More on MMT in the Tropics: or Can exchange rate instability, and zero interest rates, guarantee prosperity in the periphery?

 

Lance Taylor, Wynne Godley and myself in March 1999

Back in the 1990s (from late 1996 to early 1999 to be precise), I worked for Wynne Godley at the Levy Institute. Minsky, that I saw in Brazil once, had just passed away. Randy Wray was at the Levy at an office not far from Wynne's, where we worked on his model. I was, also, in Ed Nell's study group (Matt Forstater was a frequent visitor), that met regularly and discussed functional finance. In fact, one of the few topics that I was first exposed at the New School, rather than at my alma mater in Brazil.

Ed organized a conference on functional finance in 1997 (if memory doesn't fail me), then published as a book (see here), which in many ways was the beginning of what later would be called Modern Money Theory (note that at the core was Abba Lerner's functional finance). At dinner (at the Orozco Room) I sat at a table with Musgrave, Duesenberry, and, for a brief moment, Eisner, that had to leave early.* I think that was the first time I met Mosler.** Randy's MMT book came next year, in 1998 (I should note that I paid less attention to that book than his previous one, based on his PhD dissertation under Minsky, since I was at the time writing my own dissertation under Wynne and Lance Taylor, both pictured above on the day of my defense).

I start this, just to explain what should be obvious, that functional finance, endogenous money, and a preoccupation with full employment not only are part of my concerns, but that I learned, at least in part, some of these ideas more or less at the same time that they were being discussed and the MMT school was being formed. Mind you the notion of effective demand, and the perils of the external constraint, were things I already knew, but some of the issues with value theory and its importance for policy I also learned with Ed, and John Eatwell, at the New School. Further, on a personal note, I should clarify that while I worked for Wynne, who at the time was concerned with the growing external imbalances of the US, and the consequences for the international position of the dollar, I tended, on this topic to be closer to Randy's views, since it was clear for any one that came from the Federal University in Rio, and who had been influenced by Maria da Conceição Tavares, that the dollar was under no danger, and the US by definition didn't have an external constraint.

All of this to say, again, that in general, I do agree with the notion that autonomous spending determines income, and taxes being charged out of income, are the result of spending, and, as a result, the limit to fiscal policy is essentially political in nature. That is something that MMT has been instrumental in popularizing in the United States, and whenever I can, I do help on that (see my podcast with Stephanie Kelton, who was at Levy when I worked there, and started her PhD at the New School slightly after I did). She was here at Bucknell to discuss the documentary Finding the Money.

 

Stephanie at the Campus Theatre, Bucknell last March

This introduction, longish and winding, is to explain why it is somewhat weird to discuss this paper by Arturo Huerta, who I have met in Mexico, but do not know very well. This is difficult because it is a misrepresentation of the differences I do have with MMT. His paper is supposedly a rebuttal to some arguments that we have made with Esteban Pérez on Modern Money Theory (MMT). The paper is a mix of name calling (essentially that we are conventional or orthodox, read, neoclassical, and that we are neoliberals or aligned with them) and a series of arguments in defense of flexible exchange rate regimes as a solution for unemployment problems in peripheral countries. The title, "Exchange-Rate Stability Causes Deterioration of the Productive Sphere and Destabilizes Developing Economies," seems to go even further and advocate for exchange rate instability. For Minsky financial stability was destabilizing, for some MMT authors exchange rate stability causes underdevelopment and is also destabilizing.

In fact, this seems to be more a response to the critique, mine more than Esteban's, to Warren Mosler's proposal for Argentina (see below),* which would definitively cause more exchange rate instability,  inflation and a huge recession, than to our original discussion of MMT in developing countries. In fact, Huerta does not cite that paper, but our response to a poorly developed and somewhat misleading paper by Agustin Mario, that I discussed here, who said without any evidence that we defended supply side views of economic growth.

Mosler's plan consists of free float (which he says retains foreign reserves), a zero (yep, that is zero) interest rate irrespective of the rate of interest in the United States, and a Job Guarantee (JG) program. The rest is less relevant, at least for our purposes. I also assume some expansionary fiscal policy on top would be necessary for the JG.

