Wednesday, April 13, 2016

Latin American corner: When will they ever learn?

By Naked Keynes (Guest Blogger)

The latest IMF World Economic Outlook (April 2016) projects stagnation in World Growth (3.1% and 3.2% in 2015 and 2016) both in advanced economies (4.0% and 4.1% in 2015 and 2016) and emerging market and developing economies (1.9% and 1.9% for 2015 and 2016). The prospects for 2017 are hardly any better with an estimate of 3.5% for global output and continuing stagnation of advanced economies. But things could get worse.

The current outlook scenario depends on very optimistic assumptions which as mentioned in the report (p. 18) are “subject to sizable downside risks.” These include: (i) improved conditions for economies under stress; (ii) successful rebalancing in China; (iii) improved economic activity in commodity exporters; (iv) resilient growth (whatever this may mean) in emerging and developing economies other than commodity exporters.

The stagnation and possible reduction in world growth is not traced to transitory shocks or disruptions, or god forbid to demand conditions. It is rather traced directly to the production function (the core of mainstream economic theory) and more precisely to a decline in potential GDP levels and growth due to population aging, slow growing investment and total factor productivity (See also IMF, WEO, April 2015). This reasoning with its specific conditions not only applies to developed economies but also to developing economies including Latin American economies. In the case of Latin American economies the slow growth is traced to weak productivity and investment caused by government intervention.

The IMF assessment has two major and dangerous implications for future growth.

The first is that demand policies and more generally counter cyclical policies are simply out of the question. Government and economics agents must adapt to lower potential GDP (natural GDP) levels and growth. The IMF is thus restating its case for pro-cyclicality (contractionary policies) during a slowdown. Counter-cyclicality is only justified to rein in spending during an upward or boom phase of the economic cycle.

The second is that the only way to revamp growth is through supply side policies which even if successful (something unlikely as illustrated by the experience of Latin America) could take years to implement. It is not coincidental that the IMF WEO third chapter is titled Time for a Supply-Side Boost? Although the chapter focuses on advanced economies, mainstream economists in Latin America are preaching exactly the same policies for developing countries.

In short, the policy proposals point to reinforcing the fundamental failures of capitalist economies: continuing and self-fulfilling low growth, unemployment and poverty, inequality, and instability. When will they ever learn?

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