Transcript Economic resilience

Macroeconomic Stability and
Economic Resilience:
The Role of Macroeconomic Policies
Lawrence Schembri
Bank of Canada
Prepared for International Conference on Small States
and Economic Resilience
Malta, 23–25 April 2007
This presentation represents the views of the author, not the Bank of Canada.
Motivation: Why are we here?
•
•
Ultimate economic goal of a nation state is
economic growth that is high and stable (and
therefore sustainable)
→ economic growth contributes to a higher
quality of life
Small states have difficulty achieving this goal
–
–
•
they are “economically vulnerable” (Briguglio);
they are “open” to adverse external shocks
Our objective is to reduce the probability of an
adverse impact by “nurturing” “economic
resilience” (Briguglio, Cordina et al.)
Motivation: Why I am here?
Definition “Economic resilience”:
–
An economy’s ability to recover from, withstand or avoid
adverse economic shocks
Index of Economic Resilience (4 Components)
1.
2.
3.
4.
Macroeconomic stability – MY TASK
Microeconomic market efficiency
Good governance
Social development
My purpose:
1. Discuss how macroeconomic stability contributes to
resilience and
2. Examine how it can be achieved through
macroeconomic policy
Measuring Macroeconomic Stability
•
In the Resilience Index, macroeconomic
stability is broadly measured by:
1. Unemployment rate + Inflation rate
2. Fiscal deficit (as a ratio of GDP)
3. External debt (as a ratio of GDP)
•
•
Only #1 is a measure of macro stability
#2 and #3 are more accurately described
as measures of effective stewardship of
public and external resources
Key Hypotheses
1. Macroeconomic stability and effective
stewardship of public and external
resources “nurtures” or contributes to
economic resilience
2. Macroeconomic stability and effective
stewardship of public and external
resources can be enhanced by appropriate
domestic macroeconomic (& financial)
policies
Outline
1. Provide a conceptual framework for these
broad measures of macroeconomic stability
and their contribution to resilience
2. Discuss how macroeconomic policies (that
is, fiscal, monetary and exchange rate
policies) contribute to macro stability
3. Analyse the macroeconomic experience of
a sample of small states in order to draw
useful policy lessons
Conceptual Framework
“High Level”
Macroeconomic & Financial Policies
Macro Stability & Effective Stewardship of
Public, External & Private Resources
Economic Resilience
Economic Growth
Macroeconomic Stability:
“Conceptual Framework”
•
Ultimate economic goals: “nurturing” economic
resilience and achieving high & stable growth
•
Intermediate goals of public policy:
1.
2.
3.
4.
5.
•
Internal balance
External balance
Effective stewardship of public resources
Effective stewardship of external resources
(Effective stewardship of private resources)
Each of these intermediate goals fosters
economic resilience and high & stable growth
Macroeconomic Stability:
Meaning & Contribution to Resilience
1. Internal balance
–
–
Output at the full employment level
Low, stable & predictable inflation
2. External balance
–
–
A current account position that is roughly equal to a
sustainable level of capital flows
Relative domestic prices that adjust smoothly to any
imbalance
Contribution to Resilience:
An economy in internal & external balance can more
easily withstand and recover from external shocks.
Policies are in place to ensure flexibility & anchor
expectations.
Effective Stewardship: Public Resources
Meaning & Contribution to Resilience
1. Sustainable fiscal deficits & public debt
→ Debt service costs should be manageable
•
Tax rates: low, broadly based and stable
→ Preserve incentives to work, save & invest
2. Expenditures on public goods maximize social
returns
Contribution to Resilience:
Lessen vulnerability to crises with unsustainable
debt loads; preserve flexibility to respond to shocks;
and maintain internal balance.
Effective Stewardship: External Resources
Meaning and Contribution to Resilience
1. External debt at sustainable levels
→ External debt service costs not too onerous
2. Balanced capital inflows
→ FDI and equity are less prone to reversals
→ FDI facilitates technology/knowledge transfer
3. Easy access to global markets
→ Allows borrowing & lending to smooth shocks and
portfolio diversification to reduce risk
Contribution to Resilience
Reduce probability of crises due to high debt loads and
unstable foreign borrowing and better diversify risks
Effective stewardship: Private resources
• Represented by the “microeconomic market
efficiency” measures in the Resilience Index
• Examples: financial and labour markets
• Domestic financial markets should provide
efficient intermediation of savings and access to
risk diversification
• Labour markets should be flexible; wages should
adjust or labour move easily in response to
shocks
Fiscal Policy
Contribution to Macroeconomic Stability
• Fiscal policy is critical to maintaining macro
stability and “nurturing” economic resilience
• From a stabilization (internal balance) perspective:
→ Fiscal policy should be countercyclical
→ Fiscal policy should be automatic rather than
discretionary
• To ensure that the public debt/GDP ratio is