 

Mosler's policy proposal for Argentina

Huerta's main point is that a flexible exchange rates would free the country to spend in domestic currency, very much like Mosler suggests, without loss of reserves, which developing should not be concerned with in the first place. He essentially argues along Wray's lines according to which: "a government does not need to fear that it will run out of foreign currency reserves (or gold reserves) for the simple reason that it does not convert its domestic currency to foreign currency at a fixed exchange rate" (from Wray's Modern money theory: a primer on macroeconomics for sovereign monetary: p. 161. It is still exactly like that in the 2024 edition).

The notion is that: "a floating currency provides more policy space – the ability to use domestic fiscal and monetary policy to achieve policy goals. By contrast, a fixed exchange rate reduces policy space" (Ibid.). Of course, a fixed exchange rate is not necessarily the same that a stable one, and the notion that allowing big devaluations is counter-productive. MMTeers may say, as I'm sure they will, we do not defend big devaluations. Maybe not explicitly, but if you keep low (zero interest rates), and do not intervene in the exchange rate market, that is, unavoidably, the consequence. Doing that will not retain reserves, and central banks should be concerned about reserves. Btw, Milei was able to reduce inflation drastically because he did intervene both in the official and the parallel exchange rate markets (and the loan from the IMF is essentially about recomposing reserves; more on that in another post).

Then comes the question of why you should be concerned with reserves, and here Huerta's position is somewhat puzzling, particularly for someone coming from a developing country. I quote here, he says: "Vernengo and Pérez (2021) do not consider that purchases of imported goods are paid for in the importing nation’s currency, accepted by the exporters so that they can make investments, acquire financial assets, and make purchases in that nation." He suggests that they would accept pesos. In this view, a country that is an oil importer, that cannot function without energy, can import oil in domestic currency. Good luck with that!

But even if we leave the realm of Latin American magical realism, an the notion that developing countries can import in its own currency the basic capital and intermediary goods that they need to maintain normal levels of activity, his view is full of problems. He accepts very conventional views about the exchange rate (while claiming that I do have orthodox views, which I never did, on fiscal austerity; on that, note that The Guardian quotes me twice, here and here, as being against austerity when many heterodox economists, some even arguably MMTeers, I might add, have been for austerity in Argentina, saying that the mistake of the Kirchners was their fiscal excesses).

His main argument is that a "flexible exchange rates are important ... for increasing the competitiveness of national productivity and reducing pressures upon the external sector." He repeats it,  saying that: "A flexible exchange rate improves competitiveness and promotes economic growth, thereby reducing the current account deficit." In other words, the flexible exchange rate does solve the external problem (Randy is always more careful about that, and I have not seen that argument in his work).

He says that: "the reason for MMT’s advocacy of flexible exchange rates is so that the exchange rates may adjust to differences between domestic prices and those of the principal trading partners. By allowing those adjustments, a nation can avoid the relative-price distortions that would affect national production." *** He notes, as I suggested above, that they are not for depreciation per se (yeah, but with a zero interest rate...), but that: "the predominant exchange rate stability (achieved by maintaining high interest rates, in order to promote capital inflow) has led to exchange rate appreciation, which is detrimental to the competitiveness of national production." In this, as we noted in our original paper with Esteban, they are very similar to Bresser-Pereira's New Developmentalism. In the concern with a competitive exchange rate, but with a tolerance, if not a promotion of exchange rate instability, which is inevitable with very low interest rates.

There are many other issues, which again reveal actual use of marginalist thinking, for example, he says: "In saying that low interest rates generate inflation, these authors presuppose that low rates increase demand, and that the economy is in full employment. However, Vernengo and Pérez do not consider the fact that low interest rates favor the growth of investment, production, and productivity." First of all, that misrepresents our views. Low interest rates, leading to a negative interest rate differential (when the local rate is lower than the US rate adjusted for risk) leads to depreciation, and higher costs of imported goods, and inflation even if the economy is below full employment (I published the model in a book edited by, wait for it ... Forstater and Wray). Inflation comes from distributive conflict, and a depreciation, by affecting the costs of production and reducing real wages, stokes inflation. Second of all, his point is that lower interest rates lead to higher investment, which is a marginalist view that associates the intensity of the use of capital with its remuneration, a problem Huerta and many Post Keynesians share with Keynes.**** I follow Sraffians and prefer to abandon marginalist principles.

