Latin America's growth

From the presentation with Esteban Pérez. The graph shows that growth in the region is increasingly tied to terms of trade changes and financial flows.

This was something we discussed a few years ago here.

China and secular stagnation

So in the last couple of weeks the Chinese problems have been in the news. And many suggest that the troubles in the US are not unrelated. For example, the New York Times tells us that according to Larry Summers: “The risks of a deflationary, secular stagnation in the US would be increased by a large devaluation of the renminbi.” And Krugman resuscitates Bernanke's global savings glut as the explanation for everything, from China's slowdown, depreciation and stock troubles to the recent turbulence in Wall Street.

I will not discuss again the problems with that view. In Krugman's favor he suggests that the "ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem." It is not that it added to it, it is the problem. But in all fairness, set aside the drama in the financial press, the Chinese stock market should not be a problem for China's long term growth, since losses in domestic currency can always be compensated by their central bank. And China increasingly grows as a result of domestic markets, which are expanding, with real wages still going up, and migration to the cities also helping.

The devaluation of the yuan certainly has consequences, but the problem isn't the effects on US exports, and weaker markets here. That the US could grow with an export-led strategy doesn't pass the laugh test. The US will continue the very slow recovery, and the recent Wall Street problems will have a negligible effect on consumer spending. Yes financial markets are still unregulated and that is dangerous.

But the real problem now, as discussed (whole book is worthwhile) a while ago when commodity prices had not yet fallen significantly by Franklin Serrano, is that a devaluation of all peripheral currencies, as it has been going on in recent times, would have a negative impact on commodity prices. That would be the supply side mechanism, rather than the demand (Chinese, in particular) one. And that might have negative consequences for commodity exporters.

On the positive side, this turbulence suggests that the Fed is very unlikely to hike the rate of interest in the next meeting. That's not enough to produce a stronger recovery in the US, but it might be sufficient to preclude a global debt crisis in the periphery.

CEPR: Latin American Growth in the 21st Century - The 'Commodities Boom' That Wasn't

By David Rosnick and Mark Weisbrot

This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.

Read rest here.

On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:

"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."

In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:

"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."

They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:

"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."

In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?

Is Argentina on the verge of an external crisis?

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.

Andrés Velazco on the future of developing economies

Andrés Velazco, finance minister under Bachelet (and you wonder why the economic policies of Socialist governments are all but), tells us that according to Diaz-Alejandro "the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries." And he goes on to suggest that all growth in the region over the last decade was fueled by external conditions, which now are basically gone.

While Diaz-Alejandro is certainly correct about the positive effects of the unlike external conditions it is far from clear that growth during the last boom in Latin America is only explained by external conditions, and that we should expect necessarily higher international interest rates and/or lower terms of trade.

Yes the Fed announced that they will end QE, and that (even the speculation that would happen) led to some run to quality, with more demand for American bonds, and depreciation of developing countries currencies. But the statement of the Federal Open Market Committee (FOMC) is very clear that to: "support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

This is a topic we already discussed in the blog before. In particular while lifting the external condition allows for faster growth, it's clear that certain countries grew faster than other, irrespective of the size of the positive effect on terms of trade (see here). Also, it is not clear that the growth in commodity prices is all related to a booming demand, particularly in China. As noted before, Franklin Serrano there are structural causes, associated to the supply side, the long term costs that might be part of the explanation for the terms of trade trends.

In one thing Mr. Velazco is correct, "conservative governments viewed industrial promotion as some dirigiste relic from the past, and avoided it," and left of center government were not particularly good at promoting industrial development. I'm glad he does not think industrial policy is a mistake. In that sense, if the economies of Latin America grow less it might a for their inability to expand demand (contrary to the 'good macro' policies advocated by Velazco), and for their inability to diversify exports and reduce the balance of payments constraint, rather than simply because the external conditions worsened.

Gains from Trade? The Net Effect of the Trans-Pacific Partnership Agreement on U.S. Wages

By David Rosnick

Recent estimates of the U.S. economic gains that would result from the proposed Trans-Pacific Partnership (TPP) are very small — only 0.13 percent of GDP by 2025. Taking into account the un-equalizing effect of trade on wages, this paper finds the median wage earner will probably lose as a result of any such agreement. In fact, most workers are likely to lose — the exceptions being some of the bottom quarter or so whose earnings are determined by the minimum wage; and those with the highest wages who are more protected from international competition. Rather, many top incomes will rise as a result of TPP expansion of the terms and enforcement of copyrights and patents. The long-term losses, going forward over the same period (to 2025), from the failure to restore full employment to the United States have been some 25 times greater than the potential gains of the TPP, and more than five times as large as the possible gains resulting from a much broader trade agenda.

See rest here.

It's NOT just the external conditions

Frankly, it's a bit boring. But every time you show the actual data on Argentina's growth someone says it's just good luck. The terms of trade boom. Data below compares terms of trade in Argentina and Brazil in the same period, 2003-12 (Kirchner-Kirchner and Lula-Dilma).

Not very different, and if something terms of trade improved a little bit more in Brazil (33% against 22% approximately, for the whole period). Note that metallic commodities (Brazil is a big exporter of iron ore) increased more than agricultural goods (both Brazil and Argentina are big exporters of soybean and derived products, for example). So did Brazil grew more than Argentina, which is what you would expect if external conditions determined growth? See graph below.

As it turns out Argentina grew 5.8% against 3.6% in Brazil. Further Brazil has a larger current account deficit. Fiscal and monetary policy were more expansionary in Argentina, and the nominal and real exchange rates more devalued. Let alone that the average real wage grew more in Argentina. So no it was NOT all external conditions.

Can we please, pretty please, with sugar on top, stop just venting prejudices and get the data before we talk. You are entitled to be against the policies of the government, you might even be for the policies of the Washington Consensus (people have defended crazier ideas). But, as Daniel Patrick Moynihan used to say, you are not entitled to your own facts.