Publication: From Financieristic to Real Macroeconomics: Seeking Development Convergence in Emerging Economies
Loading...
Published
2008
ISSN
Date
2017-08-28
Author(s)
Editor(s)
Abstract
Macroeconomic "fundamentals" are a most relevant variable for economic development. However, there is wide misunderstanding about which are the "sound macroeconomic fundamentals," contributing to sustained economic growth. The approach in fashion in the mainstream world and international finance institutions (IFIs) emphasizes macroeconomic balances of two pillars: low inflation and fiscal balances. The author calls it financieristic macroeconomic balances. Additionally, a frequent assertion in the conventional literature is that an open capital account contributes to impose macroeconomic discipline in emerging economies (EEs). There is strong evidence that financieristic balances have not provided a macroeconomic environment contributing to sustained growth. A third pillar must be added, linked to the productive side of the economy. The behavior of aggregate demand, at levels consistent with potential gross domestic product (GDP), is a crucial part of a third pillar for real macroeconomic balances, which has frequently failed in neoliberal experiences. Similarly crucial parts are well-aligned macro-prices, like interest and exchange rates. Frequently, these prices and aggregate demand have behaved as outliers, as reflected in economies working either well below potential GDP (the most frequent result), or overheated, with a booming aggregate demand and a large external deficit. This paper analyses alternative macroeconomic environments faced by firms and workers in the productive side of the economy (the producers of GDP), and the interrelationship between financial and real variables. The author analyzes alternative structural countercyclical fiscal policies, intermediate exchange rate policies, and capital account approaches.
Link to Data Set
Citation
“Ffrench-Davis, Ricardo. 2008. From Financieristic to Real Macroeconomics: Seeking Development Convergence in Emerging Economies. Commission on Growth and Development Working Paper;No. 44. © World Bank. http://hdl.handle.net/10986/28018 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Exchange Rate Overvaluation and Trade Protection(World Bank, Washington, DC, 2000-02)Despite a trend toward more flexible rates, more than half the world's countries maintain fixed or managed exchange rates. In the 1980s and 1990s, developing countries as a group progressively liberalized their trade regimes, but some governments defend their exchange rate in actions that run counter to long-run plans for liberalization. Without discussing the relative merits of fixed and flexible exchange rate systems, the authors note that exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Roughly twenty five percent of the countries for which data are available have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent. After surveying the literature, the authors present lessons from experience about what has worked (or not) in response to crises involving external shocks and external trade deficits - and why. Trying to defend an overvalued exchange rate with protectionist trade policies is a classic pattern, but experience shows such protection does significantly retard the country's growth, and delay its integration into the world trading community. In fact, and overvalued exchange rate is often the root cause of protection, preventing the country from returning to more liberal trade policies that allow growth and integration into the world community without exchange rate adjustment. Most developing countries have downward price and wage rigidities and, with an external trade deficit, require some form of nominal exchange rate adjustment to restore external equilibrium. The authors present cross-country econometric and case study evidence - citing examples from Argentina, Chile, Ghana, the Republic of Korea, Malaysia, Turkey, Uruguay, and Sub-Saharan Africa (including the CFA zone) - that overvalued exchange rates reduce economic growth. Defending the exchange rate, they show, has nor no medium-term benefits, since falling reserves will eventually force devaluation. Better to have devaluation occur without further debilitating losses in reserves and lost productivity because of import controls. After devaluation the exchange rate will reach a new equilibrium, strongly influenced by government and central bank policies.Publication Middle East and North Africa Economic Developments and Prospects, October 2012 : Looking Ahead After a Year in Transition(Washington, DC, 2012-10-01)The Arab Republic of Egypt, Tunisia, Libya and the Republic of Yemen are recovering after a period of economic growth decelerations accompanying the Arab Spring uprisings of 2011. Economic recovery was relatively quick, with industrial production recovering in a matter of months and, in the cases of Egypt and Tunisia, the growth dips of 2011 were smaller than the average growth declines observed around the year of transition during past transitions to democracy. Importantly, the growth decelerations and recovery have taken place in a weak global environment, with events in the Euro zone posing particular challenges to Tunisia, and to a lesser extent, Egypt. The report focuses on the economic developments and short-term outlook for four Middle East and North Africa (MENA) Economies, Tunisia, Egypt, the Republic of Yemen and Libya. These four countries are given special attention because each of them experienced a revolution and a major political change in 2011 and is undergoing a process of political transition toward democracy. The sudden change had important economic consequences. While other countries in the Middle East and North Africa are undergoing political change, the economic ramifications were muted as compared with the changes observed in the four MENA post-revolutionary economies.Publication Intertemporal Adjustment and Fiscal Policy Under a Fixed Exchange Rate Regime(World Bank, Washington, DC, 2008-04)The paper presents a dynamic model for small to medium open economies operating under a fixed exchange rate regime. The model provides a partial explanation of the channels through which fiscal and monetary policy affects the real exchange rate. An empirical investigation is conducted for the case of Argentina during the currency board period of 1991-2001. Empirical estimates show that fiscal policy may indeed be an efficient instrument for promoting macroeconomic stability insofar as it encourages convergence toward long-run equilibrium and alters the long-term balance between exports and consumption, both private and public. The simulation applied to Argentina shows that if the share of public spending in the economy is