No Se Mancha staff writer Jesse Rogers interviews Uruguayan economist Dr. Carlos Vegh

Just as we drew it up

While economists collectively bemoan the end of the commodities boom in Latin America, few have studied the impact of external shocks as thoroughly as Carlos Vegh. The Uruguayan economist sat down with No Se Mancha’s Jesse Rogers to discuss what leaner times mean for the region.­

Carlos Vegh: No Se Mancha? Great title for a blog!

Jesse Rogers: Thank you.

I love the idea of “la pelota no se mancha”, because Diego Maradona is for us in Uruguay, a figure that is so, well, occurente. But to go back to economics, I’m hoping, for the sake of the region, that the Federal Reserve doesn’t raise rates until late 2015, early 2016.

How so? Shouldn’t we be more concerned about the downshift in external demand?

The problem is if you spend a lot in good times then how can you help growth in bad times? Chile, and to a certain extent, Colombia and Peru, have saved some of the windfall from the commodities boom, so there is room for countercyclical fiscal policy to stimulate growth.

To be honest I’m much more concerned about capital outflows. With the exception of Chile, and perhaps Colombia and Peru, central banks will have to tighten monetary policy in the middle of a slowdown, which would make the slowdown even more pronounced.

Why is it so difficult for emerging markets to lower rates? Shouldn’t a flexible exchange rate allow for an independent monetary policy?

The answer is yes, but only if you do things well and build up fiscal buffers during good times. It also depends on whether markets can differentiate between ­­serious and not so serious countries. Now if you ask me, will markets differentiate, my answer is that unfortunately I don’t think so.

On the one hand, Chile has acquired so much credibility in their macro framework that markets are not going to punish Chile when their currency begins to depreciate, but that is not going to be the case for other countries such as Uruguay, or even Peru.

But even in the case of Chile, a country with ample savings, countercyclical fiscal policy can only go so far. Suppose commodity prices are lower for some time.

We have to remember that with the exception of Mexico and Brazil, these are all small open economies that have faced similar booms in the past.

This is why it is so important for countries to save during good times, and to have a formal mechanism for doing so, like Chile’s Copper Stabilization Fund, which releases funds when the price of copper falls below a certain amount.

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Many say that the antidote is to diversify, for Latin America to scale the value added chain…

I’m all for some diversification but I think that this idea that academics in the West push – diversify, diversify – is not realistic in some sense. All these are countries that have a comparative advantage in being commodity producers, and what they should be doing is to become even more productive and add value to the commodities they already produce.

We just witnessed elections in Brazil, and in your native Uruguay. What do you think of Dilma’s new economic team?

To me, it came as a big surprise, I mean people are saying it is almost as though Neves has won the election. So I think it is very good news. I think it speaks well of Dilma. I think that Dilma is realizing that she doesn’t want another four years like the last four years, that things need to get better.

The question is how much room [Joaquim] Levy has to do what he wants to do. Because I would not be surprised if, after a honeymoon period he starts to clash, not only with Dilma, but with other people in the cabinet. We will have to see who will prevail in those internal battles.

Can we expect any progress on the Mercosur front?

In Brazil both politicians and technocrats have this internal struggle between the heart, which is protectionist, and the mind that tells them look, we are a big player in the international community, we are by far the biggest country in Latin America, and we need to fully open ourselves up to trade.

Now I think that Brazil with this new team is going to push to be a little more open and Argentina is going to say no. Which leaves Uruguay in the middle with no power to influence anything.

Which is where Uruguay currently stands with Mercosur…

Mercosur for Uruguay never made any sense whatsoever. Let’s called a spade a spade. Even the left in Uruguay has acknowledged, like president Mujica, in no uncertain terms, that Mercosur has not helped Uruguay.

It’s tough politically but from an economic point of view Uruguay would do better to leave Mercosur, because what Uruguay should have done was to open itself to the rest of the world like Chile did.

If you had five wishes for Latin America in the New Year, what would they be? 

My first wish is that governments realize finally that they need to save in good times to withstand bad times. I have been saying this for many many years, that the main purely macroeconomic problem in Latin America is pro-cyclical fiscal policy.

Second, that the Fed starts raising rates not in the middle of 2015 but at the end of 2015 so that all these processes we are talking about get pushed into the future and it gives Latin America a bit more time to prepare.

Third, that governments come to terms with the tremendous criminality problems. In some countries this is destroying the social fabric. Some of it is drug related but often it is not. I wish that governments were much more serious in how they address this problem.

Fourth, for Cuba to rejoin the community of democratic nations in Latin America. It is long overdue.

Finally, let’s hope that Venezuela is able to come back and become a full fledged democracy as both Chavez and now Maduro have been trying convert Venezuela into something that is not.

How its supposed to be

Carlos Vegh is the Fred H. Sanderson Professor of International Economics at the Johns Hopkins School of Advanced International Studies (SAIS) and a Non-Resident Fellow at the Brookings Institution. Carlos has been a consultant for the IMF, World Bank, and IDB and is currently a Research Associate at the National Bureau of Economic Research.

Jesse Rogers is an energy and economic analyst focusing on Latin America. He previously worked as a finance and politics reporter for Impremedia and as a research assistant for Mexico City’s Centro de Investigación y Docencia Económicas (CIDE). 

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