Krugman is right on Argentina

Fair is fair; I often point out when he is wrong, so I must admit he is 100% correct this time around (see my most recent comment on the topic here). By whatever measure you want Argentina has grown more than Brazil in the last decade. And yes (for the nuts in Krugman's comment section), Argentina has more inflation as a result of more nominal depreciation and more wage resistance. He did not say everything is perfect in Argentina, just better (much better, as a matter of fact) than with the neoliberal model. And that was the point of Matt Yglesias too.

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)

Just prices, elephants and kings

Well I'm not going to get medieval on your rear ends. Yep just price is the old scholastic idea that there is a fair or ethical price that can be charged for a commodity, and beyond that the producer is obtaining unfair earnings. It was the basis for the attacks on usury. David Friedman (1987), in the old New Palgrave (the one edited by Eatwell, Milgate and Newman) argued that the dominant view suggested that the just price was "the price which allowed the producer to maintain his proper place in society."

I wouldn't expect The Economist to come on the side of ethics in market relations, but that's what they have done. The Economist already has a fair price for YPF (see here), the oil company that was partially nationalized by the government of Argentina.

"Argentina could presumably mollify Spain by paying a fair price for YPF—which would most likely be half of the $15 billion or so the company was worth before the Argentine government began harassing it."

Fairness is a strange argument to use in favor of Repsol (the Spanish firm that owned most of YPF). They bought it for $13 billion in 1999, made $15.7 billion in in dividends over the whole period, plus $6.2 billions for the selling of part of the assets. So they made approximately $8.9 billions. And the fair or just price would be another $7.5 billion according to The Economist.

Of course, this price is not connected to the value of the assets, or how well the firm was managed, which says how much it can produce (output in 2011 was at 61% of the 1999 level). It must be a way for Spain to maintain its proper place in the world. Or at least the King, who is apparently incapable of maintaining his elephant hunting hobby. God save the King, then.

In the news

Two big news today.

The US, as expected, managed to keep the presidency of the World Bank. Kim was chosen over more qualified and progressive alternatives (José Antonio Ocampo, in particular). See more here.

And Argentina has nationalized the oil company (YPF) that had been privatized during the neoliberal period. By the way, notice that neither Brazil nor Mexico, the other two large countries in Latin America, had privatized their oil companies. See more here.

The Economist and Argentina

Central Bank Independence is the rallying cry of the Economist againts Argentina's new law regulating the functioning central bank. Argentina will use the central bank as a piggy bank for the government, and that will lead to inflation. This is a bit ironic since it comes after the worse crisis in capitalism since the Great Depression and during the worst European Crisis after the launching of the euro, which threatens the very existence of the currency, and both should at least lead to some revision of central bank practices. Also, one should note the independence of the European Central Bank is part of the problem in the case of Europe, since if the ECB bought small amounts of Greek debt the draconian adjustment would be unnecessary.

The only thing worth about the piece is the brief objective description of what the central bank' new charter does, namely:

"It can now be required to transfer to the treasury cash equal to 20% of government revenues plus 12% of the money supply; to use its reserves (of $47 billion) at will to pay government debts; and to play a more active role in regulating banks and in steering credit to favored industries."

They mock the president of the bank, for suggesting that the bank will not print more money than needed. Mind you that is an old idea, going back to the anti-bullionists, the Banking School, the Radcliffe Committee, and many post-Keynesian authors that defended endogenous money (what is now referred to as MMT). Also, something accepted by any central bank that follows an interest rate rule, since they lend any amount at that rate of interest.

Bernanke would probably reply that the incredible increase in the monetary base, from around US$ 850 billion to around US$ 2.5 trillion in the 2007-2011 period, was what the market needed. The Economist obviously believes that hyperinflation is around the corner in the US too.

The use of reserves, which continues a policy already in place, just with more flexibility, is a way of reducing the need for borrowing in international financial markets. And since the current account is near balance, the only other alternative would be to borrow. Note that borrowing in international markets in foreign currency, has no connection with printing money and financing domestic spending in domestic currency, other than the fact that imports increase with the level of activity. By the way, the government is reducing spending and cutting subsidies, and, hence, promoting a fiscal adjustment and as one should expect the economy seems to be decelerating, so it is very unlikely that there will be overissue, whatever that is.

