Tuesday, December 28, 2004

The New York Times Gets It Wrong

Enemies of the "Washington Consensus" across the planet are cheering this article, which supposedly proves that defauting on one's external debt, bankrupting one's financial system, and giving the finger to the international financial community is the way to end poverty and catapult a third-world economy into development.

...three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8 percent for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs - all without a debt settlement or the standard measures required by the International Monetary Fund for its approval.

Argentina's recovery has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the I.M.F., as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else.

The writer is entirely correct in what he says, but unfortunately he is dismissing some very important and, in my opinion, crucial issues. The first is that Argentina has defaulted on its debt, but nobody has reposessed anything, and nobody is taking away any of the dollars that the country earns through its exports. If I stopped paying my mortgage, I could afford a much nicer car, and make my neighbors quite jealous. In essence, that is what has happened to Argentina. Moreover, the recovery isn't as impressive as it sounds. Yes, growth is fast when compared with last year, but this is a rebound from the sharpest contraction in Argentine history, which occurred after the default on its external debt.

The second thing this writer ignores is that developing countries in general are experiencing an economic boom that is happening because dollars happen to be free at the moment. I can't think of any country in the world right now that is experiencing a balance of payments constraint on growth. The prices of Argentina's exports have risen dramatically and, more importantly, its real effective exchange rate has been kept competitive thanks to the dollar's plunge against most world currencies (including the Brazilian real). Low interest rates in the US make capital flight less tempting, even if property rights aren't exactly respected in Argentina.

I fear that Argentina's temporary success is going to lead to a lot of mistakes in many other countries. Already I see people in Colombia suggesting all sorts of crazy things (some of which Argentina itself hasn't even tried) and justifying them by saying that "Argentina is growing very fast despite its unorthodox policies." I only wish people would use a bit longer time horizon for their comparisons. Argentina's economy actually hasn't grown if one uses 2000 (the year before its default) as a base of comparison. That's not too impressive when compared with Brazil, which did not default, and whose economy is now clearly larger than it was in 2000.

I don't want to defend market fundamentalism or Argentina's creditors here. Rather, I want to defend sensible economic policy from unfounded and potentially dangerous defamation.


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