Business cycles in the Latin American countries

Professor Ida Musiałkowska, PhD Scientific review article Received: January 25th, 2007 115 UDK 330.342(8) 338.12(8) Professor Ida Musiałkowska, PhD Poznań University of Economics, Department of European Studies, Poznań, Poland BUSINESS CYCLES IN THE LATIN AMERICAN COUNTRIES Abstract: An attempt has been made in this paper to use Latin-American countries as a basis for answering the question if there is the synchronization of business cycles among developing countries. Until now, it has been believed that such synchronization exists only among countries that are at the same high level of economic development. Yet, as early as during the period of economic isolation that lasted up to the end of the 1970s, economic models of the Latin American countries indicated some similarities in shaping their business cycles. Interdependence and synchronization have been growing during the last decades of the 20th century, as the integration process within this regional group of countries developed and economies of these countries opened to the world. The effects of both phenomena are stronger in those countries that took active part in integration processes and undertook concrete social and economic reforms. Key words: Latin America, business cycles, economic convergence, interdependence, synchronization 1. Introduction The aim of this paper is to establish whether economic oscillations in respective Latin American countries tend to imitate each other. The thesis has resulted from the studies on the synchronisation of business cycles (concurrence of key points in business cycles) in those countries that are at the same level of economic development. The theory fully holds water in the case of developed countries, as has been confirmed by various researches on business cycles in G-7 countries. Still, the synchronisation of business cycles amongst the countries at a lower level of economic progress is only beginning to attract some researchers’ interest. Bearing in mind the current processes of globalisation and integration amongst regional groups, it would be very interesting to observe and study the instances of overlapping (and, related to it, the synchronisation) of business cycles in the developing countries, as well as the relations existing between their Megatrend Review, vol. 4 (1) 2007 116 Business Cycles in the Latin American Countries economies on the one hand and the US economy on the other, all seen in the light of numerous and strong omnipresent relations. 2. Common features in the economies of Latin-American countries Economies in some Latin-American countries are somewhat similar from the historical point of view, the similarity relating to the capital accumulation system and management models applied in the past. At the moment, these countries are classified as so called suburban countries.1 Despite the complexity of the Latin-American region several characteristic features can still be identified as common for all regional economies and stemming from several processes. Precisely these processes account for a partial synchronisation of business cycles amongst Latin-American countries. These are the industrialisation process that was based on the import substitution and lasted till the end of the 1970s; foreign debt crisis during the 80s; structural reforms and stabilisation processes during the 1980s and the 1990s.2 Many of the Latin-American economies were characterised up till the end of the 1970s by foreign trade restrictive systems, cumbersome public sector and macro-economic instability, whish subsequently all resulted in a high inflation rate and a deficit on the current account balance of payments. The economic policy was based on pricing controls, strong foreign trade protectionism, the system of multiple foreign currency exchange rates, non-market way of credit allocation and finally on the restrictions concerning the functioning of the market mechanism. Given all this, it was impossible to achieve stable production growth and a more even distribution of the national income, which could only help the reduction of poverty. Lapsing into a debt crisis during the 1980s brought about the necessity to introduce changes.3 The reforms conducted at the end of the 20th century precipitated the changes in the macro-economic model favoured by the majority of Latin-American countries. The new, amended model focused on the macro1 2 3 According to a standard classification, the richest and most developed countries in the world form the so called “core”. The remaining countries are in the second league, on the “outskirts”. F. Canova, The Transmission of US Shocks to Latin America, CEPR, http://www.cepr.org, Final Revision 2004 The debt crisis resulted in a restricted access to new credits necessary to finance new investments. Countries that were afflicted with both soaring inflation and deficits were struggling to stabilize prices and reduce the deficit. Still, cost cutting was far more emphasized than the stimulation of the production growth. Further changes concerning economic policy were directed to a more efficient market economy, giving way to foreign trade flows and public sector reconstruction and these were not introduced before the most turbulent phases of the crises had ended. Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 117 economic stability, competitive market structures, integration with the world’s economy (so called external orientation) and a new role of the public sector. As provided by this model, it is the public sector that is responsible for the foundation of institutions necessary for both the achievement and maintenance of the economic stability and the efficient functioning of market economy and ensuring for the poorest strata of population a broad access to all social services. In some countries the first wave of changes was being carried out parallel with educational reforms, pension and insurance reforms, as well as financial reforms relating to a strict control of the capital influx and inflation reduction. The volume and complexity of such reforms varied from one country to another. It should be noted that this kind of opening up towards global flows was accompanied by the initiation of cooperation amongst Latin-American countries and the formation of basic integration groups amongst which MERCOSUR seems to play the crucial role.4 Joining the internationalisation process resulted in the participation of Latin-American countries in the World’s Trade Organisation, as well as signing agreements with some other entities, such as NAFTA (relates to Mexico).5 The economic reforms also enhanced the attempts to initiate political dialogue with an objective to generate certain changes in this sphere too. To sum it up, the decade of the 1980s, also known as a lost decade, was a pay-up time filled up by preparations for a whole series of economic, political and social reforms. The new models and conducted reforms belonged to the leading economic flows in the world, which meant there had been a divergence from an interventionist model based on the import substitution. Such a transition towards a model of more open and competitive economies was perceived as a good foundation for the economic growth and macro-economic stability. Still, taking care of the public well-being was neglected, together with providing necessary services for the vulnerable and jeopardised. Poverty reduction succeeded to a degree in Chile and Bolivia. The remaining countries are still facing the need to introduce new reforms (second generation of reforms) to the effect of the institutions carrying out public services improving the quality of their legal and social services.6 4 5 6 On the MERCOSUR group see more in: L. Ruis Himenez, “The Iberoamerican Community of Nations – The Unused Potential of a Stagnant System”, Megatrend Review, Vol. 1, No. 1, 2004, pages 55-66 (editorial remark). The growing number of bilateral agreements is often perceived as something negative today. Still, their main advantage is seen in the establishment of regional groups, a more direct approach to direct foreign investments and stabilizing the situation regarding the participation of investors in the economies of respective countries. V. Corbo, Economic reforms in Latin America, Zeszyty BRE Bank-CASE 59/a, Warsaw, 2002 V. Corbo, ibidem Megatrend Review, vol. 4 (1) 2007 118 Business Cycles in the Latin American Countries 3. Business cycles and their synchronisation Seen from the economic point of view, business cycles can be said to be dynamic processes relating to the oscillations in the observed macro-economic aggregates and reflecting the dynamism of the economic development. The existing writings on business cycles comprise a great number of definitions and theoretical concepts. Still, it is the business cycle definitions stemming from the Real Business Cycle Theory (RBC) that are most often cited for the purposes of studying the so called synchronisation effects. Now