2017/26 | LEM Working Paper Series | ||||||||||||||||
Choosing sides in the trilemma: international financial cycles and structural change in developing economies |
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Mario Cimoli, Jose Antonio Ocampo and Gabriel Porcile |
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JEL Classifications | |||||||||||||||||
E44, O11, O25
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Abstract | |||||||||||||||||
This paper analyzes the impact of international financial cycles on
structural change in developing economies. It is argued that the
impact of these cycles depend on the specific combination of
macroeconomic and industrial policies adopted by the developing
economy. The cases of Brazil and Argentina are contrasted with those
of Korea and China. In the Asian economies, macroeconomic policy has
been a complementary tool along with industrial policy to foster the
diversification of production and capabilities. Inversely, in the case
of the Latin American countries, long periods of real exchange rate
(RER) appreciation, combined with the weaknesses (or absence) of
industrial policies, gave rise to loss of capabilities and lagging
behind. Tests of structural break in times series of indexes of
technological intensity of the production structure confirm the long
run effects of financial shocks in the Latin American case. In the
case of Korea there is evidence of hysteresis à la Baldwin-Krugman: a
high RER was initially required to export and diversity the economy,
but it was no longer necessary when the country had already built
indigenous capabilities.
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