STIGLITZ IS WRONG ON ARGENTINA: In the Outlook section of yesterday's Washington Post, Nobel laureate Joseph Stiglitz blames Argentina's meltdown on its now-abandoned fixed exchange rate system. It doesn't take a Nobel Prize winner to show he's wrong. In fact, I think I'm up to the job. Here's the gist of Stiglitz's argument:
Disillusionment with "reform" -- neo-liberal style -- has set in. Argentina's experience is being read: This is what happens to the A-plus student of the IMF. The disaster comes not from not listening to the IMF, but rather from listening. That Argentina has moved to the bottom of the class has much to do with the exchange rate system. A decade ago, it had hyperinflation, which is always disastrous. Pegging the currency to the dollar -- one peso equaled $1, no matter what the rate of inflation or the economic conditions -- acted, almost miraculously, to cure this problem. The IMF supported the policy. It stabilized the currency and was supposed to discipline to the government, which couldn't spend beyond its means by printing money without breaking the peg. It could only spend beyond its means by borrowing. And to borrow, presumably, it would have to follow good economic policies. A magic formula seemed to have been found to tame the seemingly incorrigible politicians.
There was only one problem: It was a system doomed to failure. Fixed exchange rates have never worked. Even the United States couldn't live with a fixed exchange rate, going off the peg to gold in the midst of the Great Depression. Typically, failures do not appear overnight. They are not usually the result of mistakes made by the country, but of shocks from beyond their borders about which they can do little.
Had most of Argentina's trade been with the United States, pegging the peso to the dollar might have made sense. But much of Argentina's trade was with Europe and Brazil. The strong (most would say, overvalued) dollar has meant enormous American trade deficits. But with the Argentine peso pegged to the dollar, an overvalued dollar means an overvalued peso. And while the United States has been able to sustain trade deficits, Argentina could not. Whenever you have a massive trade deficit, you have to borrow from abroad to finance it. Although the United States is now the world's largest debtor country, outsiders are still willing to lend us money. They were willing to lend to Argentina, too, when it had the IMF stamp of approval. But eventuallythey realized the risk….
As the Asian financial crisis led to crises in Russia, and then Brazil, Argentina suffered more and more. Interest rates soared and with the collapse of the Brazilian currency, Argentina simply could not compete with its neighbor's cheaper exports.
As if things were not bad enough, a falling euro made it harder for Argentina to export to Europe, and low prices for the commodities it sells further strained the economy. Moreover, while Europe and the United States preach free trade, they have kept their markets relatively closed to Argentina's agricultural goods.
Stiglitz thus claims that Argentina's fixed rate hobbled the economy with an overvalued peso, reducing the competitiveness of Argentine exports and producing massive trade deficits. Rising interest rates in response to capital outflows further weakened the economy, triggering a vicious circle that ultimately led to collapse. Stiglitz's explanation flies in the face of some very basic facts. Argentina's trade deficit shrank, not grew, shrank in 1999 after the Brazilian crisis. Meanwhile, in 2000 and 2001, Argentina actually ran a trade surplus and exports were increasing. Massive trade deficits didn't cause capital outflows because there were no massive trade deficits. Likewise, weakened exports due to an overvalued exchange rate didn't wreck the economy because exports didn't weaken. Exports in goods rose in 2000 and 2001, climbing from 23.3 billion pesos in 1999 to 26.7 billion pesos in 2001. Exports were equal to 8.9 percent of GDP in 1998, before Brazil's currency collapse; they stood at 9.8 percent of GDP in 2001. (See this Cato Institute paper by Kurt Schuler for the stat's I've cited.)
So what really happened in Argentina? Fiscal deficits, not trade deficits, were what drove up Argentina's foreign debt. Government spending grew rapidly during the second half of the 1990s, while an anti-growth tax system did a poor job of pulling in revenue. As the economy tanked after Brazil's crash, the new de la Rua administration responded with tax increases and undermining the fixed rate (by proposing a shift from a straight dollar peg to a dollar-euro peg). The inevitable devaluation would have been survivable if it had been done sooner and the fixed rate had been maintained. Instead, the government dropped the fixed rate, attempted to "pesofy" outstanding dollar-denominated debts, and ended up completely wrecking what had been a fairly healthy financial system. The current meltdown is the result.
What is Stiglitz up to? Bashing the IMF is one of his hobbyhorses, and he's riding it in this op-ed. Personally, I've got no use for the IMF, and in particular I share Stiglitz's disdain for the Fund's root-canal economics -- especially its love of tax increases during economic contractions. But Stiglitz also has decided that the world is suffering from an excess of pro-market zeal, and his agenda here is to paint Argentina as a failure of "neoliberalism." All I can say is I wish I lived on the planet Stiglitz thinks he's on -- it would be a lot nicer world than this one. But as long as we're all stuck here, the least we can do is to get the basic facts right. posted by Brink Lindsey at 10:31 AM