Huerta puts emphasis on the role of investment as central for growth, and in the need of very low interest rates for that, irrespective of their effect on exchange rate instability. He actually says several times that exchange rate stability is a problem, and argues that: "economies that give priority to exchange-rate stability cannot employ flexible monetary and fiscal policies to stimulate growth." On this, my views are closer to Ricardo Summa, that notes that investment is not so unstable, and follows the accelerator, and that autonomous demand (the non capacity generating part of it) is central for explaining growth.

So one needs a managed exchange rate, to avoid the inflationary pressures, and one needs to be concerned with reserves to be able to avoid the perils of not being able to import essential goods, that would cause bottlenecks an impede growth. But Huerta knows that, as a friend noticed (see below).

As he says in his tweets, what would Mexico do if it runs out of dollars to buy corn? Why not use pesos instead then? I mean, I get that Vernengo did not consider that, but he is an orthodox economist, isn't he?

In other words, sometimes, and certainly not always, developing countries cannot pursue expansionist fiscal policies because they do NOT HAVE DOLLARS (there is a reason every country, even China, accumulated humongous reserves of dollars after 2008-9). In order to be able to do it, sometimes, higher rates are needed in the periphery (not so much in the US). Then expansionary fiscal policy can be pursued even with higher interest rates, and the economy would be able to grow (as would investment that would respond, not to the higher interest, but to higher levels of demand). Exchange rate competitiveness is not central for growth, and Latin America did its State-led, import substitution industrialization (that Huerta cites all the time) during Bretton Woods with a stable nominal exchange rate (Mexico had a fixed rate from 1954 to 1976; they call it stabilizing development). It was a period of high growth, and relatively stable and appreciated exchange rate.

* I did co-edit a book, that had what I think was the last paper written by Eisner and can be seen as a follow up to that conference (ours what out of a few sessions we co-organized at the Easterns in DC in 2004, on functional finance issues.

** Mosler was in Argentina and presented this in several venues, including, at the University of Moreno, where someone questioned the idea that flexible rates with zero interested was feasible, and correctly noted that it would be inflationary and contractionary. He proceeded to ask if the person worked with me, as the story was related to me. As if my position on this is somewhat unique and someone that suggests that it doesn't make sense is my disciple.

*** Note that for Huerta exchange rates change relative prices and allow to fix distortions, in typical marginalist fashion. The emphasis is not on the effects on distribution and through that on quantities, as in structuralist views.

**** This blog is known for emphasizing the Sraffian critique of the marginalist theory of investment (very old post on that).

Is Venezuela a threat to the US?

I published not long ago on the sanctions imposed on Venezuela, in the middle of the easing of relations with Cuba. Now the US has imposed additional sanctions on Venezuela, and declared that the country is "an extraordinary threat to the national security of the United States." That this statement is, at face value, ridiculous is fairly evident. The sanctions are imposed allegedly on the basis of violations of human rights, which is also not credible, since the US (not just in the past, but right now) supports governments with a very poor record on human rights. In Latin America the US gives full support to the government of Colombia were human rights violations are the norm.

The media coverage in the US about Venezuela is, as noted by Mark Weisbrot, worse than the coverage during the build up to the Iraq war. I normally don't discuss non-economic issues in the blog. But it is worth listening to Mark on the Diane Rehm show today. Note that as Mark says, it is the US that is isolated on Venezuela, with almost all the governments in the region decrying the US policies. And as he says, there are problems with the economic policies in Venezuela (and other left of center governments in the region), but nothing justifies the US support for "regime change" in Venezuela, in particular, and the region. And no the government is NOT a dictatorship. Not only it was elected in clean elections, but also the vast majority of the media is anti-Chávez and they do have freedom of expression, as Mark notes, probably more than in the US.