higher than the share of imports, an increase in the tax rate will stimulate capital stock slightly, at least in the short term, and depreciate the real effective exchange rate. In the long run, the fiscal policy affects the value of the real exchange rate and consequently external competitiveness.Publication Third Ethiopia Economic Update : Strengthening Export Performance through Improved Competitiveness(Washington, DC, 2014-06)Rising exports contributed to Ethiopia’s remarkable growth performance over the past decade. Buoyed by favorable external conditions, exports also helped create jobs and earn much-needed foreign exchange. The way Ethiopia created and nurtured a high-value horticulture industry and expanded its air services exports was an encouraging example of “self-discovery.”Publication Gross Inflows Gone Wild : Gross Capital Inflows, Credit Booms and Crises(2012-11)The main goal of the paper is to examine whether surges in private capital inflows lead to credit booms. The authors built a quarterly database on gross capital inflows, credit to the private sector, and other macro-financial indicators for a sample of 71 countries from 1975q1 to 2010q4. Identifying credit booms is not trivial: they use different criteria implemented in the literature. The estimates suggest that: (i) Surges in gross private capital inflows are overall good predictors of credit booms. (ii) The likelihood of credit booms is higher if the surges in foreign flows are driven by private other investment inflows and, to a lesser extent, portfolio investment inflows. (iii) Surges in gross inflows are also good predictors of credit booms that end up in a financial crisis -- "bad" credit booms. This finding holds even after controlling for the appreciation of the local currency and the build-up of leverage. (iv) Bad credit booms are more likely to occur when surges are driven by other investment inflows. At best, foreign direct investment inflow-driven surges help mitigate the incidence of this type of credit boom. (v) The predictive ability of gross other investment inflows is primarily driven by bank inflows. (vi) Consistent with the literature, the analysis finds that the build-up of leverage and the real overvaluation of the currency help predict credit booms that are followed by a systemic crisis. Controlling for these factors, capital flows are still a significant predictor of credit booms.
Users also downloaded
Showing related downloaded files
Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.Publication Global Economic Prospects, June 2025(Washington, DC: World Bank, 2025-06-10)The global economy is facing another substantial headwind, emanating largely from an increase in trade tensions and heightened global policy uncertainty. For emerging market and developing economies (EMDEs), the ability to boost job creation and reduce extreme poverty has declined. Key downside risks include a further escalation of trade barriers and continued policy uncertainty. These challenges are exacerbated by subdued foreign direct investment into EMDEs. Global cooperation is needed to restore a more stable international trade environment and scale up support for vulnerable countries grappling with conflict, debt burdens, and climate change. Domestic policy action is also critical to contain inflation risks and strengthen fiscal resilience. To accelerate job creation and long-term growth, structural reforms must focus on raising institutional quality, attracting private investment, and strengthening human capital and labor markets. Countries in fragile and conflict situations face daunting development challenges that will require tailored domestic policy reforms and well-coordinated multilateral support.Publication Services Unbound(Washington, DC: World Bank, 2024-12-09)Services are a new force for innovation, trade, and growth in East Asia and Pacific. The dramatic diffusion of digital technologies and partial policy reforms in services--from finance, communication, and transport to retail, health, and education--is transforming these economies. The result is higher productivity and changing jobs in the services sector, as well as in the manufacturing sectors that use these services. A region that has thrived through openness to trade and investment in manufacturing still maintains innovation-inhibiting barriers to entry and competition in key services sectors. 'Services Unbound: Digital Technologies and Policy Reform in East Asia and Pacific' makes the case for deeper domestic reforms and greater international cooperation to unleash a virtuous cycle of increased economic opportunity and enhanced human capacity that would power development in the region.Publication What Have We Learned about the Effectiveness of Infrastructure Investment as a Fiscal Stimulus? A Literature Review(World Bank, Washington, DC, 2021-10)Since the Great Depression of the 1930s, and through the more recent Asian Crisis of 1997 and Great Recession of 2008/09, governments have experimented with Keynesian style fiscal stimulus to support employment and accelerate economic recovery. The effectiveness of these policies depends on the size of fiscal multipliers. A large body of economic literature has estimated such multipliers, with gradually increasing precision, due to econometric improvements and better ways to identify fiscal impulses. Overall, the largest multipliers are found to be associated with public investment, as opposed to other types of spending. Such public investment multipliers are typically below one in the short run, but studies with multi-year horizons suggest that values higher than unity can be attained over time. The size of multipliers is sensitive to economic conditions. During recessions, and periods of high unemployment, transfer payments appear sometimes to offer higher multipliers than public investment. An important exception is when fiscal and monetary policies are closely coordinated and interest rates approach zero, conditions that provide the strongest evidence for the efficacy of public investment multipliers. Other institutional factors also play a crucial role in determining the size of the public investment multiplier, in particular the country’s absorptive capacity, and the selection of high-quality shovel ready projects. However, there is limited empirical evidence available on the magnitude of fiscal multipliers in developing country settings, or for infrastructure sectors or subsectors specifically. The few studies available suggest that certain types of green infrastructure (energy efficiency, solar energy, and so forth) may bring employment benefits in the short run, while innovative digital infrastructure may yield longer-run benefits for economic growth. The relevance of these findings to the current COVID-19 crisis is explored.