There is for starters the question of what causes external crises. As I have noted in other places (chapter 7 here or here, for example), external crises are NOT caused, in general, by fiscal deficits (quite the opposite, fiscal crises are the result of balance of payments crises). External crises result from the inability to service foreign debt (and to import intermediate and foreign goods), which are caused by a shortage of foreign currency (i.e. dollars).
As it can be seen in the graph above (data from Orlando Ferreres for those concerned with the sources), the current account surplus as a share of exports has shrunk and is now negative (at around 4% or so of exports). Note, however, that the level is far from desperate, and well below the crises levels when the current account deficit is above 60% of the exports.
Part of the anxiety is associated to the fall in the central bank's reserves, which stand at around US$33 billions now, down from slightly more than US$50 in 2011. The European crisis and the negative real rates of interest explain the drain on reserves, which are also not at a critical point right now. A combination of exchange controls, that have been in place (and have not been particularly efficient), and higher rates of interest might stop the outflows.*
Sure enough a balance of payments crisis could ensue, if say Vulture Funds eventually force a default, or if an external shock like a worsening of the crisis in the central countries followed by flight to safety, or a collapse of the terms-of-trade lead to a sudden decrease in the value of exports. But those do not seem to be necessarily intrinsic to the Argentine situation, and a slow recovery in the center, with significant amounts of international liquidity, and no incredible collapse of the prices of commodities seems as likely as the alternative.
In other words, the problem in Argentina, which is relevant for many countries in the region, is the long-term development strategy, and not the short-run balance of payments position. What the shrinking of the current account surpluses, and the resulting constraints on policy space, suggests is that the continuous dependence on commodity exports (manufacturing exports go mostly to the region, i.e. Brazil, and produce a deficit), and the absence of a more coherent policy of import substitution and of industrial development, continues to be relevant, as predicted more than 60 years ago by Prebisch and ECLAC.
* Higher rates can be compensated by subsidized credit by the public banks if demand for credit increases, but that would require demand expansion.
Part of the anxiety is associated to the fall in the central bank's reserves, which stand at around US$33 billions now, down from slightly more than US$50 in 2011. The European crisis and the negative real rates of interest explain the drain on reserves, which are also not at a critical point right now. A combination of exchange controls, that have been in place (and have not been particularly efficient), and higher rates of interest might stop the outflows.*
Sure enough a balance of payments crisis could ensue, if say Vulture Funds eventually force a default, or if an external shock like a worsening of the crisis in the central countries followed by flight to safety, or a collapse of the terms-of-trade lead to a sudden decrease in the value of exports. But those do not seem to be necessarily intrinsic to the Argentine situation, and a slow recovery in the center, with significant amounts of international liquidity, and no incredible collapse of the prices of commodities seems as likely as the alternative.
In other words, the problem in Argentina, which is relevant for many countries in the region, is the long-term development strategy, and not the short-run balance of payments position. What the shrinking of the current account surpluses, and the resulting constraints on policy space, suggests is that the continuous dependence on commodity exports (manufacturing exports go mostly to the region, i.e. Brazil, and produce a deficit), and the absence of a more coherent policy of import substitution and of industrial development, continues to be relevant, as predicted more than 60 years ago by Prebisch and ECLAC.
* Higher rates can be compensated by subsidized credit by the public banks if demand for credit increases, but that would require demand expansion.
So Matias, what's your take on all the criticisms of Argentina's policies, the alleged understatement of inflation in the official statistics, etc.?
ReplyDeleteHi Robert:
DeleteYep, inflation is around 25%, and everybody knows that the official rate is too low. They should fix it. But the people that question the government policies more often than not ask for devaluation of the currency and fiscal adjustment (say Frenkel, for example). Yet, the evidence for the effect of devaluation on export growth (and hence some effect on the current account) is nil (price elasticities are low compared to income ones). On top inflation is in part the result of nominal depreciation and inertia. Fiscal adjustment, which has been actually in place, leads to lower growth (and that's why the current account has not exploded). So yeah there might be some reasonable criticism of the government, but not the one that comes from New Developmentalism types. Argentina needs fiscal expansion, and industrial policy directed towards good lod fashioned ISI.
Ok, red lights off. But what about the trend? Watch the "movie" from 2003 onwards and clouds in the horizon appear. With your graph, the CA seems pretty similar to some stories already told here (first peronism and the late 60´s)... do you think Kicillof will be able to scape from being the "new" Gómez Morales (orthodox turn) to become a renewed Krieger Vasena (heterodox stabilization)?
ReplyDeleteBesides, I agree with the need of a good old-fashioned ISI, but there is still time? The political dynamic has urgent aims; the (not) strategic industrial plan 2020, the (failed) BND II project, the (lack) of heavy investments in infrastructure, etc. aren´t speaking instead of a train that has already left the station?
Matías, very good post. The recent Argentinean policy was something like an “heterodox neo-developmentalism”. A heterodox (leftist?) frenkelian approach to the economic situation.
ReplyDelete