Note that the pressure on Venezuela takes place at the same time that in many countries, the right wing forces which historically have received support from US administrations, both Republican and Democratic ones, are pushing for impeachments and veiled threats of coups. Part of the reason for right wing pressure, and the hate these left of center governments have generated on the wealthy and the middle classes (which in the past were for military coups) is, as noted by Bresser-Pereira in Brazil, related to the improvement of income distribution and the conditions of the poorest in the region. Note that the region is the exception in the last decade, with inequality falling, even if it is still high.

PS: Beyond the political questions, which of course do have an economic impact, there is very little sensible written about the long run problems of growing with abundance of foreign currency (something often referred to as a resource curse or Dutch Disease). A precursor to that discussion can be found in the work of Celso Furtado, written in 1957, when he was at the Economic Commission for Latin America (ECLA). See more here.

How bad is the Argentine crisis?

There is a certain view about current events in Argentina that tends to emphasize the potential effects of the devaluation as the collapse of the economic model, and, and, hence, suggest that the post-default process of economic growth should not be taken as an alternative for other countries in distress, like for example Greece and other Southern European countries. This kind of view, expressed for example by Walter Molano in the Financial Times (subscription required; minus the strange argument that the Argentine problem is "geographical"), suggests that policies should be aimed at pleasing international financial markets since the goal is to promote "confidence in the country’s economic management," and that devaluation is necessary for solving the "unsustainable economic imbalances."

First, it must be understood that the current devaluation, which was of the order of 20% in nominal terms in the last days of last week, is part of a plan that was most likely in the works, since the change in the economic team at the end of last November, when the current finance minister, Axel Kicillof, became the sole commander of the economy displacing Guillermo Moreno, and to a lesser extent Mercedes Marcó del Pont (full disclosure, I worked in the central bank during her tenure as president) in the internal domestic dispute.

In other words, this is not a balance of payments crisis (or a currency one) per se, even though it might become one, since it was actually part of a policy decision, first to accelerate the depreciation of the currency, which started in the last month of 2013 after the new finance minister assumed his position, and that culminated with the renegotiation of the debt with the Paris Club (to regain access to international financial markets), and the gradual liberalization of the exchange market, trying to move the official rate closer to the 'blue,' that is, the black market rate. Note that the current account, as I noted before here, is not in a terrible situation, the Brazilian position has been far worse for a longer period, and the real exchange rate was not more appreciated than in Brazil either.

Before discussing my views of what might happen, it is important to note the New Developmentalist views, which are often associated to Bresser-Pereira and in Argentina to Roberto Frenkel and his co-authors, that the re-alignment of the real exchange rate was inevitable and necessary to promote more competitiveness and growth does not hold water (see my previous critique here, and Fiorito and Amico's here). Bresser has in fact argued that this devaluation is likely to be good for Argentina. In his words (the whole article here):

"the peso retrieved the lost competitive equilibrium; the government declared that the peso had reached the desired level, and, without fearing an increase in the dollar's official price, it suspended several restrictions to the purchase of dollars , in order to draw the parallel down. If this strategy of keeping the exchange rate at the competitive level is successful, profit expectations will rise, business enterprises will invest again, the current account surplus will be restored, and the Argentinian crisis will be over."

Martín Rapetti (a Frenkel co-author) remains more skeptical here (in Spanish), but insists it was inevitable (the exchange rate realignment).

In my view, the devaluation was not inevitable and is not particularly good. First, it will be inflationary, and as I noted a few years back, also might be contractionary, so expect less growth this year. The reduced growth is what will hold the current account in a reasonable situation, by the way. Hence, devaluation will not solve either the inflationary problem, nor the external constraint one. In this sense, the crisis (manufactured as it is) is worse than most people understand, since it won't solve any of the pressing problems in Argentina.