that we are talking about these definitions we could quote R. Lukas who claimed that cyclical oscillations are in reality “a series of movements that oscillate around the trend of the real gross domestic product (GDP)”,7 so that, according to the definition, cycles are actually all the discrepancies from the trend.8 The same approach could be applied to other studied macro-economic indicators. The abovementioned concept appears to have been made use of most frequently. The topic of this paper is effectively a phenomenon that is getting increasingly more studied across different aspects and spheres of life. The term convergence or nearing9 covers the process of drawing closer together and assimilation of various characteristics of the analysed phenomena. Its root lies in natural sciences where the term ‘convergent evolution’ encompasses all the similarities amongst the characteristics of otherwise unrelated organisms. Before global market singles out as a main source of convergence, various other reasons and sources are identified, for example: technology, (managerial) elite, and culture.10 Nowadays, convergence is usually analysed in the context of achieving social and cultural consistency within the process of globalisation.11 Convergence is not always premised as an undoubted fact that needs no proving. The process of called divergence or moving apart also happens in these modern times. The assumption is that processes of cultural convergence and divergence need not be opposed necessarily; on the contrary, they can complement each other. There are also some common places, a joint concept that can be identified with globalisation (as an example of convergence) and its counter-balance is growing awareness on separate identities and national/regional cultures (divergence). 7 8 9 10 11 R. Lucas, “Understanding Business Cycles, 1977”, in: F. E. Kydland, Ed., Business Cycle Theory, Edward Elgar Publishing Company, Aldershoot-Brookfield, 1995 There is not an undoubted reply to the question whether this trend should be calculated against GDP levels or GDP growth rates. The issue of the analytical form of the trend remains unresolved too. The terms convergence and nearing are used parallel in the paper to denote the same phenomenon. Predecessors of the convergence theory were: J. Burnham, R. Aron, D. Bell and J. Ellul. W. Morawski, Socjologia ekonomiczna, PWN, Warsaw, 2003, pages 311-342 Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 119 Convergence can also apply to ironing out of the differences in the levels of economic progress and achieving balance and similarity amongst economic indicators such as: public debt, budget deficit, interest rates, and inflation rate. These are precisely so called Maastricht criteria of convergence and they all need to be met if an EU member country wishes to join monetary union. The convergence processes are time-consuming and are therefore analysed in the context of economic development. The variations regarding the tempo and dynamism of the development can precipitate either a reduction or an increase in the discrepancies between the levels of the economic and social development across countries and regions.12 Studies related to the phenomenon of convergence across regions and countries are mainly focused on answering the following questions: • Are spatial variations concerning the income per capita fixed or do they change with time? • Is there the so called ‘catching up’ effect, that is, are those regions and countries that are at a lower level of economic development curbing and lessening the distance existing between them and more developed countries? • Are the relations amongst regions and countries regarding the income distribution fixed and stable or are they subject to changes? There is yet another aspect to the studies on the convergence of economic processes which relates to researching whether business cycles, including those regional ones too, are synchronised or not. This aspect was studied within other convergence issues in European regions. In this case however, the subject was not only the scope and intensity of changes but their temporal convergence too. Replies to the above raised questions lead to the formulation of several types of convergence processes that differ in the effects they produce. To this effect, we can differentiate between absolute convergence and conditional convergence.13 Both types are marked with the symbol (factor) β and are called β-convergence (Beta convergence). Both types are based on the assumption of the macro-economic stability over the observed time period. The assumption reflects as: (1) xit = x in time t. 12 13 K. Gawlikowska-Hueckel, Procesy rozwoju regionalnego w Unii Europejskiej. Konwergencja czy polaryzacja?; Wyd. Uniwersytetu Gdańskiego, Gdańsk 2003, page 71 X. Sala-i-Martin, “Regional Cohesion; Evidence and Theories of Regional Growth and Convergence”, European Economic Review, Vol. 40, 1996, page 1325-1352; X. Sala-i-Martin; Keynote speech: Convergence and divergence – theoretical underpinnings, in: Economic Convergence and Divergence in Europe. Growth and Regional Development in an Enlarged European Union, Eds.: G. Tumpel-Gugerell, P. Mooslechner; E. Elgar, Cheltenham, 2003, pages 117-130 Megatrend Review, vol. 4 (1) 2007 120 Business Cycles in the Latin American Countries If over the observed time period the condition 0 < β < 1 is met, then convergence is conditional. The condition for absolute convergence, on the other hand, would be β = 1. Apart from these two types of convergence, the existing writings on business cycles also mention the so called σ-convergence (sigma convergence). This type of convergence features decreasing differences in the amount of income per capita within one group of regions (countries) in time. This type is also called variant convergence.14 The two basic types of convergence are linked by the following relation: if GDP levels in two countries are becoming similar (σ-convergence), then it must be a result of the speedy development of the poorer of the two (β-convergence). Unless β-convergence happens first, this kind of reconciling of the discrepancies in the amount of income between countries becomes impossible. So, β-convergence is an absolutely crucial prerequisite for σ-convergence to happen. On the other hand, it is possible for β-convergence to happen without σ-convergence ensuing, since the initial speedy development of poorer countries does not have to result in diminishing differences regarding income per capita. Even if poorer countries develop at a quicker pace than the affluent ones, it will only result in the swapping of their positions in the final ranking concerning the gross national income, rather than a diminished dispersion of income. To sum it up, β-convergence is a necessary but not sufficient condition for σ-convergence to happen. The first type of convergence relates to the oscillations amongst countries concerning the distribution of income, whilst the latter type indicates whether the income dispersion diminishes with time.15 3.1. Synchronisation of business cycles The phenomenon of convergence (nearing) applies to business cycles too. However, when we talk about business cycles then the term “synchronisation” is more often used. In this context synchronisation means the eradication of differences upon the formation of business cycles. Upon analysing convergence, it is the concurrence of the key points in business cycles that gets examined and compared, which, in turn, enables to establish the respective length of the phases of growth and stagnation.16 However, this does not mean that cycles will end up identical. Synchronisation aims at enhancing the efficiency of regional and supra-national economic systems. 