The second of the IV Development Week of the Navarra Center for International Development of the University of Navarra focused on topics related to macroeconomics in developing countries. This event took place at IESE Business School in Madrid and included issues on monetary policy in an interdependent world of the resilience of emerging markets when facing a global crisis.

The first speaker was Sebastian Edwards, professor of International Economics at the University of California - Los Angeles, co-director of the National Bureau of Economic Research's ‘Africa Project' and former chief economist for Latin American at the World Bank. In his presentation ‘Monetary Policy and Recovery in an Interdependent World' he questioned whether countries with flexible exchange rates have historically been able to pursue a truly independent monetary policy, in light of traditional theory's support of this concept. He argues that to the extent that central banks take into account other central banks' policies there will be a "policy spillover," and monetary policy will not be fully independent. His work he analyses three Latin-American countries: Chiles, Colombia and Mexico to see to what extent the policy change in the Federal Reserve can influence domestic policy interest rates.

The following presentation was given by Eduardo Cavallo, economist form the Inter-American Development Bank on ‘Precautionary Strategies and Household Saving'. He explained that from the observable data the found a negative correlation between risk and private saving in cross-country comparisons, particularly in developing countries. He provided a plausible explanation for the disconnect between precautionary-saving theory and the empirical evidence that is based on a model with a richer account for the various modes of ‘precautionary' behavior by private agents, in cases where institutions are weaker and labor informality is prevalent. In such environments, household saving decisions are intertwined with firms' investment decisions. As a result, the interaction between saving behavior, broadly construed, and aggregate risk and uncertainty, may be more complex than is frequently assumed.

Size of firms and the qualification of professionals

Pedro Gomes, from Universidad Carlos III de Madrid, presented his paper ‘Human Capital and the Size Distribution of Firms'.

In his intervention he explained the countries that have relatively fewer workers with a secondary education have smaller firms. The shortage of skilled workers limits the growth of more productive firms. Two factors influence the availability of skilled workers: i) the education level of the workforce and ii) large public sectors that predominantly hire individuals with a better education. For this research he set up a model economy with a government and private firm formation where production requires unskilled and skilled jobs. Workers with a secondary education are pivotal as they can perform both types of jobs. He found that level of education and public sector employment account for 40-45% of the differences between the United States and Mexico in terms of average firm size, GDP per capita, and GDP per hour worked. It also showed that the impact of public employment on skill premiums and productivity measures depends on the skill bias in public hiring.

Nathalie Pouokam, spoke about ‘A Political Economy Theory of Growth'. In her presentation she explained that according to standard neoclassical growth model developing economies will eventually catch up with leading economies. While good performances from Asian countries support the standard neoclassical growth model, economic stagnation in Sub-Saharan Africa and Latin America calls for a different theory that is capable of explaining both growth miracles and growth tragedies. Her paper showed that a high degree of patience in the preferences of citizens and politicians and the ability of citizens to replace a politician in power are key ingredients for economic growth.

In this way, her paper predicts that all thing held equal, the economies that have the greatest probability to grow are those with the strongest political institutions, or said otherwise, those with the lowest possibility to experience a coup d'etat or give rise to a dictator. However, this relationship between dictatorships and growth that her model predicts is not linear. In fact, it shows that in the case that a country would have a dictatorship, growth would depend on the citizens.

Impact effect in commodity prices shocks

Leandro Medina, economist of the IMF exposed his paper: ‘The Effects of Commodity Price Shocks on Fiscal Aggregates in Latin America'.

His paper analyzed the effects of commodity price shocks on fiscal revenues and expenditures in Latin American countries quarterly from 1995 to 2013. Results indicate that Latin American countries' fiscal aggregates rise in response to positive shocks to commodity prices, yet there are marked differences across countries. Fiscal variables in Venezuela display the highest sensitivity to commodity price shocks, with expenditures responding significantly more than revenues. At the other end of the spectrum, in Chile expenditures respond very little to commodity price fluctuations and the dynamic responses of its fiscal indicators are very similar to those seen in high-income commodity-exporting countries. Results suggest that this heterogeneity may relate to the enactment of fiscal rules, as different dynamic panel estimations show that government expenditures in countries with fiscal rules respond less to shocks to commodity prices.

Risk factors to emerging markets

Cerró la jornada Liliana Rojas-Suárez, investigadora senior del Center for Global Development, consultora del Banco Mundial, el Fondo Monetario Internacional y la Secretaría General Iberoamericana, y presidenta del Comité Latinoamericano de Asuntos Financieros (CLAF). Su intervención se tituló ‘As the Global Cycle Turns: How Resilient are Emerging Markets to Take the Hit?'.

En primer lugar, identificó los tres principales factores de riesgo globales que no se reflejan plenamente en las variables financieras y afectan a las economías de mercados emergentes. El primero de ellos es la creación temporal de liquidez para los mercados internacionales de capital, lo que se deriva de la combinación de tasas de interés muy bajas en las economías desarrolladas y el aumento de las regulaciones que afectan a los bancos internacionales.

En segundo lugar, está el exceso de confianza de los inversores internacionales en su capacidad de prever el momento y el camino del aumento de la Reserva Federal de las tasas de interés, que exacerba las vulnerabilidades de los mercados emergentes a cambios repentinos y/o grandes en la política estadounidense de tasas.

Y el tercer riesgo tiene que ver con fragilidades financieras en China mayores que lo esperado y la consecuente desaceleración mayor que lo esperada del crecimiento  económico a medio plazo para corregir estos problemas.

Tras identificar estos riesgos, Rojas-Suárez analizó la resiliencia de las economías emergentes a la hora de enfrentarse a impactos externos mayores asociados con ellos. Lo hizo a través de las siguientes variables: la capacidad de un país para hacer frente a las condiciones financieras más estrictas y la capacidad de las autoridades para implementar rápidamente políticas anticíclicas.

Tras el análisis, ofreció las siguientes conclusiones: los países BRICS (Brasil, Rusia, India, China y Sudáfrica) ha debilitado significativamente su posición relativa; y muchos países de América Latina no son tan resilientes como antes. En cambio, los países europeos emergentes han mejorado su posición en el ranking en relación con otros mercados emergentes. Por otro lado, la situación en Asia es una combinación, si bien varios países de la región han disminuido su fortaleza.