Note that if the government on top of the current measures adds fiscal contraction (monetary tightening is a given, since higher rates of interest will be needed to avoid more capital flight; and the effects of monetary contraction can be compensated by subsidized public credit) as the New Developmentalists wanted (since for them inflation was caused by excess demand) then the slowdown will be significant and even a recession could take place. The Plan Progresar (that gives money to young students without jobs) might indicate the opposite disposition, but the crisis might force the government to slowdown the economy to avoid a more serious current account deficit.

A more benign scenario would be that the Central Bank manages to control the depreciation, and stabilize the real exchange rate, likely at a somewhat depreciated rate (how much will depend on wage resistance, and how much inflation we get; my guess is that some real depreciation will take place, and lower real wages will follow, which also will add a contractionary force in domestic demand), but this does not turn into a run on the currency.

As I noted before, there are good reasons to believe that lack of growth in advanced economies and low rates of interests in the center will preclude outflows of capital, if higher real rates of interest are imposed in Argentina (they are still negative now) like Brazil has done. Also, the plateau of commodity prices indicates that the balance of payments will not worsen immediately, so there will still be space to solve the long-term problems associated with excessive dependence on the export of commodities, and to pursue the difficult but necessary process of import substitution.

In short, the default and the process of growth (which was possible because of favorable external conditions, but NOT caused just by that; as I noted several times terms of trade improved less in Argentina than in Brazil, and the former grew far more during the commodity boom period), which was based on fiscal expansion and income redistribution is an alternative to Neoliberal policies. And the way to deal with the limits to the model (which are associated to the external constraint) are not related to the exchange rate, but to industrial policy.

PS: Here a video in which Fabián Amico provides a similar analysis (in Spanish).

Bresser-Pereira calls for the end of the euro

In his recent column on the European crisis Bresser suggests that in the absence of depreciation the Southern countries would be better off by abandoning the euro.

If the Southern countries had their own currencies, the adjustment would be simple: it would be enough to depreciate their currencies in relation to the German currency. Since they have a common currency, the solution is either a concerted discontinuation or the “internal devaluation”, that is, recession, unemployment, and a drop in real wages. It is this policy that is being adopted under the command of Germany, of the European Central Bank and of the IMF.

It is clear that the creation of the euro was a mistake for which European countries are paying dearly. The rational solution is the concerted discontinuation of the euro. Then the European Union will be saved. But for this we need courage in the Southern countries, particularly in their chief country, France, and Germany's willingness to come to an agreement. Neither one seems today available in Europe. The situation of the Eurozone countries reminds me greatly of the Argentinian situation and its “plan de convertibilidad”. A huge crisis was necessary to untie the peso from the dollar. Now we are seeing the euro of the Southern countries tied to the “German euro” and, apparently, only a huge crisis could lead the Europeans to get rid of this curse that is the common European currency.

Note that this is very different than the approach emphasized by Holland, Galbraith, and Varoufakis in their Modest Proposal, who argue for increasing public investment.

Where is the elasticity? (or more on devaluation and growth)

Since 2007 mainstream economists, and often some heterodox (or more precisely eclectic) authors, have suggested that the Argentine economy is on the verge of collapse (see for example my good friend Bresser-Pereira here or this). A typical argument made by both orthodox economists (some of which favored the Convertibility Plan of the 1990s) and the more unconventional is that real exchange rate (RER) appreciation is at the heart of the Argentine problems and the more recent lack of growth.

I have discussed this before here with respect to the so-called Sustainable and Stable Competitive Real Exchange Rate literature (see here). The argument for a SSCRER was put forward by Frenkel and Taylor in a well-known paper, but the notion has many defenders (see the good paper by Blecker and Razmi from Setterfield's essential book on growth), including more conventional authors like Rodrik. At the risk of being repetitive let me point out the pros and cons of the arguments for devaluation.

