2003 Reports

Macroeconomic Balances in Emerging Economies: The Conflict Between Purely-Financial and Real-Economy Macrobalances

Ffrench-Davis, Ricardo

The macroeconomic environment of Latin American Countries (LACs) has been dominated by strong economic cycles in the last 30 years. East Asia entered in the same environment in the 1990s. An increase in economic activity in the 1970s in LACs, ended with recession in the early 1980s and then opened a whole decade lost for growth. Subsequently, a recovery took place in the period 1990-94, which was followed by a recession, though a short one, in 1995. The biennium 1996-97 exhibited a strong recovery, with a sudden stop in 1998. In late 1999 a short-lasting recovery survived until early 2000. Finally, a recessive environment predominated until today; by now it is a sexennium (1998-2003) lost for economic growth and social progress, under the framework of the so-called Washington Consensus. In financial crises in the 1960s and 1970s, imbalances of the fiscal sector tended to have an active, leading, role. That changed dramatically in the 1990s. If we disaggregate changes in aggregate demand into public and private components it is found that, rather than the public profligacy of previous decades, in the 1990s, in general, it was the private sector that led to booms and to busts. Large external deficits during the booms and moves towards surpluses in the busts were determined, mostly, by swings in capital flows.