From financieristic to real macroeconomics: seeking development convergence in EEs

Ricardo Ffrench Davis
WP 44 Commission on Growth and Development



Macroeconomic “fundamentals” are a most relevant variable for economic development. However, there is wide misunderstanding about which are the “sound macroeconomic fundamentals,” contributing to sustained economic growth. The approach in fashion in the mainstream world and international finance institutions (IFIs) emphasizes macroeconomic balances of two pillars: low inflation and fiscal balances. We call it financieristic macroeconomic balances. Additionally, a frequent assertion in the conventional literature is that an open capital account contributes to impose macroeconomic discipline in emerging economies (EEs).
That approach implies a clear omission of the overall macroeconomic environment for producers. As a consequence, in many EEs “a sound macroeconomics” (low inflation and fiscal discipline) is observed, in parallel with slow growth and high unemployment of labor and productive capital resulting from unstable aggregate demand, outlier macro‐prices, and volatile capital flows.
There is strong evidence that financieristic balances have not provided a macroeconomic environment contributing to sustained growth. A third pillar must be added, linked to the productive side of the economy. The behavior of aggregate demand, at levels consistent with potential GDP, is a crucial part of a third pillar for real macroeconomic balances, which has frequently failed in neoliberal experiences. Similarly crucial parts are well‐aligned macro‐prices, like interest and exchange rates. Frequently, these prices and aggregate demand have behaved as outliers, as reflected in economies working either well below potential GDP (the most frequent result), or overheated, with a booming aggregate demand and a large external deficit.
This paper analyses alternative macroeconomic environments faced by firms and workers in the productive side of the economy (the producers of GDP), and the interrelationship between financial and real variables. We analyze alternative structural countercyclical fiscal policies, intermediate exchange rate policies, and capital account approaches.