ECONOMIC DEVELOPMENT AND EXCHANGE RATE POLICIES - José Antonio Ocampo Board Member, Banco de la República, Colombia Presentation at the Banque de ...
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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, 2019THE 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
3.5
3.0
1980-2006
2.5 1990-2006
2.0
1.5
1.0
0.5
0.0
High-tech Mid-tech Low-tech Natural Pimary goods
manufactures manufactures manufactures Resource
basedSPECIALIZATION PATTERNS MATTER
(Hausmann-Hwang-Rodrik)
Residuals Linear prediction
IRL
.429625
e( growthgdp | X,lexpy1992 ) + b*lexpy1992
CHN
KOR
SGP
TTO FIN
AUS CANUSA ISL
CYP NZL SWE
DNK
CHL HUN ESP NLD
GRCHRV
MYS
THAPRT DEU CHE
IND
PER BLZ
LKA
OMN ROM MEX
TUR BRA
BGD
IDN DZA
SAU
BOL LCA
JAM COL
ECU
PRY
KEN
MDG
HTI
.31443
8.10487 9.83871
lexpy1992MANUFACTURING 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
Growth of world trade vs. world GDP
8,0% 7,4% 7,3%
7,0%
6,0%
4,8%
5,0%
4,0% 3,7%
3,2% 3,1% 3,1%
3,0% 2,4%
2,0%
1,0%
0,0%
1950‐1974 1974‐1986 1986‐2007 2007‐2018
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
DOMINANCEBALANCE 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
Super Cycle Components for Non-oil Subindices Super Cycle Components for Non-oil and Oil Prices
0.4 0.8
0.3 0.6
0.2 0.4
0.1 0.2
0.0 0.0
-0.1 -0.2
-0.2 -0.4
-0.3 -0.6
-0.4 -0.8
1875 1900 1925 1950 1975 2000 1875 1900 1925 1950 1975 2000
Non-tropical super cycle Tropical super cycle Non-oil total super cycle
Metal super cycle Oil super cycle100,0
120,0
140,0
160,0
180,0
0,0
20,0
40,0
60,0
80,0
2000m01
2000m07
2001m01
2001m07
2002m01
2002m07
2003m01
2003m07
2004m01
2004m07
2005m01
2005m07
2006m01
2006m07
2007m01
2007m07
Fuels
2008m01
2008m07
2009m01
2009m07
2010m01
2010m07
2011m01
Excluding fuels 2011m07
2012m01
2012m07
2013m01
2013m07
2014m01
2014m07
2015m01
2015m07
Commodity prices, 2000‐2018 (CPB data, 2010=100)
STRONG COMMODITY PRICE
2016m01
2016m07
2017m01
FLUCTUATIONS HAVE CONTINUED
2017m07
2018m01
2018m07
IN THE EARLY TWENTY-FIRST CENTURYVOLATITY OF PORTFOLIO FLOWS
HAS PERSISTED….
Portfolio flows towards developing countries
450
400
350
300
250
200
150
100
50
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Emerging Asia Latin America Emerging Europe Africa and Middle East… BUT THERE IS NO EVIDENCE
OF A SUDDEN STOP … SO FAR
Emerging Asia Latin America
Emerging Europe Africa and Middle East
75,0
65,0
55,0
45,0
35,0
25,0
15,0
5,0
‐5,0
‐15,0
‐25,0
12/2014
03/2015
06/2015
09/2015
12/2015
03/2016
06/2016
09/2016
12/2016
03/2017
06/2017
09/2017
12/2017
03/2018
06/2018
09/2018
12/2018
USD BillBALANCE 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)
Foreign exchange reserves by level of development
(% of GDP)
50%
Core OECD, excluding Japan
45%
Japan
40% Upper middle income
35% Lower middle income, excluding China
China
30%
Low income
25%
Gulf countries
20%
15%
10%
5%
0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015INTERMEDIATE FOREING EXCHANGE
REGIMES HAVE BECOME MORE COMMON (1)
(Ghosh, Ostry y Qureshi, 2015)
Upper middle‐income countries
100%
80%
60%
40%
20%
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Hard peg Peg to single currency Basket peg
Horizontal band Crawling peg/band Managed float
Independent floatINTERMEDIATE FOREING EXCHANGE
REGIMES HAVE BECOME MORE COMMON (2)
(Ghosh, Ostry y Qureshi, 2015)
Lower middle‐income countries
100%
80%
60%
40%
20%
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Hard peg Peg to single currency Basket peg
Horizontal band Crawling peg/band Managed float
Independent floatTHERE IS ALSO A MORE FREQUENT USE
OF CAPITAL ACCOUNT REGULATIONS
(Erten and Ocampo, 2017)
Capital Account Regulations, 1995‐2015
0,800
0,700
FX‐related
regulations
0,600
Capital‐outflow
regulations
0,500
Capital‐inflow
regulations
0,400
Financial sector
restrictions
0,300
0,200IMPLICATIONS 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.
HOW DO WE MANAGE BALANCE OF
PAYMENTS DOMINANCE?
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.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, 2019You can also read
