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View Diary: Neoliberalism Defied? The Argentine "Miracle" (148 comments)

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  •  Argentina (4.00)
    If orthodox economists are puzzled by what is going on in Argentina, then they need to go back and reread history and pass macro-economics in an open currency environment again.

    First calling Argentina a miracle is stretching the truth - unemployment is in the low teens, the standard of living has been slashed and there is a dramatic increase in both crime and poverty. Given a choice between the Free Trade of 1999 and the "protectionism" of 2005, I can assure you that almost every Argentine would pick 1999.

    However, once the meltdown of 2001 is looked at, and subsequent global policy is looked at - what has happened in Argentina is rather unremarkable.

    First, the value of defaulting itself - 100 Billion dollars had a debt service of almost 9 billion per year. And Argentina will not return to global capital markets until something is done about repayment.

    Another part of devaluing is left unmentioned in most English news sources, but is, in fact, crucial to understanding what has happened. Any Argentine politician or policy thinker you talk to - off the record - will tell you that the real cause of the collapse in the 1999-2001 time frame was corruption. Elites racked off profits, which, since they could easily be shipped abroad, were then banked, primarily in the US. In the days before the final meltdown, the millions were shuffled in last minute moves to get money out - while leaving ordinary Argentinians to hold the bag.

    By making internal profits much less valuable globally, and slashing the value of sunk assets - including land and real estate - Argentines were suddenly in the posiition of not having as much incentive to allow capital to flee.

    Second, there is the increased hiring from inflation and slashing wage costs from devaluation. The average hour of Argentine labor in 2000 was 4.23, it is now 1.65. That does wonders for both competitiveness, and reducing demand for imports. Purchasing power parity per capital is still over 1,000 dollars below its 1999 peak.

    Third, there is the dollar glut and protectionism. The reason there were recurrant financial crisis points in the 1990's (1994, 1996, 1997-1998) was that there was  global dollar shortage, driven by the growth of US equity prices. There is now a global dollar glut. The dollar glut means that commodity prices have gone up, and Argentina exports commodities. With lower labor costs, and higher export prices - this explains almost all of the GDP increase.

    But let us face the protectionis question head on - Argentina's protectionism is a response. There won't be retaliation, first because of the commodities inflation, and second, because there already is protectionism going on - namely the US devaluation and stealth protectionism. Argentina is responding to the failure of economic policy in the US the same way that Vladmir Putin is in Russia - with economic nationalism and closing of the capital markets to foreign investment.

    What this points to is not "economic nationalism good, free trade bad" - but "Thatcherism Bad. Thatcherism Worse. Thatcherism Worst of all."

    Thatcherism bad because it produced global investment designed to strip the profitable parts of the economy out of local hands. Thatcherism worse because it created a situation where elites in Argentina had every reason to ship profits out of the country to "safe havens". And Thatcherism worst of all, because while the meltdown was in progress, the IMF loan packages did little but buy time for more money to flee the country. As Douglas Adams quipped "most books on happiness seem to involve the movement of small pieces of paper, which is odd, because by and large, the small pieces of paper aren't unhappy."

    The real design of the IMF is as an insurance company that charges the victims of the accident for the bad driving of the drunk large banks. It does not have enough money to adequeately buffer the world financial system, and it does not have enough authority to force sovereign default before it becomes a problem.

    Argentina's default, because it is the largest one, could be tolerated by the global fiscal system. However, if every country did what Argentina did - default and devalue - there would be a global economic meltdown. Argentina, by getting out first, did what Sweden and Denmark did in 1930 - get off the hard money standard and export. Sweden in particular is paradigmatic example: rely on the need of resource hungry countries to buy what they have to sell.

    -

    The flip side of this coin is tha Argentina can get away with default and devalue because of an unsustainable US piling up of Debt. We don't have fiscal crisis points in distant countries - all of the world's fiscal crisis is now in one place - the US. And it is showing up as drastically higher commodity prices - Oil is up 400% from its peak, gold has doubled, and other commodities are following suit. Argentina can tell foreigners to go hang, because it produces enough oil and gas for its own needs.

    In 2002, the plan by the Peronists was to set up an Australian style economy - seek self-sufficiency from commodity imports, and discourage manufactured imports through import substitution and lowering wages, as well as slamming the door shut to capital flight. This works as long as the US is pumping dollars into the world economy and dollars are easy to come by - afterall, the flip side of the vast US trade deficit is more surpluses for others.

    The other point is that because the US is sucking in every dollar of available investment, the Argentines have little incentive to go to capital markets and compete against the US for global investment - it simply isn't worth the trouble.

    The cost - Argentina's industrial capacity and standard of living are well below their peak, there is high poverty rate, over 50%, and high crime rates - do not justify the term "miracle", particularly when well understood mechanisms account for why Argentina is recovering. That it is recovering is a good thing, but it is not a scalable solution - unless of course Americans want to run a much larger trade deficit and finance even more of global development with dramatically lower standards of living for themselves.

    In summary - that the "Washington Consensus" style IMF turns colds into pneumonia is well known. That Argentina can recover by default, devaluing and exporting, since it does not need to import energy or most materials - is not suprising, and parallels many similar cases in the 20th century.

    •  Thanks Stirling (none)
      But to be clear, only I used the the word "miracle" - I used quotes - and I was evoking to earlier South American "miracles" - Brazil and Chile.

      I'm thinkin', I'm thinkin'

      by Armando on Sun Dec 26, 2004 at 09:44:19 AM PST

      [ Parent ]

    •  yeah, elites using the free market as cover (none)
      You're 100% right, it was regional elites -- Argentina's big problem -- not unlike ours -- is that an inordinate amount of political power in its structure goes to the interior states and, thus, encourage, huge amounts of state corruption in the interior.  

      That said what happened under Menem (and also under Salinas in Mexico to a certain extent) was local elites being co-opted by US investment banks selling privatization and the free market. Sachs and others had sold a free market vision of what Latin America and Argentina could become with the free market.  Then, every US investment bank came down to sell off state industries and -- once they took all the profits (along with the elites) out of the country left.

      What is really telling is that the the Latin American investment banking industry has crashed.  The big I-banks have closed down much of their operations. Violy is on its last legs. The Pan-Regional market (just like the new economy) is a forgotten dream.  This is all because the deals didn't work and because the banks took the money and ran back to New York and Madrid (and then set up private banking accounts for the smart Argetines who helped them).

      Yes, this is not the first time that Argentina has done this -- effectively defaulted on debt (and enriched many folks close to power). But the post Memem situation is not equivalent to what happened in the 70s because Menem and Carvallo basically sold off the country's main assets to Wall Street and Madrid (actually mostly Madrid).

      To me what is telling about Argentina (and many other would be free markets) is how much more we are becoming like these economies with our own corrput elites.  We've always had an economic oligarchy but at least we tried to control it with the estate tax, etc.  Now, Bush has thrown this away and we've got folks like John Snow and Rumsfeld who start out in Politics, go to business (make hundreds of millions) and then go back.  Just like Argentina...

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