Years of Poems and Spirits

I have been reading Paul Blustein’s “And the Money Kept Rolling in (And Out)”. The book tells the story of the 2001 Argentina default and subsequent IMF intervention.

From the journalistic point of view, the book is not quite as good as his first one on Asian crisis in 97 (The Chastening), which is full of anecdotal accounts of key players during the crisis (for example, Taiwan’s central banker decided to devalue TW dollar while playing golf with his Korean counterpart, who sensed something was about to happen but didn’t know what when the Taiwan guy whispering Chinese into his cell phone). It was as if Ken Burns shot a documentary on Watergate.

This book is somewhat duller but has more insight in international economics. It tells a much more coherent story on how domestic policies (i.e. fiscal policy) drives trade and currency valuation.

I had this discussion with Migdal (I admire the man but he needs a econ upgrade) and most recently in class with a fellow student: who is to blame for currency crisis? My arguemnt is: it is the fiscal policy that is at fault. In other words, currency devaluation is just the consequence of inflation. Currency speculation is a byproduct, NOT the culprit.

Blustein certainly started out hoping to make a case against the moneymen on the Street. But as he progresses, he finds the Argentinian government the most to blame. The whole country is addicted to deficit spending and the political system is configured to keep it that way.

For example, its federal system means the provinces can borrow money without federal consent. Its Peronist tradition (i.e. Latin American populism) gives labor unions a disproportionally large role in policy decisions. Also, a powerful government means temptation of corruption and personal ego: often a President does not want to leave office and finds ways to buy his votes/time through government spending.

Since 2001, the Argentinian economy is on a fast recovery. However, I just came across this article on WSJ, “Economic Reckoning Looms In Argentina’s Election“, which says that the recovery is riddled with high inflationary risk:
“(Its current President) has ramped up spending, helping to fuel inflation. The government’s fiscal surplus is rapidly shrinking due to subsidies for energy, as well as goodies for pensioners, some public-sector workers and other key constituencies. There are also inflationary pressures from the higher international prices for Argentine agricultural commodities, which are blowing back to cash registers at home.”

The article did not mention the capital account or currency reserve level. One of the problem in 2001 was that the governments borrowed too much foreign debt to finance its spending. The focus of the article is the government’s price control practice.

I am interested to see how such an anti-investment policy will work. It is not a contractionary policy but almost like selective punishment. It has been working in China (I think so until I am proven wrong), will it work for Argentina?