economic development and exchange rate policies
TRANSCRIPT
ECONOMIC DEVELOPMENT AND EXCHANGE RATE POLICIES
José Antonio Ocampo
Board Member, Banco de la República, Colombia
Presentation at the Banque de France,
Paris, February 14, 2019
THE TWO MAJOR ISSUES
Dynamic efficiency: scaling up towards activities with higher technological contents is the key to dynamic growth. Difficulties faced by natural-resource dependent economies in doing so.
Exchange rate policy plays an essential role in facilitating or hindering economic diversification.
Balance of payments dominance: cyclical fluctuations in external financing and the terms of trade limit the space to adopt countercyclical macroeconomic policies.
Active exchange rate management and capital account regulations help manage these cyclical swings without affecting long-term growth.
DYNAMIC EFFICENCY
DYNAMIC EFFICIENCY
Successful development is essentially a process of structural change. It depends on dynamics of production structures and related policies and institutions.
Basic issue: there may be a conflict between static (resource allocation) and dynamic efficiency (changes in the structure of production).
Analytical contributions of classical development economics, neo-Schumpeterian, structuralist and evolutionary economics: critical role of learning, externalities and economies of scale/agglomeration.
Disappointment with effects of more open economic policies on growth (e.g., Latin America).
SPECIALIZATION PATTERNS MATTER
Most countries that have failed in increasing market shares are exporters of primary goods and natural resource-intensive manufactures.
Non-dynamic markets face “fallacy of composition” effects (typical of commodity markets).
There are countries that have extracted fair growth out of a specialization pattern based on natural-resources or low-tech manufactures.
But most developing countries that have grown fast have been increasing market shares in mid or high-technology exports
The East Asian regional cluster has an effect on top of those captured by the patterns of export diversification (huge contrast with Latin America).
SPECIALIZATION PATTERNS MATTER (Ocampo-Parra)
Per capita GDP growth according to specialization pattern
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
High-tech
manufactures
Mid-tech
manufactures
Low-tech
manufactures
Natural
Resource
based
Pimary goods
1980-2006
1990-2006
SPECIALIZATION PATTERNS MATTER (Hausmann-Hwang-Rodrik)
e(
gro
wth
gdp
| X
,lexp
y19
92
) +
b*l
exp
y19
92
lexpy1992
Residuals Linear prediction
8.10487 9.83871
.31443
.429625
MDG
PRY
BGD
JAM
ECU
BOL LCA
LKA
COL
HTI
PER
KEN
IDN
BLZ
CHL
DZASAU
OMNTUR
TTO
IND
GRC
ROM
THA
CYP
CHN
HRV
PRT
MYS
BRA
HUN
AUS
MEX
ESP
KOR
NZL
SGP
NLD
CANUSADNKSWE
DEU
IRL
FINISL
CHE
MANUFACTURING IS CRUCIAL FOR RAPID GDP GROWTH
STRUCTURAL
TRANSFORMATION POLICIES
High quality infrastructure and education systems serve as basic “framework conditions”
Support for structural transformation of production Support for new industries and production clusters
Diversification of the export base
Domestic production linkages of exports and activities with FDI presence
Innovation systems that accelerate the development of technological capacities
And appropriate international rules / “policy space”
EXPORT STRATEGIES
Increasing market shares in sectors where a specific country has an established position.
Diversifying into higher technology products.
The first strategy is widely available. The second will be available only to a limited number of developing countries
Individual countries can succeed in any of these strategies, but as a group developing countries can only succeed if the demand is elastic (it may require developed countries losing market shares).
Different markets provide different opportunities (N-S, S-S with China at the center, intraregional).
Domestic markets may still be attractive!
STRONG SLOWDOWN OF INTERNATIONAL TRADE MAKES DOMESTIC/REGIONAL
MARKETS MORE ATRACTIVE
7,4%
3,7%
7,3%
3,1%
4,8%
3,2% 3,1%
2,4%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
1950-1974 1974-1986 1986-2007 2007-2018
Growth of world trade vs. world GDP
Exports GDP (market prices)
ANCHORED VS. SHALLOW INDUSTRIES
The development impact of the strategy of a given country depends on the capacity to capture a high or small share of the value added.
This is in a sense obvious and even tautological, as GDP is nothing else but “value added”
But can have broader implications, as those activities with limited value added (e.g., maquila) are likely to be footloose.
Unless the industries are firmly “anchored” in the domestic economy, their growth-enhancing capacity evaporates: “shallow” specialization.
A CRITICAL INSTRUMENT: NATIONAL DEVELOPMENT BANKS
Private finance unwilling to fund activities with uncertain returns, strong learning effects and externalities key for structural transformation and sustainable development.
