Macroeconomic Policies

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• Macroeconomic Policies
• INTRODUCTION
• In the 1950s and 1960s economic development was
  seen as a complex process of economic, social and
  political transformation (ex "dual economy,
  "surplus unemployment, "human capital, "stages
  of development, "takeoff," "structuralism).
• In the early 1990s, economists came around to the
  simpler view that growth was a matter of getting
  national policies right.
• Whether it was landlocked Uganda, unstable
  Argentina or transitioning Ukraine, the right
  policies meant lower fiscal deficits, lower
  import tariffs, fewer restrictions on
  international trade and capital flows, a greater
  role for markets in allocating resources.
• regardless of history, political economy, or
  local institutions.
• Much of this vision was reflected in the
  Washington Consensus, articulated by John
  Williamson in a 1990 conference held at the
  Institute for International Economics.
• The consensus synthesized the policies economists
  in the World Bank and IMF thought were necessary
  to rescue Latin American from cycles of high
  inflation and low growth.

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• The 10 reforms of the Washington Consensus
• Fiscal discipline (to end up with balance of
  payments crises, high inflation and capital
  flight).
• Reordering public expenditure priorities
  switching expenditure from non-merit subsidies to
  basic health care, education and infrastructure.
• Tax reform. Enlarge the tax base, reduce marginal
  tax rates.
• Liberalization of interest rates (but how fast?
  supervision?).
• Competitive exchange rates (fix, float?)
• Trade liberalization (how far?)
• Liberalization of inward foreign direct
  investment
• Privatisation (but it can be a highly corrupt
  way of transferring wealth to a privileged elite
  it may also be inefficient if privatised markets
  are not properly regulated).
• Deregulation. easing barriers to entry and exit.
• Property rights
• The WC helped fill the need for an economic
  policy framework following the discrediting of
  central planning and import-substitution trade
  strategies.

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• The 1990s
• The developing world in general, and LA in
  particular, emerged with more open and
  competitive economies, lower inflation, lower
  fiscal deficits, smaller governments, fewer
  restrictions on private sector activities, and
  more market-based financial sectors.
• In Latin America, countries stabilized their
  economies, defeated hyperinflation, further
  opened their markets to international trade and
  capital and privatised public enterprises.
• In Eastern Europe and the former Soviet Union,
  market reforms followed the end of communism.
• India abandoned central planning, embracing a
  wide range of reforms
• China continued its market-oriented reforms,
  though in its on way. .
• In Africa, countries such as Ghana, Tanzania, and
  Uganda embarked on privatisation and liberalized
  trade.
• In Bolivia, Brazil, India, and Russia, exchange
  rates became more competitive.
• The scope, breadth, and depth of the reforms
  during the 1990s were unprecedented in recent
  economic history.

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And yet, results were disappointing - They
exceeded the most optimistic forecasts in some
cases (East Asia) - They fell well short of
expectations in others (LAC).
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• Different approaches, different performances
• In East and South Asia, including China and
  India, domestic liberalization and outward
  orientation were associated with spectacular
  growth and poverty reduction.
• This was so even though reforms were implemented
  in a manner that departed from conventional
  wisdom (speed and design of reform, large state
  presence, high levels of import protection,
  capital controls).
• At the same time, booms and busts continued in
  Latin America.
• For most former Soviet Union countries, the 1990s
  was a costly and traumatic decade.
• Africa did not see the expected takeoff.
• In General
• Some countries managed to sustain rapid growth
  with just modest reforms
• Others did not grow even after implementing a
  wide range of reforms.
• Moreover, similar reforms yielded different
  growth performances

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• NEW TYPE OF CRISES EMERGED
• Emphasis on market openness made states
  vulnerable to inflows of short-term capital that
  could exit as swiftly as they entered.
• The major recipients of capital flows during the
  1990s suffered a financial crisis
• - Mexico (1994)
• - East Asia (1997),
• - Russia (1998)
• - Brazil (1999, 2002)
• - Turkey (2000)
• - Argentina (2001).
• Suddenly, policymakers were confronted by the new
  issue of financial contagion the risk of a
  crisis spreading from one country to another
• The exceptions are Chile, China, and India, all
  of which had introduced restrictions on capital
  flows.
• Economists questioned the pace and sequencing of
  deregulation and liberalization.

