Transcript Security Scenarios And The Global Economy

NS4053
Winter Term 2015
Argentina: Reverse Convergence
Overview
Miguel Kiquel, Argentina: A Case of Reverse Convergence,
Brookings, November 2014
Main Points
• Argentina’s growth performance over last century unique
• Country has
• moved from being a prosperous developed country at
beginning of 20the century to
• Joining the group of emerging countries 100 years later
• Possibly a case of reverse convergence
Main lesson,
• Convergence does not occur naturally, but
• Requires supporting policies to take advantage of
opportunities opened up by openness and capital
inflows.
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Argentine Economic History I
• Argentina’s successful period largely between 1880s and
the 1920s
• Country was integrated into the world economy
• One of the major suppliers of food and raw materials to the world
• Magnet for foreign direct investment for poor workers leaving
Europe and searching for opportunities in the new world
• Depression in 1930s marked a turning point
• Drop in commodity prices
• Trade barriers were imposed on Argentina exports
• Sudden drop of capital flows from advanced countries
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Argentine Economic History II
• Conditions resulted in a change in the development
paradigm
• World economic order in 1930s was that of protectionism
in Europe and the U.S.
• First -- policy response in Argentina – shift towards
industrialization and import substitution
• Prebish thesis – terms of trade go against primary
producers therefore need to industrialize
• New policy shift created tensions between
• traditional export sectors (mainly agricultural/beef sectors) that
were efficient and main suppliers of foreign exchange and
• Infant industrial sector that needed foreign exchange to import
intermediate and capital goods
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Argentine Economic History III
• Second change in the economic paradigm was a
relaxation of fiscal and monetary discipline
• A trend that became more pronounced since the midforties during Peron administration
• Beginning of the era of inflation and the stop and go
macroeconomic cycles
• Typically an expansionary phase stimulated by fiscal and
monetary policies
• Always ended in balance of payments crisis due to lack of
reserves and an overvalued exchange rate
• Cycles became more intense over the years
• Inflation hit triple figures in 1970s
• Devaluations in these cycles resulted in unsound
banking system and led to debt restructuring or outright
defaults.
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Argentine Economic History IV
• Since mid-1970s Argentina suffeed a large crisis
approximately every seven years
• Widespread bank failures and sovereign debt defaults
• In 1989 country experienced hyperinflation.
• These were distributive episodes in which thee were
sharp redistributions of income and wealth.
• Between 1975 and 1991, GDP per capita dropped 22 percent
• Worst period in Argentina’s economic history
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Argentine Economic History V
• Hyperinflation marked a new turning point
• Triggered a new change in economic polices and
• Put the economy back on a growth path
• Between 1992 and 2013 economy grew at an average rate
of around 4 percent
• Faster than that of most Latin American countries
• However there was a deep crisis in 2001
• Since then there has been some sifting of policies and a
return to inflation
• Some concerns about the near-term outlook as the
country is again in default with large fiscal deficits and
balance of payments problems
• Still the post-hyperinflation period suggests Argentina
may be on a new secular cycle that is simply on a pause
due to macroeconomic problems.
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Lessons from History I
Lessons from Argentina’s growth patterns
• First – Argentina grew faster in periods in which
• It was more open and more integrated with the world economy
• When it followed an export oriented strategy as opposed to
those in which it adopted import substations.
• Second – The abuse of stimulus policies – fiscal deficits
primarily financed by printing money in an environment
of fixed exchange rates
• Started a new era characterized by high inflation and business
cycles closely tied to an abundance or scarcity of reserves
• Typical stop go cycle – expansion driven by macroeconomic
policies leading to higher imports and inflation
• Currency strengthened, balance of payments deficit often
caused massive devaluation and further inflation
• Produced significant volatility and reduced the trend rate of
growth
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Lessons from History II
• Third – exchange rate policy matters
• Most crisis occurred following a period in wich currency
became overvalued
• When devaluation occurred it was recessionary because it
affected domestic income
• Negative balance sheet effect that affected the ability of
government and banks to service foreign currency debt
• Created a link between devaluations and financial crises
• Fourth macroeconomic financial crisis were very
disruptive to growth
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Reasons for Optimism I
Some cause for optimism at the present time
• First, although country is in default – this time clearly
related to legal and political issues as opposed to the
ability to pay
• Once new government takes office at the end of 2015 and debt
resolved, country risk should drop
• Would open up way foreign capital inflows that should help
reignite growth
• Second – Argentina has a sound banking system that
this time is not the source of vulnerability – few foreign
currency liabilities
• Third key macroeconomic imbalances:
• The fiscal deficit
• Overvaluation of currency
• Have increased but not reached unmanageable levels as10
in previous crisis
Reasons for Optimism II
• Solving macroeconomic imbalances will be critical if
country wants to take full advantage of growth
opportunities
• During Kirchner years a shift towards interventionist
policies
• New trade restrictions – import substitution
• Directed credit lines
• Subsidized interest rates
• Numerous controls to access foreign exchange and
• A near freeze on utility rates
• Brought to a halt investment in energy generation
transmission and distribution
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Assessment
• Country needs large investments in infrastructure and
many sectors – mining, oil and gas, and agriculture
• If new administration does not address the incentives to
invest in infrastructure and in key sectors, the
macroeconomic improvements will
• Provide short-term relief but
• Not foster long-term growth
• Big question is whether
• The next government will be willing and able to attract
investment and external financing to develop major projects or
• The country will again get trapped in domestic politics
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