For the past five years, Argentina has been growing not quite like China, but close. Everything indicates it will do it again this year. There are some folks out there who think that the reason this is happening is because Argentina is following the same model as China. They may be right. Whether this is a good thing is another matter.
As we know, the opinions of economists this side of the hemisphere about the Chinese model are divided. There are those who think the model is both good and sustainable (e.g., proponents of the BW2 hypothesis). There are others who think that it may be good for China, but not for the global economy, not to mention the fact that it is not sustainable. And then there is me (and whoever wants to join my cause). I personally think that, regardless of the sustainability or lack thereof of the Chinese growth model, it is not good for anyone, not even for China.
By “Chinese growth model” I mean the policy of accumulating reserves by preventing not just nominal but real exchange rate appreciation. Quite frankly, I don’t mind that the Chinese peg the nominal exchange rate to the US dollar. Any market economy is entitled to do so, for this is a matter of monetary policy choice. So, if the Chinese like a fixed exchange rate over a flexible one, let them have it. More important than the formal exchange rate per se are, in my opinion, two other ways in which China interferes with global macroeconomic rebalancing. These are: capital controls, particularly on outflows, and price controls, particularly on food and public services. It is in these areas of policy where China flunks the “market economy” test by a long shot.
For, consider what would happen if the capital account was open and the prices of wage goods and nontradables were determined by the market rather than by the government (via administrative controls and subsidies handed from the budget). Part of the excess supply of money caused by the monetization of the current and FDI account surpluses would be eliminated via portfolio outflows and the other part, by domestic inflation. In the first case, the international allocation of Chinese assets would be done by the private sector rather than by the Central Bank of China, hence resulting in less money flowing to the US Treasury and more to where is needed . In the second case, the real exchange rate would appreciate facilitating macroeconomic adjustment via a reduction in the current account surplus.
But, more importantly, there would be less microeconomic distortions in China, hence guaranteeing more efficiency in the allocation of Chinese resources. In such a world, the national and subnational governments of China would be able to redirect public resources from subsidizing wage goods to increasing social spending in areas such as health care, education, and social security, hence improving the welfare of the Chinese people.
China would probably not grow faster as a result of these policy changes, but it would certainly grow better. Right now, the Chinese economy must invest about 40% of its GDP (net of depreciation) to grow by 10% per year. This implies that the incremental output-capital ratio is 0.25: substantial, but well below China’s potential. Rise it to 0.35 by improving investment efficiency and it will be possible to increase consumption by 12 percentage points of GDP without reducing growth.
Like China, Argentina has been able to manipulate the real exchange rate through a combination of sterilized FX intervention, capital controls, and massive subsidization of wage goods including foodstuffs (via export taxes and moral suassion), transportation (via budgetary transfers to private sector providers), and energy and other utilities (via the freezing of tariffs). Unlike China, however, Argentina has a low saving ratio (less than 25% of GDP, which makes misallocating resources more intertemporally onerous); binding supply constraints (due to a lack of investment in key sectors such as energy); a tight labor supply (as formal workers are nearly fully employed); and an inflationary history that renders capital and price controls quite ineffective. So, if the growth model of accumulating reserves at the price of accumulating microeconomic distortions is not good for China, it must be worse for Argentina, where early signs of exhaustion are evident from the acceleration of inflation since 2005, an acceleration that market distortions and the tampering of CPI statistics cannot disguise.