sustainable (& therefore preserve fiscal space to
respond to external shocks), governments should
commit to a long-run target for this ratio
Exchange Rate & Monetary Policy
Contribution to Macroeconomic Stability
• Two policies must be discussed together
• Choice of exchange rate regime has direct
implications for the monetary policy regime
1. Common currency → no domestic monetary policy
2. Fixed or heavily managed exchange rate → monetary
policy must maintain the exchange rate
3. Flexible exchange rate → monetary policy independence,
but central bank must chose a nominal anchor: inflation or
money supply targeting
• Key Consideration: Stable nominal target to
anchor expectations and maintain macro stability
Macroeconomic Policy
Challenges in Small States
Fiscal Policy
• Large demand for expenditures & transfers
(governments play a large role; provide insurance)
• Tax collection inefficient (lack economies of scale;
heavy reliance on import taxes)
• Chronic deficits often result that are not easy to
finance (require financial institutions to hold debt)
• Monetary financing of deficits undermines exchange
rate & monetary policy
Macroeconomic Policy
Challenges in Small States
•
•
•
•
Exchange Rate & Monetary Policy
Difficult to conduct an independent monetary policy
(thin domestic financial markets; low demand for
monetary base; fiscal problems)
Typical policy regimes: Common currencies; currency
boards; fixed or heavily managed exchange rate
regimes
Import domestic monetary policy from abroad
Lose the nominal exchange rate as a flexible
adjustment mechanism; must rely on flexible wages
and prices to absorb shocks
Country
Populatio
n (2006)
GDP
Billions
of USD
GDP per
capita
PPP
Exchange rate
regime
Monetary
Policy
Framework
Bahamas
303,770
$6.48
$21,300 Fixed peg to USD
Exchange
rate anchor
Barbados
279,912
$5.11
$18,200 Fixed peg to USD
Exchange
rate anchor
Fiji
905,949
$5.50
$6,100 Fixed peg against a
Exchange
rate anchor
basket
Jamaica
2,758,124
$12.71
400,214
$8.12
Mauritius
1,240,827
Singapore
492,150
Malta
$4,600 Float
Base money
target
$20,300 Fixed peg to Euro
Exchange
rate anchor
$16.72
$13,500 Float
Inflation
targeting
$138.6
$30,900 Managed float against a Exchange
USD, Euro and JPY.
rate anchor
Nominal Exchange Rate
Local currency per USD
4
70
60
3
50
40
2
30
20
1
10
0
0
1973
Barbados
1978
Malta
1983
1988
Singapore
Fiji
1993
1998
The Bahamas
2003
Mauritius
Jamaica
Misery Index
Fixed Exchange Rate
30%
20%
10%
0%
1980
1985
Barbados
1990
Malta
1995
Fiji
2000
Bahamas
Misery Index
Managed Floating Exchange Rate
100%
75%
50%
25%
0%
1980
1985
1990
1995
Singapore Mauritius Jamaica
2000
Fiscal Deficit per GDP
Fixed Exchange Rate
5%
0%
-5%
-10%
1973
1978
Barbados
1983
Malta
1988
Fiji
1993
1998
The Bahamas
2003
Fiscal Deficit per GDP
Managed Floating Exchange Rate
20%
10%
0%
-10%
-20%
1973
1978
1983
1988
1993
1998
Singapore Mauritius Jamaica
2003
External Debt per GDP
36%
24%
12%
0%
1973
1978
Barbados
1983
Malta
1988
Mauritius
1993
Fiji
1998
2003
The Bahamas
Output Growth
Fixed Exchange Rate
30%
20%
10%
0%
-10%
-20%
1973
Barbados
1978
1983
Malta
1988
1993
Fiji
1998
2003
The Bahamas
Output Growth
Managed Floating Exchange Rate
80%
50%
20%
0%
-10%
1973
1978
1983
Singapore
1988
1993
Mauritius
1998
Jamaica
2003
CPI
Fixed Exchange Rate
45%
35%
25%
15%
5%
0%
-5%
1973
1978
Barbados
1983
Malta
1988
1993
Fiji
1998
2003
The Bahamas
CPI
Managed Floating Exchange Rate
80%
50%
20%
0%
-10%
1973
1978
1983
Singapore
1988
1993
Mauritius
1998
Jamaica
2003
Coefficient of variation for Output Growth
1973 – 2004
1973 – 1989
1990 - 2004
Bahamas
2.80
2.65
1.88
Barbados
2.08
1.73
2.78
Fiji
1.56
2.21
1.05
Jamaica
5.79
-23.54
1.13
Malta
0.83
0.73
0.71
Mauritius
1.30
1.14
0.19
Singapore
0.53
0.44
0.64
Country
Coefficient of variation for CPI
1973 – 2005
1973 – 1989
1990 - 2005
Bahamas
0.72
0.47
0.76
Barbados
1.14
0.85
0.95
Fiji
0.64
0.44
0.59
Jamaica
0.76
0.50
0.91
Malta
0.97
1.02
0.32
Mauritius
0.81
0.79
0.37
Singapore
1.58
1.38
0.82
Country
Summary of Findings
• Prudent fiscal policy seems to be
prerequisite for achieving economic
resilience and stable growth
• Low and stable inflation can be achieved
with either a fixed or a managed floating
exchange rate
• External debt and current account positions
become less of a concern if domestic
macroeconomic policies are appropriate
Concluding Remarks
• Economic resilience is an important and useful
concept for small states
• Macroeconomic stability is critical to economic
resilience
• Good fiscal, monetary and exchange rate policies
can foster macroeconomic stability and “nurture”
economic resilience
• Financial policies are also important for resilience;
strong financial institution and access to global
capitals
• Despite the challenges small states face, it is in their
best interest to adopt best-practice macroeconomic
policies
Closing Remark - Role of IMF
• Given the challenges small states face, the
IMF (and other international organizations)
should provide technical assistance to them
to put in policies that will increase resilience
• They should also consider providing access
to precautionary lines of credit so that these
states can borrow when they are affected by
an adverse economic shock