Sustaining economic growth in Argentina

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Sustaining economic growth in Argentina

• Dani Rodrik
• April 2008

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A roadmap

• The context the transformation of thinking on
  growth strategies
• Argentinas growth strategies from the 1990s to
  today
• Why is todays model more sustainable?
• What can be done to ensure greater
  sustainability?
• Concluding remarks on the confidence-competitivene
  ss conundrum

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From the Washington Consensus
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to diagnosing binding constraints

• Binding constraints to growth differ across
  countries and over time
• clear evidence that growth is unlocked in a
  large variety of ways
• different strokes for different folks CHN was
  constrained by poor supply incentives in
  agriculture BRA is constrained by inadequate
  supply of credit, SLV by inadequate production
  incentives in tradables, ZAF by inadequate
  employment incentives in manufacturing, ZWE by
  poor governance
• Relaxing binding constraints requires
  well-targeted reforms that are cognizant of
  prevailing second-best and political
  complications
• selectivity instead of a laundry list
• pragmatism in lieu of best practice and rules
  of thumb
• The binding constraints change over time
• Need for flexibility and ability to respond to
  changing circumstances
• institutional reform is key, but to sustain
  rather than ignite economic growth, in two areas
• Building resilience to external shocks
• Maintaining productive dynamism

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Argentina in the 1990s

• Relaxing one binding constraint
• Building credibility through the Convertibility
  Law
• monetary straitjacket gt confidence gt drop in
  country risk gt capital inflows gt higher
  investment gt higher growth
• But running into another binding constraint
• Growing problems of competitiveness
• Especially after Brazils 1999 devaluation
• With no flexibility to respond within the rules
  of the game

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From a foreign-financed, consumption-driven model
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to a high-saving, high-investment model
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that outshines Brazils performance
ARG
BRA
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The key behind the transition a competitive
currency
Latin America
East Asia ARG
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Undervaluation of real exchange rate is good for
growth evidence across countries
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Undervaluation of real exchange rate is good for
growth evidence over time within countries
Partial relationship between a measure of
overvaluation of the real exchange rate and
growth rate of per-capita GDP (controlling for
initial income and country and period fixed
effects). Data are for developing countries and
cover a panel of five-year averages from 1980-84
through 2000-04. Based on Rodrik (2007).
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Undervaluation of real exchange rate is good for
growth sustained real depreciations as a
precondition to growth accelerations
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Why is an undervalued currency good?

• The level of the real exchange rate is the main
  relative price that determines the profitability
  of tradables relative to non-tradables
• Hence it determines investment demand in
  tradables
• This is a key determinant of economic
  performance, because
• social returns to non-traditional tradable
  (export) activities are high and typically exceed
  private returns
• Which in turn is due to two sets of reasons
• tradables are more intensive in (poorly-provided)
  institutional prerequisites than traditional
  activities and
• tradables are the repository of growth generating
  externalities in learning and agglomeration
• Which implies that undervaluation is a
  second-best tool for promoting efficient
  structural change in a developing economy

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Thanks to the new exchange-rate regime,
manufacturing employment is growing again
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and productivity is rising faster than in
comparators
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What makes the competitive real exchange rate
possible?
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Back to international evidence

• What leads growth episodes to fizzle out or to
  collapse?
• Running out of investment ideas (weakening
  animal spirits)
• Inability to manage external shocks
• Corrective institutions
• Institutions that help maintain productive
  dynamism
• Institutions of conflict management

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Institutions of productive dynamism

• Competitive exchange rate helps
• So does industrial policy
• The more you have of one, the least you need of
  the other
• If the real exchange rate is left to appreciate,
  there will be a need for a more robust industrial
  policy
• The prerequisites for sustaining competitive
  currency
• Cant maintain undervalued currency for long
  through artificial means
• sterilized intervention and price controls entail
  rising costs
• Sustainability requires high saving relative to
  investment (or equivalently, low national
  expenditures relative to income)
• High private savings help, but Argentinean saving
  propensities are not like Asian ones
• So fiscal surpluses have a large role to play
• especially when commodity prices are so high

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Argentina will have to do even better on domestic
saving
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Institutions of conflict management

• Ability to deal with shocks requires ability to
  apportion its costs
• A well-functioning democracy is the most robust
  institution of conflict management we know
• Evidence from the terms-of-trade shocks of the
  1970s
• Authoritarianism is the enemy of successful
  adjustment, not its ally

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Well-functioning institutions are key to
weathering adverse shocks
Relationship between the growth effects of
adverse external shocks and
(a) rule of law
(b) degree of democracy
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Concluding remarks Argentinas
credibility-competitiveness conundrum

• The Argentine curse
• Credibility at the expense of competitiveness?
• The Convertibility Law
• Competitiveness at the expense of credibility?
• Increasingly costly interventionism
• How to turn the vicious cycle into a virtuous one
• Cannot be heterodox on all fronts
• Need strong fiscal policy to support weak
  currency
• And cooperative relations between government and
  private sector to support confidence