Thursday, March 13, 2014

Don't Cry for Me, Argentina

In an op-ed column titled “Cry for Me, Argentina” New York Times columnist Roger Cohen argues that “Argentina is the child among nations that never grew up. Responsibility was not its thing. Why should it be? There was so much to be plundered, such riches in grain and livestock, that solid institutions and the rule of law seemed a waste of time.”

This is about par for the course for the news media over the last decade or so—long diatribes about how Argentina must be doing horribly because their leaders say populist things, have nationalized a number of industries, and about a decade ago defaulted on its debt. You see, these are all things that only irresponsible countries do. Things must be awful in Argentina. 

So how’s it going south of the equator?

Argentina’s real gross domestic product (GDP) per capita—which measures average income growth per citizen—has grown by 82 percent from 2002 to 2013, according to the International Monetary Fund. That’s almost three times as fast as Brazil, which is typically thought of as South America’s economic darling, and nearly eight times as fast as the U.S. Unemployment—which peaked at 22.5 percent in 2002—is now down to about 7.3 percent. But Argentina is irresponsible, this wasn't supposed to happen!

But it did: In the wake of the financial crisis of 1998-2001, the Kirchners ditched the neoliberal policies of the Chicago Boys, defaulted on the government’s debt, and eliminated the one-peso-one dollar convertibility law—a law that guaranteed that Argentine pesos would always be exchangeable at a fixed rate with American dollars. This was treated as sacrilege by economic conservatives who insisted that Argentina couldn’t recover until it cut taxes and converted its debts into dollars.

But the result of the default and devaluation was a falling peso relative to other world currencies, making Argentine products relatively cheaper in world markets. That led to a boom in exports and tourism, paving the way for recovery.

Now, this isn’t to say that everything the Kirchner’s did (or do) was a good idea, nor is it to suggest that all countries should default on their debts when faced with financial crises. Defaulting and devaluing are not universal policy elixirs—Argentina suffered immensely in the immediate aftermath as people’s savings were virtually wiped out and the banking system was destroyed.

But here’s the thing: It worked. Argentina has enjoyed the strongest growth over the last decade of any country in Latin America.

That's not to say that Argentina doesn't have any problems. It has problems. Lots of them.

The most recent one is that the government is printing lots of money and running large budget deficits, causing demand to outstrip supply. With too many pesos chasing too few goods and services, prices are being forced up by about 10.5 percent per year, according to the Argentine government—though alternative data sources show considerably higher inflation rates than the official data suggests.

This means that Argentina is facing the exact opposite problem than the U.S.—rather than a shortage in demand, Argentina is facing a shortage in supply. The solution, as my post on the babysitting co-op illustrates, is to pump the brakes on the printing press, raise interest rates, and cut the deficit. That’s not something the Argentine government is keen on doing, giving its populist rhetoric.

So Argentina needs to get inflation under control before it becomes a bigger deal—an orthodox diagnosis that seems to run contrary to Argentina’s heterodox approach to economics. To be sure, ignoring the conventional economic wisdom has worked out for Argentina in the past. Of course, that doesn’t mean that the mainstream economic opinion is wrong all the time.

But this recent inflation blip notwithstanding, Argentina has done remarkably well since its last big depression in the early 2000s. Yet you would never know that by listening to people like Roger Cohen, who would have you believe that Argentina has been a disaster.

Cohen isn't alone—somehow Argentina's success has never penetrated the minds of American journalists, who can’t understand how President Cristina Kirchner could have possibly won re-election in 2011, despite Argentina's robust growth. Others have insisted that Argentina must be suffering from its 2002 default, despite the evidence to the contrary.  In 2011, the New York Times’ Clifford Krauss described the Argentine economy has “stagnant.” It’s as if the press has chosen to report what should have happened, rather than what did.

Look, I get why it’s easy to pick on Argentina. Its investment climate is mediocre at best, its regulatory framework isn’t any good, and Argentina just flat out doesn’t “follow the rules.” That might not always be a successful approach, but Argentina hasn’t been the economic catastrophe everyone thinks it is.

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