External Disequilibrium Research Articles

Impacts of US Interest Rates on Growth, Income Distribution, and Macroeconomic Policy Space in Developing Countries: A SFC Supermultiplier Model

ABSTRACT This paper presents a stock-flow-consistent model in which growth is led by exports, government consumption, and consumption out of interest. It considers domestic and external debt dynamics and gross capital flows. The balance of payments constraint serves as a ceiling but not a floor for growth. Countries may choose to not fully use their external space to decrease public debts or accumulate international reserves. The model is applied to a comparative dynamics exercise to explore how a hike in foreign interest rates may impact growth and income distribution in a developing country under different policy responses. The shock forces the country to apply at least one contractionary macroeconomic policy or lose its reserves. Contractionary monetary policy may be the only tool to avoid external disequilibrium after the shock for countries with open capital accounts. Financial flows may impose trade-offs between short and long run policy objectives. Accumulated international reserves helps maintain expansionary policies and higher average growth rates after external shocks by providing liquidity in foreign currency.

The Problem of Engines in Statistical Physics.

Engines are open systems that can generate work cyclically at the expense of an external disequilibrium. They are ubiquitous in nature and technology, but the course of mathematical physics over the last 300 years has tended to make their dynamics in time a theoretical blind spot. This has hampered the usefulness of statistical mechanics applied to active systems, including living matter. We argue that recent advances in the theory of open quantum systems, coupled with renewed interest in understanding how active forces result from positive feedback between different macroscopic degrees of freedom in the presence of dissipation, point to a more realistic description of autonomous engines. We propose a general conceptualization of an engine that helps clarify the distinction between its heat and work outputs. Based on this, we show how the external loading force and the thermal noise may be incorporated into the relevant equations of motion. This modifies the usual Fokker–Planck and Langevin equations, offering a thermodynamically complete formulation of the irreversible dynamics of simple oscillating and rotating engines.

CEPAL, Economic Development, and Inequality

Latin American structuralism, first promulgated in 1949 by the Argentine economist Raúl Prebisch, held that Latin American economies were characterized by heterogeneous technologies, structural unemployment, external disequilibrium, and secularly deteriorating terms of trade. The crisis of structuralism in the latter 1960s, following the exhaustion of “easy” import substitution, ultimately resulted in “neostructuralism” in 1990, a reformed version of the doctrine that emphasized greater equity in income distribution, expansion of export markets, aggressive pursuit of technological change, and continuous “learning by doing.” In the last two decades, CEPAL’s interest has focused on issues of inequality in the global region that is still the most unequal in the world.

Destabilizing austerity: Fiscal policy in a BOP-dominated macrodynamics

A contractionary fiscal policy is the usual policy advice given to countries that experience deficits in current account. However, under certain circumstances, fiscal austerity may worsen external disequilibrium. This paper discusses the conditions in which instability may emerge using a Keynesian model which highlights the crucial role of public investment for structural change and competitiveness in developing economies. In addition, the paper addresses the interactions between fiscal policy, the exchange rate policy and industrial policy. It is argued that a virtuous circle between these variables is possible. A competitive real exchange rate combined with an industrial policy aimed at increasing the diversification and technological intensity of exports may make compatible growth and income distribution.

Challenges for the Chilean economy under cyclical shocks, 1999–2016

ABSTRACTA brief summary of the evolution of economic policies and growth in Chile since 1973 is presented, distinguishing between four periods: 1973–89 with average growth of 2.9 percent, 1990–98 with 7.1 percent (notably above the 3.2 percent Latin American average), 1999–2013 with 3.9 percent, and 2014–16 with 1.9 percent, explaining the main forces underlying these sharp differences. Analysis focuses on the fiscal and external disequilibrium associated with the fiscal treatment of the copper price and the adoption of a free exchange rate since 1999. Subsequently, the focus is on the macroeconomic situation in 2013 and five sources of accumulated disequilibria that suggested a high probability of significant deceleration of the economy. The article ends with a discussion of the actual deceleration in more recent years, converging with the negative average outcome of the region, and concludes that worsening economic performance has been associated mainly with the shift from the coherent countercyclical policies of the 1990s to the procyclical opening of the capital account, liberalization of the exchange rate, and adoption of sharp inflation targeting overcoming other relevant macroeconomic targets since then.

