Argentina, Paul Krugman and the Great Recession

By Michael Robert

February 3, 2014
http://thenextrecession.wordpress.com/2014/02/03/argentina-paul-krugman-and-the-great-recession/

It’s just over ten years from its last major currency and debt crisis and Argentina is looking into the gun barrel of major slump again (see my recent post, http://thenextrecession.wordpress.com/2014/01/25/emerging-market-crisis/).  In that post, I commented that “Argentina is suffering the most because it already defaulted on its debts back in 2001 and has had large deficits on its balance of payments with the rest of the world.  The irony here is that many Keynesians like to use the example of Argentina as a way out of the austerity that the likes of Greece or Portugal are suffering in the Eurozone.  Do what Argentina did in 2001: ‘default on your debts, leave the euro and devalue your currency, then you can get growth’, the argument went. Well, the proverbial chickens have come now to roost on that strategy.”
It seems that I am not the only one that has picked up on the contradictions of the Keynesian solutions for the slumps in Greece and Argentina.  Neoliberal economists have swung into action to criticise Keynesians like Paul Krugman and Matt Iglesias for promoting the example of Argentina as the way out for Greece in its depression back in 2012 (see http://thefaintofheart.wordpress.com/2014/02/02/another-krugman-flip-flop-notice-that-he-never-misses-the-mark/ or http://econlog.econlib.org/archives/2014/02/where_the_stres.html).
Of course, these neoliberal critics argue that what was wrong with Argentina’s policies was not so much going for devaluation, or even defaulting on their foreign currency debts, but more that the government adopted “counterproductive statist policies” like nationalising the energy companies.  My criticism was different.  Back in February 2012, I posted (http://thenextrecession.wordpress.com/2012/02/20/exiting-the-euro/) that for Greece: “devaluation would not work, unless a national capitalist economy can improve competitiveness and raise exports to pay for foreign investment.  Without that, devaluation can only make the foreign debt burden even worse.  Indeed, competitively priced exports will be difficult to achieve if so much capital and raw materials must be imported to make those exports.  And Greece’s import component of exports is high.  Indeed, the experience of five recent devaluations of economies in crisis (including that of Argentina) shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels (http://www.cepr.org/meets/wkcn/1/1621/papers/Rebelo.pdf)  – that’s no picnic.”

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