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December 08, 2010

Questions (and some potential answers) on immigration and remittances

Immigration is a topic that raises many questions from both policymakers and the public, and researchers work to offer perspective. Some questions currently being posed are

  • Does immigration into the United States have a positive impact on native-born employment opportunities?
  • If remittance fees (that is, fees immigrants pay to send money home) are reduced, how much more money do migrants send home?
  • How does sponsorship of family members' immigration into the United States change immigration patterns?

Researchers discussed these questions and more at the Federal Reserve Bank of Atlanta's Americas Center research conference on Remittances and Immigration, held Nov. 5–6, 2010.

Unskilled immigrant labor and offshoring
Some highlights from the research presented at the conference include a paper by University of California, Davis professor Giovanni Peri that was recently profiled in the New York Times. Peri argues that unskilled immigrant labor helps prevent U.S. firms from relocating offshore.

The paper cites evidence indicating that less-educated immigrants are employed in jobs that require more manual and routine-intensive tasks and on average do not compete for jobs in which the bulk of native workers are employed. Those jobs tend to be more cognitive and nonroutine-intensive type of work. In other words, immigrants and low-skilled native workers are not substitutes but complements. In fact, unskilled immigrants compete more with offshore workers. The paper concludes that immigration generates cost-savings for U.S. firms and thus a corresponding increase in productivity, so immigration's aggregate effect on the level of low-skilled native employment in the United States is positive.

This finding is in contrast to research conducted by George Borjas of Harvard University, who also participated in the conference. His work suggests that rather than being complements, immigrants with similar skill levels tend to be substitutes for native workers.

Remittance fees
In 2008, immigrants sent $336 billion to their relatives in developing countries, and in many countries remittances are often greater than private capital flows and official development aid combined. Remittance flows also generate billions of dollars in fees.

Dean Yang, from the University of Michigan, quantifies the impact of money transfer fees on remittances flows. Using a unique field experiment among Salvadoran migrants in the Washington, D.C., area, migrants were randomly assigned discounts on remittance transactions fees. Surprisingly, minor reductions in remittance fees led to large increases in total transfers. For instance, a $1 reduction in transaction costs generated $25 more remitted dollars per person per month. This finding suggests that a reduction in transaction costs can lead to very sizable gains in recipient countries.

Sponsorship of family members
Although countries such as Canada and Australia prioritize the entry of young, skilled foreign workers, the U.S. immigration system strongly emphasizes family reunification, which is a method where naturalized immigrants can sponsor relatives (spouse, children, parents, and siblings) in their immigration to the United States. Sponsoring new immigrants means that migrants not only are a major source of remittances, but they can fundamentally shape the flow of immigration by assisting migration of their relatives.

Until now, researchers had limited data on sponsors' behavior. Using a new immigration survey, Yale University professor Mark Rosenzweig presented research that for the first time explores the role of sponsorship. He shared preliminary results showing that while immigrant children who are less educated tend to receive remittances from their relatives who have immigrated to the United States, children with more schooling are able to take better advantage of the U.S. job market and are the first ones to be sponsored.

Other papers included research aimed at quantifying the effect of female migration on children left behind, the impact of immigrants on the educational attainment on natives, the productivity gains from skilled migration into the United States, and the role of seasonal migration in mitigating famine in Bangladesh. All of the conference papers are available.

By Stephen Kay, senior economist and coordinator of the Atlanta Fed's Americas Center, and Federico Mandelman, research economist and assistant policy adviser, both of the Atlanta Fed's research department

December 8, 2010 in Americas, Employment, Immigration, Labor Markets, Latin America/South America | Permalink


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The remittance fee of those immigrants must be clearly stated to them so that there will be no more problems. This is a hot issue since I am one those immigrants in the world who question the remittance fee,

Posted by: Donald Martin | October 12, 2012 at 03:51 PM

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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.

August 17, 2005 in Latin America/South America, This, That, and the Other | Permalink


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I'll second you final comment. I don't think i actually wrote anything about argentina until after convertibility collapsed. i worked on Argentina for the government at the time. And since Argentina called its arrangement a currency board, it was rather awkward to call it something else. Saying "argentina's not quite pure currency board" or using "convertibility" and putting a footnote saying it was not a pure currency board is rather awkward.

But we certainly were aware that it was not a pure currency board. Hell, Cavallo spent most of 2001 trying to make it less of a currency board, and to introduce greater flexibility into the regime in various ways. The making it a basket peg to the euro/ $ for example. the variable tariffs. some changes in domestic reserve requirements.

Moreover, it was totally clear that in 2001, a pure currency board would have implied a much more rapid fall in the money base and more deflation to generate the real depreciation needed to bring argentina's current account deficit (note -- current account deficit, not trade deficit) down to a level that was consistent with available external financing. and if argentines wanted to shift funds abroad, they needed to run a current account surplus.

Argentina wasn't willing to do this. It meant shrinking nominal government spending to match the fall in nominal tax revenues. That did not happen -- rather the government, particularly local governments, started issuing local quaisi-currencies.