14 15 16 Ibidem R. Barro, X. Sala-i-Martin, “Convergence”, Journal of Political Economy, 100 (2), 1992; K. Gawlikowska-Hueckel, ibid., pages 97-101 M. Kruszka, “Synchronizacja wahań koniunkturalnych w gospodarce krajów rozwiniętych”, Wiadomości Statystyczne, No. 6 (505)/2003 Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 121 The theoretical foundation for the studying of the synchronisation of business cycles can be found in the concepts of the real business cycle17 dating back to end of the 80s.18 These concepts fit in the new ways of thinking regarding the novel development theories (regional development included). They indicate the role of real factors influencing the economy (including economic oscillations too) of which the most important one is the so called technological shock. When analysing the synchronisation phenomenon in relation to business cycles what should be tested is both the influence of national factors that engender some parallel events, such as fluctuations in spending, investments, trade and monetary policies, but also the influence of factors that are specific for each regional group, such as the European Union or Latin (South) America. The majority of writings on the synchronisation in business cycles originate from either American or British research circles. But gradually, as the processes of European integrations went on, numerous studies on the convergence of business cycles were initiated in Europe too. One of the main problems faced in every upcoming phase of the integration (bearing in mind we refer to the frames of the economic and monetary union) are the variations arising during one business cycle. It is especially on labour markets where we encounter excessive cycle oscillations most often, which then leads to various hindrances to the efficient functioning of both the entire economic system and individual economic entities. Simultaneity, that is, the concurrence of the key points, along with the resulting length of phases in a business cycle, facilitates the conduct of the anti-cyclical activities by means of the shaping and the selection of the economic policy instruments. This then simplifies the carrying out of the economic policy, including the EU structural policy and the evaluation of its results. Synchronisation of business cycles can be examined on different levels of spatial configurations: on global level, on the level of regional groups, national level and finally on the level of various regions within a national economy. 3.1.1. Synchronisation of business cycles on national level The existence of the mechanisms of transmission, as well as the processes of internationalisation and globalisation helped focus the attention on some common economic features in various countries across the world. Precisely as a result of such deliberations with respect to the existence of common characteristics among business cycles on global level, the economists started taking into consideration the existence of a global business cycle. However, these deliberations 17 18 This equally applies to the synchronization of cycles on the level of regional groups, countries and regions. R. Barro, Makroekonomia, PWN, Warsaw, 1997 Megatrend Review, vol. 4 (1) 2007 122 Business Cycles in the Latin American Countries most often take account exclusively of the developed countries19 (for example the group G-7). Such a selection is justified by the comparability of these countries’ respective levels of economic development, and, as already has been explained when talking about the phenomenon of convergence; this is the only approach with a solid and well-grounded foundation available so far. The existence of a global business cycle has been proven in the studies by Kose, Otrok, Canova, Lumbsdaine and Prasad, as well as Huebner and Lubiński.20 These studies claim that developed countries’ business cycles are all synchronised 21 and influenced by the so called global factor. Having said this, oscillations in GDP and employment rates have been identified in more than 30% of the cases as the main causal factor. So, the developed countries’ economies are interdependent and they share not only the mechanism of transmission but also the reactions to external shocks. The cited studies undertook to compare the shaping of the global cycle and a national business cycle. It has turned out that global cycle reflects all important economic events over the last 30 years: gradual expansion in the 1960s, the mid 1970s recession (related to the oil crisis), the early 1980s recession (due to an increase in the indebtedness and crises stemming from a more stringent monetary policy in the developed industrial countries), along with the slowing down of the economic growth in mid 1990s. Once developing countries got included in the analysis, the global cycle image somewhat changed. But it still reflects the same events. However, compared to the developed countries’ (G-7 group) economic reactions to some events, in the developing countries some delayed reactions are arising as a response to the same events, such as the beginning of the oil crisis from the 1970s. Still, these studies failed to determine whether this joint shaping of the global cycle and individual national cycles was caused by the events themselves (the so called global factor, such as the above-mentioned crisis), or by some transmission mechanisms with respect to certain occurrences amongst countries. Still, the global cycle has been postulated based on the influence and the domination of the global factor. The main components of this global factor (that determines the shape of the global cycle) are: foreign trade, merchandise prices, monetary policy and purchasing power.22 19 20 21 22 This approach is consistent with the postulates used in the studies on convergence processes in those regions that are at a similar level of economic development. M. A. Kose, C. Otrok, C. H. Whiteman, International Business Cycles: World, Region and Country-Specific Factors, http://www.iowa.edu, 3.2002; D. Hubner, M. Lubiński, Modern business cycle, PWE, Warsaw, 1989; R. Lumbsdaine, E. Prasad, “Identifying the Common Component in International Business Cycle”, Economic Journal, 113, 2003, pages 101-127 D. Hubner, M. Lubiński, Współczesny cykl koniunkturalny, PWE, Warsaw, 1989 F. Canova, M. Ciccarelli, E. Ortega, Similarities and Convergence in G-7 Cycles, October 2003, http://www.cepr.org Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 123 Making use of a series of geographically shaped criteria, we can differentiate amongst a number of factors causing the oscillations on various economic levels: global, the level of regional groups,23 and national.24 Based on the existing literature we can make out different factors in relation to each of these levels. This particularly relates to factors specific for individual countries. The effects these factors have on the overall oscillations in production, investments and spending have been analysed on all levels. There are certain factors in the economies worldwide which determine the shaping of both national and regional cycles.25 Studies conducted in many countries suggest that the same factors affect a great majority of oscillations within cycles. This particularly relates to those countries that are closely linked. Looking at both developed and developing countries, certain similarities can be noted with respect to the shapes of business cycles in both groups.26 Therefore, the existence of a global or an international business cycle can be assumed. As already mentioned, this cycle reflects all the recent important economic events in the world. Certain analyses have also been conducted concerning regional groups and individual countries. In the case of the United States, for example, all low breaking points within its cycle are synchronised with the global cycle. Still, there have been examples when global cycle had a growing tendency whilst the American economy was stagnating (this is caused by a lower level of total investment, along with diminished consumption and production compared to the year before). In other examples, American economy got out of the recession faster than global economy (1981 or 1984). Movements within global, German and European economies were compared upon the analysis of European cycles. In the cases of the recession from 1982 and growth from 1973 global and German economies tuned out to be convergent. On the other hand, economic growth from the mid 1970s, high breaking points from 1979 and 1983 and low key points from 1969 and 1975 were exclusively under the influence of national factors. So called regional (or European) factor played a minor role in the shaping of changes concerning the 23 24 25 26 The phrase ‘regional factor’ will be used in the text thereinafter to denote a factor operating at a level of regional groups, rather than a level of a sub-national community. M. A. Kose, C. Otrok, C. H. Whiteman, ibid. M. A. Kose, C. Otrok, C. H. Whiteman, International Business Cycles: World, Region and Country-Specific Factors; http:// www.iowa.edu, 3.2002 S. Gerlach, “World Business Cycle under Fixed and Flexible Exchange Rates”, Journal of Money, Credit and Banking, 20/1998, pages 621-632; F. Canova and H. Dellas, “Trade Interdependence and International Business Cycle”, Journal of International Economics, 34 (1993), pages 23-47; U. M. Bergman, M. D. Bordo i L. Jonung, Historical Evidence on Business Cycles: The international Experience, WP No. 255, Stockholm School of Economics, 1998; M. Crucini, “International Comovement: Is Theory Ahead of International Business Cycle Measurement?”, Working Paper, Ohio State University, 1999 Megatrend Review, vol. 4 (1) 2007 Business Cycles in the Latin American Countries 124 total production though it influenced the recessions in 1967, 1975 and 1978, along with the German economic ascent in 1964 and 1973. Studies of the Japanese economy, regional factor analyses in developed Asian countries and the global factor effect, as well as their comparisons and parallels with German and American economies, have swiftly led to a conclusion that Japanese situation is quite stable. Over the observed period of time, Japanese economy went through rather a long period