Depreciation protects local industry and leads to a boost to domestic production, and also, by leading to an increase in exports, reduces the external constraint of the economy. That would be the substitution effect associated to the change in the relative prices. Yet depreciation also (everything else constant) reduces wages, increases the profits of exporters, and leads (yes, the economy is wage-led) to a reduction in spending and lower levels of activity. In this case, a depreciation does help reduce your external constraint, but by leading to a contraction. The second effect, associated to an income effect, was well-known by heterodox authors, having been developed by Albert Hirschman and Carlos Diaz-Alejandro (for the Argentine case) and then formalized by Krugman and Taylor (see here; subscription required).

At the end of the day it is an empirical question. All the evidence seems to suggest, at least for the Argentine case (here paper by Fiorito and others in Spanish; but it seems to be more general, see here) that income effects tend to be larger than substitution effects, and hence one might be concerned about possible contractionary effects of a depreciation.

In the case of Argentina, it is clear that the expansion of the volume of exports goes hand in hand with the expansion of the world GDP (Figure below).

The relation between the real exchange rate and exports is less clear. As it is shown below after the large real depreciation in 2002, growth in the volume of exports goes hand in hand with significant appreciation.

No doubt defenders of depreciation will argue that the big depreciation in 2002 was essential for export growth afterwards (see Rapetti here who argues that "competitive RER was a key factor behind Argentina’s recovery and growth"). But if you put the depreciation in the wider macroeconomic context of 2002, and compare with the current one, you are bound to have second thoughts.

The depreciated nominal exchange rate in a context of high unemployment (around 22%) did not lead to inflationary pressures, since wage demands were subdued (and hence the nominal depreciation translated into a large real one). Second, spare capacity meant that the protection afforded by the real depreciation led to a huge expansion of domestic production, spurred by the expansion of domestic demand (higher real wages and expansion of fiscal spending, particularly in social programs). Exports actually don't seem to move much with the depreciation. There is no econometric evidence for large elasticity of exports with respect to the exchange rate, in the short or long-run (if someone has it please, please, pretty please with a cherry on top share it; it's been frustrating to have an argument with people that argue a point for which there is no known evidence).

Note that all the above mentioned conditions are not in place now. Unemployment is considerably lower (around 7% or so), and the expansion of real wages and government spending have slowed down (so much so, that in the last year the economy has stalled). So maybe we need less Frenkel and Taylor and more Krugman and Taylor to understand what is going on in Argentina right now.

What is new about the IMF's views on capital controls?

I wanted to write about this topic for a while, but didn't have enough time. The IMF has adopted a new institutional view on capital controls, which will inform their policy advice and surveillance of member countries, which they suggest reflects "a very broad consensus" [I'm always a little bit wary of broad consensuses]. Note that the Fund is still in favor of capital account liberalization, as noted in the second key feature of their institutional view, which says that "capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or 'thresholds' of financial and institutional development."

The question is how to get beyond the threshold, but there is no doubt that liberalization should be ultimately pursued, at least to some degree. They do add a cautionary note that full liberalization might be an impossible goal for many countries. In their words: "countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times."

The new institutional view is based on the notion that capital flows will continue to move away from the center, and that developing countries will be faced with a persistent pressure for the appreciation of their currencies. Blanchard says in his post that "looking at the relevant set of investors suggests higher flows to emerging markets are here to stay." He also suggests that the biggest threat from those inflows, the so-called Dutch Disease that New Developmentalist authors like Bresser-Pereira (here, for example) have emphasized, is not that dangerous and the empirical evidence about it is not well established [by the way, I tend to agree with Blanchard on this one, and believe that fears of a Dutch Disease are exaggerated].

My concerns with the new institutional view are twofold. On the one hand, I would rather not accept a general rule in which the IMF has a say on when and why a member country should use capital controls. Right now countries have a right to do it. So this new institutional view actually reduces policy space for developing countries. Note that the IMF, in spite of all the talk about the new macroeconomics is enforcing austerity in the European periphery. So the orderly manner that would lead to benefits from capital account liberalization are basically fiscal asuterity and inflation targets (slightly higher, 4% and not 2%).

