7 Ways Argentina Defies the Conventional Economic Wisdom

Reflections on Argentina’s Economic Growth and Recovery, by Michael Cohen

My New School colleague Michael Cohen’s new book Argentina’s Economic Growth and Recovery: The Economy in a Time of Default provides the first detailed account in English of one of the remarkable episodes in recent economic history.  Cohen’s rendering of 21^st century Argentine political economy is detailed, nuanced, filled with summaries of political debates and standoffs and with a rich appreciation of the unequal ways in which the economic benefits are shared as the Argentine economy recovered from its macroeconomic collapse in 2001.

The book is a fast-paced (at times blow-by-blow) account, of macroeconomic extremes in terms of debt, exchange rates, government budget and trade balances and fiscal and monetary policy in Argentina.  But when I finished reading the book (and took a big exhale) what struck me — not an expert on Argentina by any stretch — were the many ways that the Argentine experience contradicts the conventional economic wisdom.  Without much explicit attention to issue of conventional economic wisdom (other than the attack on World Bank and IMF structural adjustment policies imposed on Argentina in the 19990s), Cohen’s account nonetheless forces us to think critically about some widely-held views in economics and especially development economics.  Let me describe seven different ways in which Argentina’s experience in the 21^st century should make us revisit some of the accepted aspects of economic wisdom.

Conventional wisdom #1.  Conventional wisdom is that default on foreign debt will have disastrous consequences for economic growth, economic suicide.  The country that defaults, the thinking goes, immediately shuts itself out of international capital markets for an unpredictably long period of time, brings on a long-term collapse of the exchange rate, requires a long-term recession as the country is forced to “live within its means.”

Argentina defaulted in early 2002 and then:

*one year later was borrowing considerable  from the World Bank and Inter-American Development Bank.

*between 2002 and 2006 inward FDI rose at a rate of 26% per year  (much from Brazil)

*by 2006 was experiencing rapid economic growth rates, funding new social programs aimed at reducing poverty and was considered fiscally very sound.

Conventional wisdom #2.  Conventional wisdom runs that globalization is a process that drastically reduces the power of the nation-state, since increased capital mobility means that capital’s interests no longer coincide with those of the nation state and, anyway, the state’s influence over capital and the economy generally is diminished because capital (and labor) can simply move or shift production locations if domestic policies put it at a disadvantage.

Argentina’s example in a time of default is increased power of the national government, first over the decision to default on foreign debt, and then to run very active jobs and redistributional policy. Nestor Kirchner’s “strong state” was even criticized for being too powerful at time.

Conventional Wisdom #3. A corollary of this conventional wisdom about the diminished power of the nation state in the era of globalization is that one size – that is the neoliberal policy package – fits all.  Fiscal and monetary restraint, current and capital account liberalization, removal of subsidies are the basic requirements of any structural adjustment.  As a result of this thinking (which Cohen shows originated in the US and Europe), these policies became the basics of IMF and World Bank conditionality attached, in one form or another, to loans made throughout the later part of the 20^th century.

Cohen’s account of Argentina in the run-up to default is a case of “the (neoliberal) operation was a success but the patient died.”  Hyperinflation was cured but the debt became unsustainable.  Cohen’s account since default is a description of a complicated set of deviations from this policy prescription – and with considerable success: Higher taxes, pro-poor redistribution and spending, job creation programs, loose monetary policy with careful attention to a competitive exchange rate.  This was the political foundation for the rapid growth of the 2000s.

Conventional wisdom #4. Latin American wisdom (from  1950’s structuralist views on economic development made famous in the writings of Raul Prebisch and Hans Singer) says that developing countries should actively seek to avoid a pattern of specialization which is too reliant on commodities and primary goods – they have a low income elasticity of demand and are standardized goods for which no market power and no labor bargaining can take place.

What happened in Argentina in the 2000s was a period of rapid economic recovery strongly supported by the global commodities boom that drove an explosion of exports and which had a considerable multiplier effect across the Argentine economy – continuing to this day.  The terms of trade — driven to a great extent by high world prices for soybeans — is up over 50% in the last decade.  And this has come even in a period of depreciation of the Peso against the Brazilian Real. (Note that Cohen also questions whether the main source of economic growth was domestic demand.  When the peso was devalued in 2002, import substitution took place, raising demand for domestic goods and services.  Government spending also grew.  These, he argues, were the basis for the “demand-led recovery.”

Conventional wisdom #5: With the rise of China, consensus is growing around the view that the autocratic is most able to promote development.  Increasingly, Chinese success is connected to the autocratic nature of the political system.  It is this absence of democratic accountability in China, the conventional wisdom goes, that has allowed the Chinese government the ability and nimbleness to harness labor and capital investment in a massive industrialization effort.  Argentina’s remarkable era of democratically-elected governments belies this consensus view.