of growth during the 60s and shorter periods of recession in 1965, 1971 and 1980. Japanese national factors and its business cycle itself often predetermined movements within the global cycle. On the other hand, the factor of regional groups in developed Asian countries did not exert remotely the same influence. National factors had a major role in Latin American countries, for example during the crisis in the 1980s. National factor accounted for up to 64% and 57.2% in GDP and spending respectively. This share was lower in the investment field, amounting to 30.6%. As for the shaping of the investments levels, up to 57.2% is attached to other factors.27 Fluctuations within GDP levels are much more influenced by the global factor in the developed countries. When GDP oscillations become too sharp then national factors start to have a more prominent role. National factors also play quite a distinctive role in those cases when economic structures are based much more on the processing of raw materials than on the servicing sector (Table 1) Table 1: Respective influence shares of global, regional, national and other factors in the shaping of the total GDP, spending and investments within regional groups (average values in the period 1960-1991, %) Group/Region 27 Global factor Regional factor National factor Other factors North America A B C 33.5 28.5 13.9 39.4 29.4 39.3 18.7 15.5 31.3 7.4 24.1 13.0 South America A B C 17.9 12.2 7.8 4.9 5.2 3.1 63.9 57.2 30.6 11.9 24.0 57.2 Africa A B C 5.9 4.3 4.0 6.1 4.9 3.3 70.8 73.6 8.9 15.3 15.0 82.3 The domination of national factors in the shaping of economic activities decreases in direct proportion to the liberalization and opening up of Latin American markets. The analyses conducted recently amongst others by F. Canov and other researchers who contribute to OECD work (Organisation for economic cooperation and development) indicate the significance that international factors have on economic activities in Latin American countries. Therefore, all the changes concerning respective influence shares of individual factors in Latin American countries can be ascribed to the intensifying of the globalization process the results of which stretch over to the developing countries too. Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD Group/Region Asia(developed countries) A B C Group/Region Asia (developing countries) Europe Oceania A B C A B C A B C 125 Global factor Regional factor National factor Other factors 13.3 10.6 9.7 Global factor 4.4 7.5 0.5 32.3 24.4 22.7 14.3 13.2 9.7 2.8 2.2 3.9 Regional factor 6.1 5.7 3.8 2.3 2.3 1.6 2.8 1.7 3.5 69.8 57.5 38.0 National factor 67.6 54.2 22.8 48.2 30.3 41.8 69.9 33.2 71.6 12.4 28.2 46.9 Other factors 19.9 30.5 71.6 15.8 41.5 32.4 11.0 50.6 13.0 Legend: A – gross domestic product, B – spending, C – investments. Source: M. A. Kose, C. Otrok, C. H. Whiteman, International Business Cycles: World, Region and Country-Specific Factors, http://www.iowa.edu, March 2002 Factors relating to regional groups play a bigger role in those economies based on providing services and characterised by higher GDP levels (including GDP per capita). This is similar to the influence of the global factor. The summary of all the studies conducted in 60 different countries worldwide can be brought down to the following: • Global factor plays a major role and its influence is visible in all the studied cycles upon explaining the oscillations within economic aggregates; • An outstanding role is also played by the factors relating to individual, specific countries (that is, their economic structure); • Region-specific factors played minor roles (except in the US). GDP oscillations mainly depend on the presence of global factor, whilst the oscillations concerning investments and spending largely depend on national and other specific factors, and much less on regional and global factors.28 These findings have been upheld by some recent researches on respective economies in G-7 countries where global factor plays the biggest role in the shaping of business cycles, followed by national and region-specific factors.29 The conducted studies show that processes of integration and globalisation contribute to the increasing number of international and supra-national cycles, that is, to the global cycle and region-specific cycles. The influence of these phenomena is more visible and easier to spot in the case of cyclical economic oscillations in developed more than in developing countries. This also makes for one 28 29 M. A. Kose, C. Otrok, C. H. Whiteman, ibid. F. Canova, M. Cicarelli, E. Ortega, Similarities and Convergence in G-7 Cycles, October 2003, http://www.cepr.org; R. Lumbsdaine, E. Prasad, “Identifying the Common Component in International Business Cycle”, Economic Journal, No. 113, 2003, pages 101-127 Megatrend Review, vol. 4 (1) 2007 126 Business Cycles in the Latin American Countries of the premises in the study of synchronisation (that is, concurrence) of business cycles in developed countries. 3.1.2. Synchronisation of business cycles in individual countries – national cycles Seen from the viewpoint of the current integration processes it seems that national cycles will start disappearing and getting replaced by region-specific cycles. But despite such estimates, national business cycles are not dying out. The very form of a business cycle is still under the influence of so called national factors. National cycles can be more or less synchronised. Business cycles in G-7 countries, as well as cycles in other industrially developed countries tend to be synchronised. In developed countries’’ economies there is a possibility of the transmission of the business cycle impulse through a transmission mechanism that is in the first place generated by their respective sizeable shares in global trade.30 The economy of the United States is taken as an exemplary cycle. We can differentiate between rising and falling phases when analysing a cycle. It has been noted that national cycles have a bigger tendency towards synchronisation during a falling phase. The US economy and other developed countries’ economies went through several slowing down phases between 1971 and 2002. The first such occasion happened in the mid 1970s; the countries analysed in this paper also went through this stage. Low economic growth was again recorded in the early 1990s. Then a phase marked by torpid economic activities ensues in the early 2000s. Differences amongst the studied countries relate to the economic decline in the late 1970s and early 1980s, whilst synchronisation existed only during two three-month periods and did not happen in all countries anyway.31 Oscillations concerning the real GDP trend exhibit high correlation in the sphere of breaking points; many countries have been noticed to go through a falling phase of their business cycles at the same time when it happens in the States. Business cycle oscillations are usually accounted for by investment and spending (two GDP components that are most subject to oscillations32). Studies have also confirmed that investments and spending display considerable convergence between themselves. However, their convergence is still weaker than the convergence relating to GDP oscillations. The biggest synchronisation of all aggregate oscillations has been recorded in the economies of the States, Great Britain and Italy. Somewhat lesser synchro30 31 32 The economies that get compared against each other most often are those of the United States, Great Britain, France, Italy, Japan, Canada and Australia. M. Kruszka, ibid.; F. Canova, M. Ciccarelli, E. Ortega, ibid. Factors that influence GDP levels most are investments and spending, their oscillations determine oscillations within GDP. In 1954 and 1991, the quotient of correlation between investments/spending and GDP osillations in the States stood at 0.92 and 0.77 respectively. R. Barro, Makroekonomia, ibid., pages 33-35 Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 127 nisation has been noted in the changes within the cyclical activities in Australia (where synchronisation happened only in relation to GDP). There is a convergence in France and Japan and it exists at the level of highest points within a cycle, including both GDP oscillations and investment oscillations. And finally, let us mention Canada where oscillations of all economic aggregates are completely independent from what is happening elsewhere.33 The existence of the European cycle was established for the first time at the end of the 90s. Presently, there are both studies upholding and those overruling this process. In the context of the European integrations it is believed that the following are the most relevant factors in the synchronisation of cycles: foreign exchange rate stability, foreign trade, external shocks and national income levels. The synchronisation of regional cycles within the European Union is achieved through precisely these factors, along with state borders, geographical locations, economic structures and historical links. Between 1975 and 2002 as much as 89% of the regional cycles within 15 member states exhibited a synchronisation trend amongst each other, whilst in 46% of the cases synchronisation existed with more than a half of all other cycles.34 4. Synchronisation of business cycles in Latin American countries Developing countries feature a lot in various researches and economic studies. However, these studies rarely touch on the issue of business cycles and their activities, not to mention the issue of the presence (or absence) of synchronisation amongst these countries’ business cycles. This mainly results from an understanding that synchronisation usually happens between countries at a similar (and, needless to say, high) level of economic development. 