Argentina lessons for Greece/EMU and India??

CEPR economists have been going pretty aggressive to suggest Argentina is a good success story. They  suggest the growth reforms since 2001 crisis has lessons for EMU economies (and others).  They also predicted that incumbent President Cristina Fernandez de Kirchner likely to be reelected given the positive developments in economy.

In this paper, the authors point Argentina is a success story for follwing reasons:

  • The Argentine economy has grown 94 percent for the years 2002-2011. IMF projects 2011 growth at 8%
  • It reached its trend GDP in the first quarter of 2007
  • Country grew without much FDI and FII. This is a counter to thise who believev please international community is important
  • The growth is driven by domestic consumption and investments. It isn’t because of commodity export boom as most perceive. Exports form just 3-4% of GDP which is very small to generate such high growth
  • Moreover, barring this economic growth, social indicators have improved with  decline in poverty and inequality

Hmm. Interesting.

What about inflation?  The major question on Argentina  is on inflation which is given around 8% by official estimates but as per  professional economists is around 25-30%.  So much so professional econs were fined for this overestimation of inflation. Rogoff says this under-reporting could be as Argentina issues indexed bonds.

The paper says the inflation could be higher but Argentina did not sacrifice growth for inflation:

Inflation may be too high in Argentina, but it is real growth and income distribution that matter with regard to the well-being of the vast majority of the population. By these measures, as we have seen above, the government appears to have made the correct decision not to fight inflation by sacrificing economic growth. . To take one important historical example, South Korea registered annual rates of inflation similar to those of Argentina in recent years, in the 1970s and early 80s, while it traversed the journey from a poor to a high income country. 

I would just disagree with this. Inflation is a lot about expectations and once government says official inflation is around 27% this will lead to all kinds of problems.  I don’t think this is the right lesson to take. Inflation is a bigger tax which hurts poor more and throws income distribution policies for a toss.  India is currently struggling to lower inflation and we have this talk of for higher growth we need to tolerate higher inflation which is just plain wrong. Higher inflation leads to lower growth and that is how it has beenm. One can argue about threshold level of inflation and say Argentina has a higher threshold than India and hence can have higher inflation than acceptable 5-5.5% in India. But that is just about it.

Back to the paper. The authors point higher inflation could dampen things if currency does not depreciate:

However, inflation at this level can affect growth and employment through the exchange rate. If the nominal exchange rate is fixed or does not depreciate sufficiently in response to the inflation, then the domestic currency becomes increasingly overvalued in real terms. This happens each year that Argentina has inflation higher than its trading partners, and the peso does not depreciate enough to make up for the difference between domestic and foreign inflation rates. 

Figure 10 shows Argentina’s Real Effective Exchange Rate. The peso fell sharply11 in response to the devaluation. Then there was a correction for “overshooting,” and the peso appreciated somewhat, remaining fairly steady until 2007. Then it appreciated significantly in real terms relative to its trading partners, by about 19.8 percent. If inflation continues at current levels, it will be difficult for the government to carry out its policy of targeting a stable and competitive real exchange rate, and that could hurt the economy by making exports and import-competing industries less competitive.

What about lessons for EMU? Greece should not really worry abt international investors. Just default and grow out of the crisis:

From the point of view of any of the individual governments that are being subjected to this process, the Argentine solution involving a default large enough to reduce the country’s debt burden to a manageable level would have to be considered as a possible alternative. For Greece at this point, for example, this could very possibly be preferable to its current trajectory, even if it were to involve leaving the euro.

Another lesson countering claim of Rogoff-Reinhart that recovery from recessions with financial crisis are long and painful:

Argentina’s experience calls into question the popular myth, as noted above, that recessions caused by financial crises must involve a slow and painful recovery. 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, 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.


Dean Baker of CEPR says there are few accepting this Argentine growth which is unacceptable. Krugman says people prefer to highlight achievments of Latvia whose GDP is 18% below peak.

Superb stuff. Need to dig deeper into Argentina numbers..



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