Basic functions:
Provide counter-cyclical finance.
Support activities that lead structural transformation.
Deepen and improve financial markets for development-friendly instruments.
Support greater inclusion of small firms.
Finance global public goods (climate change).
NDBs should work very closely with private sector.
THE ROLE OF EXCHANGE RATES
Competitive and stable real exchange rates always play an essential role in the development of new production sectors. Large empirical evidence in this regard.
This role is stronger if we want to overcome two constraints: the possible rent-seeking effects of industrial policy, and limits imposed by international rules (lack of sufficient policy space).
At the same time, tax sectors with no learning spillovers or externalities.
This leads to effectively multiple real exchange rates: different real exchange rates for sectors with diverse spillovers, while maintaining the commitment of IMF members to avoid multiple exchange rates.
BALANCE OF PAYMENTS
DOMINANCE
BALANCE OF PAYMENTS DOMINANCE (1)
“Balance of payments dominance” refers to a macroeconomic regime in which short-term dynamics is determined by external shocks, positive or negative.
In developing economies, the major sources of commodity price cycles and procyclical external financing (including, possibly, sudden stops). Changes in export volumes may also play a role, but are generally less important.
The most important, and more difficult to manage are medium-term cycles, more than short-term volatility.
THERE IS STRONG EVIDENCE OF LONG-TERM COMMODITY PRICE CYCLES
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
1875 1900 1925 1950 1975 2000
Non-tropical super cycle Tropical super cycle
Metal super cycle
Super Cycle Components for Non-oil Subindices
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1875 1900 1925 1950 1975 2000
Non-oil total super cycle
Oil super cycle
Super Cycle Components for Non-oil and Oil Prices
STRONG COMMODITY PRICE FLUCTUATIONS HAVE CONTINUED
IN THE EARLY TWENTY-FIRST CENTURY
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
180,0
200
0m0
1
200
0m0
7
200
1m0
1
200
1m0
7
200
2m0
1
200
2m0
7
200
3m0
1
200
3m0
7
200
4m0
1
200
4m0
7
200
5m0
1
200
5m0
7
200
6m0
1
200
6m0
7
200
7m0
1
200
7m0
7
200
8m0
1
200
8m0
7
200
9m0
1
200
9m0
7
201
0m0
1
201
0m0
7
201
1m0
1
201
1m0
7
201
2m0
1
201
2m0
7
201
3m0
1
201
3m0
7
201
4m0
1
201
4m0
7
201
5m0
1
201
5m0
7
201
6m0
1
201
6m0
7
201
7m0
1
201
7m0
7
201
8m0
1
201
8m0
7
Commodity prices, 2000-2018 (CPB data, 2010=100)
Fuels Excluding fuels
VOLATITY OF PORTFOLIO FLOWS HAS PERSISTED….
0
50
100
150
200
250
300
350
400
450
2010 2011 2012 2013 2014 2015 2016 2017 2018
Portfolio flows towards developing countries
Emerging Asia Latin America Emerging Europe Africa and Middle East
… BUT THERE IS NO EVIDENCE OF A SUDDEN STOP … SO FAR
-25,0
-15,0
-5,0
5,0
15,0
25,0
35,0
45,0
55,0
65,0
75,01
2/2
01
4
03
/20
15
06
/20
15
09
/20
15
12
/20
15
03
/20
16
06
/20
16
09
/20
16
12
/20
16
03
/20
17
06
/20
17
09
/20
17
12
/20
17
03
/20
18
06
/20
18
09
/20
18
12
/20
18
Emerging Asia Latin America
Emerging Europe Africa and Middle East
USD Bill
BALANCE OF PAYMENTS DOMINANCE (2)
These cycles directly affect domestic spending, the growth of credit and asset prices…
… but they also reduce the margin for countercyclical macroeconomic policies, and even generate incentives to adopt procyclical policies.
Fiscal policies can always play a countercyclical role, but face strong economic and political economy pressures to turn procyclical.
With capital mobility, economic policy faces a strong undesirable trade-off between a procyclical monetary policy and a procyclical exchange rate policy.
The latter has strongly negative effects on economic diversification, both because of uncompetitive rates during booms (“Dutch disease” effects) and volatility.
THE DEBATE ON FISCAL RULES
Several rules are procyclical in their design (including the Maastricht rules), but others have the desirable countercyclical elements (Chile 2000, Colombia 2011)
In commodity-exporting countries, stabilization funds must be one of its instruments
In any case, there are strong procyclical pressures: Financing is procyclical (somewhat less in the case of
domestic bond markets)
Political economy: austerity during crisis generates strong pressures to spend during booms.