The Origins and Development of the Latin American Structuralist Approach to the Balance of Payments, 1944–1964

The paper offers an historical account of the origins and development of the Latin American structuralist approach to the balance of payments between 1944 and 1964. We focus on the contributions by Raul Prebisch, Celso Furtado and Juan Noyola, all of them members of the United Nations Economic Commission for Latin America (CEPAL) during the 1950s. Prebisch used the foreign trade multiplier concept to distinguish the business cycle mechanisms at the ‘centre’ and at the ‘periphery’. Noyola introduced the notion of external disequilibrium as a feature of the industrialization process. This was further elaborated by Prebisch's formula connecting the relative rates of growth to the ratio of income-elasticities of import. Furtado examined the implications of the external demand constraint for economic growth, an important element of the two-gap models of the 1960s. The main piece of empirical structuralist research was the CEPAL 1957 report about Mexican external disequilibrium elaborated by Furtado and Noyola, not published at the time; we discuss that report in the context of the Mexican devaluation of 1954.

Is the European debt crisis a mere balance of payments crisis?

This paper is interested in linking formally external disequilibrium to the sovereign debt crisis which the EMU is experiencing since 2009. Relying on the CHEER approach that connects the goods market to the capital market, we show that when a country belonging to a monetary union faces external disequilibrium relative to its main partner, the corresponding interest rate differential increases. Moreover, when these imbalances are persistent, it may trigger a balance of payments crisis. Our findings indicate that this phenomenon seems to be at play for the European countries under international assistance.

Financial integration, euro and the twin deficits of southern Eurozone countries

The purpose of this study is the examination of the relationship between fiscal and Current Account balances for the countries of southern eurozone. The twin deficit hypothesis is tested within the context of a portfolio model involving variables from the financial sector. Empirical analysis is conducted with panel data, for the period 1991-2011. Evidence is provided to support the twin deficit hypothesis. Additionally, it is found that it is not only the fiscal policy of the southern eurozone countries that affects their Current Account balances, but also the fiscal policy of the eurozone surplus countries of the north. Interdependence of euro-zone countries suggests that fiscal policy can be used for the elimination of external disequilibrium. Therefore, fiscal policy should be coordinated but not uniformly applied.

The Origins and Development of the Latin American Structuralist Approach to the Balance of Payments (1944-1964)

The paper offers an historical account of the origins and development of the Latin American structuralist approach to the balance of payments between 1944 and 1964. We focus on the contributions by Raul Prebisch, Celso Furtado and Juan Noyola, all of them members of the United Nations Economic Commission for Latin America (CEPAL) during the 1950s. Structuralist authors stressed the differences between balance of payments dynamics in developed (industrialized) and underdeveloped economies. Prebisch used the foreign trade multiplier concept to distinguish the business cycle mechanisms at the “centre” and at the “periphery”. Noyola introduced the notion of external disequilibrium as a feature of the economic development process. This was further elaborated by Prebisch’s formula connecting the relative rates of growth to the ratio of income-elasticities of imports, later restated by Anthony Thirlwall. Furtado examined in detail the implications of the effective external demand constraint for economic growth, an important element of the two-gap models of the 1960s. The main piece of structuralist research, from an empirical perspective, was the CEPAL 1957 report about external disequilibrium in Mexico elaborated by Furtado and Noyola, which was not published at the time. We discuss that report in the context of the Mexican devaluation of 1954, which also attracted the attention of J.J. Polak and other economists at the International Monetary Fund.

