive situations actual GDP can exhibit huge gaps with the frontier. This connects with the second part of the paper in which the causes of real volatility are studied. In emerging economies external shocks have tended to be a primary source of macroeconomic fluctuations. Main transmission channels include: export prices fluctuations, international interest rates shocks, and swings in financial flows. While these variables can be characterized as exogenous, the exposure of each country to these shocks and the amplitude of their effects are largely determined by domestic factors. The final section analyzes the role played by short-term segments of financial markets. The contrast between Latin America and developed countries plus newly industrialized economies is evident. The first group of countries has experienced the predominance of financial investment oriented to speculation over productive activity, and the crowding-out of domestic savings by external savings. Policymakers should ensure that the volume of inflows is consistent with the absorptive capacity of the host country. The failure to address this point is at the core of recent macro-instability in LAC. Absorption capacity must refer to both the use of existing productive capacity and to the creation of new one. The composition of flows is also relevant on three dimensions. First, greenfield FDI (that excludes acquisitions) feeds directly into capital formation (usually intensive in imported capital goods). Second, volatile flows tend to impact more directly on foreign exchange and financial assets and real estate markets; they carry a weaker association to capital formation. Third, temporary capital surges tend to leak into consumption, due to the faster release of liquidity constraints and faster capacity of consumers to react as compared to the lagged response of productive investment. In this context, capital account regulations may perform as a prudential macroeconomic tool, working at the direct source of boom-bust cycles: that is, volatile capital flows. They provide room for action during periods of financial euphoria, through the adoption of a contractionary monetary policy and reduced appreciation pressures. If effective, they will also reduce or eliminate the usual quasi-fiscal costs of sterilized foreign exchange accumulation. What is extremely relevant is that, in the other corner of the cycle, of binding external constraints, they may provide space for expansionary monetary and fiscal policies.