IMF projections may be ‘too pro-cyclical’ warns Vergara

International Monetary Fund projections of potential output and productivity risk becoming "overly pro-cyclical", according to Central Bank of Chile president Rodrigo Vergara.

Yesterday he argued the drastic changes in South American productivity estimated by the IMF over the last few years cannot be explained by the same old structural bottlenecks the Fund has been pointing to for decades.

In a a response to the World Economic Outlook, Vegara, representing Argentina, Bolivia, Paraguay, Peru and Uruguay as well as his country, says the South American countries "question the view that the Latin American slowdown is mostly structural in nature".

The IMF view, Vergara says, "suggests that a very sudden drop in productivity growth has taken place recently". He and his colleagues, on the other hand, "suspect that potential growth has been lower than previously thought all along, but also somewhat higher than current estimates".

The most extreme example of this is in Brazil, he says, where the IMF's estimate of potential growth reached 4.2% in 2012 following "a period of exceptionally favorable external conditions", but has since been downgraded to "a lacklustre 2.5%". The same broad trend is visible for Latin America as a whole, he says.

"These are very substantial revisions to make over such a short period, and we would expect them to be accompanied by strong evidence of structural change," Vergara says. But while he describes continued Fund calls to remove infrastructure bottlenecks, improve business conditions, and enact education reform as "laudable", these obstacles "have been in place for decades and cannot explain the recent slowdown".

He notes: "While particular structural reforms are indeed needed in certain cases to address bottlenecks and boost productivity, we encourage the Fund to use a granular approach and to focus on those reforms that are most critical to each member's macroeconomic circumstances. We must all work to ensure that our estimates of potential growth – and thus our policy assessments – do not become overly pro-cyclical."