1. NS4540 Winter Term 2019 Argentina: Reverse Convergence
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview
Miguel Kiquel, Argentina: A Case of Reverse Convergence, Brookings, November 2014
Main Points
Argentina’s growth performance over last century unique
Country has
moved from being a prosperous developed country at beginning of 20the century to
Joining the group of emerging countries 100 years later
Possibly a case of reverse convergence
Main lesson,
Convergence does not occur naturally, but
Requires supporting policies to take advantage of opportunities opened up by openness and capital inflows.

3. Argentine Economic History I
Argentina’s successful period largely between 1880s and the 1920s
Country was integrated into the world economy
One of the major suppliers of food and raw materials to the world
Magnet for foreign direct investment and for poor workers leaving Europe and searching for opportunities in the new world
Depression in 1930s marked a turning point
Drop in commodity prices
Trade barriers were imposed on Argentina exports
Sudden drop of capital flows from advanced countries

4. Argentine Economic History II
Conditions resulted in a change in the development paradigm
World economic order in 1930s was that of protectionism in Europe and the U.S.
First -- policy response in Argentina – shift towards industrialization and import substitution
Prebish thesis – terms of trade go against primary producers therefore need to industrialize
New policy shift created tensions between
traditional export sectors (mainly agricultural/beef sectors) that were efficient and main suppliers of foreign exchange and
Infant industrial sector that needed foreign exchange to import intermediate and capital goods

5. Argentine Economic History III
Second change in the economic paradigm was a relaxation of fiscal and monetary discipline
A trend that became more pronounced since the mid-forties during Peron administration
Beginning of the era of inflation and the stop and go macroeconomic cycles
Typically an expansionary phase stimulated by fiscal and monetary policies
Always ended in balance of payments crisis due to lack of reserves and an overvalued exchange rate
Cycles became more intense over the years
Inflation hit triple figures in 1970s
Devaluations in these cycles resulted in unsound banking system and led to debt restructuring or outright defaults.

6. Argentine Economic History IV
Since mid-1970s Argentina suffeed a large crisis approximately every seven years
Widespread bank failures and sovereign debt defaults
In 1989 country experienced hyperinflation.
These were distributive episodes in which there were sharp redistributions of income and wealth.
Between 1975 and 1991, GDP per capita dropped 22 percent
Worst period in Argentina’s economic history

7. Argentine Economic History V
Hyperinflation marked a new turning point
Triggered a new change in economic polices and
Put the economy back on a growth path
Between 1992 and 2013 economy grew at an average rate of around 4 percent
Faster than that of most Latin American countries
However there was a deep crisis in 2001
Since then there has been some sifting of policies and a return to inflation
Some concerns about the near-term outlook as the country is again in default with large fiscal deficits and balance of payments problems

8. Lessons from History I Lessons from Argentina’s growth patterns
First – Argentina grew faster in periods in which
It was more open and more integrated with the world economy
When it followed an export oriented strategy as opposed to those in which it adopted import substations.
Second – The abuse of stimulus policies – fiscal deficits primarily financed by printing money in an environment of fixed exchange rates
Started a new era characterized by high inflation and business cycles closely tied to an abundance or scarcity of reserves
Typical stop go cycle – expansion driven by macroeconomic policies leading to higher imports and inflation
Currency strengthened, balance of payments deficit often caused massive devaluation and further inflation
Produced significant volatility and reduced the trend rate of growth

9. Lessons from History II
Third – exchange rate policy matters
Most crisis occurred following a period in wich currency became overvalued
When devaluation occurred it was recessionary because it affected domestic income
Negative balance sheet effect that affected the ability of government and banks to service foreign currency debt
Created a link between devaluations and financial crises
Fourth macroeconomic financial crisis were very disruptive to growth

10. Reasons for Optimism I Some cause for optimism at the present time
First, although country is in default – this time clearly related to legal and political issues as opposed to the ability to pay
Once new government takes office at the end of 2015 and debt resolved, country risk should drop
Would open up way foreign capital inflows that should help reignite growth
Second – Argentina has a sound banking system that this time is not the source of vulnerability – few foreign currency liabilities
Third key macroeconomic imbalances:
The fiscal deficit
Overvaluation of currency
Have increased but not reached unmanageable levels as in previous crisis

11. Reasons for Optimism II
Solving macroeconomic imbalances will be critical if country wants to take full advantage of growth opportunities
During Kirchner years a shift towards interventionist policies
New trade restrictions – import substitution
Directed credit lines
Subsidized interest rates
Numerous controls to access foreign exchange and
A near freeze on utility rates
Brought to a halt investment in energy generation transmission and distribution

12. Assessment
Country needs large investments in infrastructure and many sectors – mining, oil and gas, and agriculture
If new administration does not address the incentives to invest in infrastructure and in key sectors, the macroeconomic improvements will
Provide short-term relief but
Not foster long-term growth
Big question is whether
The next government will be willing and able to attract investment and external financing to develop major projects or
The country will again get trapped in domestic politics