Saturday, January 08, 2005

Get Out of Jail Free

Stanley Fischer was quoted yesterday in Brazil's leading newspaper, Valor. "The saying says that 'Brazil is the country of the future, and always will be,' but I think that Brazil is already having that future." He was being kind, I suppose, given that his employer, Citigroup, wants to be much bigger in Brazil.

Fischer congratulated the Lula administration on its macroeconomic management, and led the audience to believe that Brazil's recent good fortune was its own making. I wonder, however, if he would say the same thing about Argentina, which is also recovering (in fact growing faster than Brazil) despite the fact that the Argentine government's economic policies have been atrocious at best.

Indeed across the globe, it appears that developing country governments can do whatever they want with economic management, and markets will not punish them. Just think of it. Russia's President Putin has nationalized a large proportion of the country's energy industry and, while the stock market fell, there were no other economic repercussions.

So, Argentina can snub foreign investors, the IMF, and impose a tax on exports, India can consider tapping into its foreign reserves in order to build infrastructure, and so on, and none of these countries witness a run on the currency, or even the slightest pressure on interest rates.

Something else must be going on here. We must be in a new environment, where capital flows don't respond negatively to economic aberrations. Why could this be? Could it be because the country that prints the world's reserve currency is also running its economy in an irresponsible manner? Yes. The US twin deficits (and the stock of foreign debt) are a get out of jail free card for irresponsible economic policymakers across the world.


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