More on FT's negative propaganda on Argentina

I had promised to return to the issue of inflation in Argentina, in my previous post about the Financial Times' biased coverage of the Argentine boom post-default and devaluation in 2001-02.  The important question, and not only in the Argentine  case, is whether inflation is somehow associated to excess demand,  which would justify the conservative calls to cool down the economy and promote tighter monetary and fiscal policies.  The graph below shows average capacity utilization in the Argentine economy, and it clearly shows that since 2006 the levels have reached the normal position close to 80% of utilization.

The same can be seen in the measure of the output-to-capital ratio presented below.  In other words, investment has allowed capacity to adjust to demand, and the level of the Y-K ratio to return to its normal level.  In other words, the boom has allowed the economy to recover normal levels of capacity utilization, and if the economy grew at a faster pace, capacity would have most likely adjusted.  The only way that the economy would reach full capacity would be if the rate of growth of demand was considerably faster than the ability of capacity to adjust.  From 2003 to 2010 GDP (proxy for demand) grew around 60%, while investment did 147% (the adjustment of capacity), on a cumulative basis.  Also, even though unemployment fell from close to 25% to around 7.5%, there is space for lower levels of unemployment, something that is particularly in an economy with significant numbers of employees underemployed, or employed in low productivity activities.

The real danger, as always for developing and peripheral countries, comes from the balance of payments.   The graph below shows the current account to export ratio.  Clearly the space to grow without reaching the external restriction has shrunk during the boom, approaching zero in 2011, but the limit has still not been reached.  This would be a limit, but not a capacity limit.

In sum, inflation cannot be associated with excess demand, since the evidence does not support that the economy is above maximum capacity.  Further, well understood what I'm suggesting is that capacity does adjust to demand, so inflation in normal times (exclude wars and other catastrophic events) is related to cost pressures. I'll deal with the evidence for commodity prices, and distributive conflict in another post.

Financial Times thinks rating agencies did a good job

A bizarre article in the Financial Times, by Jude Webber, that claims that Argentina's recovery "is not quite as attractive or clean-cut as some of its proponents suggest." There are lots of factual mistakes and half-truths. Just an example.  They say Argentina's investment at 19.4% of GDP  last year was too low.  Compared to what? The US that was at 15.9%, or Argentina in 2002 when it was around 10%?  So the problem with Argentina is that is not China?

Also, they say that Argentina's "economy [is] just a sixth of the size of Brazil’s and a third of Mexico’s," and is going to be overtaken by Colombia.  The only thing they forgot to tell you is that the population of Argentina is just a one fourth of the Brazilian and around 40% of the Mexican, and that if you measure GDP in dollars, since the Brazilian and Mexican currencies are appreciated, it would overestimate the GDP of those countries and underestimate the Argentine.  Data from the World Bank puts the Argentine Gross National Income (GNI) in Purchasing Power Parity (PPP) at the Mexican level (around US$14,000 in 2009) and above the Brazilian (close to US$ 10,000).  These seem more than just simple mistakes, and it's appalling that they publish this kind of stuff.

Let alone that the idea that the "recovery" (Argentina passed the peak of the previous cycle in 2005, but okay let's call it a recovery) is risky is strange (this from people that did not see anything risky about Convertibility!!!).  The country has current account surpluses, high levels of reserves, and debt denominated in foreign currency shrunk incredibly.  How is this risky?  They seem to have more trust in the views of rating agencies than the hard numbers.  In fact, the article says that the president (Cristina Fernández de Kirchner) "believes the rating agencies got the financial crisis wrong.” I was also under the impression that rating agencies did give triple-A ratings to subprime bonds. Was that a correct assessment of their riskiness in FT’s view? Is that just her belief or is it a fact?  Do FT's journalists know the difference? They only report what people believe, and do not check (if this actually needed checking) whether it is true or not?

PS: I'll leave the inflation stuff for another post.  Will not deal with the absurd implication that kiosks that sold Clarin were closed because the newspaper was critical of the government.  The problems have more to do with Clarin's business dealings with the murderous dictatorship of the 1970s, that gave it a quasi-monopolistic position in newsprint.  In fact, this government has an incredibly positive record of defending human rights and those that were oppressed during the last Argentine dictatorship.

No Time for Celeb Activists

Gideon Rachman, the FT's chief foreign affairs columnist, offers a humorous and insightful take on the proliferating role of celebrities in development, debt-forgiveness and poverty reduction. George Clooney, Bono, Graydon Carter and Angelina Jolie all take hits from Rachman's wickedly poisonous pen.

"There is something unedifying about an unelected celebrity intimidating politicians," he writes. Indeed. Especially when, as Rachman notes, "they see things in the stark and simple terms favoured in Hollywood movies, rocks songs and the speeches of US president George W. Bush."

Isn't it just a little too easy for Bono or Brad Pitt to tell us what the solution is to complex issues such as underdevelopment? I think it is. On the other hand, I find my respect increasing exponentially for Mia Farrow. She has for many months been writing insightful and passionate op-eds in the Wall Street Journal and elsewhere on the atrocities in Darfur and China's connection to the Sudanese regime.

"As Khartoum's largest and closest business partner, China has provoked outrage from the international community for underwriting genocide in Darfur. In recent months, Beijing has responded with steadily increasing talk about its commitment to promoting peace in the region. But it has taken no meaningful action."

This is good stuff. Unlike some celebrities, who seem to fit their advocacy in between film premiers and shopping for yachts, Ms. Farrow seems to have devoted herself entirely to this issue. Perhaps that's why Gideon Rachman leaves her out of his column? And I say good for her -- keep it up (and show the rest how it's done!).

Making the Internet Connection

"Innovation is possible literally anywhere that the internet is in operation," says Vint Cerf, Google's "Chief Internet Evangelist," in an interview with Andrew Edgecliff-Johnson of the Financial Times. Of the 6.5 billion people in the world, however, only 1 billion have access to and use of the internet. What does that say about the untapped potential for global innovation?

Cert highlights some of the challenges to extending internet connectivity to greater numbers of people around the globe. These range from infrastructure and capacity building (such as electricity and training) to security and privacy concerns.

"If we ever move into a regime where the providers of basic internet service have any control over what users can put on the network as an application, then I see a potential hazard to innovation. At the present time, this is still a very open system."

As Evan O'Neil points out elsewhere, there are ethical issues related to the process of extending connectivity that may not be immediately apparent. Getting laptops into the developing world is a noble venture. But what if development is not the only motive?