December 07, 2003

All things considering, the Argentine economy appears to be doing remarkably well... | Argentina's economy: April 2002, the economy was floundering, apparently at risk of hyperinflation, after a disorderly devaluation in a dollarised society, the largest debt default in history, and a deep depression. A year ago, the consensus on Wall Street was that the economy would grow a mere 2% this year while inflation would run at 20-25%. In fact, inflation is likely to end the year at 3% and GDP to expand by 7% (see chart). Next year's outlook is similar. The problems may come later. Three things have helped the appearance of recovery along. One is simply the depth of the hole into which the economy fell. Even if growth continues at its current brisk rate, GDP will not return to its 1998 level until 2005. Unemployment is down from its peak of 21.5% last year, but is still at 15.6%. One Argentine in two now lives in poverty. Every week, militant groups of unemployed stage street protests... Second, macroeconomic policy has been more effective than critics admit. Booming tax revenues have enabled the government to hit fiscal targets agreed with the IMF in September,...

Posted by DeLong at 02:10 PM

November 24, 2003
A Little Polite Score-Settling

I'm finding more delightful moments in Robert Rubin and Jacob Weisberg's In an Uncertain World. Here is a nice defense of Clinton-era policy accompanied by a little very polite score-settling: pp. 296-7: "Dwelling on the mistakes [of U.S. government and IMF policy during the Asian financial crisis of 1997-8] tends to obscure the larger point, which is that a market-based approach--of IMF loans combined with essential reforms--led to relativley rapid recovery in countries that took a reasonable degree of ownership of reform and avoided the real risk of much more severe global disruption. Perhaps the best testimonial to the market-based approach... comes from decisions taken by emerging market governments.. with an electoral mandate from the disadvantaged.... Both Kim Dae-Jung in South Korea and, more recently, President Luis Inacio Lula da Silva in Brazil had come to power on populist platforms. Both chose to embrace global integration and policy regimes designed to engender market confidence as a part of fulfilling their mandates to reduce poverty and raise living standards. "At the same time, the entire Asia experience left me with the view that future financial crises are almost surely inevitable and could be even more severe.... [I]t is imperative to focus...

Posted by DeLong at 08:10 PM

September 26, 2003
Stephen Roach Has Hopes and Fears

Morgan Stanley's Stephen Roach likes Treasury Secretary Snow's new policy of talking down the dollar: Morgan Stanley: As expressed in Dubai, the G-7's vision of market-determined exchange rates fit the script of global rebalancing like a glove.  It promised the one shift in relative prices -- a weaker dollar -- that a lopsided, US-centric world so desperately needs.  For a world beset by massive and unsustainable external imbalances, the G-7 recipe offered the best possible endgame -- a balanced global economy.  It was the perfect ending to my bad dreams of the past four years. It's not clear why he likes it. As I've said before, there are two ways of announcing changes in exchange rate policy. The first is to announce that monetary policy will be different--say, if Chairman Greenspan were to say something like: One of the considerations impelling the Open Market Committee toward continued monetary ease for a considerable period of time is the sense that the appropriate value of the exchange rate should produce a trade balance equivalent to desired fundamental long-term capital flows; and that the current level of the U.S. exchange rate seems to be associated with a perhaps excessive inflow of short-term finance...

Posted by DeLong at 09:17 AM

September 16, 2003
The Endgame for the U.S. Current-Account Deficit

Kevin Drum interviews Paul Krugman, and in the course of the interview Krugman thinks about the end of the U.S. trade deficit: CalPundit: An Interview With Paul Krugman: What happens if these foreign countries do stop buying U.S. bonds? Is this a real concern, or a tinfoil hat kind of thing? Oh, I don't think China is going to [stop buying U.S. bonds in order] to pressure us. You can just barely conceive of a situation where they're mad at us because we're keeping them from invading Taiwan or something, but more likely they just start to wonder if this is really a good place to be putting their money. So what happens is a plunge in the dollar when they decide to stop buying and start cashing in, and a spike in U.S. interest rates. But you might also get in a situation where the interest rates the government has to pay to roll over its debt become so high that you get an accelerating problem, which is what happened in Argentina. What happened was that suddenly no one would buy Argentine debt unless they paid a twenty something percent interest rate, and everybody says, but if they have...

