Arnold Kling

Economists on Argentina

Arnold Kling, Great Questions of Economics
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It is interesting to read the analyses of Argentina by Martin Feldstein and Joseph Stiglitz side by side. Feldstein was a chief economic adviser in a Republican administration and Stiglitz was chief economic adviser in a Democratic administration.

They agree about the flaw of pegging the Argentinian peso to the dollar. Feldstein calls it a "bad idea" and Stiglitz calls it "highly risky."

They disagree on how to characterize the ratio of Argentina's foreign debt to its GDP.

  • Stiglitz describes this ratio as "moderate, at around 45 per cent, lower than Japan's."
  • Feldstein describes it as "excessive...eventually reached 50 percent of GDP...clear that Argentina could no longer borrow to roll over those debts and pay the interest"

They also disagree on the impact of the IMF's attempts to encourage Argentina to reduce its budget deficit.

  • Stiglitz says that making these recommendations was "a fatal mistake."
  • Feldstein says that the recommendations should have been enforced, but instead that "the multi-billion dollar loans that the IMF gave to Argentina permitted it to postpone dealing with its fundamental problems."

I would reiterate what I said in post #24, that the IMF stands for the "Impossible Mission Fund."

Brad DeLong's Macroeconomics textbook has this to say about economists who attack the IMF when a country experiences an increase in interest rates and a devaluation of the exchange rate as a result of a currency crisis:

both...were wrong...the fall in exchange rate confidence and the resulting decline in international investment must lead to a rise in domestic interest rates and...must also lead to a [currency depreciation] --p.206-207

DeLong then goes on to draw an analogy between those who expect the IMF to prevent these consequences and the legend of King Canute commanding the tides to stop.

Discussion Question. As the case of Argentina illustrates, it is not clear when the IMF is helping or hurting countries by lending to them. How can the IMF determine when its loans are helping countries by providing liquidity or hurting them by deepening insolvency?

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