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REGIONAL INTEGRATION IN THE AMERICAS: REGIONAL INTEGRATION IN THE AMERICAS: THE IMPACT OF THE GLOBAL...
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REGIONAL INTEGRATION IN THE AMERICAS: REGIONAL INTEGRATION IN THE AMERICAS: THE IMPACT OF THE GLOBAL ECONOMIC CRISIS THE IMPACT OF THE GLOBAL ECONOMIC CRISIS A Role for Regional Integration Agreements A Role for Regional Integration Agreements in the Architecture of International Finance? in the Architecture of International Finance? José María Fanelli CEDES & MERCOSUR Research Network Woodrow Wilson International Center for Scholars November 23, 2009
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Transcript of REGIONAL INTEGRATION IN THE AMERICAS: REGIONAL INTEGRATION IN THE AMERICAS: THE IMPACT OF THE GLOBAL...
REGIONAL INTEGRATION IN THE AMERICAS: REGIONAL INTEGRATION IN THE AMERICAS: THE IMPACT OF THE GLOBAL ECONOMIC CRISISTHE IMPACT OF THE GLOBAL ECONOMIC CRISIS
A Role for Regional Integration Agreements A Role for Regional Integration Agreements in the Architecture of International Finance?in the Architecture of International Finance?
José María FanelliCEDES & MERCOSUR Research Network
Woodrow Wilson International Center for Scholars November 23, 2009
(I)(I)
Volatility and Crises Matter in LA and Volatility and Crises Matter in LA and the pre-crisis IFA was not effective at the pre-crisis IFA was not effective at
reducing volatilityreducing volatility
Aggregate volatility is substantially higher than in developed
countries
Consumption is usually more volatile than income, and investment volatility is high as compared to international standards
Crises have been frequent. Several countries experienced at least one important crisis in the “Second Globalization” period but the frequency of these crisis occurrences differs
The simultaneous occurrence of financial and real shocks (for example, interest rate and terms of trade shocks) compounds the size of growth collapses
Excess volatility in Latin America: some stylized facts Excess volatility in Latin America: some stylized facts
Latin America: initiating accelerations and collapses
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Accelerations
Collapses
The Latin American region is particularly sensitive to financial shocks: more The Latin American region is particularly sensitive to financial shocks: more frequent collapses in 1981, 1998-2000 frequent collapses in 1981, 1998-2000
The Debt Crisis
The Russian/Argentine Crises
Sudden stops and large trade shocks occur frequentlySudden stops and large trade shocks occur frequently. . Example, LAC-7Example, LAC-7
1980-861986-88;1998;
2002-03Venezuela
1981-86; 1997-99
2001-04Perú
1998-20021983;1985;
2002-04Colombia
1982-85; 1994-97
1986;1992-94; 2003
México
1981-86; 1998-2000
1985-86; 2002-03
Chile
1981-851986;1999-2003Brasil
1980-84;1994-96; 1998-2004
1986-87; 1993; 2002-03
Argentina
Sudden stopsCrunches de
Comercio
1980-861986-88;1998;
2002-03Venezuela
1981-86; 1997-99
2001-04Perú
1998-20021983;1985;
2002-04Colombia
1982-85; 1994-97
1986;1992-94; 2003
México
1981-86; 1998-2000
1985-86; 2002-03
Chile
1981-851986;1999-2003Brasil
1980-84;1994-96; 1998-2004
1986-87; 1993; 2002-03
Argentina
Sudden stopsCrunches de
ComercioTrade Shocks Sudden Stops
Brazil
Mexico
Peru
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90
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110
120
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140
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1980=
100
Boom de financiamiento Sudden stops PBI per capita
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1980=
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Boom de comercio Crash de comercio PBI per capita
70
80
90
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120
130
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1980=
100
70
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90
100
110
120
130
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1980=
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A sA simultaneous sudden stop and trade collapse. Example: Argentinaimultaneous sudden stop and trade collapse. Example: Argentina
SUDDEN STOP + TRADE COLLAPSE
Large capital inflows Sudden Stop Per Capita GDP
SUDDEN STOP + TRADE COLLAPSE
Per Capita GDPTrade boom Trade collapse
Financial stress, associated with sudden changes in risk aversion and domestic de-
leveraging, causes strong output losses and has long-lasting deleterious effects on the aggregate investment rate
Currency and term mismatches play a role in nurturing financial disequilibria
The government acts as insurer of last resort and the fiscal imbalances provoked by the bailout of the banking system tends to erode public debt sustainability and affects political legitimacy
The authorities are unable to implement appropriate anti-cyclical policies in a context in which capital flows behave pro-cyclically
The resources that international financial institutions (IFIs) provided to counterbalance capital outflows and ease the credit crunch in the past did not suffice to significantly smooth aggregate fluctuations
More often than not, the conditionality attached to the funds did not help, either
Weaknesses of the pre-crisis IFA from the LA point of view Weaknesses of the pre-crisis IFA from the LA point of view
(II)
Volatility and a weak IFA provided Volatility and a weak IFA provided incentives for incentives for
self-insurance self-insurance in the 2000sin the 2000s
A number of emerging countries that experienced episodes of financial stress and sudden stops in the 1980s and 1990s adopted a self-insurance strategy in the period prior to the international crisis
The widespread use of self-insurance strategies has fed global imbalances
Some examples:• Argentina• Chile• Brazil• Korea• Indonesia• Thailand• Russia
Self-Insurance in the Emerging Economies
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Bil
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SD
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% G
DP
Total Reserves (left)
% GDP (right)
Argentina
Growth Collapse + Investment drop + Increase in savings
-6
-4
-2
0
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% G
DP
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dI
S-I
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% G
DP
dS
dI
S-I
0
50
100
150
200
250
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Bil
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n U
SD
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% G
DP
Total Reserves (left)
% GDP (right)
Brazil
Growth Collapse + Investment drop + Increase in savings
-8
-6
-4
-2
0
2
4
6
8
199
0
199
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199
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200
1
