photo: Taylor White
Nobel Prize economist Joseph Stiglitz and coauthor Martin Guzman (from now SG) had just written a piece on Argentina, entitled “Argentina’s Uncertain Prospects” focusing on the early economic policies and potential scenarios for the government of the newly elected President Mauricio Macri. In my opinion, the article paints an excessively gloomy picture of Argentina’s prospects, based on a limited policy narrative. This does not mean that everything will be fine: world economic conditions are deteriorating and, in my opinion, a global recession is likely in the next couple of years. But in that case we should be talking about the world’s, and not only Argentina’s, uncertain prospects.
Let me clarify that I do not work with the new government. I am writing in my personal capacity, as I did in the past in this blog about developments in my country (see for instance, “Argentina’s Recent Growth Episode“, which led to some furious responses from critics of the then Argentine government, and several blogs on the situation with the holdouts: “Argentina and Elliot, Again” and “Some Reflections on Argentina’s Debt Restructuring” and whether Argentina has been in “decline” during the last hundred years or not.
First, I want to note that I agree when SG refer to the advances in Argentina’s economic and social conditions during the Presidency of Nestor Kirchner (2003-2007). An important clarification though is that economic growth and improvements in social conditions started in mid-2002 under then President Eduardo Duhalde and Minister of the Economy Roberto Lavagna, about a year before Nestor Kirchner took office in May 2003. The phrase in the article that argues that “When Kirchner took office, Argentina had just experienced its most severe economic crisis ever,” must be put in context: when then President Nestor Kirchner was sworn in, the Argentine economy was already one year into the healing process, with an annual growth rate from mid-2002 to mid-2003 of almost 8%, that then continued for several years.
Let me now move now to the two main topics in the article that, in my view, require better analysis: first, the economic and social conditions inherited by the Macri Administration, and second, the policy analysis presented by SG.
The Starting Point for the New Administration
The paper oscillates between criticizing and praising the economic and social situation left by the government of Cristina Fernández de Kirchner. On the one hand, after arguing that Argentina “navigated the global financial crisis with relative success” during the first period of Cristina Fernandez as President (2008-2011), they acknowledge the serious economic problems in her second presidential period (2012-2015) (for instance, they recognize that “the fiscal surplus during Nestor Kirchner’s presidency turned into a sizable deficit under Fernández,” and that “Argentina could face a balance-of-payments crisis, owing to deteriorating external conditions and macroeconomic mismanagement, especially since 2011.”).
But then they argue about several positive aspects inherited by the government of Mauricio Macri (“a more egalitarian income distribution, an economy close to full employment, and a much lower debt-to-GDP ratio”); consider that “Macri’s task is to address the external and fiscal imbalances and reduce inflation, without undoing what has been achieved;” warn that misguided policies by the new government may “lead to the worst of all possible worlds: stagflation – a cooling economy in which inflation is not fully contained;” and close the article by stating that if Macri’s policies fail “the process of inclusive development will be severely harmed.”
I agree about the more egalitarian income distribution –although the validity of this statement depends on the reference year, and in any case income distribution, along with other social indicators, have deteriorated during the last part of the Presidency of Cristina Fernández. Also, there is a relatively lower level of indebtedness (emphasis on “relatively”).
But at the same time the article does not seem to recognize that the economy is already in stagflation and appears not to have been creating employment during the last four years (which casts doubts about the notion that the country has been operating “close to full employment”).
According to official data, income per capita grew an annual average of about zero percent in the period 2012-2015 (0.05%) (by comparison the world income per capita grew at 1.2% per year and Latin America and the Caribbean at 1.4%, using market exchange rates and not PPP), while the annual average inflation was 16.3%. Even according official data, it looks pretty much as very bad stagflation to me. Private estimates paint an even more negative picture: average annual income per capita may have been about -0.5% (i.e. negative per capita growth) and annual inflation was estimated at above 20-25% during the last presidential period of Cristina Fernández. Unfortunately, until accurate estimates of the national statistics are recalculated (including poverty rates), we will not know for sure how bad the situation has deteriorated during the last years.
While employment grew strongly during the presidential period of Nestor Kirchner (Employment NK), it slowed down during the first period of Cristina Fernández de Kirchner (CFK1), and it had stagnated during the last period (CFK2). Therefore, it seems difficult to argue that the economy inherited by Macri was “close to full employment.” In fact, as the electoral result showed, economic and social conditions clearly deteriorated under CFK2.
Current Policies and Future Scenarios
The focus of the article is an evaluation of the first economic measures taken by the new administration of Mauricio Macri.
They present the positive view as follows: “Optimists believe the new policy regime will lead to an influx of foreign direct investment, and that a “fair” resolution to the vultures’ claims will clear the way for a bridge loan to cover any financing gap. Moreover, the weaker exchange rate, combined with pent-up sales of commodities waiting for the one-time devaluation, will suffice to meet any foreign-currency needs.”
But then Stiglitz and the coauthor move to present an extensive discussion of the pessimistic view. The comments are a series of “if this happens (usually a bad thing), then this (also bad) would be the result,” which, in general, paint a gloomy future scenario for Argentina (an example: “If the central bank acts too aggressively and drives the economy into recession, the poor would be disproportionately affected”). The summary of the negative view goes like this: the devaluation will be transmitted to prices, and that would lead to wages increases; the Central Bank will react by increasing interest rates (following a misguided inflation targeting approach) which would push the economy into recession; foreign direct investment, and the bridge loan to help with the fiscal situation, will not materialize because the problem with the vulture funds will not be resolved adequately. Therefore, stagflation will follow, the poor will suffer and income distribution will deteriorate.
