Sunday, September 22, 2013

Andrés Velazco on the future of developing economies

Andrés Velazco, finance minister under Bachelet (and you wonder why the economic policies of Socialist governments are all but), tells us that according to Diaz-Alejandro "the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries." And he goes on to suggest that all growth in the region over the last decade was fueled by external conditions, which now are basically gone.

While Diaz-Alejandro is certainly correct about the positive effects of the unlike external conditions it is far from clear that growth during the last boom in Latin America is only explained by external conditions, and that we should expect necessarily higher international interest rates and/or lower terms of trade.

Yes the Fed announced that they will end QE, and that (even the speculation that would happen) led to some run to quality, with more demand for American bonds, and depreciation of developing countries currencies. But the statement of the Federal Open Market Committee (FOMC) is very clear that to: "support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

This is a topic we already discussed in the blog before. In particular while lifting the external condition allows for faster growth, it's clear that certain countries grew faster than other, irrespective of the size of the positive effect on terms of trade (see here). Also, it is not clear that the growth in commodity prices is all related to a booming demand, particularly in China. As noted before, Franklin Serrano there are structural causes, associated to the supply side, the long term costs that might be part of the explanation for the terms of trade trends.

In one thing Mr. Velazco is correct, "conservative governments viewed industrial promotion as some dirigiste relic from the past, and avoided it," and left of center government were not particularly good at promoting industrial development. I'm glad he does not think industrial policy is a mistake. In that sense, if the economies of Latin America grow less it might a for their inability to expand demand (contrary to the 'good macro' policies advocated by Velazco), and for their inability to diversify exports and reduce the balance of payments constraint, rather than simply because the external conditions worsened.

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