Posted by DeLong at 01:23 PM

August 03, 2003
20-20 Hindsight

Paul Blustein of the Washington Post has a nice article ( Argentina Didn't Fall on Its Own) on Argentina, the inflow of foreign capital, and its recent collapse. I do, however, think that he overplays the "poor investors" and the "poor Argentinian government" line: Wall Street firms touted Argentina as one of the world's hottest economies as they raked in fat fees for marketing the country's stocks and bonds. Thus were sown the seeds of one of the most spectacular economic collapses in modern history, a debacle in which Wall Street played a major role. The fantasyland that Argentina represented for foreign financiers came to a catastrophic end early last year, when the government defaulted on most of its $141 billion debt and devalued the nation's currency. A wrenching recession left well over a fifth of the labor force jobless and threw millions into poverty. An extensive review of the conduct of financial market players in Argentina reveals Wall Street's complicity in those events. Investment bankers, analysts and bond traders served their own interests when they pumped up euphoria about the country's prospects, with disastrous results... Argentina's politicians were told at extraordinary length by their own economic advisers, by the...

Posted by DeLong at 08:45 AM

June 05, 2003
Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent: John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude. Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield...

Posted by DeLong at 07:09 AM

May 13, 2003
Emerging-Market Bonds with Collective Action Clauses

Emerging-market bonds with collective action clauses to make restructuring easier. Not yet the wave of the future, but perhaps a ripple: ...GEORGE BUSH'S Treasury Department has a mediocre reputation in international economic circles. Mr Bush's first Treasury secretary, Paul O'Neill, was known more for gaffes than for gravitas. His affable successor, John Snow, has been too busy trying to sell Mr Bush's tax cut at home to show much interest in matters abroad. On the international scene, Team Bush pales in comparison with Robert Rubin and Larry Summers, Bill Clinton's Treasury secretaries. Yet the Bush administration may have more influence on one of the most pressing questions in international economic policy than the Clinton crew ever did: how can the debts of developing countries be restructured? John Taylor, the top international man in Mr Bush's Treasury, has long touted a market-based approach to dealing with sovereign-debt crises. He is sceptical of the International Monetary Fund's proposal for a "sovereign-debt restructuring mechanism" (SDRM), which would create, in essence, a watered-down international bankruptcy court. Mr Taylor prefers to encourage solutions to debt problems by persuading emerging economies to introduce "collective-action clauses" in their bonds. In recent months all this has changed....

Posted by DeLong at 11:43 AM

March 16, 2003
Morris Goldstein Is a Very Good Economist

Morris Goldstein is a very good economist. The latest thing from him to land on my desk is his look at "Debt Sustainability, Brazil, and the IMF." After reflecting on Morris's take, I find myself a little bit less optimistic about Lula and Brazil than I used to be......

Posted by DeLong at 07:41 AM

March 04, 2003
Those Who Do Not Remember History...

Those who do not remember history are condemned to repeat it, and the rest of us are condemned to repeat it with them. Gerardo della Paolera and Alan M. Taylor point out that those who have studied the 1929 collapse of the gold standard in Argentina would have found few surprises indeed in the 2001 collapse of the currency board. Yet another brick in the wall suggesting that it is long-lasting institutional deficiencies that are the causes of the "bad policies" that overoptimistic economists like me think stand in the way of successful development and growth. Gaucho Banking Redux: Gerardo della Paolera, Alan M. Taylor | NBER Working Paper No. w9457 | Issued in January 2003 | Argentina's economic crisis has strong similarities with previous crises stretching back to the nineteenth century. A common thread runs through all these crises: the interaction of a weak, undisciplined, or corruptible banking sector, and some other group of conspirators from the public or private sector that hasten its collapse. This pampean propensity for crony finance was dubbed 'gaucho banking' more than one hundred years ago. What happens when such a rotten structure interacts with a convertibility plan? We compare the 1929 and 2001...

