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Universidade de Brasília Departamento de Economia STRUCTURAL CHANGE, MACRODYNAMIC CAPABILITY AND ECONOMIC PERFORMANCE IN LATIN AMERICA: THE CASE OF BRASIL.

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Presentation on theme: "Universidade de Brasília Departamento de Economia STRUCTURAL CHANGE, MACRODYNAMIC CAPABILITY AND ECONOMIC PERFORMANCE IN LATIN AMERICA: THE CASE OF BRASIL."— Presentation transcript:

1 Universidade de Brasília Departamento de Economia STRUCTURAL CHANGE, MACRODYNAMIC CAPABILITY AND ECONOMIC PERFORMANCE IN LATIN AMERICA: THE CASE OF BRASIL Joanílio Rodolpho Teixeira Department of Economics, University of Brasília (UnB)

2 The onset and aftermath of the debt crisis during the so- called "lost decade" of the eighties led many countries in Latin America to abandon the inward-oriented, state-led, development model that had been in place for the better part of four decades. In its place was substituted an outward-oriented model heavily reliant on market forces. Almost two decades latter the picture is mixed. Growth did not pick up as expected during the nineties, leading to increasing disappointment with market oriented reforms. Even Though things have improved in recent years, it is not clear to what an extent this is due to the international commodity boom more than to reforms finally paying off.

3 1.Fiscal discipline 2.Redirection of public expenditure priorities towards health, education and infrastructure 3.Tax reform including the broadening of the tax base cutting marginal tax rates 4.Unified and competitive exchange rates 5.Secure property rights 6.Deregulation 7.Trade liberalization of inward foreign direct investment; 8.Privatization 9.Elimination of barriers to direct foreign investment (DFI) 10.Financial liberalization Elements of the Washington Consensus

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5 High rates of interest Constraints and unrestrictions in the international financial market (Pendulum Policy) Inflow of foreign capital Expansion of foreign debt Expansion of Monetary base Expansion of the debt services Operations to sterilize (open market) money Expansion of National Debt Increasing risk of default and bankruptcy Lack of credibility Risks of speculative attacks Unrestrictions and Constraints in domestic Financial markets Stagnation Unemployment Recession Expectation of devaluation Deterioration of trade Balance Desacceleration of inflation Bubbles of consumption Overvaluation of Real Rate of exchange as nominal anchor Monetary policy Against the stream Limits of the Stabilisation Plan Based on the Exchange Anchor

6 Reestablishment of Competitive relative prices Improvements In the productive process Increasing productivity Improvements in income distribution Expansion of GNP Expansion of private savings Reduction of imports Better immersion In international Economic relations Devaluation of Real Reduction of Public expenses Controls of money Supply and bank’s Credits Expansion of the rates of interest Reduction of subsides Reduction of inflation Liberalization of foreign trade Brazilian Perspective of the Washington Consensus Expansion of Investment Expansion of Savings Reduction of Foreign debt Liberalization of Domestic markets Reforms of Public sector (privatization) Reduction of Private investments “Improvements” in the trade balance Expansion of exports PHASE I PHASE II

7 The figure shows a standard Swan diagram. We imagine a country with a pegged exchange rate and high capital mobility, so that interest rates are determined by the need to avoid rapid depletion of reserves, and in effect monetary policy is removed as a tool of stabilization. Thus the "expenditure level" policy variable on the horizontal axis is fiscal; glossing over many complications, we can simply think of it as the budget deficit. On the other axis we show an "expenditure composition" variable, the cost of production in our country relative to that abroad.

8 What Swan pointed out was that the nature of the difficulties facing a country depend on where in this space it resides. To see this, we draw two curves. One curve represents conditions under which the country has "internal balance"; as drawn, it is upward-sloping. The reason is that any rise in the country’s relative costs would tend to reduce exports, increase imports, and thus reduce employment; to compensate, to keep employment constant, the country would need to have a fiscal stimulus – a larger budget deficit. At any point to the right or below this internal balance curve, the economy will suffer from too much demand for its goods, and will experience inflationary pressures. At any point above or to the left, it will suffer from unemployment. The other curve shows conditions under which the country has "external balance". It slopes downward, because an increase in spending would other things equal increase the current account deficit; to offset this the relative cost of production in this country would have to fall. At any point below or to the left of the external balance curve, the country will have a current account surplus (or at least a deficit below what is really appropriate), at any point above or to the right an unacceptably high current account deficit.

9 These two curves define four "zones of economic unhappiness", shown in the figure; only at the point where the two curves cross is the economy without problems internal or external. (All happy economies are alike; each unhappy economy is unhappy in its own way). A country may have an external surplus or deficit; it may have unemployment or inflation. And by considering what kind of economic problems a country has, one gets a clue as to what kind of policy action is appropriate.

10 The IB curve reflects all combinations of the exchange rate (e) and domestic spending (C+ I + G) that generate the desired internal balance in the economy. Similarly, the EB curve shows all combinations of e and (C + I + G) that produce external balance(balance in the current account). The area below the IB curve indicates unemployment, and the area above the curve reflects inflation. The area below the EB curve reflects current account deficits and the area above the curve indicates current account surpluses.

11 Selected Indicators of the Brazilian Economy

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14 Innovation Saving Employment Consumption Liquid Assets Medium and Long Term assets Finance Investment Income / Production Structural Change Development 1 8 7 9 5 10 6 11 12 13 4 3 2 14 Monetary and Financial aspects of Macrodynamic Capability

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16 The current drawbacks in Lula’s administration prompt an impulse to answer a set of(im)pertinent questions regarding the scope of policies for emerging economies: i) Why do the administrators of the Financial system deliver the same medicine to each ailing developing country? ii) Is it the case that policies are only introduced if they are in the interests of the domestic oligarchy who will retain wealth and privilege whatever external policies are proposed? iii) Why do orthodox packages of structural adjustment systematically bring about recession, unemployment and further polarization of income and wealth in countries with basically no social safety nets to protect ordinary people? iv) Why is it that the financial system is so fiercely protected in its speculative operations around the world? v) Are the conventional policies implemented because it is believed they really overcome crisis in developing countries or they are mainly designed to benefit financial interest in advanced industrial world? THE DAUNTING TASK AHEAD

17 vi) Why, in theory, do the financial monarchs support democratic institutions when, in practice, they undermine democratic process by imposing imprudent policies that hurt the ordinary people and lead to social turmoil and democratic setbacks? vii) Why the adjustment crusade for “internal balance” (fiscal responsibility) and “external balance” (current account equilibrium) is always pushing for the reduction of real wages but rarely questions military and propagandist expenses? viii) Why to enforce conventional measures to protect copyrights licensing, designs and pattern laws, misconceived to the extent that they attempt to confine knowledge to limited frontiers, instead of stimulating technological diffusion, worldwide efficiency and higher welfare in developing countries? ix) Finally, what should be a fair fiscal instance on developing countries in face of recession or economic downturn? There is some skepticism in the air but as Gramsci (1971, p. 374) used to consider, “if the skeptic takes part in the debate, it means that he thinks that he can convince people. That is, he is no longer a skeptic, but represents a positive opinion, which is usually bad and can triumph only by convincing the community that other opinions are even worse, because useless”. In other words, the choice to accelerate actions towards resource creation with a human face is gloomy. Above all, banking institutions are more dangerous nowadays to Brazil’s socio.economic progress than standing armies.


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