ARGENTINA INFLATION – FIVE QUESTIONS FOR STEVE HANKE

http://www.nytimes.com/2002/02/10/business/five-questions-for-steve-h-hanke-peso-peg-done-wisely-but-not-too-well.html

FIVE QUESTIONS for STEVE H. HANKE; Peso Peg: Done Wisely, but Not Too Well?

By ANTHONY DePALMA
Published: February 10, 2002
STEVE HANKE
STEVE HANKE

ARGENTINA was once the darling of investors, a large emerging market graced with stability and transparency. Now, it has defaulted on $132 billion in debt, its banking system is in turmoil, the value of its currency is uncertain, and middle-class Argentines have rioted through the elegant squares of Buenos Aires.

How did this happen? One of the main suspects is the Convertibility Law that Argentina adopted in 1991, a modified currency board system that pegged the peso to the dollar one to one. At first, it succeeded in taming Argentina’s runaway inflation, but many economists believe it eventually became a severe drain on the economy.

The currency board system, however, has supporters. One of the strongest is Prof. Steve H. Hanke of Johns Hopkins University. Professor Hanke agreed to answer questions about Argentina’s travails but insisted on responding by e-mail because of what he called the complexity of the issues.

ANTHONY DePALMA

  1. The currency board system was supposed to ensure economic stability. What went wrong?
  2. In our 1991 book, ”Banco Central O Caja de Conversión?,Kurt Schuler and I proposed an orthodox currency board for Argentina. Instead of the real thing, the Argentines opted for a convertibility system in April 1991. In October 1991, we warned that convertibility would evolve from a currency-board-like system into something closer to a central banking system. And that it did. Last year, for example, the ”pure” foreign reserves in the convertibility system fluctuated wildly from a high in February of 193 percent of its monetary liabilities to a low in December of 82 percent. If Argentina would have employed an orthodox currency board, those reserves would have always been 100 percent of the system’s monetary liabilities.

If that wasn’t bad enough, Domingo Cavallo meddled with convertibility shortly after he was reinstated as Argentina’s economic czar in March 2001. In April, he announced that the peso’s anchor would eventually change from the dollar to a basket of 50 percent dollars, 50 percent euros, and in June he announced a preferential exchange rate for exports. These changes moved convertibility further from currency board orthodoxy and caused interest rates to skyrocket. The lessons are clear: deviations from currency board orthodoxy cause problems — big problems. In Argentina, they resulted in a tightening of monetary conditions in the middle of a slump.

And to add insult to injury, the de la Rúa government increased tax rates on three occasions during the past two years. These rate hikes put Argentina’s tax rates well above comparable U.S. rates. Not surprisingly, the tax-increase packages caused the economy to slump further and tax revenues to collapse.

  1. So the currency board is not to blame? Only the way Argentina tinkered with it?
  2. There is nothing wrong with the currency board system concept. Indeed, the I.M.F. has concluded that the currency boards installed in the 1990’s, as well as Hong Kong’s, have strengthened fiscal discipline and the banking systems, have motivated reforms and have been the linchpins for growth. And until it began to meddle with convertibility, that was the case in Argentina. Indeed, Argentina’s real G.D.P. grew by more in the decade of convertibility than in any other decade in the 20th century.
  3. The currency board system seems to be unprepared to deal with external events that can cause unforeseen problems — for example, Brazil’s 1999 devaluation, which severely hurt Argentina’s exports to Brazil. Isn’t this a major flaw in the system?
  4. You are alluding to the allegation that by linking the peso to the strong dollar, the peso became overvalued and Argentina became uncompetitive. The claims about Argentina’s lack of competitiveness are nonsense. A classic sign of uncompetitiveness caused by an overvalued currency is declining exports. But Argentina’s exports increased every year in the past decade except 1999, when Brazil, its largest trading partner, suffered a currency crisis.

Exports during the first 11 months of 2001 were about 3.2 percent ahead of exports during the same period in 2000. Considering that the real growth in world trade was only 0.9 percent last year, Argentina’s export performance was relatively strong. Indeed, the export sector has been one of the few bright spots in the Argentine economy.

  1. What will happen next in Argentina?
  2. Since the central bank was established in 1935, until 1991, the peso depreciated against the dollar by a factor of three trillion. With central banking and a floating peso, I am afraid Argentina’s problems have just begun, again.

  3. Isn’t the currency board discredited even if it did not contribute to Argentina’s crisis?
  4. No. Argentina’s meltdown occurred after the convertibility system was officially abandoned on Jan. 6 and is still in progress. The only reason Argentina was able to hold its head above water before then was the convertibility system, with all its flaws.