Posted by DeLong at 02:02 PM

September 12, 2002
Ken Rogoff on the IMF

Ken Rogoff on the claim that IMF bailouts take the money of rich-country taxpayers, give it to the unworthy, and so create "moral hazard". (He also covers a host of other issues.) ...It would be hard to overstate the influence of the popular perception that IMF crisis loans are thinly disguised bail-outs, with the tab paid mainly by ordinary taxpayers in the industrialised world. The presumed need to limit such bail-outs, and their adverse long-term incentive effects, is a central element of virtually every important plan out there to improve the way the IMF does business. The challenge posed by the bail-out view is not simply lack of transparency—that IMF loans are really outright transfers and should be called such. No, the deeper and more troubling implication is the “IMF moral hazard” theory. Simply put, if lenders are confident they will ultimately be bailed out by heavily subsidised IMF loans, they will extend too much credit to emerging-market debtors at rates that do not reflect the true underlying risk. The result? Bigger and more frequent crises than if the IMF did not exist. Giving the IMF more resources, it is argued, exacerbates the crises it was designed to alleviate....

Posted by DeLong at 02:21 PM

August 11, 2002
I Don't Know Anything About the Brazilian Economy

I don't know anything about the current state of the Brazilian economy. But Ted Truman does. And he favors the policy of having the IMF commit another $30 billion in loans to Brazil. The way Truman sees it, the last round of IMF loans--in 1998--gave Brazil the breathing room to almost bring its government finances into balance. But it was not quite enough. And now Brazil needs to do more. Doing more, however, requires time: time for Brazilian politicians to face up to the situation and get their policies in order. Without IMF loans, Truman believes, Brazil will have no time--and the expectation that it won't get its policies in order will instantly destroy the high probability that, with six months of grace, Brazil will be able to avoid the high inflation that is an effective governmental bankruptcy. Op-ed: Brazil Needs Help The Brazilian economy remains vulnerable. The ratio of public-sector debt to gross domestic product rose from 34 per cent in 1997 to 49 per cent in 1999 but has now increased to 55 per cent when it was projected to be on a declining trend. Less than 20 per cent of public sector debt is held abroad but...

Posted by DeLong at 08:07 PM

August 02, 2002
I Can't Stand It...

Minimal, minimal competence and consistency. Is that too much to ask? Apparently yes... - Major Business News The Bush administration signaled it would support a financial rescue package for embattled Brazil, a fast retreat from its anti-bailout policy. Just days after he irked Brazilian President Fernando Henrique Cardoso by suggesting new aid might be siphoned off to Swiss bank accounts, and just days before his first official visit to the trouble spots of South America, Treasury Secretary Paul O'Neill indicated the U.S. would back an agreement now being negotiated between Brasilia and the International Monetary Fund. "The economic team in Brazil has done a remarkable job of maintaining sound fiscal and monetary policies," Mr. O'Neill said Thursday. "I continue to favor support for Brazil and other nations that take appropriate policy steps to build sound, sustainable and growing economies."......

