Modeling regional macroeconomic interactions: situation and perspectives for macroeconomic coordination in Latin America. Background paper prepared for the REDIMA workshop on Modeling Macroeconomic Coordination in the Andean Community, (Santiago, Chile 22 October 2003)""

Includes bibliography

Hubert Escaith is Director of Statistics and Economic Projections Division, ECLAC. The views expressed in this document, which has been reproduced without formal editing, are those of the authors and do not necessarily reflect the views of the Organization.. This paper was prepared for the REDIMA workshop on Modeling Macroeconomic Coordination in the Andean Community, Santiago, Chile 22 October 2003. Introduction The early 1990s opened a new era for the analysis of economic interactions between Latin America and Caribbean (LAC) countries. Two channels, real and financial, conveyed the transmission of shocks. Intra-regional trade recuperated strongly in the wave of trade liberalization and the resumption of economic growth after the "lost decade" that marked the 1980s. The first year of the 1990s decade coincided also with the large scale introduction of new financial instruments that allowed operators to trade riskier papers, opening the door to an active market of financial titles emitted by the so called "emerging economies". As a result of this innovation, and the settlement of the old debt problem through the Brady agreement, and an increasing flow of foreign direct investment, the net transfer of resources to the region became once again positive, and growth resumed. But growth resumption was accompanied by higher volatility, due to the nature of the new international financial market, where contagion and herding have become a prominent reality. As a result, shocks initiating in one country will have direct impacts upon trade and other real variables, financial spreads and exchange rates in its neighbouring geographical area, as well as upon the international business climate if the troubled country is large enough (e.g., Argentina, Brazil or Mexico). This common destiny, in spite of differences in policies or fundamentals from one country to another, is a clear symptom of the emergence of a subregional dimension as a result of trade integration and financial globalization. (Studart, 2002). Indeed, because of this common component, national macroeconomic stability (including real aspects) should now be treated as a regional public good. The existence of such externalities calls for more coordination of national economic policies in the region. Despite these interdependencies and notwithstanding major initiatives in promoting macroeconomic coordination in several LAC subregions, cooperation does not always emerge naturally, even when it would be optimal to do so. Reflecting on this situation, Escaith, Ghymers and Studarts (2002) states that "it is striking that there is no systematic, operational regional or subregional scheme to deal with these regional or subregional spillovers… Indeed, economic policies are still totally uncoordinated and all the decisions continue to be taken in close-knit national circles without considering any spillovers at all. The clearest symptom of this is the choice of exchange-rate regimes based on strictly national considerations." The paper is available in PDF format (Only english version).""