Photo: Steve H. Hanke

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PatAgonica

Soy el Dr. Gastón Alejandro Saint Martin (ARDMS. RVT. RPVI eligible, MD. CCPM). Medico patagónico; me gradué en la UNBA (Universidad Nacional de Buenos Aires, en 1961) Recién graduado y casado fui a hacer mi entrenamiento en la Universidad de Louisville, (UdeL) Kentucky, USA, la mas antigua Universidad Municipal de La Unión; pobre, pero de excelente nivel académico; con una pequeña escuela de medicina. Louisville está en la margen izquierda del rio Ohio (afluente del Mississippi) Elegí a UdeL por estar entre los rio Ohio y Tennessee, que era la zona mas subdesarrollada de La Unión, (cuna de los "Hillbillies") montañeses pobres, poco ilustrados, casi analfabetos pero gente honrada, noble y muy trabajadora; donde era de esperar encontrar problemas de patología medica y socio económicos similares a los de la población rural patagónica indigente. Los médicos residentes de la Universidad de Louisville atendíamos al Louisville General Hospital y al Children’s Hospital of Louisville. Finalizado mi entrenamiento, y al tener yo visa de emigrante, me pude quedar en USA, donde los abogados jueces y los médicos con residencias de entrenamiento completas, teníamos un brillante futuro económico, estabilidad y brillo social. La tentación para quedarse fue muy grande, pero cumplimos mi plan regresando a casa; Argentina (No a Buenos. Aires.) sino a La Patagonia (Gral. Roca, Rio Negro), donde trabajé intensamente, no solo en medicina asistencial sino en política. Para el inicio, recluté un pequeño grupo de médicos argentinos jóvenes entrenados en USA y Canadá con quienes creamos al Instituto Medico del Comahue, el pequeño hospital austral privado pionero en medicina asistencial moderna. Construimos el edificio por esfuerzo propio, y por administración, con la dirección técnica de mi padre (Ingeniero Prospero Saint Martin). Tuvimos muchos éxitos y fracasos. Nos integramos al Colegio Medico de General Roca, donde fui el primer organizador de la primer biblioteca medica patagónica. De nuestros Colegas Veteranos aprendimos la Filosofía Ético Moral Medica Hipocrática) y a ser médicos humanistas, antes que corporativos." Allí, practicando, aprendimos las normas básicas de cortesía entre colegas y pacientes. No fue fácil la convivencia y el pasaje armonico de lo (clásico) antiguo a lo (bueno) moderno, pero ¡lo logramos ... y muy Bien! En el ano 2000/2002 La Anarquía establecida Argentina desde el 10 de Septiembre de 1930 estalló y ya “no pude tolerar al criminal anárquico mamarracho republicano Argentino" que culminó con el "Robo Legalizado" (Google "The Legalized Theft" by Steve Hanke - CATO Instituto and/or Johns Hopkins economist) Como muchos de los argentinos ordenados, responsables, con importante capital de trabajo sin deudas, con algunos ahorros PERDIMOS TODO! Yo no perdí mis edificios, mi casa, mi Consultorio Radiológico) ni mi costoso instrumental diagnostico pero al quedar fuera de corporaciones medicas-hospitalarias corruptas, y fuera de los canales de facturación y cobro ... me encontré despojado de uno de los derechos humanos mas importantes “EL DERECHO A TRABAJAR” , del que depende mi “DERECHO A LA PROPIEDAD” y derecho a de “VIVIR en LIBERTAD” como me de la gana y sin pedir nada a nadie (¡LIBRE ALBEDRIO!) Por ello decidimos volver (ya estando jubilados) por segunda vez a USA. Hoy tengo otra residencia legal en Chicago (Oak Park, 60301) Mi mentor (en USA y Argentina) ha sido el Dr. Rene Favaloro (pionero del bypass coronario), con quien (cada uno por su lado) hemos compartido los mismos dilemas, para decidir volver, y para adaptarnos a esta ANARQUÍA Argentina (ver www.29deJulio.wordpress.com ) – La ANARQUÍA en la que cayó La Republica Argentina el 10 de Septiembre de 1930, fue causado por errores garrafales del GOBIERNO DE LOS ESTADOS UNIDOS DE NORTEAMÉRICA. (Presidente Herbert Hoover (POTUS 31) ...MAS... errores garrafales en la "ACORDADA UNÁNIME de LA TOTALIDAD DE LOS JUECES DE LA CORTE DE JUSTICIA ARGENTINA" ...MAS... errores garrafales del Gobierno del Reino Unido de Gran Bretaña (UK) ...MAS... el error de un soldadito con grado de General y cáncer de estomago Gral. Félix Uriburo) que no se atrevio a desobedecer al Jefe de su jefe cuando le ordenaron "violar a La Constitucio ... "en nombre de ella??) y asi TODOS ELLOS JUNTOS, en un contubernio internacional, por primera vez en la historia de La Republica Argentina depusieron a un Presidente Constitucional, (Presidente Hipólito Yrigoyen) electo dos veces (en periodos NO consecutivos), por el voto popular, y depuesto con la absurda e ignorante excusa (si no fue mentirosa) de ser "ser viejo e inoperante..."

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