Convergence criteria across the regions of the Global South

Across the Global South economies fiscal pressures and high debt levels remain a key challenge, despite some of the progress in introducing policy frameworks designed to secure macroeconomic stability. The need to keep a lid on fiscal imbalances is coming to the fore in a number of Latin American economies (Brazil and Argentina being among the heavyweights in point), while some of the largest African economies such as Nigeria are grappling with inflation rates that are among the highest in the past several decades. In addressing these macroeconomic imbalances there may be scope to explore not only improvements in the macroeconomic policy framework at the national level, but also at the level of regional integration arrangements. In particular, the convergence criteria used in the EU as well as a number of regional blocs from the Global South could be replicated by other regional integration arrangements from the developing world, with positive implications for the overall quality of the macroeconomic policy framework.    

The main benchmark for regional blocs in designing their convergence criteria are the Maastricht convergence criteria of the EU – these set limits on the size of the budget deficit, public debt and fluctuations in macroeconomic indicators such as exchange rates, interest rates and inflation. Even a cursory look at the state of macroeconomic indicators in the EU, most notably with respect to public debt levels, suggests that the limits set by the regional convergence criteria are not always met. Nonetheless, there is empirical evidence that suggests that without such regional targets, the gaps and imbalances in the EU’s member economies would have been even greater. The empirical study undertaken by researchers from Groningen University on the effectiveness of convergence criteria and the excessive deficit procedure (EDP) suggests that the regional rules-based framework was effective in eliciting superior economic policy outcomes – as the researchers note, “we find that a 1% of GDP larger EDP recommendation leads to 0.8–0.9% of GDP of additional fiscal consolidation plans, and 0.6–0.7% of actual consolidation… Overall, our results suggest that EDP recommendations have substantially shaped fiscal policies in the euro area, especially in the years 2010–2014, when EDP recommendations were most frequent”.[1]

In the developing world, there is a wide variety of experiences with convergence criteria (from discussions and preliminary design to tracking and implementation) in such regional blocs as the Gulf Cooperation Council (GCC), the Eurasian Economic Union (EAEU), the Eastern Caribbean Currency Union (ECCU) as well as a number of regional organizations in Africa, such as the East Africa Community (EAC) and the Southern African Development Community (SADC) among others. While the blueprint of these convergence criteria in most cases closely follows the EU framework, the degree of applicability and relevance of these criteria is notably less significant than in the European Union[2].

There may be scope for the above regional blocs from the Global South to improve their framework for such regional convergence criteria, with other regional integration arrangements such as MERCOSUR exploring the potential for introducing such regional macroeconomic policy frameworks. The greater use of convergence criteria at the regional level of the Global South realm could serve to attain a number of important policy objectives:

  • A stronger framework for regional integration: convergence criteria facilitate policy coordination and create a more predictable and stable framework for common policy initiatives
  • Stronger foundation for macroeconomic stability: convergence criteria can be effective in limiting macroeconomic imbalances in the fiscal and monetary spheres
  • Greater scope for intra-regional trade: greater macroeconomic stability improves the conditions for regional trade
  • Greater scope for investment flows: lower volatility in macroeconomic aggregates improves the prospects of higher FDI inflows
  • A basis for a conditionality framework in disbursing funds: the degree to which members of the regional bloc are complying with the key convergence criteria can serve as a basis for conditionality in the disbursement of funds from regional development institutions as well as other multilateral organizations
  • A basis for advancing integration towards a monetary union: the use of convergence criteria provides scope for regional economies to forge ahead with greater monetary policy coordination and the possibility of launching a regional currency

The introduction of such regional convergence criteria need not necessarily signal the start of preparations for a currency union – the main rationale would be the reinforcement of economic policy rules (and supplementing the rules operating at the national level), particularly in the fiscal sphere. The regional convergence criteria could also facilitate the coordinated work of global and regional development institutions in monitoring and supporting developing countries’ economic stabilization efforts. The composition of the convergence criteria could vary and in such cases as MERCOSUR may focus more on the fiscal and debt indicators, with developing economies having scope to improve upon the modalities of the EU’s framework. The EU being fully aware of the imperfections of the original model for convergence criteria (deficit and debt positions of Italy and France being very much in the headlines) is moving ahead with changes that allow for country-specific debt-sustainability analysis (DSA requirements) to be incorporated into the new framework[3].

Overall, the Global South is not deriving maximum dividends from its regional integration arrangements and regional development institutions – not only in terms of the increase in the share of intra-regional trade (that on many counts is below potential), but also in terms of strengthening the regional framework for macroeconomic stability and economic policy rules. While there may be a number of drawbacks in the current EU system of convergence criteria and regional policy rules, empirical studies do suggest that such regional rules-based frameworks have a positive effect on the quality of economic policies pursued by members of the respective regional integration arrangements.  


[1] https://www.sciencedirect.com/science/article/abs/pii/S0176268018304531

[2] At least in part due to the lack of integration in the monetary sphere in some of these non-EU regional blocs

[3] https://www.bruegel.org/policy-brief/implications-european-unions-new-fiscal-rules

Yaroslav Lissovolik, Founder, BRICS+ Analytics

Image by MabelAmber via Pixabay


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