4.1. The character of business cycles in Latin American countries This paper analyses eight biggest Latin-American economies between 1950 and 1995, and these are the economies of Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.35 Cyclical movements in these countries’ economies were followed by means of a method applied in the case of classic business cycles, as defined by Burnes and Mitchell. Real GDP per capita index was made use of. Synchronisation was established based on Pearson’s linear correlation method and the US business cycle was used as exemplary in the process. 33 34 35 M. Kruszka, ibid. I. Musiałkowska, Regionalne cykle koniunkturalne w Unii Europejskiej, PhD thesis, University of Economy, Poznań, 2005 P. Mejia-Reyes, Classical Business Cycles in Latin America: Turning Points, Assymetries and International Synchronisation; University of Manchester, 5/1999 Megatrend Review, vol. 4 (1) 2007 128 Business Cycles in the Latin American Countries Based on these data, seven turning points were determined (for example commencement dates of recessions and expansions, also seen as initial moments marking the beginning of the periods of faster and slower economic growth). Table 2: Turning points in business cycles of Latin-American countries and the US between 1950 and 1995 (GDP per capita) Turning point Lowest point Highest point Lowest point Highest point Lowest point Highest point Lowest point Highest point Lowest point Highest point Lowest point Highest point Lowest point Highest point Argentina Bolivia Brazil Chile Colombia 1953 1956 1955 1958 Mexico Peru Venezuela US 1957 1960 1955. 1958 1975. 1978. 1981. 1983. 1970 1973 1978 1985 1973 1975 1979 1982 1987. 1992. 1988 1989 1992 1989 1991 1952 1959 1961 1963 1980 1985 1979 1980 1983 1971 1976 1981 1983 1981 1987 1987 1990 1990 1993 1987 1992 1992 Source: P. Mejia-Reyes, Classical Business Cycles in Latin America: Turning Points, Asymmetries and International Synchronisation, University of Manchester, 5/1999 These studies give rise to the following conclusions. First, what all the studied countries have in common is a long period of stable growth that came to an end in the late 1970s and early 1980s. Second, all the countries (except for Colombia) were hit by a recession incurred by the foreign debt crisis. The recession effects could be felt in some of these countries even up to 1983. Third, after the early 1980s’ crisis and the achievement of a high turning point, cyclical frequency went up, which was reflected by shorter periods that individual cycles lasted for. This state had resulted from a shortened period of the economic expansion. And finally, though the recession started in all the countries at around 1980, four separate groups of countries behaviour which slightly differed can still be singled out. • Up till 1980 there was no crisis whatsoever in Brazil and Mexico; • Before the 1980 crisis there had been only one period of recession in Argentina, Bolivia and Venezuela; • After the one in the mid 1970s this was the first recession in Chile and Peru; • The only time recession hit Colombia was between 1955 and 1958. If we compare Latin American countries’ economic results to the US results, it can be said that before 1979 the US had suffered even two spells of recession, Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 129 which, in turn, indicates a more stable economic growth in Latin American countries between 1950 and 1979. If we study the flow of movements and changes concerning GDP in the eight Latin American countries, then an asymmetry in the growth rate can be noticed. The average growth rate during the growth period stood at 3.1% per year, whilst average decline rate during the recession came up to 4.1%. Compared to the expansion, the recession was characterised by twice higher number of oscillations (growth unpredictability). Average length of expansion and recession periods were seven and five years respectively In five out of seven countries variations within the recession were much bigger than those that happened during the expansion.36 The biggest recessional variation index when compared to the expansion ones was recorded in Chile, Mexico and Peru (Peru had the lowest variation index of 2.5). As for the length of both phases, the following types of countries can be differentiated: those in which recession lasted for a shorter period of time compared to expansion-Argentina, Chile and Venezuela and those in which recession and expansion lasted for exactly the same time periods-Bolivia, Brazil, Mexico and Peru. The length of an entire cycle in Latin American countries is similar to the length of one cycle in the United States. The average cycle duration in Latin American countries is 12 years and in the United States it is 11 years. Still, there are considerable variations between individual countries. For example, in Peru a cycle lasts for six years on average, whilst we are talking about 22 years in Bolivia. Certain “distractions” can also be noticed within one cycle’s direction, which was incurred by a long and already mentioned expansion period before 1981-1982. However, a drop in both the number of oscillations and their intensity has been recorded over the recent years.37 Observations have also shown a significant asymmetry that is characteristic of the cycles in Latin American countries, as well as the fact that economies behave in different ways during a period of recession and expansion. This is a fact that was not taken into consideration during many of the past studies that dealt with the phenomenon of business cycles in Latin American countries. 4.2. Synchronisation and lack of synchronisation in Latin American countries’ economic oscillations It is of paramount importance to ascertain the mechanisms of transmitting of the so called “growth distractions” (that is, shocks) in the developing coun- 36 37 The analysis did not include Colombia as the data were available only for one period of the growth spell. M. Aiolfi, L. Catгo, A. Timmermann, Common Factors in Latin America’s Business Cycles, International Monetary Fund, http://www.imf.org, 2005 Megatrend Review, vol. 4 (1) 2007 130 Business Cycles in the Latin American Countries tries, as these affect the synchronisation of business cycles.38 Causes for the oscillations and transmission mechanisms in the 1970s differed from those in the 1980s when an unusual autarchy was noticed on Latin American financial markets. At that time the majority of business cycle impulses were conveyed through foreign trade and adjustments, that is, changes in the exchange rate. During the 1990s, parallel to the liberalisation of Latin American financial markets and a growing number of links to the US financial markets, an increased number of “shocks” transferred from the US economy to Latin American countries were recorded. Financial channels (especially foreign exchange rate) started to play an exceptionally important role in the transmission of business cycles. The identification of the causes for oscillations made it possible for the instruments of the stabilisation of economic policy to be adjusted better.39 In the case of the eight Latin American countries studied in the previous sub-section (Argentina, Bolivia, Brazil, Chile, Colombia, Mexico, Peru and Venezuela) a strong synchronisation has been spotted between the cycles in Peru and Brazil, as well as between Brazil and Argentina, 40 which resulted from trade links and similarities between the respective countries’ economic policies. Synchronisation between other countries is quite poor (the synchronisation quotient has reached the level of 50%).41 Up till 1995 no synchronisation had been noticed between Latin American countries ‘ business cycles and the US economy, except in the case of a rather strong correlation between the States and Colombia.42 This can be perhaps accounted for by different reactions to the so called external shocks, along with differences in individuals countries’ respective economic policies. A group of large Latin American countries were separately studied (Argentina, Brazil and Mexico) for the reason than country’s size is often cited in literature as one of the causes for the synchronisation. It was noticed that in 38 39 40 41 42 Speaking of the role of the factors on each territory-specific level, it can be noticed that global factor had a much lesser role in these economies, whilst national factor had a much bigger influence on GDP, mainly through the employment rate oscillations. F. Canova, The Transmission of US Shocks to Latin America; CEPR, 2004, http://www. cepr.org Results from some other studies indicate the existence of a very postitive correlation between the two Mercosur countries-Brazil and Argentina, in: A. Arnaudo, D. Jacobo, “Macroeconomic Homogeneity within MERCOSUR: an Overview”, Estudios Económicos, El Colegio de México, No. 12 (1) 1997, pages 37-51, or: R. F. Engel, J. V. Issler, “Common Trends and Common Cycles in Latin America”, Revista Brasileira de Economia, No. 47 (2) 1993, pages 149-176 These studies have eben corroborated by the work of Iguíñezo and Aguilar who did not notice any statistics-wise relevant correlation between business cycles in the Andean countries after the 1998 crisis, in: I. Iguíñez, G. Aguilar, “Ciclos Peruanos, Andinos y de Estados Unidos”, Documento de Trabajo, No. 141, Pontificia Universidad Católica del Perú, 1998 P. Mejia-Reyes, ibid. Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 131 the period 1951-1955 the correlation between Argentian and Brazilian business cycles on one side, and other countries’ on the other, was weak. Peru and Bolivia are exceptions as these countries’ business cycles showed a bit stronger synchronisation with Argentinean and Brazilian cycles over this period. Mexico, on the other hand, exhibited medium correlation with Bolivian and Venezuelan cycles over this period. Some countries whose cycles that showed synchronisation with one big country did not always have their cycles synchronised with another big countries (for example, the aforementioned Bolivia showed no synchronisation with Brazilian cycle). What stands behind such a weak correlation of business cycles most often are the omnipresent protectionism and the lack of live trade links between Latin American countries, together with the stagflation that lasted at least to the beginning of the debt crisis in 1982. Up till then, the factors influencing the inter-cycle synchronisation had been of national origin and there were lots of similarities in their respective reactions to economic distractions (shocks). Similarities between the forms of business cycles in some Latin American countries (Argentina, Brazil, Bolivia, Mexico, Peru and Venezuela) stem from: the industrialisation process that was based on the import substitutions and lasted till the end of the 1970s; the foreign debt crisis from the 1980s and other similar structural reforms and stabilisation processes from the 1980s and the 1990s.43 All up until the beginning of the 1990s no standard form of Latin American business cycle had been spotted.44 Global factors and global economic distractions had played no major role before the integration groups started investing real effort, economies started to open up and financial markets to liberalise. Speaking of the synchronisation between business cycles (both in the developed and developing countries) on one side and GDP oscillations on the other, the inverse proportion has been recorded. Namely, the bigger GDP oscillations are, the less the synchronisation is, and vice versa.45 4.2.1. The influence US economic oscillations had on Latin American cycles and their synchronisation with the US cycle46 Upon describing the global cycle, one country’s business cycle has been noticed to depend not only on national factors. United States play an enor43 44 45 46 Ibidem Some authors point out the existence of similarities and synchronisation between the following four: Argentina, Brazil, Chile and Mexico. These conclusions tally with only some of the studies cited in this paper. Cycles show a long-term kind of synchronisaiton in the studies referring to a 135-year long period starting from 1870, in: M. Aiolfi, L. Catгo, A. Timmermann, ibid. F. Canova, M. Ciccarelli, E. Ortega, ibid. This sub-section is based on: F. Canova, The Transmission of US Shocks to Latin America, Final Revision 2004, CEPR, http://www.cepr.org Megatrend Review, vol. 4 (1) 2007 132 Business Cycles in the Latin American Countries mous role in the trade links between Latin American countries. At the same time, foreign trade is one of the main channels for the transmittance of business cycle impulses between countries or regions. That is why in this chapter we deal with inter-economic dependencies on one such important trade partner and its effects on the forms of Latin American business cycles. These are some of the issues addressed here: first, are the shocks, that is, economic distractions, transmitted through foreign trade or by monetary means (through exchange rate), and is this pattern of transmitting of the impulses similar to the transmitting model that exists in the developed countries? Second, are Latin American countries’ business cycles synchronised with the US cycle? Third, is the “shock” transmittance influenced by the size of a country and international agreements concerning the monetary policy? Canova offers replies to these issues by means of analysing in her article apart from the US cycle other countries’ cycles too: Argentina, Brazil, Chile, Ecuador, Mexico, Panama, Peru and Uruguay. Thus the analysis includes both small and large countries; those with strong as well as those with weak trade links to the US; countries with different backgrounds and experiences with respect to their monetary policies (countries that have not seen the “dollarisation”, which means that both foreign exchange rate and interest rates are effective and their economic policies anti-inflation-oriented, such as Chile and Mexico; countries that have had “dollarisation” introduced, such as Peru and Ecuador; countries where partial dollarisation has been introduced); countries that have signed various agreements with the International Monetary Fund; countries partially hit by the 1990s’ crisis. Comparable statistical data from these countries are also available. There has been a research concerning a growing transmittance of impulses which results from closer links between financial and merchandise markets.47 An inter-state mechanism has been developed with an inset mechanism of time 47 There are different models of the transmittance of business cycle impulses depending on the type of channel and the type of shock, that is, the distraction in question. A) THE PATTERN OF TRANSMITTING OF THE IMPULSES THROUGH TRADE 1. Demand-induced shock affects the US prices. 2. This aggravates the trade conditions with Latin American countries as prices of imported goods go up compared to the prices of exported goods. 3. Then a rise of import and GDP levels ensues along with a decline of import, thereby improving the trade balance. 4. Prices in Latin American countries can remain the same; can go up or down, depending on whether there have been any changes of the exchange rate and whether a rise in the entire demand considerably affected the prices and production. 5. Interest rates and monetary changes depend on the monetary policy that is valid in a country (if cash supply is adjusted to GDP changes and monetary policy is anti-inflation-oriented, then interest rates will go up too). Oscillations in the US prices do not affect the prices in Latin American countries (and interest rates remain balanced). The importance of this channel of the impulse Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 133 lag. This model therefore enables the understanding of the effects on individual economies, inter-cycle synchronisation and some other factors, not only those that are directly studied. The research is based on three-month data whilst the analyses were conducted for the following periods: 1980-1981, 1985, 2000-2001. The influence of the US economic distractions on Latin American countries’ foreign exchange rate during the crisis years of 1994, 1998 and 2001 has also been studied. Some general conclusions that can be drawn from Canova’s research are: • Shocks induced by real supply and demand in the US have a minor influence on the oscillation of some macroeconomic variables in the studied Latin American countries; • monetary shocks in the US economy bring about considerable oscillations in all Latin American countries; in this case the main channels for the transmittance of business cycle impulses are interest rates, and to a smaller degree, foreign trade channels; transmittance depends on the strength of trade links, and these links are strong in the case of for example Mexico, Ecuador or Panama. B) THE PATTERN OF TRANSMITTING OF THE IMPULSES THROUGH FINANCIAL MARKETS 1. Monetary shock in the States brings about the fall of interest rates 2. Then what happens is an increase in the value of Latin American currencies as a result of fixed agreements the value of securities goes up and local interest rates decrease. 