Sunday, May 06, 2012

Argentina's post-2001 recovery and its possible lessons for Europe

Mark Weisbrot points out that Argentina in its recovery from the financial disaster of 2001-2 has done very well without relying heavily on exports. (Argentina and the magic soybean: the commodity export boom that wasn't Guardian 05/04/2012)

"One of the great myths about the Argentine economy that is repeated nearly every day is that the rapid growth of the Argentine economy during the past decade has been a 'commodity export boom'," he writes. But it's more financial journalists and columnists who claim this based on conventional wisdom in their circles. Or maybe just plain laziness. "I haven't seen any economists make the claim that Argentina's remarkable economic growth over the past nine years – which has brought record levels of employment and a two-thirds reduction in poverty – has been driven by soybeans or a commodities export boom. Maybe that is because it is not true."

After discussing some of the relevant economic numbers, he writes:

The myth of the "commodities export boom" is one way that Argentina's detractors dismiss Argentina's economic growth as just dumb luck. But the reality is that the economic expansion has been led by domestic consumption and investment. And it happened because the Argentine government changed its most important macroeconomic choices: on fiscal, monetary, and exchange rate policies. That is what took Argentina out of its 1998-2002 depression and turned it into the fastest-growing economy in the Americas. [my emphasis]
And Wiesbrot links to a paper he-authored with Rebecca Ray, Juan Montecino and Sara Kozameh, The Argentine Success Story and its Implications 10/02/2011 (Center for Economic Policy Research {CEPR}). And he reminds us that the current economic and currency crisis in Europe has some strong similarities to Argentina's problems under the domination of neoliberal economic policies and a national currency tied to another currency (the US dollar, in Argentina's case).

In the paper, Weisbrot and his collaborators summarize that experience:

In December of 2001, the [Argentine] government defaulted on its debt, and a few weeks later it abandoned the currency peg to the dollar. The default and devaluation contributed to a severe financial crisis and a sharp economic contraction, with GDP shrinking by about 5 percent in the first quarter of 2002. However, recovery began after that one quarter of contraction, and continued until the world economic slowdown and recession of 2008-2009. The economy then rebounded, and the IMF now projects growth of 8 percent for 2011.

Argentina’s real GDP reached its pre-recession level after three years of growth, in the first quarter of 2005. Looking at twenty-year trend growth, it reached its trend GDP in the first quarter of 2007.
Not surprisingly, the Obama Administration which is heavily committed to the neoliberal policy menu hasn't terribly appreciated the value of Argentina's approach: "It is remarkable that Argentina has achieved its success in the face of adverse external circumstances, some of which continue to this day. Just one month ago the Obama administration, under pressure from 'vulture funds' and their associated lobby groups, announced that it would oppose multilateral loans to Argentina."

And they explain how distant the general conventional wisdom about the troubled state of Argentina is from the facts of recent years:

It is striking that Argentina’s economic growth over the last nine years has been given so little positive attention. China’s success as the fastest-growing economy in world history has been widely recognized, even if the Chinese government is often criticized in the Western press for its trade and currency policies. India’s rapid growth since 2003 (averaging 8.9 percent annually from 2003-2008) has also attracted much praise. But Argentina has not generally been seen as successful. Much of the press reporting has been negative, focusing on the high inflation of recent years.

But it is real income that matters in terms of living standards, and the Argentine economy has grown 94 percent for the years 2002-2011, using IMF projections for the end of this year. This is the fastest growth in the Western Hemisphere for this period, and among the highest growth rates in the world. It also compares favorably to neighboring economies that are commonly seen as quite successful, such as Brazil, which has had less than half as much growth over the same period. [my emphasis]
Weisbrot et al suggest that Argentina provides contrasting evidence to the widespread assumption "that recovery from recessions caused by financial crises
must necessarily take much longer than recovery from other types of recessions." Don't tell poor David "Bobo" Brooks:

JUDY WOODRUFF: Well, speaking -- you bring me around to the economy. I am going to ask you the question I ask you every month at the beginning of the month, and that is when the unemployment numbers come out.

David, more jobs were created in April, but not as many as everybody wanted. What does this say about the economy? ...

DAVID BROOKS: Let me get out what I have been saying for the last four years, which is, first of all. . .

MARK SHIELDS: Financial. . .


DAVID BROOKS: Financial crisis, it takes a long time to recover. I say it every month. It's the truth.

JUDY WOODRUFF: Gee, have you said that before?

DAVID BROOKS: I say it on a monthly basis. I just should say answer A., and there it is. (Shields, Brooks on Bin Laden Politics, Chen Guangcheng, Jobs Report PBS Newshour 05/04/2012)
Yet, as the Weisbrot eta l paper notes, "Argentina’s deep recession from 1998-2002 was one of the very worst, in terms of lost output, of the past hundred years; and it was clearly caused by a financial crisis that culminated in a systemic financial collapse. Yet the recovery was very rapid." Would Bobo even notice if he read that paper?

They also write:

Argentina’s financial crisis and collapse were as severe as that of almost any country in recent decades; and yet it took only one quarter after the default to embark on a rapid and sustained recovery. This is not only because of the devaluation and improved macroeconomic policies, but because the default freed the country from having to be continually hamstrung by a crippling debt burden and by pro-cyclical policies imposed by creditors. It is these types of policies, along with the ultra-conservatism of central banks like the present ECB [European Central Bank], that mostly account for the historical experience of delayed recoveries after financial crises. The Argentine government has shown that this bleak scenario is just one possible outcome, and that a rapid recovery in output, employment, poverty reduction, and reduced inequality is another very feasible path that can be chosen.
In general, Argentina's recent experience also casts doubt on even the non-crisis versions of neoliberal doctrine:

Yet in spite of all of these adverse external conditions that Argentina faced during the past nine years, the country experienced this remarkable economic growth. This should give pause to those who argue, as is quite common in the business press, that pursuing policies that please bond markets and international investors, as well as attracting FDI [foreign direct investment], should be the most important policy priorities for any developing country government. While FDI can clearly play an important role in promoting growth through a variety of mechanisms, and foreign capital in general can, in some circumstances, boost growth by supplementing domestic savings, Argentina’s success suggests that these capital inflows are not necessarily as essential as is commonly believed. And it also suggests that macroeconomic policy may be more important that is generally recognized.
The fact that exports played a fairly limited role in the post-default, post-currency-change years is potentially a hopeful sign for a country like Greece, which has very limited potential for export growth. Germany's position in recent years has been to tell other European countries they should copy Germany's export-based orientation, generally an unrealistic prescription, especially for the short- and medium-term.

The paper from last October described the already-sobering prospects for economic recovery in hard-hit EU countries like Greece, Ireland, Italy, and Spain. Prospects have deteriorated significantly since then, despite the stopgap measures undertaken by the EU and international banks to prevent a more rapid financial meltdown. So what they said in October is more true today: "The attempt to adjust through 'internal devaluation' in Europe is proving to be as much a disaster there as it was for Argentina in its deep 1998-2002 recession." Internal devaluation means pushing down wages, salaries and incomes.

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