Macroeconomic Coordination in Latin
America:
Some Lessons from the Mercosur
Experience
José Luis Machinea
and Guillermo Rozenwurcel
ECONOMIC COMMISSION FOR LATIN AMERICA AND
THE CARIBBEAN
Seminar on Regional Financial Arrangements
New York, July 14th 2004
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Incentives for coordination
•
•
•
•
•
Interdependence (trade and financial)
Political support for a deeper integration
Discipline under domestic pressure
Improvement of credibility (buy reputation)
Elimination of distortions and reduction of
fiscal costs
• Reduction of volatility in the block
Trade interdependence
a) Intra-regional exports as percentage of total exports
UE
NAFTA
1989
2000
MERCOSUR
ASEAN
MCCA
CAN
0
10
20
30
40
percentage of total trade
50
60
70
Trade interdependence
a) Intra-regional exports as percentage of regional GDP
EU
ASEAN
NAFTA
CACM
AC
MERCOSUR
0
2
4
6
8
10
12
% of regional GDP
Source: own calculations based on DOTS (2001) and WDI (2001).
14
16
18
20
Financial interdependence
• Lack of financial relations
• But
– Similar external financial shocks
– Contagion
Financial shocks
Correlation of capital movements
as percentag e of GDP in M ercos ur countries , 1971-2000
Argentina
Argentina
Brasil
Paraguay
Uruguay
Chile
1
Brasil
0.29
0.13
1
Paraguay
0.09
0.64
0.45
0.02
1
Uruguay
0.50
0.01
0.26
0.17
0.57
0.00
1
Chile
0.39
0.04
0.37
0.05
0.50
0.01
0.54
0.00
Bolivia
Bolivia
1
0.27
0.50
0.25
-0.04
0.07
0.15
0.01
0.19
0.84
0.73
Source: Own estimation based on IMF
Nota: Debajo de cada coeficiente de correlación se encuentra el p-estadístico.
En negrita los coeficientes positivos y significativos estadisticamente.
1
0
800
Mar-04
900
Dec-03
1,000
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
Country risk
Chile
Mexico
Peru
700
600
500
400
300
200
100
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
Mar-99
2,000
Dec-98
Sep-98
Jun-98
Mar-98
Dec-97
Country risk
2,500
Argentina
Brazil
Uruguay
Peru
1,500
1,000
500
0
Incentives for coordination
•
•
•
•
Interdependence (trade and financial)
Political support for a deeper integration
Discipline under domestic pressure
Improvement of credibility (buy
reputation)
• Elimination of distortions and reduction
of fiscal costs
• Reduction of volatility in the block
– Nobody wants to have a partner with a highly volatile
economy. Alternatives: reduce interdependence or find
cooperation mechanism to reduce volatility
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Coordination: costs and
difficulties
• Autonomy
• Cyclical Synchronism
• Differences in the underlying model (Argentina
and Brazil during the nineties)
• Long-run benefits and a high discount rate
during crises
• Doubts about the cooperative behavior of
partners (prisoner’s dilemma)
Interdependence
(or Dependence?)
Regional GDP distribution
100%
80%
70%
ASEAN
CAN
Trinidad y T.
MCCA
Alemania
Colombia
10%
Indonesia
SADC
20%
Guatemala
NAFTA
30%
Nigeria
40%
Brasil
50%
Sudáfrica
60%
EE.UU
porcentaje por país del PBI regional
90%
UE
CARICOM
0%
MERCOSUR
ECOWAS
Nota: el indicador se calculó como la participación de cada país en el PBI regional promedio del período 1990-1999.
Fuente: Cálculos propios sobre datos del WDI (2001)
Coordination: costs and
difficulties
• Autonomy
• Cyclical Syncronism
• Differences in the underlying model (Argentina
and Brazil during the nineties)
• Long-run benefits and a high discount rate
during crises
• Doubts about the cooperative behavior of
partners (prisoner’s dilemma)
Cyclical synchronism
NAFTA
MERCOSUR
CAN
MCCA
ASEAN
EU
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
weighted average of correlation coefficient
0.40
0.45
Cyclical synchronism
1962-2002
Argentina Brazil ParaguayUruguay Bolivia
Argentina
ALL
Merco
Merco+
0.15
0.32
1
Paraguay
0.04
0.78
0.14
0.37
1
Uruguay
0.50
0.00
0.33
0.03
0.62
0.00
1
Bolivia
0.09
0.57
0.06
0.70
0.46
0.00
0.44
0.00
EE.UU.
Mundo
Argentina
0.07
0.66
0.59
0.00
0.59
0.00
0.12
0.46
1
-0.02
0.91
0.10
0.51
-0.06
0.71
0.11
0.47
0.20
0.21
0.22
0.17
0.28
0.04
0.25
0.24
0.30
0.30
1
0.24
0.13
0.04
EE.UU. Mundo
AVERAGE
Brasil
Chile
Chile
1
-0.05
0.42
Argentina
Chile
EE.UU. Mundo
1
Brasil
0.33
0.27
1
Paraguay
0.29
0.33
0.45
0.12
1
Uruguay
0.95
0.00
0.34
0.25
0.36
0.22
1
Bolivia
0.75
0.00
0.47
0.10
0.66
0.01
0.81
0.00
1
Chile
0.71
0.01
0.33
0.28
0.74
0.00
0.75
0.00
0.77
0.00
1
EE.UU.