Second, the view of the relevance of capital controls is limited to its effects on exchange rates, its volatility, the risk of appreciation, and last the possibilities of depreciations with disruptive outflows (or sudden stops). I tend to see capital controls as an essential tool not just for exchange rate management, but also for industrial policy, since the availability of dollars is often essential for determining which sectors can be promoted by allowing imports of essential goods (e.g. capital and intermediary goods), and which ones would be forced to rely on domestic substitutes. Import substitution and alternative development policies, of course, remain an anathema at the IMF.

Further, exchange rates are connected and do affect income distribution. It is far from clear that the only thing a country wants to do is avoid 'excessive' appreciation and loss of external competitiveness. Higher wages, associated with appreciated exchange rates, might be relevant for demand expansion too. At any rate, the point is that a great deal of discretionary power by domestic authorities should be the norm when it comes to capital controls. The less power the IMF has in this respect, the better.

Argentina is right

By Luiz Carlos Bresser-Pereira

There is no sense in leaving to a foreign company the control of a sector that is strategic for a country's

Argentina once again became the target of the North, of the “common sense” that comes from Washington and New York, and decided to retake State control of the YPF, the country's major oil company, formerly under control of a Spanish company. The Spanish government is indignant, the company protests, both swear to take all legal measures to protect their interests. The Wall Street Journal states that “the decision will damage Argentina's reputation even further with international investors”. But I ask: does the development of Argentina depend on international capital, or is it the owners of that capital who cannot agree when a country decides to protect its interests? And, as for oil industry, is it reasonable for the State to be in control of its most important company, or should it leave everything under the control of multinational corporations?

It seems today that developing countries have little doubt regarding the second question. Almost all of them decided to assume this control; in Latin America, all except Argentina. There is no sense in leaving to a foreign company the control of a sector that is strategic for a country's development such as oil, especially when this company, instead of reinvesting its profits and increasing production, remitted them to its Spanish headquarters. Besides, the days are past when a country that decided to nationalize the oil industry would go through what Iran experienced in 1957. Great Britain and France immediately overthrew the democratic government that then existed in the country and replaced it with the Shah, who promptly put himself at the service of the imperial powers.

But what will happen to Argentina in view of the decrease in the investments of multinational corporations? Is it not a “greater evil”? This is what tell us every day those companies, their governments, their economists and their journalists. But a country like Argentina, with a moderate Dutch disease (like the Brazilian one) does not need foreign capital by definition, that is, does not need nor should have a current account deficit; if it has a deficit, it is because it did not adequately neutralize the chronic overvaluation of the domestic currency, one of the causes of which is the Dutch disease.

The best proof of what I am saying is China, that grows with huge current account surpluses. But Argentina is also a good example. Since 2002, when it devaluated the exchange rate and restructured its external debt, it has had current account surpluses. And, thanks to these surpluses, that is, thanks to this competitive exchange rate, it grew much more than Brazil. Whereas Brazilian GDP grew by 41% between 2003 and 2011, the Argentinian GDP grew by 96%.

Those most directly concerned with direct investments in developing countries are the multinational corporations themselves. They are the ones that capture those countries' domestic markets without offering their own domestic markets in return. To us, investments from multinational corporations are only interesting when they bring about technology and share it with us. We do not need their capital that, instead of increasing total investments, appreciate the local currency and increase consumption. Their capital would be interesting if it were intended for export, but, since this is unusual, it usually represents just a permanent seigniorage on the national domestic market.

Published in Folha de S. Paulo, April 23, 2012 (in Portuguese here)

Perverse dependence on Asia

By Luiz Carlos Bresser-Pereira

Published originally in portuguese in the Folha de S. Paulo, January 16, 2012

In his last column, Martin Wolf mentioned the fact that, since 2007, the fast-growing Asian countries have grown by 60%, whereas rich countries have grown by 3%, and he pinned the world's economic hopes in Asia. Brazil, in the same period, grew by modest 16%. Brazilians also depend on the increase in Asian demand to achieve their growth. Brazilian economy is not stagnant as the economy of developed countries, but, in terms of growth, it is closer to them than to countries such as China and India.

Read the rest here.