From Financieristic To Real Macroeconomics: Seeking Development Convergence In Ees

Abstract

There is a broad consensus that macroeconomic “fundamentals” are a most relevant variable to enhance economic development. However, there is wide misunderstanding about (i) which are the “sound macroeconomic fundamentals", contributing to a sustained high economic growth, and (ii) how to achieve and sustain them. The approach that has been in fashion in the mainstream world and IFIs emphasizes macroeconomic balances of two pillars: low inflation and fiscal balances. We call it financieristic macroeconomic balances. Additionally, a frequent assertion in the more recent conventional literature is that an open capital account contributes to impose macroeconomic discipline in EEs. Indeed, this approach assumes, frequently implicitly, that full opening of the capital account automatically generate an aggregate demand consistent with productive capacity. That approach implies a clear omission of the overall macroeconomic environment for producers, which includes other most influential variables such as consistency of aggregate demand with potential GDP, and interest and exchange rates. As a consequence, in many emerging economies (EEs) “a sound macroeconomics” (low inflation and fiscal discipline) is observed, in parallel with slow growth and high unemployment of labor and of productive capital resulting from unstable aggregate demand and outlier interest and exchange rates. The standard approach evidently includes other ingredients, but assumes, that the hard, relevant, proof is in fulfilling those two pillars. The belief is that that couple leads to achieving productive development if the economy is liberalized. There is strong evidence that financial macroeconomic balances have provided a macroeconomic environment that has not contributed to a high and sustained growth. A third pillar must be added, linked to the productive side of the economy. The behavior of aggregate demand, at levels consistent with potential GDP (productive capacity or production frontier), is a crucial part of a third pillar of real macroeconomic balances, which has frequently failed in neo-liberal experiences. Similarly, are well-aligned macro-prices, like interest and exchange rates. Frequently, these prices and aggregate demand have behaved as outliers (out-of-equilibrium), as reflected in economies working either below potential GDP (the most frequent result), or overheated, with a booming aggregate demand and a large external deficit. This article will widen the view on macroeconomic balances by taking into account the macroeconomic incentives faced by firms and workers in the productive side of the economy (the producers of GDP), and the inter-relationship between financial and real variables. We analyze alternative structural countercyclical fiscal policies, intermediate exchange rate policies, and capital account approaches.