0.10
0.74
0.34
0.26
-0.27
0.38
0.24
0.44
0.17
0.57
-0.19
0.53
1
Mundo
-0.13
0.67
-0.07
0.82
-0.10
0.74
0.09
0.77
0.09
0.76
-0.07
0.83
0.53
0.06
1
0.65
1990-2002
Paraguay Uruguay Bolivia
Brazil
1
AVERAGE
ALL
Merco
Merco+
0.38
0.46
0.58
1
FUENTE: Cálculos propios con base en WDI (2001)
Nota: debajo de los coeficientes de correlación se encuentra en cursivas el p-estadistico. En negrita
los coeficientes positivos y significativos estadísticamente.
Coordination: costs and
difficulties
• Autonomy
• Cyclical Synchronism
• Differences in the underlying model (Argentina
and Brazil during the nineties)
• Long-run benefits and a high discount rate
during crises
• Doubts about the cooperative behavior of
partners (prisoner’s dilemma)
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Volatility: the exchange rate
variability
• Size
• Effects
• Economic (impact on trade)
• Political-Economy
• Causes
• Fundamentals
• Stabilization programs (different timing)
• External shocks
• Contagion
• Self-fulfilling prophecies
• Different Exchange rate regimes
MERCOSUR:
Selected Real Effective Exchange Rates
275.0
250.0
225.0
200.0
175.0
150.0
125.0
100.0
75.0
Effective, Argentina
Effective, Brazil
Effective, Uruguay
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
50.0
Bilateral Brazil-Argentina
Bilateral Brazil-Uruguay
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
MERCOSUR:
Bilateral Real Exchange Rates
140
130
120
110
100
90
80
70
60
50
40
Andean Community:
Selected Real Effective Exchange Rates
275.0
250.0
225.0
200.0
175.0
150.0
125.0
100.0
75.0
Effective, Colombia
Effective, Venezuela
Effective, Ecuador
Effective, Peru
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
50.0
Bilateral Colombia-Ecuador
Bilateral Colombia-Perú
Bilateral Colombia-Venezuela
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
Andean Community:
Bilateral Real Exchange Rates
200
180
160
140
120
100
80
60
40
20
Central America:
Selected Real Effective Exchange Rates
150.0
140.0
130.0
120.0
110.0
100.0
90.0
Effective, Guatemala
Effective, Costa Rica
Effective, El Salvador
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
80.0
Bilateral Guatemala-Costa Rica
Bilateral Guatemala-El Salvador
Ene-04
Jul-03
Ene-03
Jul-02
Ene-02
Jul-01
Ene-01
Jul-00
Ene-00
Jul-99
Ene-99
Jul-98
Ene-98
Jul-97
Ene-97
Jul-96
Ene-96
Jul-95
Ene-95
Jul-94
Ene-94
Jul-93
Ene-93
Jul-92
Ene-92
Central America:
Bilateral Real Exchange Rates
140
120
100
80
60
40
Volatility of Bilateral Real Exchange Rates
(standard coefficient as % of mean)
Colombia-Venezuela
Colombia-Peru
Colombia-Ecuador
Guatemala-El Salvador
Guatemala-Costa Rica
Brasil-Uruguay
Brasil-Argentina
0.0%
5.0%
10.0%
15.0%
Jan 1999 - May 2004
Jan 1992 - May 2004
20.0%
25.0%
30.0%
35.0%
Jan 1992 - December 1998
Volatility: the exchange rate
variability
• Size
• Effects
• Economic (impact on trade)
• Political-Economy
• Causes
• Fundamentals
• Stabilization programs (different timing)
• External shocks
• Contagion
• Self-fulfilling prophecies
• Different Exchange rate regimes
Volatility: the exchange rate
variability
• Policy alternatives to reduce variations in
the ER or its effects
– Monetary Union
– Macroeconomic Coordination
– Exchange rate compensatory mechanism
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Monetary Union
• No possibility of MU in the short-run based on
OCA
• Importance of financial interdependence, but
consider:
– Magnitude of shocks
– Attempts by country to differentiate itself from the
partner in difficulties.
• Main problem: lack of reputation
• Dynamic of monetary union , but consider the low
exit costs
• Political will: absence of a regional agenda or large
gap between reality and rhetoric
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Macroeconomic coordination
1. The European experience
• Exchange rate policy is crucial
• Fiscal and monetary policies should converge
• Room for opportunistic behavior should be
reduced over time
• The evaluation of the commitment must be
transparent
• Supranational institutions are important
• Macro policy coordination must parallel advances
in other integration areas.
