The View from Buenos Aires
A visit to Buenos Aires in September provided a good vantage point to look at the euro zone’s deepening crisis. Angle readers will recall that Argentina went through a painful adjustment process some ten years ago. This culminated in the peso being forced off its peg to the US dollar in 2002 as well as debt default. Unemployment jumped to 30 per cent, and poverty shot up above 50 per cent of the population. Since then the county has bravely remerged from the debris, although it is still pursued by some of its creditors. The crisis caused deep hardship, but almost certainly less than sticking to the currency peg (and good luck arrived with a decade of rising commodity prices as well).
Does the Argentinean experience offer any light at the end of the tunnel for Greece? I am not so sure. Greek public debt is up to three times higher as a share of GDP compared with Argentina ten years ago, and the current account deficit is substantially greater. If Greece offers to repay one-third of its debt, backed with hard collateral (which might be what is on offer to private creditors) then its debt-to-GDP level will still equal that of Argentina in 2002, before it defaulted. Greece today is not Argentina then—the situation is worse.
Help from the New World?
So Argentinians know what macroeconomic crisis brings. Might the new world help the old world out? Some of Latin America’s central banks are buying the bonds of euro zone countries, albeit on a small scale (and mainly to diversify their foreign exchange reserves). The BRICs and the other emerging economies might assist with larger-scale purchases using their reserves (China tantalizes the markets with the prospect). However, Latin America’s contribution is certain to be modest in relation to the desperate state of public finance in Mediterranean Europe. Moreover, BRIC help will only arrive if the Europeans come up with a credible plan. The Brazilians have been adamant on this point. They certainly don’t want to see the euro follow the dollar down, with their own currencies appreciating (resulting in lost competitiveness). Brazil has repeatedly warned of ‘currency wars’ (though recently the dollar spiked sharply up as investors fled to the safety of US capital markets, the most liquid in the world).
More fundamentally, it is not clear what the BRICs and the other emerging economies might get out of buying euro zone bonds in danger of an imminent write-down (China buys lots of US treasuries, but the US is not about to default). The euro zone as a whole runs a capital account surplus, so BRIC savings might just as well stay home to finance their own investment needs. Could the emerging economies get some future goodwill from Europe? Perhaps, in the tussle of agricultural trade negotiations, one of the blocks to progress in the Doha round? Maybe, but global governance has been as bad at linking the issues of finance and trade—which are really two sides of the same coin—as it has in sorting out problems in each. And so we see a reversal in fortunes between the New World and the Old World. Look no further than the recent downgrade of Italy’s debt and the upgrade of Peru’s debt by the credit rating agency, Standard & Poor’s. A sign of our times.
The new policy model in Latin America
Which brings us to the UNU-WIDER project meeting on ‘The New Policy Model, Inequality and the Poverty Debate in Latin America’, hosted by the Faculty of Economics, University of Buenos Aires in September. Our thanks go to the faculty and the university for their warm welcome, and also for hosting a public event consisting of a panel discussion. You can find a report by Annett Victorero of that roundtable elsewhere in this Angle. UNU-WIDER’s external project director is Giovanni Andrea Cornea of the University of Florence. Readers will be hearing a lot more about this project as it moves towards publication: watch our working paper series over the next few months. But as a taster, let me give you a few of the things that struck me as an outsider to the region.
For one, it is clear that the macroeconomics generally look a lot better than they did even five years ago. Some of this can be attributed to the boom in global commodity prices, but also to policy, especially fiscal policies that are sharing the windfall more broadly. Rising commodity prices have always been something of a mixed blessing for Latin America. Taking a look at Buenos Aires itself, it is evident that the city’s magnificent architecture arose partly in the boom years of the late nineteenth century when for many immigrants from Europe it offered a better prospect than Canada (or indeed, the USA). Yet, with a high concentration in land ownership in Argentina and across Latin America, booming commodity prices traditionally intensified inequality by raising the returns to land. A pattern of unequal growth linked to the vicissitudes of the global economy was thereby put in place (see the UNU-WIDER annual lecture by Jeffrey Williamson)
These days, commodity revenues are shared more widely, not least because governments have become more adept at striking better tax deals with mining companies; Peru’s debt upgrade partly reflects its recent deals with miners. Tax collection is mostly up—Brazil collects nearly as much revenue as Germany as a share of GDP—though Mexico lags behind. The resulting revenues are funding some of the recent expansion in social protection, specifically conditional cash transfers. And there is something of a right-left political consensus around social protection as the project meeting discussed. For this reason, Latin America’s ‘new social model’ is attracting attention elsewhere (Africa’s old and new oil economies should take note).
Sustaining the reversal in inequality
In sum, many countries have seen falling income inequality since 2000. However, this represents only a partial reversal of the rise in inequality during and following the lost development decade of the 1990s, and then the largely disappointing response of economies in the 1990s to the policies of the Washington Consensus. Across the region, the rough rule of thumb appears to be that some 75 per cent of the rise in inequality of the 1980s has been reversed, and absolute poverty is down. But that still leaves highly unequal societies; Chile is still more unequal than in the 1960s, for example. The region will have to do much better in creating new jobs in non-traditional sectors.
The question that kept coming to my mind is how far Latin America can deepen its relationship with China, to accelerate inward investment, technology adoption, innovation and diffusion. Domestic manufacturers are facing fierce competition from Chinese imports, and countries need to think hard about how to move up the value-chain. The region’s policy makers should view Justin Lin’s recent presentation at UNU-WIDER (available now as a video) as well his 2011 WIDER annual lecture for inspiration.
To achieve more economic diversification and employment growth, the right blend of state intervention and market initiative will be necessary. The public seems to have unpacked the Washington Consensus, generally favouring trade liberalization as employment promoting (though not initially without cost) but being sceptical of privatization and deeply concerned about corruption. Still, optimists can point to the strength of Latin American democracy (with one or two exceptions). This potentially gives the region a long-term edge over some of the Asian tigers in managing rapid economic and social change.
And while policy plus the commodity boom is delivering growth and jobs, injustice is still a word you hear frequently when Latin Americans describe their societies. Cities remain ‘fractured’ between rich and poor; see the UNU-WIDER working paper by Dennis Rodgers, Jo Beall and Ravi Kanbur (WP2011/05) and an article on the forthcoming LSE launch of their UNU-WIDER book in this issue of Angle. In Argentina’s case, Michael Cohen of New York’s New School makes a strong case for the urban sector as a driver in the post-2002 recovery, not just rising commodity prices, in his recent working paper for UNU-WIDER (WP2011/10).
It is evident that across the region, many hard-working people have no social security and their livelihoods are highly vulnerable to any global economic downturn. Hence, Latin America’s policy makers are very concerned about the weak state of the US and European economies. Latin America has been badly hurt by global recession before. This time the region is much stronger in facing the storms, and could contribute to their resolution, but only if we restart the move to economic multilateralism. The New World can offer help to the Old, but only if the Old World understands that economic nationalism benefits nobody in the end.
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Working Paper | Growth and Recovery in a Time of Default