Countercylical policies can generate high deficits
In any case, since the work by Kaminsky, Reinhart and Végh, strong evidence that fiscal policies tend to be procyclical in the developing world.
THE DEBATE ON MONETARY AND FOREIGN EXCHANGE POLICIES (1)
The dominant vision: the optimal policy is inflation targeting with flexible exchange rates and free capital movements.
Fundamental problems with this view: Portfolio flows towards developing countries tend to be
procyclical.
In this context, countercyclical monetary policies may enhance the cyclical pattern of capital flows.
The domestic effects of exchange rate on domestic prices have the opposite sign to those generated by demand, generating an incentive to adopt procyclical monetary policies.
Through the effect on the domestic cost of foreign debts, exchange rate fluctuations also generate procyclical wealth effects.
THE DEBATE ON MONETARY AND FOREIGN EXCHANGE POLICIES (2)
Fundamental problems (cont.) For all these reasons, a countercyclical monetary policy
may not avoid overheating during booms and strong contractionary pressures during crises…
… together with procyclical exchange rate variations, that have negative effects on structural diversification (again, overvaluation during booms, volatility through the business cycle).
The policy response: Interventions in foreign exchange markets and reserve
accumulation = intermediate foreign exchange regimes.
Manage the capital account through regulation on capital flows and other “macroprudential” policies
In a sense, all desirable choices are in the interior of the Mundell triangle.
STRONG RESERVE ACCUMULATION HAS BEEN THE RULE SINCE THE ASIAN CRISIS
(Ocampo, 2017)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
198
0
198
1
198
2
198
3
198
4
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
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199
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199
8
199
9
200
0
200
1
200
2
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200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
Foreign exchange reserves by level of development(% of GDP)
Core OECD, excluding Japan
Japan
Upper middle income
Lower middle income, excluding China
China
Low income
Gulf countries
INTERMEDIATE FOREING EXCHANGE REGIMES HAVE BECOME MORE COMMON (1)
(Ghosh, Ostry y Qureshi, 2015)
0%
20%
40%
60%
80%
100%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Upper middle-income countries
Hard peg Peg to single currency Basket peg Horizontal band Crawling peg/band Managed float Independent float
INTERMEDIATE FOREING EXCHANGE REGIMES HAVE BECOME MORE COMMON (2)
(Ghosh, Ostry y Qureshi, 2015)
0%
20%
40%
60%
80%
100%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Lower middle-income countries
Hard peg Peg to single currency Basket peg Horizontal band Crawling peg/band Managed float Independent float
THERE IS ALSO A MORE FREQUENT USE OF CAPITAL ACCOUNT REGULATIONS
(Erten and Ocampo, 2017)
0,200
0,300
0,400
0,500
0,600
0,700
0,800
Capital Account Regulations, 1995-2015
FX-relatedregulations
Capital-outflowregulations
Capital-inflowregulations
Financial sectorrestrictions
IMPLICATIONS FOR THE ROLE OF CAPITAL ACCOUNT REGULATIONS IN THE
INTERNATIONAL MONETARY SYSTEM
Regulation of cross-border capital flows is an essential ingredient of global financial regulation, but it has not been recognized by G-20/FSB and OECD, partly by IMF.
It should be seen as an essential element of macroeconomic management in emerging economies, not as an “intervention of last resort”.
The major problems today are the management of the asymmetric monetary policies that the world economy may require, and the limitations on the use of the instrument in some free trade agreements.
So long as source countries are not active participants, capital account regulations will remain weak.
Countercyclical macroeconomic policies during booms are essential in all dimensions: fiscal, monetary and foreign exchange policy.
The latter means avoiding overvaluation and strong exchange rate volatility.
This can only be made consistent with countercyclical monetary policy with intermediate foreign exchange regimes and capital account management.
If countercyclical policies have not been adopted during booms, procyclical policies are unavoidable during crises.
HOW DO WE MANAGE BALANCE OF PAYMENTS DOMINANCE?
SUMMARY:
POLICY IMPLICATIONS
POLICY IMPLICATIONS
Combine strategies of structural transformation with countercyclical macroeconomic policies that help manage balance of payments dominance.
An essential element of both is an active exchange rate policy aimed at guaranteeing competitive and relative stable real rates.
Strategy of structural transformation may require effectively multiple real exchange rates, which implies taxing sectors that do not generate learning externalities.
Avoiding overvaluation and exchange rate volatility through the business cycle requires intermediate foreign exchange regimes and active capital account management
ECONOMIC DEVELOPMENT AND EXCHANGE RATE POLICIES
José Antonio Ocampo
Board Member, Banco de la República, Colombia
Presentation at the Banque de France,
Paris, February 14, 2019