By the way, historically that is what central banks did. The Bank of England entire initial capital was lent to the government. And one thing that is generally agreed is that the ability to borrow money at relatively cheap rates was essential to explain the British rise to power in the XVIII century, and for the eventual defeat of the French hegemonic pretensions. Inflation, when it occurred was caused by changes in costs of production, and as Thomas Tooke, an often neglected author, suggested, in his monumental History of Prices, that bank issue responded to the needs of trade.

But given the ironic tone of The Economist, let me ironically finish by quoting Milton Friedman, who also opposed Central Bank Independence, albeit for different reasons than I do: ‘to paraphrase Clemenceau, money is too serious a matter to be left to the Central Bankers.’

The New IMF and Argentina

There has been a certain view, that was already quite popular around the time Strauss-Kahn still managed the IMF, that with Christine Lagarde the Fund has become less orthodox, not just regarding capital controls, but now also supposedly on fiscal issues. See for example the article in the NYTimes by Liz Alderman.

In the last World Economic Outlook, the Fund argues (WEO, p. 110) that Argentina's inflation results from excessively expansionary policies (no analysis backs this claim and the effects of a more devalued currency and commodity prices are not discussed) and suggests (p. 42) that monetary tightening is necessary. Also, the report continues the tone of the previous WEO, suggesting that in developed countries fiscal adjustment should continue to reduce the debt burden, and in developing ones, like Argentina, to avoid overheating.

So fiscal and monetary contraction is their policy advice. The IMF forecasts a significant slowdown next year for Argentina (4.6% for 2012 down from 8% this year). The logic is that Argentina's growth is not sustainable and perhaps a crisis is around the corner.

Andrés Velasco, ex-finance minister of Chile, suggests so much in his last column for project syndicate. This notion that Argentina is close to an external crisis is peculiar to say the least. Velasco had published a paper with Ricardo Hausmann after the 2001-2 crisis that recognized that the problems were not fiscal, but related to exchange rate misalignments, export performance and access to international financial markets.

Although shrinking, Argentina still has a current account surplus, has not depended on international financial inflows (but on its own exports), and the ratio of short term external obligations to reserves is relatively small. So if the whole world economy sinks into lower growth, Argentina, that is forecasted to be the second fastest growing economy after China in 2011, will probably slowdown, but there is no reason for the macroeconomic policy to push for a slowdown for fears of an external crisis.

In that sense, it seems that the default position at the Fund, and in mainstream academic circles (Velasco was at Harvard, before returning to Chile) is that fiscal adjustment is needed in Argentina. And apparently almost anywhere in the world. The New IMF looks a lot like the old one to me!

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.

Real Wages in Argentina

So there has been some fuss about whether Argentina default was good or not for the economy, because of a terrible article in the New York Times (here). Krugman correctly noticed that this was nonsense and was praised by Dean Baker. I think that it is important to note the role of devaluation (and noted that in comments to both blogs), but wouldn't disagree with Krugman that it's important to emphasize that defaults are not followed by catastrophes and that Argentina is actually a terrible example if one wants to make the opposite case.

At any rate, an Argentine reader (using a pseudonym) got really angry with me, and said some obviously incorrect things about Argentina (and Brazil to boot). But one of his points shows that it is important to clarify at least one fact. The graph below shows real wages in Argentina, with official data, and data from alternative sources that can be obtained in a paper by Roberto Frenkel and Mario Damill (here).

Note that real wages in Argentina have grown irrespective of what inflation index you use. And yes, in Brazil they did stagnate. The recovery of real wages is central to understand, not just the evolution of the economy, but some of the political events that lead to people, like the anonymous blog commentator, to be so angry. But as I told him, using Moynihan's fantastic dictum, a person is entitled to their opinion, not their facts.

PS: The data for real wages comes from ECLAC; the alternative index for Argentina was calculated by deflating the series with the inflation data in the Frenkel and Damill paper.

Argentina, Ecuador and Greece

Well ... not really about Greece, but this paper that has been finally published on Argentina and Ecuador (in the Journal of World-Systems Research) does say something for the euro area countries in trouble.

From the abstract:

The paper draws lessons from the failed Argentine experience with convertibility to highlight the dangers of dollarization in Ecuador. Argentina’s currency peg to the US dollar was successful in reducing inflation but given the overvalued real exchange rate, created burgeoning twin deficits and a chronic dependency on foreign capital. Ecuador too suffers from chronic current account imbalance. In contrast to Argentina, Ecuador seems to be relying on remittance income to close its external financing gap. Though perhaps this model is less unstable than that of relying on foreign capital it is no more sustainable. The paper closes with a realistic critique of this development strategy.

