Challenges for Macroeconomic Policy
A greater effort to understand the structural situation, eliminating the transitory effects of the business cycle and other associated factors, can help guide policy decisions. Many indicators, such as fiscal balances, debt-to-GDP ratios and credit ratings, tend to be very pro-cyclical as they are influenced by economic growth, commodity prices and real exchange rates.24 It is therefore important not to give excessive weight to the “success” of purely domestic factors and to maintain a prudent perspective on the duration of the favourable context, which allows rebuilding policy space.
In designing fiscal stabilisation policies in Latin America it is necessary to differentiate between normal shocks, which induce stationary fluctuations around a trend, and extraordinary shocks, which are long-lasting and may have irreversible effects. One obstacle to designing fiscal measures for exceptional events is that measures for dealing with non-stationary shocks, and due to the weakness of automatic stabilisers in the region, must have a significant degree of discretionarily. In the case of a non-stationary event, it is impossible to know beforehand precisely how the trend will evolve —much less how the economic structure and its forms of governance may change as a result of the shock.25 Thus, it is important to distinguish between strictly counter-cyclical policies and macroeconomic adjustment policies. The former aim to counter temporary shifts away from the current trend; the latter manage the consequences of permanent shocks through changes in rules. The objective may be to structurally reduce excessive volatility, or (in the case of multiple equilibriums) to co-ordinate decisions in order to put the economy in an equilibrium that is considered superior to another.26
For commodity export economies, similar arguments also apply to the fluctuations in prices of international exports. The recent international financial crisis has revealed the importance of fiscal policy as a tool for macroeconomic stabilisation. Most countries, including those that recorded positive rates of growth in 2009, have tried to combat the recession with larger fiscal deficits; this has in part been generated by automatic stabilisers, but primarily through the application of discretionary measures due to the weakness of the former in the region. This has allowed for a growing consensus on the legitimacy of applying transitory fiscal deficits as tools for macroeconomic stabilisation in periods of sharp decline in demand. Once the emergency is over, the strategies to exit the crisis must include goals for sustainable public debt that are consistent with the public investment and social policies required to accelerate progress towards sustainable development.27
Clear counter-cyclical fiscal rules can help to reduce aggregate volatility and expand the tax base to increase spending and social investment needed to reduce inequality in the region. It is important not to reduce fiscal policy to mere quantitative control over public accounts (public debt, spending and deficit) so that the impact of public finances on crucial development objectives is not forgotten. The links between quantitative and qualitative aspects of fiscal policy must also be incorporated in the quality of public finances with the aim of ensuring the effective and efficient use of public resources.28
The credibility of fiscal policy must be reaffirmed, given the region’s vulnerability of public finances to the economic and social situation and its institutional and political limitations. A tendency towards excessive discretionality must be avoided, and a limited and responsible discretionality encouraged. Nevertheless, recent experiences show that when rules are rigid and not adjusted to the economic cycle, they often end up being difficult to implement and therefore have little credibility. A recommended guiding principle on fiscal policy is the use of the structural balance indicator to complement effective balances. A temporary co-existence between fiscal deficits and macroeconomic stabilisation is part of a medium-term strategy that takes into account the performance of social indicators and productive development, giving more weight to goals related to structural balance than to current effective balance. In addition, reality has shown that there are exceptional circumstances in which active discretionary policies are justified. The goal of any macro-fiscal rule must be to achieve structural balance (or balance in public debt) in the medium-term (sub-national governments included); it must also contain escape clauses and transition periods for significant macroeconomic fluctuations. Although fiscal rules do not assure per se fiscal credibility and solvency, if they have enough credibility and are part of a country’s fiscal architecture, they can become powerful counter-cyclical tools. For this to happen, it is important to develop mechanisms that institutionalise counter-cyclical fiscal policies in the face of excessive fiscal discretion during periods of prosperity.29
Funds aimed at stabilising tax revenues generated from the export of natural resources, whose prices are characterised by instability, are part of the fiscal stabilisation framework. When well-run, these funds can help stabilise recurrent expenditures, add financing in critical situations, and regulate the supply of foreign exchange. In turn, the smooth operation of stabilisation funds requires full co-ordination between fiscal and exchange-rate authorities. Its absence could be an obstacle to the match between the macroeconomic environment and achieving sustained development, causing imbalances between different objectives, such as inflation, employment, export quality and growth.
Despite its heterogeneous situation, this is a period of opportunity for more and better growth in Latin America and the Caribbean, but co-ordinated policies on various fronts are necessary in order to achieve this; among these, macroeconomic policy stands out. The history of Latin America shows that there has been a close relationship between the direction of macroeconomic policy and the region’s volatile, poor development, its limited productive investment and low productivity growth. A macro economy at the service of development focuses on fiscal, monetary and exchange-rate policies and capital markets. There must be co-ordinated management of all these areas of economic policy if the macroeconomic environment is to stimulate capital formation, innovation and the creation of quality jobs.
Christian Daude and Angel Melguizo on Channel 10 in Peru discussing the launch of the 2012 Latin American Outlook
Christian Daude on Channel N in Peru discussing the launch of the 2012 Latin American Outlook