Conventional wisdom #6: Conventional economic wisdom is that a tide of economic growth will raise all boats.  The friendly World Bank amendment to this has been that one also needs good institutions, i.e. clear property rights protections.  The conventional wisdom is that economic growth per se is the central means to the improvement of well-being and the reduction of poverty.

The Argentine case shows that growth alone was not adequate and Cohen attributes progress on the poverty and employment front to Kirchner government efforts to support housing, health care, job creation, social protection and infrastructure.

Conventional wisdom #7. Conventional wisdom is that the international financial institutions are more powerful than domestic political forces – thus the old joke that the World Bank has brought down more governments than have national revolutionary movements.

Cohen’s account tells the fascinating story of a country that defaults on its foreign debt in the face of enormous IMF pressure not to do so.  Then, just a few years later, the government elected with the largest plurality in decades finds itself in an unwinnable battle about export taxes with the powerful and large domestic farmers.  These huge corporations, profiting greatly during the commodities boom of the 2000’s succeed with a lockout (keeping produce and meat off the domestic market), protests, influence peddling in the Senate, control of the media.  So what’s new?  Argentina defies the conventional wisdom.

Perhaps what is the most unconventional part of this book is the way Cohen tells the economic story of Argentina in a time of default.  Contrary to the economists, Cohen argues that all economic processes must be understood as political, that economic change comes generally with a “major realignment of political power.” Even more interesting is Cohen’s insistence that you can’t assess economic policy in some pure way, but only in the context of its institutional and political overlay.  This leads him to strongly resist the notion of the end of history or the end of politics in Latin America.  The book resounds with a very hopeful view of the possibilities of creativity and innovation in policy making and poverty reduction, management up urban development, but also with a realistic sense of the limits of politics.

Cohen’s views on these issues are closest to those of Peter Evans and his notion of “embedded autonomy.” The idea is that the most effective developmental states are those most closely connected to economic and civil society actors, but which also have sufficient autonomy  (a) to be able to implement policy effectively even when the impact of a policy shift is not favorable to one or more group of actors, and (b) to implement policies with long-term developmental consequences rather than short-term ones. Embedded autonomy is a particularly useful lens with which to think about economic policy making in Argentina, with its history of Peronism, military dictatorship and now a vigorous democracy.  Embedded autonomy remains particularly relevant in the Kirchner era, which at various moments was accused of being too embedded and at times too autonomous.

Finally, I would be remiss if I didn’t speak of Cohen’s own problem of “embedded autonomy.”  Cohen has been personally friendly with the Kirchner’s over many years and  they have supported the Latin American Observatory at the New School.  So the big question as I opened the cover of the book for the first time was whether Cohen would pull his punches in his assessment of the Kirchner governments.  The answer is that he does not hide his colors – he is mostly supportive of the Kirchner governments and their efforts at redistribution and poverty alleviation.  But he does this within a distinct analytical frame and from a clear sense of principles – that economic growth alone does not alleviate problems of extreme inequality, persistent poverty and lack of access to health care.  While the rapid recovery following default is remarkable, Cohen does not let the reader lose sight of the perhaps more remarkable feat which is the recovery from a brutal military dictatorship in 1976-1983 to a strong democracy that seems to have come not just with ambitions of voting rights but also of economic rights.  And he is critical of the Kirchner’s in a number of places, mostly for ignoring important aspects of long-term social well-being related to the development of science and technology, infrastructure and the apparent collapse of energy production over the last decade that may cripple the economy going forward.

Recent economic reports indicate that Argentina is once more on the edge:  The economy may well be spiraling into another crisis — exchange rate overvalued once again, capital flight, expansionary fiscal policy, inflation taking off.  Rumor is that the government may be falsifying the published rate of price inflation.  And while Cohen covers the politics of this in much detail, he is insufficiently critical of the government in its dangerous politicization of inflation data.  The recent law regarding the accountability of the central bank makes sense in that public accountability is in general a good thing, but the political pressures this creates for monetary policy to finance public deficits are not necessarily good over the long term.

Argentina’s Economic Growth and Recovery: The Economy in a Time of Default reflects a deep appreciation for the political culture, the economic history, the geographical complexity, the class differences and the international pressures that Argentines have struggled with over the past two decades.  It is an important treatise in political economy and Cohen tells it in detail and with a lot of passion and even, at times, frustration.  My sense is that these two sentiments – passion and frustration — are conventional sentiments for most Argentines.