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8
% G
DP dS
dI
S-I
0
5
10
15
20
25
19
91
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92
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95
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Bil
lio
n U
SD
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20
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30
% G
DP
Total Reserves (left)
% GDP (right)
ChileGrowth Collapse + Investment drop + Lagged increase in savings
0
50
100
150
200
250
300
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SD
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35
% G
DP
Total Reserves (left)
% GDP (right)
Korea
Growth Collapse +Investment drop + Increase in savings
-15
-10
-5
0
5
10
15
199
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199
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% G
DP
dS
dI
S-I
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10
15
20
25
19
91
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Bil
lio
n U
SD
0
2
4
6
8
10
12
% G
DP
Total Reserves (left)
% GDP (right)
Mexico
Growth Collapse + Increase in savings
-8
-6
-4
-2
0
2
4
6
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
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199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
% G
DP dS
dI
S-I
0
1E+11
2E+11
3E+11
4E+11
5E+11
6E+11
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
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01
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Bill
ion
US
D
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30
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% G
DP
Total Reserves (left)% GDP (right)
Russia
Growth Collapse + Investment drop + Increase in savings
-20
-15
-10
-5
0
5
10
15
20
199
1
199
2
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% G
DP
dS
dI
S-I
Self-insurance might hinder global recovery. The continuous generation of trade surpluses contributes to the preservation of the existing global imbalances:
Δ Trade Surplus - Δ Imports
Self-insurance is a sub-optimal response from the national economy point of view: valuable savings are diverted from productive investment:
- Δ investment - Δ Imports
Excess volatility and crises create incentives for self-insurance; hence, mechanisms to smooth the cycle and reduce vulnerability should be placed at center stage
The role of the IFA is to prevent the occurrence of global coordination failures associated with liquidity provision, pro-cyclical capital flows, and flawed regulations
The reform should be conceived as an institution-building exercise to be undertaken at the national, regional, and multilateral levels
Regional agreements can be instrumental at facilitating the reform of the IFA.
Global failures and the reform of the IFA Global failures and the reform of the IFA
Regional Agreements can play a significant role in sustaining and promoting international trade in a world in which trade is not dynamic and beggar-thy-neighbor policies are a threat
Regional Agreements can provide the framework for coordination and institution building, in particular with regard to:
- The design of mechanisms to manage international liquidity, reducing the costs of and incentives for self-insurance
- The cooperation concerning the design and implementation of standards and codes
- The reduction of macro volatility via the coordination of macroeconomic policies
The role of Regional Agreements in the mitigation of global imbalances
(III)
A stability-friendly IFA and the possible contribution of Regional
Agreements:
An Exercise in Institution Building
REGIONAL
AGREEMENTS
FINANCIAL INFRASTRUCTURE•Legal and Judicial Infrastructure•Regulatory Framework•Policies and Practices Affecting Financial Sector• Corporate Governance
MACROECONOMIC REGIME •Exchange Rate Regime •Capital Account Regime•Monetary Regime •Capacity to Manage
National risk
• G20 • International Financial Institutions • FSB (Standards &Codes, New Mandates) • Criminality, Tax Havens, Off Shore Centers
DFA
IFA
Institution building is difficult in LA economies and recommendations about standards and codes produced by the FSB or policies pushed by IFIs will not be enough
The regional level can act as an intermediate step to articulate national and multilateral efforts: Three LA countries are members of the G20, two of them also belong to MERCOSUR
Regional arrangements can supply key regional public goods. Lack of success in providing these public goods will result in suboptimal, probably unstable, unilateral solutions
A blueprint and appropriate context-dependent strategies for institution building and enforcement are needed and regional arrangements can contribute to “internalizing” FSB and G20 recommendations, building a sense of policy ownership
Building the rules of the game after the crisis: the regional Building the rules of the game after the crisis: the regional dimensiondimension
Regional Agreements can provide the framework for institution building concerning three pillars: Liquidity assistance + Monitoring and surveillance + Exchange rate coordination.
The emphasis should be on:
- The design of mechanisms to manage international liquidity, reducing the costs of and incentives for self-insurance; example: the Chiang Mai Initiative, the FLAR- The reduction of macro volatility via the coordination of macroeconomic policies
Regional partners should cooperate concerning:
- The implementation of instruments that encourage more stable private flows (counter-cyclical guarantees); explicit introduction of counter-cyclical criteria in the design of prudential regulatory and supervisory frameworks; - Market-mechanisms that can better distribute the risk throughout the business cycle in the member countries (GDP-indexed and local currency bonds?)
An evolutionary approach to institution building can help (Swap Arrangements, Bonds Markets)
Building the rules of the game after the crisis: the regional dimension
Regional Agreements can play a significant role in sustaining and promoting international trade in a world in which:
- Trade is not dynamic and beggar-thy-neighbor policies are a threat- Unilateral initiatives, such as aggressive exchange rate policies can
harm intra-regional trade in existing regional agreements
Political legitimacy matters for institution building: The goal of mobilizing resources for development must be part and parcel of the strategies to strengthen the banking sector and capital markets. Example: strengthening regional development banks
Institutional mechanisms should be designed at the regional level to mobilize the resources of countries that are generating a structural surplus. Example: initiatives to increase regional financial integration
Building the rules of the game after the crisis: the regional dimension
Thank you!Thank you!
José María Fanelli José María Fanelli
