REMARKS BY MR. JAVIER GUZMÁN CALAFELL, DEPUTY GOVERNOR AT THE
BANCO DE MÉXICO, ON "EMERGING MARKETS IN AN ERA OF DOLLAR
APPRECIATION AND VOLATILE CAPITAL FLOWS", AT THE STATE STREET
GLOBAL ADVISORS (SSGA) - OFFICIAL MONETARY AND FINANCIAL
INSTITUTIONS FORUM (OMFIF) ROUNDTABLE "POLICY RUPTURE:
CHALLENGES AND OPPORTUNITIES FOR PUBLIC INVESTORS". London, April
1
4, 2017.
I would like to start by thanking the organizers for the invitation to speak at
this panel.
Several years after the outbreak of the global financial crisis, the world
economy continues to display a weak performance, despite the recovery that
has taken place since then. Following the rebound observed in 2010, the
growth rate of global GDP has been on a declining trend, averaging 3.5 percent
annually during the period 2011-2016, a full percentage point below its pre-
crisis trend. It should be noted that the above owes to a large extent to
developments in the advanced economies (AEs), whose sharp GDP contraction
and slow recovery in the aftermath of the crisis limited the increase in real GDP
from 2007 to 2016 to a mere 10 percent.
Even though cyclical factors explain to some extent the aforementioned
trends, the markedly low speed with which activity has recovered, as well as
the perceived fragility of the process, point in the direction of important
structural forces at play. Indeed, global demand for both capital and
consumption goods appears to remain subdued due in part to an excess of
savings over investment, further compounded by the long-lasting
deterioration of balance sheets across sectors and economies as a result of the
crisis. On the supply side, factors such as low productivity growth and
demographic trends, especially in the AEs, in combination with so-called
hysteresis effects from the crisis, are considered to be exerting downward
pressure on growth. All in all, this has given rise to concerns about the
possibility of secular stagnation and therefore a much less dynamic outlook for
the global economy.2
The situation is further clouded by parallel and reinforcing trends in
international trade flows. Not only is the global trade volume of goods and
services estimated to have recorded last year its lowest pace of expansion
since the height of the crisis, but its average rate of growth has been cut by
over one half between 2000-2007 and 2011-2016. Weakness in the pace of
economic activity naturally accounts for a large share of the observed decline
in the growth rate of international trade. However, global trade flows have
also been undermined by a number of factors directly affecting them. Chief
among these is the apparent loss of momentum in the pace of globalization
and the trade liberalization process, as evidenced, for instance, by the
lessened reduction of tariff and other regulatory barriers, the slowdown in the
number and coverage of free trade agreements, and the uptick in protectionist
measures. In addition, the patterns of production and trade may be changing,
and a tendency to shorten global supply chains might also be playing a part in
the observed deceleration of the measured cross-border flows of goods and
services.3
Not surprisingly, these developments and the hardship they have implied for
wide segments of society, have fostered the surge of a strong anti-
globalization sentiment, particularly in some of the main AEs.
In this context, we seem to be entering a new era, where the problems
resulting from the global financial crisis have not been fully dealt with, and new
perils are emerging.
I am especially concerned about five sources of risk, in view of the challenges
they present to the world economy.
First, the degree of uncertainty surrounding the outlook is significantly greater
than what can be deemed normal. Although at the moment this is explained
to a large extent by the lack of clarity and details about the future course of
policies in a number of areas in the United States, this comes atop doubts
generated by exit of the United Kingdom from the European Union, as well as
by the still-pending electoral processes elsewhere in Europe, all within the
context of strengthening nationalist positions in many other countries.
Second, the possibility of renewed episodes of increased volatility in
international financial markets is at present much more likely, given the
combination of highly integrated international financial markets, the above
described situation of uncertainty, the perspective of tighter global financial
conditions derived mainly from the normalization of monetary policy in the
United States, the vulnerable situation of several major advanced and
emerging market economies, and the potential for geopolitical problems in a
number of regions of the world, among other factors.
Third, even though the US dollar has depreciated somewhat during the course
of this year, a number of elements point towards a prolonged strengthening
of this currency. One of the most important among them is the perspective of
higher interest rates in the United States and the likely increasing divergence
of monetary policy stances among the main advanced economies, a trend that
may be accentuated by the fiscal-monetary policy mix anticipated for the
United States in coming years. The implementation of corporate tax reform
measures geared towards subsidizing exports and taxing imports, or a trade
policy aimed at increasing import tariffs in this country, should they
materialize, would also give a boost to the valuation of the dollar.
Fourth, the rise of nationalist sentiment across a broad range of economies
could result in in an increase of protectionism worldwide, in a context in which
new trade restrictions returned in 2016 to the trend levels observed since
20094 and a shift towards more opaque measures of protection is taking place.
According to some recent studies, even an increase in tariffs by WTO members
within accepted rules would have a significant impact on world trade and
welfare.5 Naturally, the consequences of an environment of retaliatory trade
restrictions would be far more severe.
Lastly, the increasing barriers to the flow of labor between economies
embodied in recent anti-immigration policy proposals, would represent a
missed opportunity to mitigate some of the challenges faced by the global
economy. In particular, the aging and low growth of the labor force in some of
the main economies would continue to be a major drag on both realized and
potential global growth. Recent research by the IMF finds that a 1 percentage
point increase of the migrant share in the adult population of AEs, can lead up
to a 2 percent increase in the level of their GDP per capita in the long run.6
What are the policy options for EMEs under such a scenario?
Although specific circumstances will vary from one country to another, some
principles of a general nature can be underscored.
