Wednesday, 17 February 2016

An Argentine myth

Those brave souls that read my blog and/or my twitter stream know that international trade is a subject that interests me a lot.

It is no secret that Argentina is a country that its affairs are accompanied by some kind of constant clatter since it evokes quite different feelings to different people. In my humble opinion it’s a rather beautiful country that on the other hand has a long history of economic mismanagement.

The most clatter was generated by the country’s sovereign default in December 2001. One can find a number of different narratives regarding the catalysts behind this but the standard one is that the country's currency board arrangement led to a significant loss of competitiveness and that this competitiveness issue was resolved by the massive devaluation that occurred simultaneously with the default. 

The fact that a devaluing currency boosts international competitiveness is a standard axiom in international economics but was this true in the case of Argentina? 

The answer, if one actually bothers to look at relevant data is categorically, no. In fact, Argentinean exports performed much better during the 1991 – 2001 period that the currency was pegged than during the following decade. 

source: World Bank, own calculations

Of course this doesn’t stop people from tossing currency devaluation around as a cure-all. 

source: World Bank, own claculations

If one looks carefully to the chart above showing the USD/ARS exchange rate (unfortunately I couldn’t find NEER data for Argentina) he/she can see that during the 00s too, Argentinean exports also performed better during the years that the currency was quasi-pegged to the dollar than during the years after a renewed and massive devaluation cycle started. What’s more during the years of the massive and constant devaluation exports (in volume terms) have decreased.

In my humble opinion, there is nothing wise about conventional wisdom and consensus is usually wrong. So maybe, just maybe, policy-makers and policy-proponents can start focusing on facts and not on doctrines proposed by first-year economics textbooks.



  1. I cannot deny the feeling that this is just one very unfortunate and simplistic piece of economic reasoning. Even if we assume the series to be correct (remember commodity super cycle), how should we deal with the fact that government stance and thus export policies changed drastically during the 2000s? What about the composition of exports and corresponding demand elasticities? Is cost competitiveness so important for all types of exports? What makes you so confident that a simple correlation also explains causation?

    There must be a reason why there are various narratives competing to explain the effectiveness of devaluations, what makes you think that you can dismiss one of them by simply looking at a raw time series?

    As economists we have lately been confronted with fierce criticism for our over simplistic reasoning and we should do everything to improve, for example by pointing out shacky lines of reasoning. A simple disclaimer will not do the job.

    1. First of all, thank you for taking the time to read my post and posting a comment.

      It was not my intention to dismiss anything. I wanted to point out that the main narrative on Argentina's default was just pure fantasy and not based on any kind of data and also pointing out that currency devaluation is not a one-size-fits-all policy. Each case is different that was the point of the "focusing on facts and not doctrines proposed by first-year economics textbooks".

      By the way, are you insinuating that I tampered with data here? Because this is kind of insulting, isn't it now? Anyway here are the series used for the 1st chart.

      I really don't understand the point re the commodities supercycle here since the commodity supercycle was supportive for the 2002-2014 period and not for the 1991 - 2001 one. What's more these series depict export volumes.

      All, your arguments sir seem to be theoretical ones. If you think that one of my points is wrong please be so kind as to point this out using data.

  2. This post is a strawman par excellence.

    The Argentine recovery was not due to suddenly exporting a bunch more because of the elimination of the 1:1 currency board. Rather it was due to rebuilding the internal industry and domestic market that had been destroyed by the failed currency policy, massive privatisations and fiscal austerity under Menem/de la Rúa. Most major Argentine economists agree on this (including Roberto Lavagna, the FinMin who oversaw the first years of recovery) and it has been affirmed by non-Argentine economists such as Mark Weisbrot of the CEPR and Michael Hudson of UMKC.

    Your argument that devaluation is not a panacea is a no-brainer, and there is even better evidence for your point if one looks at the two recent regional devaluations: Brazil and Argentina herself at the end of last year. Neither led to export boosts because the global demand is simply not there, even at lower prices.

    That said, I'm not sure whom it is you are refuting, as I have not heard this "standard narrative" "clatter" you mention. By keeping the 1:1 policy, Argentines paid the same price for imports as exports, and local industry was decimated, with unemployment topping 25% and more than half of the country thrown into poverty. Protectivist measures, expanded fiscal spending and a lower peso all helped reverse this and put Argentines back to work. That is the standard narrative. If you can refute this "clatter", then you will have an argument that is not a strawman.

    1. Thank your for taking the time to read the post.

      First of all, sth on whether the loss of competitiveness part was made up on my part. A couple of examples here

      Also, thank you for suggesting what I should refute but I think that we're straying off-topic here, aren't we?

  3. Nick, thanks for your prompt response.

    I never suggested you made up the loss of competitiveness argument-- sure one can find all kinds of goofy arguments on the internets. But several times you have called this the main narrative (or am i misunderstanding the word "Clatter"?), and now to back up the claim you cite a PhD candidate I never heard of and a paper by.... wait for it... the sub-assistant to the Argentine FinMin who created the 1:1 currency board (Cavallo).

    These may be narratives but they are not mainstream by any means, and much less the "dominant narrative". I cited Lavagna, Weisbrot and Hudson and could name many others of equal stature in the field, and it would seem to be incumbent on you to provide some sort of equally prominent economists to justify your argument that the currency-devaluation-for-export-competitiveness idea is the "standard narrative".

    Secondly, as to my suggestion as to "what to refute", you billed your post as a refutation of the standard narrative and proceeded to rebut a different argument-- a non-standard narrative. By suggesting you refute the actual standard narrative, I am not changing topics; I am suggesting you stick to the original one.

    That said, it bears repeating that we both agree on the gist of your point: currency devaluation is not a panacea.

  4. Well, you said that "this post is a Strawman per excellence" and that "I'm not sure whom it is you are refuting, as I have not heard this standard narrative clatter you mention". Besides, the views of a guy (Lavagna) taking up public sector positions whenever the Peronists were in office or Mark Weisbrot, hardly define the mainstream, do they?

    Here's a note from the federal reserve claiming the same thing.

    But this whole thingy (defining the mainstream) is futile, so please let's not engage in that any further.

    Again, thank you for reading the post and spending time to comment and discuss it with me. Cheers from Athens.

  5. I think this analysis ignored the export taxes that were implemented during NK's and CFK's terms. They disincentivized investment in many of Argentina's core exports, decreasing their productivity (even in spite of the record commodity prices). During that decade Brazil, Uruguay and Paraguay all exceeded Argentina's beef export, for instance.

    Now that president MM took over and has promised to rid the country of the export taxes (already done for all agricultural products except soy beans, which will decrease at 5% a year) investment is starting up again in the industry.

    In conclusion this is not a ceteris parabus comparison.

    1. Thank you for the comment. Do you, by any chance have any time series on export taxes, because all series I found just covered 3 years, 2002- 2004. Cheers.