Celso Furtado and the Structuralist-Monetarist Debate on Economic Stabilization in Latin America

This article investigates Celso Furtado's role in the broad controversy between structuralists and monetarists about inflation and stabilization that took place in Latin America between the mid-1950s and early 1960s. Furtado was the first to relate Latin American chronic inflation to the new growth pattern of the region after the acceleration of the industrialization process in the 1930s. The Brazilian economist criticized the applicability of the monetary approach to the balance of payments to developing countries and put forward an alternative interpretation of the connection between external disequilibrium and inflation. Furtado formulated and tried to implement in 1962–63 the first structuralist stabilization plan—called the Three-Year Plan—in a Latin American country, based on “gradualism” and regarded as an alternative to stabilization policies sponsored by the IMF in the region.

Macroeconomic constraints to growth of Brazilian economy

In the last 20 years the Brazilian economy averaged an annual growth rate of only 0.7% in per-capita terms, well below the value of about 3% it reached between 1950 and 1980. Performance was also below that of similar emerging countries like South Korea, China, Mexico and Chile. If it were to continue at such a speed, Brazil would need about 100 years to double per-capita income, and even so it would never reach anything near the standard of living of the present developed countries. The main factors for low growth in the last 20 years are well known. We can pinpoint two fundamental disequilibrium in the economy, which in a long run perspective account for its semi‐stagnation. On one side, there is a progressively increasing internal disequilibrium, as a result of the attempt to cope with inflation via mechanisms of price and wage indexation, which have contributed to maintain inflation high and with a persistent tendency to accelerate. Only the “Plano Real” managed to curbe down the inflationary tendency, at least partially. At the same time, domestic disequilibrium was reduced by means of a monetary policy that was excessively conservative, to the effect of keeping the country’s rates of interest among the highest in the world, at the same time as generating the currency ap‐ preciation in the period between 1994 and 1998. The default on the external debt declared in 1987, exposed the extent and weight of Brazil’s external disequilibrium. This latter was the result of a policy that had excessively relied on external savings and the current account as instruments to finance economic growth in the second half of the 1970. The current account deficit, practically eliminated in the second part of the 1980, was to reappear dur‐ ing the first mandate of Fernando henrique Cardoso, as a result of the adoption of an exchange rate anchor. The correction of such disequilibrium could only be real‐ Brazilian Journal of Political Economy, vol 31, no 5 (125), pp 874-879, Special edition 2011

Motivations for the Romanian Exporters

In the last decade Romania’s trade balance experienced substantial deficits. This external disequilibrium which affected the macroeconomic stability could be ameliorated by increasing the exports. Romania’s adhesion to the European Union in January 2007 created new opportunities for the exporters. However, in the new circumstances, the Romanian authorities are not allowed to apply the classical tools of the trade policy, such as subsidies or tax decrease, in order to stimulate the exports. Instead, assistance consisting in consultancy and facilities could be offered to the exporters for a better communication with foreign partners. Understanding the exporters’ motivation could be useful in such assistance. In this paper we approach the Romanian exporters’ perceptions about their activity. We use an investigation applied to the Romanian firms with export activity.

External disequilibrium and the exchange rate

External disequilibrium and the exchange rate

Exchange Rate Devaluations and Peso Phenomena in Stock Returns

This paper analyzes how a prolonged external disequilibrium, that may arise if the exchange rate is pegged, will affect the stock market. It is shown that if the central bank refuses to adjust the peg in response to the disequilibrium, stock returns are expected to remain below their equilibrium level. If the central bank finally fails in its defense of the peg and there is a devaluation, this pre-devaluation peso phenomenon will be replaced by a post-devaluation peso phenomenon. Our empirical case rests on the dramatic experiences of the Finnish economy in the 1989-1994 period. We show that the pre-devaluation peso phenomenon is able to account for the seemingly anomalous pattern of systematically dropping stock prices prior to the decision to let the Finnish markka float in September 1992. We conclude that these kinds of patterns are likely to be present in time series of market returns especially for many so called emerging stock markets.

The Changing Mix of Disequilibria During Transition: A Romanian Background

This paper looks at the dynamics of (dis)equilibria during post-command transition. It tries to define an optimal mix between external and internal disequilibrium and to apply this concept to the analysis of the Romanian economy. The forced adjustment of the balance of payments in the 1980s is presented as a prologue to the scrutiny of transformation policy underway; results and dilemmas of macro-stabilization are dealt with in this respect. The paper ends by providing some insights into the problematique of understanding (dis)equilibria in transforming economies.

