Regional arrangements to support growth and macro-policy coordination in MERCOSUR

José Maria Fanelli

No 46, G-24 Discussion Papers from United Nations Conference on Trade and Development

Abstract: The main goal of the paper is to discuss the problem of macroeconomic policy coordination in MERCOSUR and how it could contribute to sustaining growth. In the first part, the paper reviews the macroeconomic situation of MERCOSUR, emphasizing the role of the developments that followed the regime change in Brazil in 1999 and in other member countries afterwards. The analysis suggests that the worst consequences of the crises have been overcome and MERCOSUR will probably enter a new stage in which intra-regional trade will resume the positive trend that it showed before the crises. However, for this new stage to consolidate, it is crucial that Brazil increases its growth rate significantly. The second part analyses the characteristics of macroeconomic fluctuations in the region. The paper focuses on three dimensions that are key to designing a framework for macroeconomic policy coordination. The first is cyclical movements within countries and the co-movements between MERCOSUR members. The study allows us to distinguish between the effects of common (i.e. regional) and idiosyncratic shocks. The second dimension is price and quantity dynamics and the interactions between the activity level and the real exchange rate. The third has to do with those financial market failures that contribute to creating and amplifying the shocks that impinge on the region. The last section addresses what member countries can do to support growth, macro-policy coordination, and financial integration. It is suggested that for macroeconomic coordination to progress, it is crucial to identify how the incentives to coordinate can be strengthened in order to avoid coordination failures that are similar to those that followed the post-1999 crises and that had a deleterious effect on intra-regional trade. From the study of cyclical movements, prices and financial failures, it follows that the strategy for the implementation of the coordination framework should be able to work under conditions of excess volatility; must take into account that the international financial architecture is far from developing-country friendly; and, must emphasize the role of institution-building at the regional level.

Date: 2007
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