Why Paul Krugman is wrong about Argentina
Krugman is an American economist, Professor of Economics and International Affairs
I have a bone to pick with Paul Krugman and all economists who try to use Argentina as a positive model for debt-ridden European countries such as Greece, Spain and Portugal. Don’t get me wrong, there are some lessons to learn from Argentina, but Europe might do better by looking at Uruguay or Colombia — two countries that successfully fought through financial crises without defaulting on their debt.
Mr. Krugman takes an overly simplistic view of Argentina’s case.
Here’s a quick refresher of what happened:
Argentina was hit extremely hard by the 2001 global slowdown. Unemployment shot up, people took to the streets in protest, and banks froze accounts. A few presidential resignations later the government broke its currency peg to the dollar and defaulted on around $95 billion in debt, the largest sovereign debt default in history. However, with a devalued currency Argentina’s economy recovered relatively quickly, though not painlessly.
In a recent post on his popular blog The Conscience of a Liberal the Nobel-prize winning Krugman references a piece by Matt Yglesias (Slate’s business and economics correspondent), which highlights what European countries such as Greece and Spain can learn from Argentina’s crisis. Mainly, without your own currency and monetary policy you’re screwed.
Krugman seems to have a soft spot for Argentina and he uses Yglesias’ blog post as an opportunity to question media coverage of the Argentine economy.
“…articles about Argentina are almost always very negative in tone — they’re irresponsible, they’re re-nationalizing some industries, they talk populist, so they must be going very badly. Never mind this: ”
The graph Krugman posts is meant to show that since defaulting on its debt in 2002, Argentina’s real GDP actually has grown faster than Brazil’s.
“Why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged?” Krugman asks.
The first problem is that the graph is misleading. There are no sources listed but the figures appear to come from the International Monetary Fund (IMF), which uses national statistics. Anyone with a little economic context on Argentina knows that INDEC, the Argentine national statistics institute that provides GDP and inflation figures, has a reputation for fudging the numbers.
In June 2011, The Economist publicly announced it was no longer using INDEC figures and detailed how the agency, now filled with the president’s supporters, falsified the inflation rate. The IMF has noted doubts about the accuracy of Argentine data and has requested that the government improve its statistics.
In a recent Argentina Country Report, The Economist Intelligence Unit does not seem optimistic about any improvement:
“Meanwhile, serious doubts will remain about the official data on which our forecasts are based. The official 9.7% [inflation] figure compares with provincial data (which are more independent than at the national level) and private surveys that show inflation at around 20-25%. Although the IMF has recently requested improvements in the inflation (and GDP) statistics…it remains unlikely that a more reliable measure will be introduced in the short term.”
Local Argentines are well aware that inflation is higher than the official figure. Argentine unions regularly negotiate wage increases based on the independent 20-25 percent rate.
I am surprised that Krugman would post a graph without referring to the significant questions about its accuracy, especially since the rate of inflation has an effect on the size of real GDP (nominal GDP adjusted for inflation). When using independent estimates, which show inflation around 24 percent, Argentina’s real GDP is almost 3 percent lower than what is officially reported.
Krugman does not understand why Argentina is not seriously compared with Brazil, Latin America’s champion emerging market. But to me it is pretty clear: Argentina is a country with a populist government that controls trade and prices and has a penchant for publishing unreliable economic data (and apparently fake twitter accounts).
Its rapid economic growth is due to government spending and high commodity prices. They are also not worried about nationalizing foreign companies.
Brazil is larger demographically (195 million people versus 40 million in Argentina), and economically (Brazil’s U.S. $2.3 trillion versus $717 billion) and more diversified.
I agree with Krugman and Yglesias that Spain and Greece can learn from Argentina’s debt crisis. Argentina was able to recover because it broke its currency peg to the dollar and regained control of its own monetary policy. The subsequent currency devaluation made Argentine goods cheap compared with foreign imports. Argentines bought local and produced more to sell abroad. Tourists flooded in to the country taking advantage of Argentina’s culture, climate, and cheap goods and services. Economic growth picked up.
However, the nature and size of Argentina’s debt default has done a lot of harm to the country that could have been avoided. Spain and Greece, if they could somehow ditch the Euro, would benefit from having their own currency and control of monetary policy but Argentina’s neighbor Uruguay is a better model to copy.
Uruguay faced similar debt and currency pressures in 2002 but instead of defaulting they renegotiated debt terms with investors. Uruguay swallowed its national pride, looked for help and then utilized investment and a devalued currency to spur economic growth. They also avoided the populism, cronyism and corruption which has so divided and damaged Argentina during the past decade.
(Photo: Flickr Center for American Progress)