Poland into the 1990s: economy and society in transition

Poland's political system - changes and futures, Kazimierz Kloc Polish society after the communist experiement, Edmund Wnuk-Lipinski the environment, Michal Rusinski energy and conservation, Marek Lubinski external disequilibrium and adjustment processes, Krzystof Kalicki foreign trade, Ryszard Rapacki capital investments, Andrzej Parkola prices, incomes and consumption, Marian Gorski housing, Jacek Laszek the banking system and monetary policy, Grzegorz Jedrzejczak and Krzystof Kalici agriculture economic policy - overview.

External Adjustment and the Optimal Demand for International Reserves

This paper provides a theoretical underpinning for the major determinants of optimal reserve demand in the case where fundamental disequilibrium constitutes a key element governing reserve management. Emphasis is given to the role of reserves to smooth the process of economic adjustment by financing part of external disequilibrium, as well as to meet temporary random fluctuations in the excess demand for foreign exchange. The analysis incorporates this financing aspect of reserve holdings into a simple inventory model and discusses the optimal stock of reserves in the context of the optimal mix of adjustment and financing.

Balance of Payments Stabilization Policies in the Dependent Economy and Their Short-Run Impact on Economic Activity

This paper reviews financial programming in dependent economies with unemployed resources and nonmarket clearing conditions regarding domestic bank credit. Devaluation may increase domestic activity, even if the immediate export supply response is limited and devaluation tends directly to increase savings. When domestic credit markets are rationed, interest rate policy has nonstandard implications. An increase in interest rates becomes potentially expansionary to prevent a worsening of the external disequilibrium. Policy mixes to stabilize the balance of payments without inducing a domestic contraction are derived. There may also be room to accommodate the domestic counterpart of additional external project financing.

The Hungarian economic reform of the 1980s

At the end of the 1970s, under the pressure of worsening external disequilibrium, the Hungarian authorities decided on important changes in economic policy, the most remarkable being the abandonment of the old strategy of economic growth, and embarked on some systemic changes including a competitive price system, the weakening of the hierarchical system and the expansion of small firms. This trend also continued in the beginning of the 1980s; its most important product was the expansion of the private sector. It soon became clear that all these systemic changes were not sufficient to create an environment in which enterprises could enjoy autonomy and which would force them to behave rationally (Antal, 1983). Pressure for further changes led to the April 1984 resolution of the Central Committee of the Party (hereafter the changes resulting from this resolution are called ‘1985 provisions’) which, in its conceptual outlines means a consistent return to the principles of the reform of 1968 and which, in many respects, goes beyond that reform.1

Latin America, Economic Imperialism, and the State: The Political Economy of the External Connection from Independence to the Present

Part 1 The debate: dependency and the historian - further objections dependency revisited the hegemonic form of the political - a thesis. Part 2 The aftermath of independence: the transition from colonialism in Colombia, 1819-1875 protectionism and industrialization in Mexico, 1821-1854 - the case of Puebla economic policy and growth in Chile from independence to the war of the Pacific. Part 3 The classical age of imperialism: the state and business practice in Argentina, 1862-1914 railways and industrialization - Argentina and Brazil, 1870-1930 external forces and the transformation of Peruvian coastal agriculture 1880-1929 British imperialism in Uruguay - the public utility companies an the batllista state, 1900-1930. Part 4 The era of disputed hegemony: the political economy of revolutionary Mexico, 1900-1940 external disequilibrium and internal industrialization - Chile, 1914-1935 politics and the economy of the Dominican Republic, 1890-1930 dependency, historiography and objections to the Roca pack Anglo-Brazilian economic relations and the consolidation of American pre-eminence in Brazil, 1930-1945. Part 5 The new order: the US, the Cold War and Peron Latin America and the new international division of labour - a critique of some recent views state, multinationals and the working class in Brazil and Mexico foreign finance and capital accumulation in Latin America - a critical approach a reappraisal of the role or primary exports in Latin America transnational corporations, comparative advantage and food security in Latin America.