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• The way forward
• Economists are now rediscovering that the
  complexity of economic growth is not amenable to
  simple formulas.
• A revised version of the Washington Consensus
  (2002 Monterrey Consensus) mentions governance,
  corruption, and human rights.
• A frequent mistake in the 1990s was to translate
  the Washington Consensus principles into
  "minimize fiscal deficits, minimize inflation,
  minimize tariffs, maximize privatisation,
  maximize liberalization of finance," with the
  assumption that the more of these changes that
  were made, the better.
• The 2005 World Bank study, Economic Growth in the
  1990s Learning from a Decade of Reform,
  recognised that no one policy prescription fits
  all Getting the policies right" does not
  necessarily translate into a rigid set of
  policies.
• Any reform, however beneficial for efficient
  resource allocation, is not necessarily
  growth-inducing.
• For example, it is often argued that strong
  domestic institutions and policies shall be in
  place before opening up economies to flighty
  foreign capital.
• Institutions and policies are context-specific
  and need to be adapted over time
• Today, there is fresh debate about the way
  forward.

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• COURSE AIMS
• The aim of this course is to motivate the
  students with the use of simple analytical tools
  to discuss complex macroeconomic policy problems.
  
• The course is divided in two parts one
  addressing economic growth and long term issues
  the other addressing stabilization policies and
  monetary issues.
• The teaching includes the application of models
  already introduced in basic macroeconomics and
  the introduction of new tools, from the theory of
  economic growth, macroeconomics and monetary
  economics. This will help to improve the student
  understanding of the main mechanisms driving the
  behaviour of a small open economy in the
  short-run and in the long run.
• The applied nature of this course will
  materialize with the discussion of non-technical
  articles addressing real-life examples, mostly
  concerning emerging market economies.

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• LEARNING OBJECTIVES
• On completion of this course a student should be
  able to
• A. Knowledge and Understanding
• Describe the main mechanisms driving per capita
  incomes in the long run
• Discuss the role of policy in promoting long run
  growth
• Formalize the macroeconomic policy dilemmas of a
  small open economy facing domestic and external
  shocks
• Understand the fiscal aspects of inflation and
  exchange rate regimes.
• B. Subject-Specific Skills
• The neo-classical growth model
• The AK model
• Models of endogenous growth with distortions,
  public goods and government failures
• A simple model of technological change and
  adoption
• The small open economy (TNT) model
• Simple models of inflation, exchange rate
  determination and public debt dynamics.
• C. General Skills

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• TEACHING AND LEARNING METHODS
• The course will be delivered through two
  lectures (1.5 hours each) and one tutorial
  session (1.5 hours) each week.
• The theoretical arguments and analytical tools
  will be presented in the lectures.
• Exercises will be tackled in the tutorials.
• Non-technical articles with real life case
  studies will be addressed, so as to improve the
  student ability to articulate the different
  theoretical pieces.
• ASSESSMENT
• Two middle-term tests (50)
• A final exam (50).

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• COURSE CONTENT
• Introduction
• I. Economic Growth
• The Neo-classical growth model
• Endogenous growth
• Externalities, public goods, distortions and
  corruption
• Policies and institutions for technological
  change
• II. Macroeconomic adjustment in a small open
  economy
• The dependent economy model
• Fiscal aspects of exchange rate regimes
• Institutions for Price Stability
• Riding on the Storm The debt crises,
  stabilization with high inflation, capital flow
  reversals.
• Epilogue The Washington Consensus Revisited

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• BIBLIOGRAPHY
• The main references of the course are
• E Easterly, The elusive quest for growth, The
  MIT Press, Cambridge Massachusets.
• W Weil, D. , Economic Growth, Pearson
  Addison-Wesley, 2005.
• SL Sachs, J., Larrain, F., Macroeconomics in
  the global economy. Prentice Hall, 1993.
• BW Burda, M. and C.Wyplosz, Macroeconomics a
  European text, Oxford University Press, 3th
  edition, 2001.
• Other relevant readings include
• AG Agenor, The Economic of Adjustment and
  Growth, Academic Press 2000.
• PM Montiel, P. Macroeconomics in Emerging
  Markets, Cambridge University Press, 2003.
• KO Paul Krugman and M. Obstfeld, International
  Economics Theory and Policy, Addison-Wesley
  Longman, 5th edt, 2000, NY.
• K Kenen, P. , The International Economy,
  Cambridge University Press, 2000.
• J Jones, C. , Introduction to Economic Growth,
  Norton, New York, 1998.
• RESOURCES
• Most articles for discussion will be selected
  from the IMF publication Finance and Development,
  available in http//www.imf.org/external/pubs/ft/
  fandd/fda.htm.
• Specifics articles to each topic and updated
  information on this discipline will be available
  at http//sweet.ua.pt/afreitas/aulas/Macro20poli
  cies/macropolicies.htm