A first one is to fight external uncertainty with policies aimed at enhancing
domestic assurance. The priority here of course is to preserve macroeconomic
and financial stability. Under a situation of volatile capital flows, this implies
an emphasis on prudence and preemptive action on both the fiscal and
monetary policy sides. Flexible exchange rates can provide margins of
maneuver to cope with capital movements. However, exchange rate flexibility
may be accompanied by costs, and therefore intervention in the foreign
exchange market may be needed to gain some additional space. In this
process, the implementation of a balanced policy mix, which avoids excessive
reliance on one single instrument, is of the essence. Financial stability is a
complex objective that will frequently require the coordinated
implementation of a number of tools, including fiscal, monetary,
microprudential and, in particular, macroprudential policies.
A second one is that in the face of a difficult external environment, reduced
margins to implement other macroeconomic policies to stimulate domestic
economic activity, and low productivity growth in a broad range of countries,
efforts towards structural reform in EMEs take on particular relevance. As the
empirical evidence demonstrates, structural reform can lead to improved
productivity performance and broad-based macroeconomic benefits.7 This
strengthens the domestic sources of growth, thus making the economy less
vulnerable to external developments, while increasing the potential to
compete in international markets and the attractiveness of the economy to
foreign investment flows. In addition, aggregate demand may be effectively
stimulated by structural reform measures, not only directly, but also through,
for instance, the higher efficiency with which other countercyclical policy
measures operate owing to reform-enhanced transmission mechanisms.
However, it is important to emphasize that the design and implementation of
structural reforms face a number of challenges. First, as the international
experience evidences, efforts in this direction are often undertaken within the
context of episodes of severe economic distress, with the risk of higher
implementation costs, of a less carefully planned set of reform measures, and
of turning what should be regarded as a strategic action into a desperate
search for immediate relief. A second complication arises from the multiplicity
of idiosyncratic factors that must be taken into account to maximize the
potential of reform success on a case-by-case basis, such as the stage of
development and institutional setup of the subject economy; the careful
identification of a sensible order of priorities, sequencing and intensity of
reforms; and the nonlinearities, interactions and complementarities that may
exist among them. Third, the adequate implementation of structural reform
faces important difficulties of its own. Among these, the required political
support may prove elusive and costly to achieve, while the possibility of
implementation mistakes affecting the beneficial impact of the reform effort
cannot be disregarded. Lastly, in addition to being feasible, structural reform
must also be sustainable in the long-term, which in turn requires a strong and
broad sense of ownership by the societies implementing them, aided too by a
balanced mix of short- and long-term benefits.
Trade policy represents another key component of the policy toolkit
nowadays. In my opinion, a crucial issue here is to keep in mind that openness
to trade flows has unquestionable advantages. In addition to the benefits
arising from greater competition and the reallocation of resources across
sectors on efficiency, technological development and innovation, the wider
variety and better quality of raw and intermediate inputs available to domestic
producers at a lower cost also constitutes an important channel through which
significant productivity and output gains can be obtained. Motivated by these
and other beneficial effects, important strides towards trade liberalization
have been made at a global scale. However, the pace of progress in this
direction seems to have declined, and there remains an ample margin for
further trade liberalization. According to recent estimations by the OECD,8 a
broad-based convergence of trade policy towards a stance such as the one
currently observed in some of the most open economies would yield, over the
long term, a world trade intensity (that is, the sum of world imports and
exports as share of GDP) about 22 percentage points higher than in a baseline
scenario in which protectionism remains at present levels.
At the current juncture, nonetheless, the fact is that access to some markets,
especially in the AEs, may become increasingly more difficult to obtain and
preserve. In such a context, EMEs will need to consider options to broaden the
scope of trade and to deepen its reach. A first possible course of action in this
direction is to look for a more extensive and ambitious network of free trade
agreements (FTAs); experience shows that this has the potential to boost trade
flows.9 Further to this, FTAs foster greater integration into global value chains
(GVCs), although it is also true that this will frequently require additional
efforts towards the improvement of the economy's infrastructure, particularly
in transport and information and communication technology. Lastly, trade in
services appears to be an area largely unexploited, given its relative
underdevelopment in comparison to that in goods, as well as the sector's
growing importance. In more general terms, and as noted before, it is
important to keep in mind the key role of structural reform in increasing the
economy's competiveness in international markets, as well as its appeal to
foreign (particularly direct) investment flows.
To conclude, I just want to note that notwithstanding its beneficial effects,
globalization is accompanied by social costs, as wages and employment in
those sectors more exposed to competition from abroad may be adversely
affected. It has also been noted that globalization may give rise to an increase
in income inequality, although the evidence here is not fully clear.10 In any
event, as the recent experience demonstrates, the costs resulting from
globalization, either real or merely perceived, can be significant enough to
trigger a reaction that may stall, and even reverse, this process.
Indeed, if global integration is to continue, it is essential to design and
implement policies geared towards the effective mitigation of the associated
costs. A first line of defense should aim at ensuring the availability of efficient
and well-targeted social safety nets that limit the potential damage to the
most vulnerable, and that better equip them to face a far more competitive
environment. But seen from a broader perspective, there is a need for
development strategies that explicitly foster more inclusive and sustainable
growth paths. To be sure, the nature of the challenges involved in fighting
poverty, lowering inequality, and providing adequate social protection under
situations of stress, implies the simultaneous use of multiple policy levers,
including fiscal, regulatory and structural reform measures, among others.
Furthermore, macroeconomic and financial stability are a precondition for
these efforts to succeed.