Wednesday, 17 February 2016

An Argentinean myth


Those brave souls that read my blog and/or my twitter stream know that international trade is a subject that interests me a lot.

It is no secret that Argentina is a country that its affairs are accompanied by some kind of constant clatter since it evokes quite different feelings to different people. In my humble opinion it’s a rather beautiful country that on the other hand has a long history of economic mismanagement.

The most clatter was generated by the country’s sovereign default in December 2001. One can find a load of different narratives for the catalysts behind this but the standard one is that the country's currency board arrangement led to a significant loss of competitiveness and that was resolved by the massive devaluation that occurred simultaneously with the default. 

The fact that a devaluing currency boosts international competitiveness is a standard axiom in international economics but was this true in the case of Argentina? 

The answer, if one actually bothers to look at relevant data is categorically, no. In fact, Argentinean exports performed much better during the 1991 – 2001 period that the currency was pegged than during the following decade. 

source: World Bank, own calculations

Of course this doesn’t stop people from tossing currency devaluation around as a cure-all. 

source: World Bank, own claculations

If one looks carefully to the chart above showing the USD/ARS exchange rate (unfortunately I couldn’t find NEER data for Argentina) he/she can see that during the 00s too, Argentinean exports also performed better during the years that the currency was quasi-pegged to the dollar than during the years after a renewed and massive devaluation cycle started. What’s more during the years of the massive and constant devaluation exports (in volume terms) have decreased.

In my humble opinion, there is nothing wise about conventional wisdom and consensus is usually wrong. So maybe, just maybe, policy-makers and policy-proponents can start focusing on facts and not on doctrines proposed by first-year economics textbooks.