Main topics
•
•
•
•
•
Incentives for coordination
Costs and difficulties of coordination
Volatility of real exchange rates
Monetary Union
Macroeconomic coordination
– The European experience
– The Latin American experience
• Conclusions
Macroeconomic coordination
2. The realities of the region
• Demand for Coordination
• The regional experience: the failed attempts to
convergence
• What should be coordinated?
– Convergence of macroeconomic variables
– Structural reforms
– Not the exchange rate
• The importance of the exchange rate regime
– Floating regime advisable, but not without problems
– Harmonization of inflation targets might help
Macroeconomic coordination
2. The realities of the region
• External Factors:
– Volatility of terms of trade
Real shocks
1.Volatility of Terms of Trade and Export Prices
25.50
Export Prices
Terms of Tra de
15.50
10.50
5.50
NAFTA
ASEAN
MERCOSUR
MCCA
CAN
CARICOM
NAFTA
MCCA
ASEAN
MERCOSUR
CAN
0.50
CARICOM
Volatility
20.50
Magnitude of volatility, 1971-2000
Terms of trade volatility as % of total exports
Andean
Community
CACM
MERCOSUR
ASEAN
0
2
4
6
8
10
12
annual changes >20 % of total exports
SOURCE: ow n calculations based on WDI (2001) and WEO (2001)
14
16
Macroeconomic coordination
2. The realities of the region
• Volatility of external environment:
– Volatility of terms of trade
– Volatility of capital flows
Magnitude of volatility, 1971-2000
Private capital flows volatility as % of exports
MERCOSUR
Andean Community
CACM
ASEAN
EU
0
10
20
30
40
50
annual changes > 20% of total exports
Financial shocks
annual variations > 3% of GDP
Magnitude of capital flows volatility
50
45
40
35
30
25
20
15
10
5
0
CARICOM
SADC
MCCA
ECOWAS
ASEAN
Source: ow n estimations based on WDI (2001) and WEO (2001)
CAN
MERCOSUR
UE
UE (-UE
"Sur")
NAFTA
Macroeconomic coordination
2. The realities of the region
• External Factors:
– Volatility of terms of trade
– Volatility of capital flows
• Liquidity funds
• Counter-cyclical funds
• Regional stabilization funds
Macroeconomic coordination
2. The realities of the region
• Incentives for coordination
– Political will: the missing link
– The lack of incentives
– Lack of reputation (Being considered a responsible
country is not tied to meeting commitments within the area)
– Volatility of the exchange rate and little trade
interdependence
– Financial contagion induces differentiation
– Europe had exogenous coordination and
external shocks were less important
Macroeconomic coordination
2. The realities of the region
What can be done?
• Internal incentives
• Transparency of Commitments is crucial
• But, effective sanctions are not credible
• Committee of Experts: peer pressure
• Deepening integration: increase the demand
for coordination
• Counter-cyclical policies: the role of
structural deficit and stabilization funds
Macroeconomic coordination
2. The realities of the region
• External incentives
– International stabilization funds (real and
financial shocks)
– The role of Multilateral Banks (loans related to
the integration process)
– Regional financing: a key actor if enough funds
are available (needs of support from multilateral)
• Lack of correlations of terms of trade helps
• But the problems could be:
– Asymmetry of Size (Brazil)
– Similar financial shocks
Real shocks
2. Terms of Trade and Export Prices Correlation
0.90
0.86
0.82
EU
Corr. Coefficients simple average
0.80
CACM
CARICOM
0.70
SADC
0.60
0.50
Andean
Com m unity
MERCOSUR
0.52
0.47
ASEAN
0.40
ECOWAS
0.32
0.30
0.20
0.26
0.16
0.30
NAFTA
0.18
0.15
0.13
0.10
0.01
0.00
ToT
Px
N o t a 1 : correlat ion coef f ient s are expresed as t he simple average of t he correlat ion coef f icient s among t he rat es of growt h of each
count ry member.
N o t a 2 : Due t o dat a unavailabilit y only f our count ries were included f or CA RICOM : Guyana, Hait i, Jamaica and Trinidad and Tobago,
t hat represent 63%of regional GDP.
S O U R C E : own calculat ions based on WDI (2001)
Conclusions
• Macroeconomic coordination only if deep
integration is the final purpose
• Deep integration goes beyond macroeconomic:
the agenda should include other relevant issues
as well
• Need to reduce real exchange rate volatility
• Monetary Union: a long-term perspective
• The beginning of coordination: macroeconomic
stability at national level
• The cooperative game
Conclusions
• External environment
– Multinational Institutions
– Regional Funds
• External incentives: the role of Multilateral
Banks
• Macroeconomic coordination and FTAA
Macroeconomic Coordination in Latin
America:
Some Lessons from the Mercosur
Experience
José Luis Machinea
and Guillermo Rozenwurcel
ECONOMIC COMMISSION FOR LATIN AMERICA AND
THE CARIBBEAN
Seminar on Regional Financial Arrangements
New York, July 14th 2004