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What factors define potential GDP growth?
The Minister of Economy and Finance, Carlos Oliva, recently stated that "… what is important and what drives the spirit of economic policy is the increase in potential GDP, that is, generating the capacity for our economy to have the capacity to grow further, and the structural issues we need to influence … "In this issue, we analyze the differences between potential GDP and GDP factors affecting potential GDP growth
Potential GDP is defined as the highest level that the observed GDP can reach in the medium term without provoking inflationary pressures If the observed GDP is higher than the potential GDP, the BCRP raises the benchmark interest rate to slow the economy, if the observed GDP is lower than the potential GDP, the BCRP lowers the interest rate to accelerate the economy. The MEF follows this m If the observed GDP is higher than the potential GDP, the MEF adjusts budget expenditures to slow down the economy. If observed GDP is lower than potential GDP, MEF increases spending to accelerate the economy. Typically, the annual growth rate is used instead of the GDP level to apply these definitions.
The change in the difference between observed GDP and potential GDP determines the economic cycle (economic cycle) and takes the form of a sinusoidal wave that evolves around potential GDP. That is, there will be times when the economy is above potential GDP and others where it is lower. The frequency and amplitude of the sine wave characterize the economic cycle of each sector. The sum of economic cycles of different sectors defines the economic cycle of the whole economy. Our PREDICE model works with the economic cycles and potential GDP of 14 sectors of the Peruvian economy.
Economic cycles are relatively easy to project. The model reproduces the sinusoidal behavior of each economic sector and takes into account the correlation that exists between the economic cycles of the 14 sectors. This type of modeling is known as Vector Auto Regressive (VAR) models, to which are added short-term variables, such as export prices, exchange rate, credit to the private sector, sales and marketing potential. GDP projection is more complex because it depends on three factors that are difficult to define: (i) investment sector. private which becomes a stock of capital; (ii) number of workers and number of hours worked; and (iii) total factor productivity. When Minister Oliva mentions the need to increase potential GDP, he refers to the last factor, namely the increase in productivity.
Figure 1 shows observed GDP and potential GDP of primary sectors (agriculture). fishing and mining), secondary (manufacturing, electricity, gas and water and construction), tertiary (8 service sectors) and total economy. We observe that the behavior of the economic cycle in each economic sector is different and that its sum translates into an economic cycle of the total economy that reflects the impact of each one of them. The most interesting thing is that we are entering a period of the economic cycle in which the observed GDP exceeds the potential GDP. This means the beginning of inflationary pressures. This inflationary pressure will come more from the secondary sector (electricity, gas and water and manufactured goods) and from the service sector than from the primary sector (agriculture and fisheries).
We also note that potential GDP growth has slowed in recent years. years The latest data available for the month of May show a potential GDP growth of less than 3.5% per year. The recovery of private and public investment is expected to change in the rest of the year and in 2019. The sector with the lowest growth in its potential GDP is the secondary sector (affected in particular by the low level of Investment in the manufacturing sector). The recent upturn in the manufacturing sector due to the growth of the textile sector (global demand for poles) and the fishmeal sector as well as the recovery of mining investments could initiate a recovery of private investment in this sector to increase growth in the sector . Potential GDP of the secondary sector in the coming quarters, if the conditions were met.
Productivity growth is one of the factors that most influence the growth of potential GDP with investment. In this regard, Minister Oliva's statements go in the right direction. However, the measures announced are far from the structural reforms needed to increase productivity, attract private investment and generate formal jobs, which are key factors in the sustained growth of potential GDP.
labor reform that makes the labor system more flexible (for example, extending the labor promotion law of the agricultural regime to all sectors). A tax reform that strikes a balance between direct and indirect taxes, but which favors the creation of formal jobs and establishes better co-participation of taxes between the central government and the regions (for example, a more adequate distribution of the tax). A pension reform and health insurance that favors contributory schemes, but ensuring universal coverage. An electoral reform that consolidates political parties through the election of the unicameral district. A judicial reform that removes the discretion of the judges.
Hopefully, given the favorable situation due to the scandal of judicial hearings, the legislative and executive branches are expecting a legislative program that incorporates the reforms mentioned in the previous paragraph in order to: be able to reach the bicentennial of independence with a modern country and with the open path to potential GDP growth.
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