Causality and the new World Economic Outlook (WEO)

I often say that causality is the main, but not the only, difference between mainstream and heterodox approaches in macroeconomics. It's true for differences between Say's Law versus the Principle of Effective Demand, for discussions of exogenous/endogenous money, and also for interpretations of the relation between growth and productivity.

The new WEO is out (here). This one the first under Maurice Obstfeld, who substituted Oliver Blanchard. The explanation for lower growth in Obstfeld's intro says the following:

What underpins forecasts of moderating growth? First, the ongoing experience of slow productivity growth suggests that long-run potential output growth may have fallen broadly across economies. Persistently low investment helps explain limited labor productivity and wage gains, although the joint productivity of all factors of production, not just labor, has also been slow.*

So low productivity growth causes low output and employment growth, rather than vice versa. Further, lower investment is what causes low labor productivity, which is actually a plausible mechanism. No new machines, no increase in labor productivity.

But as the IMF has recently noticed, the accelerator is the mechanism that explains investment behavior (see here on the previous WEO rediscovery of the accelerator, and also Obstfeld says in the following line: "low aggregate demand... discourages investment"), and that implies that growth is what determines investment and, as a result, labor productivity. So low growth is caused by low growth. Good job!

* I'll leave out the problems with total factor productivity, which have been extensively discussed in the blog before.

How well has Brazil done during the Workers' Party administration?

First, let me be absolutely clear. I do in general favor the current administration in Brazil, as much as other left of center governments in South America. But I do understand some of the critiques from the left (not the right wing conservatives that are against social spending and more redistribution of income). A good example of the limits to the current experience in the region are provided by the Brazilian case.

Recently a post (in Portuguese; full disclosure one of the authors is a friend) went viral in Brazil. It showed how much Brazil has grown during Lula/Dilma, from the Workers' Party (PT, in Portuguese) compared to the rest of the world, and advanced economies, and the same exercise done for the Fernando Henrique Cardoso (FHC), from the Brazilian Social Democratic Party (PSDB in Portuguese) period.

Clearly, the FHC period (1995-2002) is worse than the Lula/Dilma period (2003-2014), in which the last year is an estimate (all data, as in the viral post, from the IMF's World Economic Outlook). In the Workers' Party period Brazil was growing faster and keeping pace with the rest of the world, and catching up, growing faster than advanced economies.

However, as noted in this blog several times (Dean Baker has been one of the few others that noted this in the US; part of debunking the BRICS myth) Brazil has not grown really that fast. Instead of comparing with advanced economies and the rest of the world, the picture changes a bit if one does it with developing countries, as shown below.

Note that while it is true, as it should be, that Brazil catches up with the advanced economies during the Lula/Dilma period and not so during the FHC one, it is also the case that the Brazilian performance when compared to developing countries is far from stellar. In that sense, there is a certain frustration about the lost possibilities. Mind you, conservative views that Brazil needs to return to more rigid fiscal surpluses, and tighter inflation targeting (presumably with an independent central bank, and higher rates of interest) are NOT the solution. But that is the topic of another post, I guess.

PS: I should note that there is also a frustration on part of the left in the US with Obama, and the notion that an opportunity was lost. In that respect, there is a similarity between left of center critics of the Workers' Party and the US counterparts.

Asian and Latin American shares of world GDP

Reading the April World Economic Outlook (WEO), a biannual IMF publication (more to be posted soon). You can download all the data, which is always useful. Just playing around. Note that in the last decade the share of World GDP produced by advanced economies shrunk from around 80% to approximately 60%.

On the other hand, developing countries expanded from 20% to closer to 40% of World GDP. The fact that China might be the biggest economy in the world has been in the news recently. Note that most of this increase in the periphery is in Asia, which increased from around 7% or so, essentially the same level than Latin America, to 20%, while Latin America (which did expand in the last decade; the graph doesn't show it well because of scale) remains at the same level than 1980, recovering from the lowest point in the 1990s.

The New Old IMF

The 'new' IMF still demands devaluation and fiscal adjustment. Like the old. From their new agreement with Ukraine, according to the New York Times:

"The agreement, announced in Kiev, the Ukrainian capital, will hinge on the country taking steps to let the value of its currency float downward, to cut corruption and red tape, and, crucially, to reduce huge state subsidies for the consumption of natural gas."

This is consistent with what the IMF says in last in one of the last World Economic Outlook reports. The IMF suggests that the current risks for the global economy fall into five categories, namely (IMF, 2013a, p. 14): “(1) very low growth or stagnation in the euro area; (2) fiscal trouble in the United States or Japan; (3) less slack than expected in the advanced economies or a sudden burst of inflation; (4) risks related to unconventional monetary policy; and (5) lower potential output in key emerging market economies.” Note that even though it is suggested that stagnation in Europe is a problem, it is argued that (Ibid. p. 19): “fiscal plans for 2013 are broadly appropriate in the euro area.”

The concern with fiscal policy in the United States and Japan is that these countries (Ibid, p. 19): “need strong medium-term plans to arrest and reverse the increase in their public debt ratios,” and the Fund suggests the reform of entitlement programs as the way forward for fiscal adjustment, which would burden the old, the young and the poor more than any other social groups. The last three risks are all associated with the notion that there is a danger of rapid adjustment to full capacity and inflationary pressures resurging earlier than expected.

Moreover, there is a clear gap between the somewhat mixed message of the WEO reports in terms of what policy space allows in terms of fiscal policy and what the actual practice of the IMF has imposed on countries under agreements. Article IV consultations and Letters of Intent for the recent advanced countries that have Extended Fund Facility Arrangements with the IMF (e.g. Greece) demonstrate specific long-term structural changes that are terms of the loan. The Staff Report for the 2013 Article VI consultation for Greece suggests that (IMF, 2013b, p. 1): “Progress on fiscal adjustment has been exceptional by any standard, with the cyclically-adjusted primary balance having improved cumulatively by about 15 percent of GDP during 2010–12. Labor market reforms are helping to realign nominal wages and productivity; this internal devaluation has reduced the competitiveness gap by about half since 2010.” Fiscal adjustment and price and wage reductions are the basis of the solution, very much as in the past. If there is any change in the IMF policy advice it is difficult to find in its policies.