All that glitters is not gold, neither Argentum

Financial crisis
Financial Economics

The economic turmoil in Greece has been widely compared to the crisis in Argentina 10 years ago. Some experts have even recommended that the Greek government see Argentina as an example of how to default and exit – or, in this case, “Grexit” – this current crisis. However well intentioned, this advice is flawed. The spectacular growth that so many economists point to following the Argentinian default is suspect at best and not causally related to the exit and default and it has not translated at least yet to a sustainable improvement in the well-being of its people.  

In December 2001, Argentina declared default. This declaration was followed by a mega-devaluation of the currency that ended the “convertibility law” – the law that had protected the country from a long history with inflation and hyperinflation. 

What followed, as so many economists have noted, is an era of growth in Argentina’s economy. The GDP grew at a rate of nearly 8 % per year (if measured since 2003). What some neglect to realize, however, is that this growth is not quite as it seems: 

  • Argentina’s GDP rebounded starting in 2002 mainly due to major structural reforms and investments made in the previous decade (most of those reforms have been undone and no longer exist today)

  • Since 2007 there have been serious doubts about the growth rate of official GDP and today Argentina is already in recession 

  • GDP growth owes a great part to the commodity boom that [unrelated to the default] started not long after the currency devaluation in Argentina. Soybean prices increased from $160/ton to more than $500/ton between 2001 and 2012. Soybean production boomed and exports of soy and other grains reached $30 billion dollars; export taxes grew 35% and reached $9 billion a year

Immediately following the 300% devaluation of the peso was a pass-through into prices, which the government tried to fix by controlling basic services’ tariffs and the prices on various products. When these strategies failed, the Argentine government began estimating a new consumer price index.  

The inflation that followed the currency devaluation eroded real wages, and together with the skyrocketing unemployment, increased poverty and inequality at rates never seen before in Argentina. The government intervened, attempted to assuage those numbers by offering social programs, cash assistance, even a very large pension moratorium that duplicated the number of pensioners and other public benefits (here we call them “transfers.”) Before transfers, poverty rates (using national poverty lines) increased from approximately 26% in 1998, to 54% in the peak of the crisis in 2002 and diminished to 29% in 2010. After transfers, the poverty rate diminishes to about 21%.  

What’s most troubling about this is that the current [decreased] poverty rate is sustained by massive transfers. In a forthcoming paper with Nora Lustig, we show that in the 1990s social transfers were received by no more than 10% of individuals; currently about 47% of individuals receive directly or indirectly monetary transfers from the government. These transfers reduce the poverty rate of market income by approximately 8 to 10 percentage points. However, the current poverty rate --before transfers-- is higher than in 1998. Hence, it would be disastrous to have a crisis in these conditions since these transfers together with the subsidies to transportation, energy and other sectors amount to 8% of GDP, and would become unsustainable with decreased government revenues.

Employment rates followed a similar trajectory. According to the newspaper La Nación, 45% of the decrease in unemployment during the 2003-2010 periods was the result of increased public employment; if public employment had remained constant, unemployment rates would have been 14% rather than 7%. Again unemployment at 14% in 2010 is higher than the 12% unemployment rate in 1998. Should we count the cost of maintaining these employees as an additional transfer, the total amount would reach about 10% of GDP, similar to the increase in government spending during the “exit” decade. 

To finance all this increase of 10 percentage points of GDP in government spending (it increased from about 30% of GDP in the 90s to more than 40% today), not sufficient with not paying the debts, the Argentine government first resorted to taxes on exports, financial transactions, and of course the regressive inflation tax. The government also seized pension funds totaling $30 billion accumulated in private accounts during the 1990s and used a part of the international reserves. 

What Argentina noticeably did not do, in the years following their default, was invest at a rate high enough to sustain growth in the future; neither in human capital nor in physical capital, and much less in quality education and infrastructure. That is, Argentina did not invest enough in long-term strategies to foster economic development including quality education, infrastructure, or institutional reforms. According to Zarazaga 2012), in healthy emerging market economies the capital stock should grow at or above the pace of output. However, Argentina’s capital-output ratio is relatively low, not compatible with long run growth. As another evidence of this, direct foreign investment in Argentina is just 6% of the total in South America, while the GDP of Argentina is 11% of South America, according to the recently released ECLAC (2012) report on foreign investment. Moreover, according to the Global Competitiveness Index, Argentina is also very behind in infrastructure rankings (number 81 much behind Chile, Brazil and Mexico) and mostly behind in quality of roads, railroads, ports and transport.

This short-sightedness of Argentina’s so-called triumphs - mainly in the form of money  transfers and subsidies making them unsustainable --  manifests also in low achievements and investment in quantity and quality of human capital. The finding that inequality decreased in Argentina during the period, in part due to the massive government transfers, but also because of lower rate of returns to education that decreased from 15 to 11% in the period 2003-2009 (see Pessino (2011)) (compared to the 90s with a higher return following an increase in capital/labor ratios), and low and deteriorating achievements of Argentine students (relative to the world and also to other LAC countries) in PISA 2009 compared to 2000 should not be a motive to celebrate.

Argentina has maximized the returns in the ‘short-run’ at the expense of the ‘long-run’ and this have produced huge political gains and glitter, but as we have shown: “not all that glitters is gold”, and much less in Argentina.

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