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JOSÉ LUIS MACHINEA Executive Secretary ERNESTO OTTONE Acting Deputy Executive Secretary a.i. Economic Commission for Latin America and the Caribbean econimic commission for latin america and the caribbean CEPAL R e v i e w NUMBER 91 APRIL 2007 SANTIAGO, CHILE OSCAR ALTIMIR Director REYNALDO BAJRAJ Deputy Director The CEPAL Review was founded in 1976 and is published three times a year by the United Nations Economic Commission for Latin America and the Caribbean, which has its headquarters in Santiago, Chile. The Review, however, has full editorial independence and follows the usual academic procedures and criteria, including the review of articles by independent external referees. The Review is distributed to universities, research institutes and other international organizations, as well as to individual subscribers, and is also consulted extensively on the Internet. The purpose of the Review is to contribute to the discussion of socio-economic development issues in the region by offering analytical and policy approaches and articles by economists and other social scientists working both within and outside the United Nations. Accordingly, the editorial board of the Review extends its readers an open invitation to submit for publication articles analysing various aspects of economic and social development in Latin America and the Caribbean. The opinions expressed in the signed articles are those of the authors and do not necessarily reflect the views of the organization. The designations employed and the way in which data are presented do not imply the expression of any opinion whatsoever on the part of the secretariat concerning the legal status of any country, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries. A subscription to the CEPAL Review in Spanish costs US$ 30 for one year (three issues) and US$ 50 for two years. A subscription to the English version costs US$ 35 or US$ 60, respectively. The price of a single issue in either Spanish or English is US$ 15, including postage and handling. A subscription form can be found in the Review, just before the section “Recent ECLAC publications”, and on the ECLAC web site (www.cepal.org). The complete text of the Review can also be downloaded free of charge from the above web site. Explanatory notes The following symbols are used in tables in the Review: … Three dots indicate that data are not available or are not separately reported. (–) A dash indicates that the amount is nil or negligible. A blank space in a table means that the item in question is not applicable. (-) A minus sign indicates a deficit or decrease, unless otherwise specified. (.) A point is used to indicate decimals. (/) A slash indicates a crop year or fiscal year; e.g., 2004/2005. (-) Use of a hyphen between years (e.g., 2004-2005) indicates reference to the complete period considered, including the beginning and end years. The word “tons” means metric tons and the word “dollars” means United States dollars, unless otherwise stated. References to annual rates of growth or variation signify compound annual rates. Individual figures and percentages in tables do not necessarily add up to the corresponding totals because of rounding. United Nations publication ISSN printed version 0251-2920 - ISSN online version 1684-0348 ISBN 978-92-1-121635-6 LC/G. 2333-P Copyright © United Nations, April 2007. All rights reserved. Printed in Santiago, Chile Requests for authorization to reproduce this work in whole or in part should be sent to the Secretary of the Publications Board. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and to inform the United Nations of such reproduction. In all cases, the United Nations remains the owner of the copyright and should be identified as such in reproductions with the expression “© United Nations 2005” (or other year as appropriate). C E P A L REVIEW 9 1 5 S UMMARY Less volatile growth? The role of regional financial institutions 7 José Luis Machinea and Daniel Titelman Fiscal federalism in Brazil: an overview 29 José Serra and José Roberto R. Afonso What are fiscal rules for? A critical analysis of the Argentine experience 53 Miguel Braun and Nicolás Gadano Trade agreements by Colombia, Ecuador and Peru with the United States: effects on trade, production and welfare 67 José E. Durán Lima, Carlos J. de Miguel and Andrés R. Schuschny Employment Challenges and Policy Responses in Argentina, Brazil and Mexico 95 Christoph Ernst, Janine Berg and Peter Auer Evolution of the link between selective anti-poverty policies and social sectors policies 111 Ana Sojo Effects of urban segregation on education in Montevideo 133 Rubén Kaztman and Alejandro Retamoso Consensus and dissension among Mexican economists 155 Carlos M. Urzúa Mirrors of change: industrialists in Chile and Uruguay 169 Andrés Rivarola Guidelines for contributors to the CEPAL Review 185 CEPAL Review on the Internet 186 Recent ECLAC publications 189 A P R I L 2 0 0 7 7 CEPAL REVIEW 91 • APRIL 2007 KEYWORDS Economic policy Capital movements Risk Less volatile growth? Monetary reserves Financial instruments Financial institutions The role of regional Economic integration Latin America - Caribbean financial institutions José Luis Machinea and Daniel Titelman T he volatility of economic growth in the countries of Latin America and the Caribbean has been exacerbated by a lack of suitable instruments for smoothing external shocks. Difficulties with the provision of emergency financing and the development of financial markets capable of trading government securities that incorporate better contingency mechanisms have contributed to economic volatility. To identify routes towards progress with these two issues in the Latin American context, the present article examines the role that could be José Luis Machinea played by regional and subregional financial institutions, always bearing Executive Secretary of the in mind that while these can supplement global institutions, they cannot Economic Commission for supplant them. Latin America and the Caribbean (ECLAC) ✒ [email protected] Daniel Titelman Chief, Development Studies Unit, Economic Development Division, ECLAC ✒ [email protected] 8 CEPAL REVIEW 91 • APRIL 2007 I Introduction Since the Asian crisis of 1997, it has been more widely In relation to such institutions, the primary focus recognized that the volatility of international financial of this article is on the potential for extending the markets is an important factor in the business cycles of geographical coverage of the Latin American Reserve emerging economies, as it creates new disequilibria in Fund (FLAR). It then goes on to discuss the need to domestic economies and magnifies existing ones. The stimulate the development of financial markets for countries of Latin America have been no exception, government securities with characteristics that make since the shocks caused by volatility in external financial contingencies easier to cope with. markets have been one of the main causes of growth The ability of a reserve pool to cushion the impact volatility. Thus, the impact that natural resource prices of external shocks depends on the “insureds” not all have had for decades on the region’s business cycle being affected by these simultaneously. At first sight, a has now been compounded by international financial correlation analysis of such shocks in 10 Latin American markets. Although natural resource prices have once economies indicates that, indeed, the countries are not again been making a large contribution to Latin thus affected and that it would accordingly be possible America’s economic boom in recent years, a longer- to extend the regional coverage of the Latin American term view shows that capital movements are the factor Reserve Fund. The correlation ratios for detrended that has most influenced economic cycles over the last series of international reserves tend to be low or non- three decades. significant, terms-of-trade correlations do not show a The financial volatility of the region’s countries has clear pattern either, and private capital inflows present been exacerbated by the lack of suitable mechanisms correlations that are positive but generally not close to for providing emergency financing to countries unity. In addition, a regional fund could help to curb experiencing balance-of-payments financing problems mechanisms of crisis transmission between countries, as a result of external shocks. The lack of an emergency thereby reducing the correlation between them. financing network at the regional and international level By joining a reserve pool, countries benefit from has led countries to move towards a policy of self- access to a larger volume of reserves and, depending on insurance consisting essentially in the accumulation the individual case, a possible reduction in the volatility of international reserves, which is very far from of these. The estimated coverage ratio, which combines being the most efficient option for protecting against both effects, suggests that countries whose reserves have the vagaries of the world economy. In recent years low volatility in relation to their size would have few there has been a flurry of proposals for reforming incentives to join a reserve pool. Of the 10 countries world financial institutions and markets. However, examined in this paper, those with the lowest reserve the strategies developed to improve global financial