3. a. If foreign exchange rate is properly adjusted then Latin American economic variables will not be affected. b. If foreign exchange rate is not properly adjusted then prices in Latin American countries could go up. c. Cash supply will increase if local central banks react positively to the GDP expansion. d. Cash supply will decrease if there is a trade agreement in place, which means that cash supply is related to the settling of the deficit in the exchange with the States, therefore prices “dictate” the monetary policy. An a priori assumption is that the importance of this channel depends on at least two factors: the level of the financial integration with the States and the relation between foreign exchange rate and the exchange rate of some of the more integrated countries’ currencies, or on the rigidity of the foreign exchange rate (which is more subject to changes). In case all three types of structural shocks in the US (supply, demand and monetary policy) influence both interest rates and the inflation, it can be assumed that both channels will be in force. The importance of any of the two channels for the transmittance of business cycle oscillations can vary (for example during the financial liberalization of Latin American countries in the 90s). When talking about the pattern of influence (whether through inflation or interest rates). Megatrend Review, vol. 4 (1) 2007 134 Business Cycles in the Latin American Countries • Latin American countries react almost instantaneously to the US distractions (it never takes more than several months for them to react once a distraction happens in the States). The very pattern of the transmittance of business cycle impulses differs from the one in the developed countries. For example, interest rates in Latin American countries rise during a decline phase in the US, which leads to a further cash inflow, rise of prices, depreciation of foreign exchange rate and improvements in the trade balance. Increase in the overall demand calls for a further cash influx, which, in turn, leads to a delayed (but positive) production increase (which means also GDP increase). Economic stabilisation in Argentina and Brazil in 2001 was caused by some changes in the States which affected GDP, inflation rate and nominal exchange rate. It has been recorded that countries reacted in different ways depending on whether they had fixed or fluctuating exchange rate. In those countries where fluctuating exchange rate is valid there are always certain fears concerning potential changes of the exchange rate, as central banks are forced to use monetary reserves to rein in the nominal exchange rate oscillations. Precisely for this reason only partial changes of interest rates have been noticed n those countries where fluctuating exchange rate is valid. 4.2.2. Dynamism of the transmittance of business cycle impulses Dynamism of the transmittance of different types of business cycle impulses has been analysed in the case of one so called typical Latin American country. Shocks with respect to supply and demand in the US affect largely the economy of that Latin American country. Shocks that happen in the States during a decline phase considerably diminish production and interest rates after seven and two three-month periods respectively. The effect of these changes is fleeting. On the other hand, those shocks that happen in the States during a growth phase significantly raise levels of prices and interest rates after three three-month periods, but this effect lasts for only three months. One Latin American country’s reaction to the US monetary shocks is widespread and very important, and its dynamism is stable and lasting. Despite the availability of various transmission mechanisms depending on the type of shock, financial markets are still the most dominant channel for the transmittance of business cycle impulses. The US monetary shocks produce considerable shocks in Latin American countries’ economies, which are felt through the level and oscillations of interest rates and the trade effect itself (this pattern behaves in the same way as G-7 countries). The US shocks with regard to supply and demand exert small and insignificant influence on Latin American countries’ trade. Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 135 Still, the mechanisms for the transmittance of business cycle impulses differ from those in the developed countries. Monetary distractions that happen during a decline phase in the States bring about a big and instantaneous increase in interest rates in Latin American countries. There are three causes of this phenomenon: first, this rise is imposed by the financial markets that follow an increase in the risk with respect to foreign exchange rate changes in these countries; second, local central banks regulate interest rates in line with the oscillations (the level of oscillations) of foreign exchange rate; third, a more restrictive monetary policy in the States results in the increase in global interest rates. The first two causes are crucial. These phenomena are extremely important for Latin American countries as they enable for the capital inflow in these countries to rise, which then results in greater reserves in central banks and an increase in the entire demand. In case foreign exchange rate and interest rate remain unchanged, an increase in production and capital inflow ensues all through Latin America after two three-month periods. Also, national currencies effectively depreciate against the American dollar, which leads to temporary improvements in the trade balance and a further capital influx. Countries in which the fluctuating foreign exchange rate is in force (Chile, Mexico, Brazil and Peru) are mush less prone to shocks coming from the States then those countries where fixed exchange rate is valid. In this case, the transmittance pattern remains unchanged, but the influence on interest rates, trade balance and foreign exchange rate is much lesser. Therefore, the effects of the transmittance of the US business cycle impulses are only partially manifested in Latin American countries, which is in line with the theory of the impulse transmittance. Nominal interest rates react strongly to the US shocks, whilst prices react moderately. Given this, the following features can be singled out as characteristic for Latin American countries with regard to the impulse transmittance effects: • Interest rates oscillations are bigger in those countries in which fixed foreign exchange rate is in force; • Inflation oscillations are bigger in those countries in which fluctuating foreign exchange rate is in force; • Foreign exchange rate oscillations are rather insignificant in both groups of countries; • Real foreign exchange rate oscillation pattern does not influence the production level, which casts doubt over those studies that deal with the influence of the terms of trade and financial agreements to the occurrence of business cycle distractions. Megatrend Review, vol. 4 (1) 2007 136 Business Cycles in the Latin American Countries 4.2.3. The significance of the US economic distractions on Latin American countries’ economies Shocks coming from the States account for 19-56% of all Latin American oscillations with respect to macro-economic variables. The changes concerning trade balance and inflation are most felt in Argentina and Mexico. Countries in which fixed foreign exchange rate is in force are affected by changes coming from the States in a most intensive way. International factors play the biggest role in the transmittance of business cycle impulses, they affect GDP changes in up to 58% of cases and changes within foreign currency reserves and nominal foreign exchange rate in 71-75% of cases. The abovementioned factors also play an important role in the cases of Brazil, Chile, Uruguay and Peru where they account for 55% of all changes. In other words, oscillations in Latin American countries depend on national factors only to a smaller degree, which is fully in line with the studies carried out by OECD (Organisation for the European Cooperation and Development).48 The oscillations in changeable economic variables which happen in these countries as a result of the US distractions were observed in the OECD studies. It was established that both the direction and the intensity of the synchronisation between GDP cycles depend on the type of “shock”. Shocks coming from the States with respect to supply bring about some positive co-oscillations in GDP both in the States and Latin American countries (for example, in Argentina, where the correlation factor is 0.96). The scope of reaction does not depend on either trade links with the States or the size of the Latin American country in question. The reaction is not exceptionally great in the inflation sphere (this factor fluctuates here between -0.11 and +0.10). Different reactions can happen in the case of trade balance: strong and positive in Argentina and Mexico, and negative in Uruguay, Brazil and