Re: Argentina and free trade

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Barkley,
You need to re-read my post to avoid attributing to me the opposite of
what I said.
I said dollar hegemony distorts the effect of trade, free or not.  Since
we do not have an integrated global economy, but only a disjointedly
connected one, global macro-economic equilibrium can still produce very
undesirable conmsequences to local economies. Argentina is a good
example.  From a global macro perspective, Argentina was applaused for
its currency board by the IMF.  What was considered sound global macro
economic policy turned out to be disasterous domestic macro-economic
policy

AS for Brazil, its economy is very different than that of Argentina. The
Brazilian industrialisation process from the 1950's to the 1970's led to
the expansion of important sectors of the economy such as the automobile
industry, petrochemicals, and steel, as well as to the initiation and
completion of large infrastructure projects. In the decades after World
War II, the annual Gross National Product (GNP) growth rate for Brazil
was among the highest in the world averaging, until 1974, 7.4 percent.
During the 1970's, Brazil, like many other countries in Latin America,
absorbed excessive liquidity from U.S., European, and Japanese banks.
Huge capital inflows were directed to infrastructure investments and
state enterprises were formed in areas that were not attractive for
private investment. The result of this capital infusion was impressive:
Brazil's Gross Domestic Product (GDP) increased at an average rate of
8.5 percent per annum from 1970 to 1980 despite the impact of the 1970's
world oil crisis. Per capita income rose fourfold during the decade,
reaching US$ 2,200 in 1980.

In the early 1980's, however, the significant rise in US interest rates
began to affect international capital markets, ending the favourable
conditions to foreign indebtedness that prevailed until then. A
substantial increase in interest rates in the world economy forced
Brazil, as well as other Latin American countries, to implement strict
economic adjustments that led to negative growth rates. The suspension
of capital inflows reduced Brazil's capacity to invest. The burden of
its debt affected public finances and contributed to an acceleration of
inflation. In the second half of the 1980's, a series of stringent
measures was adopted aimed at monetary stabilization.  These included
ending indexation (a policy of adjusting wages and contracts according
to inflation), and the freezing of all prices. In 1987, the government
suspended interest payments on foreign commercial debt until a debt
rescheduling agreement with creditors could be reached. Although such
measures failed to bring about the desired results, Brazil's overall
economic output by the end of the  1980's continued to grow, providing
enough surpluses in the trade balance to cover servicing of the debt.
On the one hand, the 1980's crisis signalled the exhaustion of
Brazil's "import substitution" model (a policy that nurtured Brazilian
industry by prohibiting the purchase of certain manufactures abroad); on
the other hand, it contributed to the opening up of the country's
economy. In the early l990's Brazil was engaged in a series of
far-reaching economic reforms. They encompassed trade liberalization,
deregulation, privatisation, and the establishment of a legal and
structural framework to promote foreign investment.  Economic reforms
continued through the 1990?s and included such  measures as the
abolition of state monopolies, reduction or elimination of trade
barriers in goods and services as well as of subsidies, in line with
Brazil?s obligations as member of the WTO.

In 1994, after several frustrated attempts to bring down inflation, the
Brazilian government introduced the Real Plan, a successful
stabilisation plan that replaced the currency then in use by the Real.
The Real Plan managed to achieve a sustained reduction in prices, ending
thus three decades of chronic inflation in Brazil. Since that time,
prices have been under control without a price freeze or any other
artificial heterodox economic methods. One of the main consequences of
ending inflation was an improvement in income distribution. The
restoration of the value of the currency and the return to economic
growth brought about an increase in the purchasing power of the lower
layers of the population and a significant reduction  in poverty.

Mercosur - The Common Market of the South - is an economic bloc in
theory, in pratice a customs union established on January 1, 1995. It
comprises four members (Brazil, Argentina, Paraguay and Uruguay) and two
associate members (Bolivia and Chile) representing over 220 million
people. Its combined GDP exceeds $1 trillion and it is growing at an
average of 4% per year, until last year. Mercosur is the third-largest
trading bloc in the world after the EU and NAFTA. From 1990-1996
intra-group trade grew at an annual rate of 22%, to a value of $16 bn,
net foreign direct investment increased 33% per year reaching more than
$40 bn during the period.

The current common external tariff covers 85% of all traded goods. The
normal average external tariff is
11.3%, with 11 different tiers between 0% and 20%. In December 1997 the
maximum external tariff was
temporarily raised to 23% (theoretically until 2000). The goal for
completion of tariff coverage is 2006.

Foreign enterprises were increasing investment in the region in the
infrastructure sector, particularly in areas that will require huge
building projects, such as energy, telecommunications, transportation
and tourism.

The block constitutes 76 percent of South America's GDP;  67 percent of
industrial production and intra-regional trade; 25 percent of total
world trade;  62 percent of South American population; 59 percent of
total area;

Total trade in 1990: US$ 67.3 billion; in 1994: US$ 100.8 billion; in
1997: US$ 141.2 billion.
Brazilian exports to Mercosur, 1990: US$1.3 billion; in 1994: US$8.7
billion; in 1997: US$ 11 billion.
Trade with Argentina: in 1990: US$1.1 billion; in 1994: US$ 8.5 billion;
in 1997: US$ 20.3 billion.
Thus Argentina annual trade with Mercosur is about 15% of its dollar
external debt: $154 billion (2000 est.) and falling.

Argentina problem could not be solved simply by a devaluation.  The debt
structure of years of pegged currency would face mass insolvencies with
a sudden de-valuation. Argentina, to defend the currency peg, was forced
into a series of destructive tax hikes and fiscal policies that plunge
it into deep recession.  With deep recession and an extended deflation,
a devaluation of the peso would not secure a reduction in dollar costs
in the economy.  The choice now facing Argentina is default via free
floating currency or default via dollarization.  Both incur severe
pains, though not identical pains.  A return to free float at least
permit Argentina to make the choice.

Henry C.K. Liu

"J. Barkley Rosser, Jr." wrote:

>      Henry Liu puts forth Argentina as an
> example that somehow shows the problems
> of free trade.  Hardly.  Argentina's problems
> clearly arise from its pegging of the peso to
> the US dollar at an overvalued rate.  This is
> a macroeconomic problem, not a microeconomic
> one due to free trade as such.  If it had devalued
> when its main trading partner, Brazil, did, I doubt
> it would be in the recession it is in now.
> Barkley Rosser