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August 17, 2005
Did I (And My Kind) Cause Argentina's Tailspin?
Another Econ Journal Watch article comes my way, this one implicating U.S. economists in the truly painful travails of the Argentine people around the millennial turn. According to the Kurt Schuler, the article's author:
Economists whose work in other areas I admire failed to do the research necessary for understanding Argentina’s situation accurately. As a result, their analysis was faulty. When Argentina followed the main recommendations of the consensus, the economy’s rate of decline accelerated...
A review of what U.S. economists said about Argentina shows that many failed to define key terms in their arguments; most ignored readily available data that contradicted the consensus view about Argentina’s economy; and nearly all neglected to examine the legal and statistical material, available for free online, necessary for understanding how Argentina’s monetary system worked. The episode is important because it raises the question of whether the public can trust economists who claim expertise on controversial issues of economic policy.
Yikes! If legitimate, this is a stinging indictment indeed. But I have some doubts, at least about part of the Schuler argument. I, and my co-author Owen Humpage, are fingered for an Economic Commentary article we published in 1999 titled "Dollarization and Monetary Sovereignty: The Case of Argentina." Here, according to Schuler is where we went awry:
... among the 100 most active commentators on Argentina, 91 of 94 who mentioned the topic called the convertibility system a currency board. Yet examination reveals important differences between the convertibility system and an orthodox currency board. The system was a central bank that mimicked some currency board features; it is perhaps best termed a currency board-like system, or even a pseudo currency board.
I don't know about the other 91 on the list -- a list that includes Brad DeLong, Nouriel Roubini, and Brad Setser, for example -- but I have to enter a plea of "not guilty." Here is what Owen and I wrote:
Although the new monetary institution created by the Convertibility Law is not a pure currency board, such an unadulterated arrangement is a useful benchmark from which to begin thinking about Argentina’s monetary structure.
To be fair, Schuler provides a footnote to a table the admits we "Occasionally mentioned that the convertibility system was not an orthodox currency board, but on balance seemed to consider the system a currency board." But I still argue that this is not quite true to the plain message of our article. We followed up our description of this "useful benchmark" with a section describing the actual institutional monetary arrangement in Argentina, which we titled "Argentina's Almost Pure Currency Board". Maybe the "almost pure" qualifier is not sufficient for Mr. Schuler's tastes, but the main point of our article was that it was precisely the special non-currency-board-like provisions of the Convertibility Law that provided a response to critics who claimed that a currency board arrangement, or even dollarization, was too rigid for Argentina's own good.
Schuler refers to several other "mistakes" made by others -- opinions on whether the currency was overvalued, whether exports from Argentina were uncompetitive, was dollarization technically feasible. He treats the answers to these questions, the last two especially, as definitive, but it seems to me that there is more room for honest disagreement than the author's views allow.
The advice given by economists may have been good or bad, and the record on that score is well worth exploring. Furthermore, it is hard to argue with Schuler's plea that those who proffer such advice make the effort to truly understand the institutional arrangements (and socio-political realities) with which the targets of their attentions must deal. But my suspicion is that a close and objective reading of the record will reveal a better score on along this dimension than he claims.
UPDATE: Brad Setser pleads not guilty as well, and if I was the jury he'd walk. Be sure to read his thoughts in the comment section below.
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