Panama. On the other hand, shocks with regard to demand produce some minor, insignificant reactions. The only positive reactions concerning GDP were recorded in Brazil, Chile and Uruguay. On the inflation side, this kind of shock effected insignificant reactions. In the inflation sphere negative reactions were noticed in Chile, Brazil and Ecuador. Speaking of the trade balance, varied reactions have been spotted (for example, the reaction was negative in Peru). Trade links and the size of a country were yet again not important factors in the transmittance of business cycle impulses. Therefore, the conclusion is that there is not a unique pattern of the transmittance of business cycle oscillations. The occurrence of monetary shocks has the following consequences: drop in GDP in the States brings about negative reactions in Peru, Brazil, Argentina and Chile (other countries are not affected by these distractions). In the 48 Cf. P. Agenor; J. McDermott, E. Prasad, “Macroeconomic Fluctuations in Developing Countries”, IMF Working Paper 99-135, 1999 Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 137 majority of Latin American countries inflation is synchronised with the US inflation rate, with the average correlation factor of 0, 6. The changes in the balance of payments are synchronised to varied degrees, but still negative reactions prevail. When speaking about the currency regime, GDP synchronisation happens in those countries with the fluctuating foreign exchange rate both with respect to turning points and the angle of cycle curve. However, this kind of synchronisation does not exist when talking about central banks’ foreign currency reserves (for example, a drop in reserves happened in Mexico as a result of the US shocks, whilst the reserves went up in Chile and Peru). In countries with fixed foreign exchange rate high turning points happen with some delay in relation to initial distractions from the States. As the reactions are not significant, the task of the economic stabilisation lies with the international financial institutions that grant credits tailored for this purpose. To sum it up, it can be noticed that both monetary shocks and shocks in supply influence GDP, whilst shocks in demand influence the synchronisation of the inflation level. But what is important is that the cycle synchronisation is in neither case influenced by trade links, geographical size or currency regime in the Latin American country in question. Table 3: Influence of the US shocks on the nominal effective foreign exchange rate in Latin American countries in 1994, 1998 and 2001 1994 Influence Large 1998 Shock in demand Shock in supply Brazil (depreciation) Brazil (appreciation) Shock in supply Shock in demand Shock in supply Argentina Brazil (destabilisation) Argentina (appreciation) Medium Small Shock in demand 2001 Mexico Argentina Source: based on: F. Canova, ibid. The shocks influenced the most the biggest countries such as Brazil and Argentina in which the destabilisation of the foreign exchange rate happened (Table 3). Megatrend Review, vol. 4 (1) 2007 138 Business Cycles in the Latin American Countries 5. Economic policy guidelines Based on everything set out here it is possible to formulate guidelines for conducting economic policy in Latin American countries. The majority of the oscillations in Latin American countries’ national cycles have an external source. And let us underline once again that this has been confirmed and demonstrated by all the conducted analyses. Shocks coming from the United States with respect to both supply and demand brought about some insignificant oscillations in a typical Latin American country, whilst monetary shocks produced considerable oscillations. The main channel for the conveyance of business cycle impulses is foreign exchange rate whilst foreign trade exchange channel plays a secondary role here. Speaking of the financial channels, the reaction is instantaneous (with the maximum time delay of several three-month periods). The patterns of the transmittance of impulses differ from those that are in force in the developed countries. The US economic distractions influence immensely the oscillations within macro-economic values in Latin American countries. This statement refers to both GDP and the inflation, both it also covers the nominal foreign exchange rate that destabilises. It has been noticed that countries with the fixed foreign exchange rate react differently compared to those countries in which the fluctuating foreign exchange rate is valid. The stated observations lead to a conclusion that pillars of the economic policy in Latin American countries should be alert and follow and monitor closely the international situation, including the US market movements; they should be especially focused on collecting the information concerning the potential US economic distractions. It is not superfluous to mention that the US Federal Reserves policy (including their decisions in the filed of interest rates) can influence foreign exchange rates, thereby contributing to the improvement of Latin American countries’ economic results. It has also been noted that the expenses of the introduction of a common currency for the Latin American integration group (“dollarisation” costs) are exaggerated.49 Still, these costs do not have any major influence on the formation of the real GDP. Though financial costs can be very high, what test the resilience of financial agreements are precisely those same economic distractions that the US economy is going through. 49 It should not be forgotten that the issue of the costs incurred by the introduction of the Euro has come more than once into the limelight at the time of the negotiations concerning the European integrations. The negotiating parties tried to compare the costs incurred by the introduction of a common currency to the advantages brought by using that same currency. The introduction of a common currency was amongst other things aimed at cutting transaction expenses and enabling economic entities and citizens within a certain group to benefit. One very important issue that was raised was the synchronization of national and even regional cycles, which is extremely significant from the point of view of conducting the uniform monetary policy. Latin American regional groups have not had so far an unambiguous and lasting character and that may be a reason as to why theories referring to other groups cannot apply to them. Megatrend Review, vol. 4 (1) 2007 Professor Ida Musiałkowska, PhD 139 6. Conclusion Looking at various economic processes in Latin American countries, the emergence of certain tendencies that already exist on the global economic level can be noticed. As long as the protectionism and the economy oriented to the substitution-based import ruled, inter-state links were weak. Similarities in the formation of cycles have come out as a result of common characteristics of the economic model that was in force in Latin American countries at the time. After so called first and second generations of reforms in the 80s and 90s trade links were strengthened, regional groups were formed, the continent got integrated and financial markets became liberalised. Increasing influence of international factors started to be noticed from that moment onwards. The monetary channel is considered to be the most important mechanism for the transmittance of business cycle impulses (that is, interest rates), whilst the trade channel plays a considerably lesser role. Traditionally, these two types of factors are most often cited in literature as main causes for the synchronisation between business cycles. On the other hand, the size of a country does not affect the conveyance of business cycle impulses. Based on Latin American countries’ experiences it can be concluded that mechanisms for the transmittance of business cycle impulses in the developing countries differ from those that are in force in the developed countries. Still, the effects of these phenomena are not of the same scope and intensity as those noticed in the case of European economies sand G-7 countries. Also, nothing that could be defined beyond any doubt as an unambiguously shaped Latin American cycle has yet been identified. Megatrend Review, vol. 4 (1) 2007 140 Business Cycles in the Latin American Countries References • Agenor, P. – McDermott, J. – Prasad, E.: “Macroeconomic Fluctuations in Developing Countries”, IMF Working Paper 99-135, 1999 • Aiolfi, M. – Catгo, L. – Timmermann, A.: Common Factors in Latin America’s Business Cycles; International Monetary Fund, http://www. imf.org, 2005 • Arnaudo, Aldo, A. – Jacobo, D.: “Macroeconomic Homogeneity within MERCOSUR: an Overview”, Estudios Económicos, El Colegio de México, No. 12 (1) 1997, pages 37-51 • Barro, R. – Sala-i-Martin, R.: “Convergence”, Journal of Political Economy, Vol 2, No. 100, 1992 • Barro, R.: Makroekonomia, PWN Warszawa, 1997 • Bergman, U. M. – Bordo, M. 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