I already argued that the economy has been in stagflation the last four years. Therefore, the question is whether the new economic policies would lead to a resumption of growth, accompanied with a slow decline in inflation and increases in employment, which would help to reduce poverty.
First, the devaluation. Many people seem to argue only in terms of relative prices (“the devaluation reduces real wages”) without considering the potentially positive growth and employment effects. What counts for the economy is the aggregate wage bill in pesos: that is the number of employed multiplied by the nominal salary. Keynesian economists know the importance of the total wage bill to sustain aggregate demand. Also, Dani Rodrik and other development economists have shown that a more competitive exchange rate leads to higher growth in output and employment. In particular, the example of Argentina between 2002 and 2007 shows that having a competitive exchange rate led to faster growth and more employment, with a development path comparatively more labor intensive than in the past. As noted before, production and employment have been virtually stagnant since the peso was allowed to appreciate over the last years of Cristina Fernandez.
After the last devaluation, what is needed is a crawling peg against a basket of currencies to make sure that the peso does not appreciate again. It is true that, in the past, devaluations were linked to sharp contractions, but that was related to financial and banking crises caused by excessive dollar-denominated debt, which is not the case now in Argentina.
Also, contrary to the argument in Stiglitz’s paper, the beneficiaries of the devaluation are not only producers of commodities, but also a variety of small and medium firms producing agroindustrial and industrial goods, many in the relatively poorer provinces outside the Pampas. Tradable services (from tourism to computer and professional services) will benefit too. All these activities have potentially important employment effects. Rather, it can be argued that it was the policy of peso appreciation followed by Cristina Fernández which benefited the wealthy that had access to the subsidized dollar for savings purposes and helped the relatively higher income people that decided to take vacations outside Argentina, while it acted against the possible expansion of employment in small and medium firms, in domestic tourism, and in the poorer provinces. The devaluation started to correct those regressive policies.
Hopefully, in the coming negotiations on salaries (and prices) between firms, workers, and the government, the focus will be less on short-term distributive impacts of changes in relative prices (which SG seem to emphasize), and more on the important dynamic gains in growth, employment and incomes for all of an adequate parity for the exchange rate.
Second, foreign direct investment. I do not believe that the government is counting on FDI to reactivate the economy. It is rather expecting that Argentine citizens, which have substantial reserves of dollars “abroad” (or “under the mattress”), decide to change them into pesos and use it to consume and invest, now that the unrealistic valuation of the dollar has been corrected and the police controls on international transactions have been lifted. It should be noted that according to the estimates of Lane and Milesi-Ferretti, Argentina has a positive net external position of several points of the GDP (i.e. total national assets, public and private, are greater than total liabilities; in other words the country is an international creditor), while all the major countries in LAC have negative net external positions.
Third, inflation targeting. As Stiglitz, I also have my reservations (see here ). But rather than the general concept, the problems experienced by many developing countries have been related to how inflation targeting has been applied, including unrealistically low levels of the inflation target and the lack of an overall policy framework that considers other policies and objectives, including growth and employment. A limited focus on an inflation target that is “too tight” may lead to declines in growth and employment through different channels (see the reference above). So far, though, the targets mentioned by the Argentine government seem reasonably gradual, only reaching one-digit inflation over several years, and they seemed to be focused on coordinating expectations of firms and workers. I think (and hope) that the current government will look at targets for growth, employment, inflation and poverty within a single policy-making framework, and will use multiple instruments and not only the interest rate.
Fourth, the resolution of the debt crises. Anyone that has read my previous blogs on the subject (that I mention above) knows that I do not have any sympathy for the basic business model followed by Elliot et al. Although these funds claim that they help the efficiency of the economic system, in fact they substantially increase the risks and inequities in the always painful resolution of debt problems. A just solution of the current impasse has enormous geopolitical and economic implications, way beyond Argentina, considering that the world is clearly in another period of financial turmoil. I hope that the international community understands that it is in their collective interest to intervene to ensure such a just resolution.
Even without the “bridge loan” there are different ways in which multilateral banks (more the World Bank and CAF, rather than the IADB, which is constrained by its own misguided financial policies) can help to finance the ambitious program of infrastructure announced by the current government to revitalize the economy of the poorer provinces in the northern areas of Argentina. That investment program will directly contribute to growth and employment in the short term, and, over time, will increase the competitiveness and the production and employment opportunities in those provinces. That program can be also financed and expanded to other regions through different public-private schemes that would be completely unrelated to the resolution or not of the debt problems with Elliot et al.
Finally, the government has announced a “zero poverty” target, and started to adjust the social safety net to that effect. I do not have any indication to believe that the government is anything but serious about this objective. This should benefit the poor and vulnerable, while maintaining aggregate demand for the economy. The reduction in inequitable and wasteful energy subsidies will also help to reorient public expenditures towards strengthened social safety nets and infrastructure.
In summary, I think that, in contrast to premature gloomy scenarios, there are other potential policy narratives that suggest far more positive scenarios for Argentina. Of course, a catastrophic world recession could change that; but then the problem will be global and not only for Argentina. Meanwhile, it seems appropriate to give some time to the new administration before starting to predict failures.