ILSSO > Steak, Sun, and Struggling Farmers

Bienvenidos a Rosario, Argentina!

We started yesterday off bright and early to our first authentic Argentine breakfast. Then, we departed Buenos Aires for Pergamino to visit Alejandro Calderon at his livestock and row crop farm. There he told us about his rotational grazing practices with his red and black angus beef herd.

He has discovered that raising bulls for stock is much more profitable than selling a finished animal. He also explained to us his cropping system, which includes a winter and summer rotation of corn, soybeans, wheat, and green peas. Soybeans are their preferred crop, even though there is a 35 percent export tax on anything that is sold. This tax seems to be just one of the many governmental regulations that Argentina farmers struggle with on a day-to-day basis. Even so, Alejandro has been successful with his cropping operation and has expanded to include for-hire crop services.

During the heat of the early afternoon, we broke for lunch at the fairgrounds of the Sociedad Rural. Here we were treated to a three course meal. At first we were given a meat tray that we mistook for the main course. After accidentally loading up on bread and Coke, we were than treated to a large, delicious Argentine steak! Just when we thought the meal was done, they brought out a cup of ice cream and frozen fruit. It was a refreshing treat for the warm weather.

After lunch we went to Alejandro’s machinery shed. He is one of the few farmers in the area who is able to own his own machinery. He explained the uses for his machinery and how he has begun to implement technology such as GPS.

Next we traveled to their equivalent of a local elevator. We learned that they take wheat from the local farmers, but they only trade soybeans. This 19,000 metric ton storage facility was also a dealer for agrochemicals and fertilizer. We recognized many brand names from the United States.

Finally, we boarded the bus and headed to Rosario where we stayed for the night. Many of us adventured out on the town to enjoy more local cuisine. We look forward to tomorrow and another sun filled day in Argentina where we'll add on to today’s sunburn!

Adios Amigos!

“The Red Hot Chili Peppers”

Ryan, Iowa
John, Nebraska
Jeff, Kansas
Travis, Idaho
Paige, Washington
Brady, South Dakota
Cody, Illinois
Allison, Texas
Kaite, Michigan
Alec, New Jersey
Lynsey, Florida
Derek, Minnesota
Gaby, Puerto Rico
Sarah, Tennessee
Clay, Florida
Holly, Georgia



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Current and past state FFA officers are invited to participate in the International Leadership Seminar for State Officers (ILSSO). Participants spend 10 days traveling abroad and learning about international agriculture and the global marketplace. Find out more about National FFA Global programs on ffa.org.

ILSSO > Touched Down and Ready to Tango

Hola FFA amigos from Buenos Aires, Argentina!

The day we were all waiting for finally arrived! Bright and early yesterday morning, the ILSSO participants boarded their flight to Argentina, “The Land of Silver."

If you have ever taken a road-trip, you know how time can fly when you are having fun! Card games, new friendships, conversations, studying up on our Spanish “skills”, a couple naps, pictures and various other activities filled our nine hour flight. Some of the scenery we saw from the plane's windows included the Caribbean Sea, Andes Mountains, Amazon Rainforest and many of the small towns that dots across South America.

We safely arrived last night just as the sun went down and were greeted by customs and a considerably warm climate.

As we left the airport, we were greeted by an Argentine tour guide. Although we had just entered a new country, we felt right at home as our tour guide held up signs that read “FFA.” We boarded a motor coach and headed for the Hotel Presidente. We learned pieces of Argentine history along the way as our tour guide gave us a little taste of the city life.

Tonight we are resting up in order to begin our tours of Argentine agriculture tomorrow! Our guides Jorge Cazenave and Jimmy Murphy will be taking us to a corn, soybean, and wheat farm, and we'll visit with a director of the farmer’s union. We will find our rest tomorrow evening in Rosario!

Adios Amigos and hasta manana (see you tomorrow)!

“The Exploring Jaguars”

Jamie, North Carolina
Laura, Tennessee
Rebecca, Virginia
Justin, Minnesota
Michael, Iowa
John, Illinois
Amy, Ohio
Nicole, Florida
Garrett, Kansas
Michelle, Florida
James, Virginia
Johanna, Kansas
Kirby, Minnesota
Brianna, Washington
Reva, Oregon
Debra, Nebraska

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Current and past state FFA officers are invited to participate in the International Leadership Seminar for State Officers (ILSSO). Participants spend 10 days traveling abroad and learning about international agriculture and the global marketplace. Find out more about National FFA Global programs on ffa.org.