Posted by DeLong at 08:15 AM

July 28, 2002
Anne Krueger's Take on Argentina

A speech by Anne Krueger, Principal Deputy Managing Director of the IMF, on Argentina. It is much less lively than Michael Mussa's book: contrast Krueger's "...we should have focused more closely on the debt dynamics. Indeed, we are now stepping up our work on the analysis and assessment of debt sustainability..." with Mussa's "if, if, if... if my grandmother had wheels, she would be a bus." More important, I think that there are at least two crucial pages missing from the text of Krueger's speech. How, exactly, did Argentina transform itself from the favored darling of neoliberal reformers and the poster child for the success of the Washington consensus in 1998 into a country that had only one last desperate and slim chance to save itself from macroeconomic disaster at the end of 2000? Surely the policy tightrope you have to walk isn't that narrow and perilous, is it? I mean, the U.S. economy survived eight years of Ronald Reagan, and then two years of President "Read My Lips: No New Taxes" before George W. Bush decided in 1990 that he would rather be a president than a demagogue. (It is true that Alan Greenspan thought--or gave the impression...

Posted by DeLong at 08:56 AM

July 26, 2002
Mark-My-Beliefs-to-Market Time

Mark-My-Beliefs-to-Market Time I am reading Michael Mussa's brand-new very short book on the latest Argentinian financial crisis [Michael Mussa (2002), Argentina and the Fund: From Triumph to Tragedy (Washington: Institute for International Economics: 088132339X)]. In The Importance of Being Earnest, Oscar Wilde gets a laugh out of the idea that a chapter on a rupee crisis is too exciting for young ladies--out of the idea that a technical discussion of anything having to do with international finance can be anything but deadly boring. But reading this is different. First, I'm weird: I'm an economist, which means (these days at least) that I don't even have the sparkle and flash, the willingness to take risks and go out on limbs, that accountants have. Second, the Argentine crisis is an important setback for human happiness--a much more important tragedy even than the closing of a Zambian copper mine. Plus the crisis has important lessons for international economic policy in the future. Third, Michael Mussa--former chief economist at the IMF for a decade--is a fearless and witty guy: he (reportedly) spoke of his boss at the IMF, Michel Camdessus, as a man who was 'so optimistic he always sees the glass as half...

Posted by DeLong at 06:09 PM

July 07, 2002
More Thoughts on Stiglitz's Globalization and Its Discontents

So I reread Globalization and Its Discontents, and I am more puzzled than ever. I cannot figure out what is going on inside Stiglitz's head. Part of it I think I have figured out. The repeated changes of position--"No! You should not have imposed any conditions on Suharto but lent freely respecting Indonesia's national sovereignty!" "No! You should not have loaned anything to Suharto at all!" "No! You should have loaned to Suharto, and encouraged capital to flow into Indonesia! And been very careful of his face! The longer Suharto stayed in power, the more order defeats chaos, and the better for Indonesia!" "No! Corrupt kleptocrats harm their countries! Clinton and Camdessus should have warned industrial-core companies against investing in Indonesia!" These repeated changes of position tell me that Stiglitz's main complaint against Summers, Fischer, and all is that they were sitting in the control seat where he wanted to be. He wanted to be the one making the decisions about when to lend in hope and when lending would be hopeless, when the current leader is the best that can be expected and when the best option is to cut off all economic contact and hope the current leader...

Posted by DeLong at 09:45 PM

July 02, 2002
IMF Chief Economist Ken Rogoff Unloads Both Barrels in the Direction of Joe Stiglitz

IMF chief economist Ken Rogoff unloads both barrels in the direction of Joe Stiglitz. The "nut" paragraphs are below. I think that, analytically, Rogoff has the better of the particular point he chooses for his argument. Following what appear to be Stiglitz's prescriptions--lend more with fewer conditions and have the government print more money to keep interest rates low--seems that it would have been overwhelmingly likely, in all the cases I know well, to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm's and bank's ability to repay its hard-currency debt and sent the entire country's financial and industrial system into bankruptcy. Stiglitz would have to argue that universal bankruptcy is not that bad: that legal deals would have been quickly struck to write down debts and get the flow of financial intermediation going again. I'm not that optimistic about what happens once the lawyers enter the picture. An Open Letter to Joseph Stiglitz, by Kenneth Rogoff, Economic Counsellor and Director of the Research Department, IMF. Let's look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments...

Posted by DeLong at 06:32 PM