Argentina Continues to Defy Conventional Wisdom: A Response to Milberg

I welcome Will Milberg’s response to my book and was pleased with his appreciation of how the case of Argentina challenges conventional wisdom in economics. His review adds to the debate about Argentina, highlighting one of my motivations for writing the book: to show how the Argentine experience since 2001 flies in the face of economic pundits, both in the academy and in the financial press, and that it is important to pay attention. Milberg’s message was seconded by Paul Krugman in a NY Times blog posting in which he directly identifies “conventional wisdom” as obscuring accurate perception of strong Argentine recent economic performance.

I would carry this further to the case of the recent re-nationalization of the Argentine oil company, YPF. The exaggerated external critique and prediction of economic doom once again for Argentina fails to see that this decision makes sense if the government is able to achieve its own institutional objective of making YPF a well-run enterprise serving the national interest by expanding energy production. Commentaries by The Financial Times and The New York Times, with the exception of Krugman, sound eerily similar to their alarmist predictions in 2002 that Argentina would fall off the tip of South America after the default on its debt. Conventional wisdom, I believe, as Milberg notes, is sorely in need to revision.

And while I very much agree with most of Milberg’s observations about the Argentine case, and accept his friendly critique of some parts of my book, I think that he is too easily accepting some external views, from the U.S. and Europe, that “the country is once more on the edge.” This is not true in terms of its growth, balance of payments, fiscal deficit, growing investments in infrastructure, and most importantly reduced poverty and inequality. Low unemployment continues despite some slowdown in the construction sector.

Recent policy decisions and major legislative victories by President Cristina Fernandez de Kirchner on critical issues of social policy and the reorganization of the Central Bank demonstrate continued governmental momentum in strengthening “the model.” GDP growth in 2011 was 8.9%, an outstanding performance, particularly in a context of global economic uncertainty in Europe and the United States.

The YPF decision is supported by more than 75% of the Argentine population and is again an example where the logic of giving priority to domestic interests above foreign obligations makes good political sense and has brought clearly identifiable economic benefits to the country.

The issue of inflation remains a major concern, as real inflation is probably close to 25%, and deserves government attention. The unresolved issue of the controversial  calculation of inflation by INDEC, the government’s statistical office, probably itself contributes to uncertainty and thus itself fuels inflationary expectations.

The continuing drama of Argentine expectations deserves deeper historical analysis. Expectations play a major role in behavior and for different reasons, both the government and external observers should be careful in fueling negative expectations. Global capital will not benefit if Argentina’s economy fails to grow or worse still, falls into recession. Smart investors should study the Argentine case in detail to learn that there are lessons which should be considered, as solutions are suggested for Greece, Spain, and the rest of Europe, not to speak of a still sputtering US economy. Argentina’s government has learned that it must chart its own path, listening to the world at large, but in the end, make its own decisions in the interests of its people. That, after all, is part of the meaning of sovereignty and democracy, both of which cannot be taken for granted in a period of globalization.