Posted by: brad | August 17, 2005 at 05:20 PM

Three other comments:

1: Hanke and Schuler argue that the failure of convertibility in no way casts doubt on the desirability of currency boards, 'cause convertibility was never a true currency board. But remember, that in the fact of an external financial shock, a true currency board would imply bigger falls in base money and faster deflation. i.e. the internal adjustment would have been more brutal. I also don't remember Hanke loudly criticizing Argentina's not quite a currency board back when Argentina was doing well ...

2: To me, the trade argument is a bit of a red herring. Argentina had large external debts relative to its exports, and paid a high and rising interest rate on its external debt. So the net interest payments part of the current account was large and negative. Those interest payments could have been financed if Argentina was running a trade surplus. But it wasn't. Even after the 99-00 recession, Argentina's trade was roughly in balance. and in 2001, Argentina ran a current account deficit despite experiencing a $20 billion (private) capital outflow -- a deficit that was financed by running down reserves (gross reserves fell $10 b), borrowing from the imf and running down borrowed reserves(net reserves fell by $20b) and by running down various external assets (banks foreign assets fell by $10 b).

3: Moody's reports nominal exports grew by 1% in 98, fell 10.5% in 99, grew 11% in 00, and then were flat in 01. I think the 11% growth in 00 had something to do with the global rebound in commodity prices. 2000 was a good year for the world economy, and particularly good year for commodity exporters. Argentina exports oil and gas, along with wheat and soybeans. Over a four year period though, exports were basically flat. Schuler I think used a much longer time series to argue that export growth was not hurt by the currency board. For me the real question was whether exports could be expected to grow fast enough to get rid of the current account deficit after the series of shocks in 99 (devaluation in real, $ appreciation). I don't the data provided much support for a sustained export boom in the face of the stronger real peso after 99.

Posted by: brad | August 17, 2005 at 05:35 PM

"But remember, that in the fact of an external financial shock, a true currency board would imply bigger falls in base money and faster deflation. i.e. the internal adjustment would have been more brutal."

Yep, I'd say that this was the point. Why, hell, Italy has now got itself a spanking bells and whistles version 3.0 currency board (or should this be deutschmark-isation), and what's the betting this one is going to work.

Isn't the substantive point that plenty of people read Argentina completely wrong with disastrous results for the Argentinians, or what's the difference between Argentina and Turkey? Meanwhile I have the horrible feeling too many people are making the same mistake with the euro. Mind you, no-one will be able to accuse Marty Feldstein of getting it wrong :).

Posted by: Edward Hugh | August 18, 2005 at 08:30 AM

"Did I (And My Kind) Cause Argentina's Tailspin?"

This is a bit like the question "did the UK participation in the Iraq war cause the London bombings"?

Clearly it didn't, the terrorists caused it. Iraq involvement may well have been an aggravating factor.

Likewise Argentina's tailspin would be down to the institutional system and the political class in Argentina, but some of the advice they received most probably aggravated things. Especially the decision at the begining of 2001 to extend the credit and try to defend the peg, that's the one I really don't understand.

Posted by: Edward Hugh | August 18, 2005 at 08:53 AM

Oh I am tiresome, here I am again. The thing is it worries me that the lessons of Argentina have not been assimilated, and I keep shoving the boat in on the euro as I think if people were clearer about what went wrong in Argentina they might be able to understand what happens next in Europe a bit better. Reading your article Dave, you yourself were aware of the parrallel at the time:

"The costs of lost policy discretion are substantial. If this were not so, the United States and other large industrialized countries might forgo fiat money and return to a system based on gold or some other commodity. But the costs of low confidence and uncertainty about the exchange value of a currency can also be large. If this were not so, each of the European Monetary Union states would not have agreed to forgo issuing its own currency under its own independent monetary policy."

As you rightly say the costs of low confidence and currency uncertainty can be large. The issue is whether abandoning monetary policy autonomy resolves these problems by allowing them to be attacked at root, or simple shelves them for a time.

The latest relevant research on structural reorms in the eurozone by Romain Duval and Jørgen Elmeskov suggests that EMU may be an impediment rather than a stimulus to the needed structural reforms. That's the theory, and the reality seems to back it up if you look at Italy, Greece and Portugal: balance of payments issues, lots of debts, slow reforms, low (or in Italy's case negative) productivity improvements, lethargic growth.

Maybe you think the jury is still out, as far as I'm concerned the guilty verdict is in and its just a question of waiting for the sentence to be passed. Meantime I'm afraid until we make a collective adjustment on this one the ghosts of times past (in this case Argentinian ones) will still come back to haunt us.

Posted by: Edward Hugh | August 18, 2005 at 09:17 AM

Sorry, I'll stop trying to do some serious work and get back to blogging soon, honest I will. That way I won't be clogging you up with inane comments. But continuing my one man campaign against the *dismal* science, and with all those other Melanie Safka fans out there in mind:

I've Got a Brand New Pair of Roller Skates (You've Got a Brand New Problem)

For roller skates read yatch, rolex, mobile phone, washing machine, TV and anything else Berlusconi may have added to the list while I've had my back turned.

Posted by: Edward Hugh | August 18, 2005 at 09:34 AM

Schuler.... I think we know what to make of somebody who argues that he is right and Milton Friedman and Anna J. Schwartz are wrong on issues of monetary economics.

Posted by: Brad DeLong | August 18, 2005 at 12:49 PM

David, here are my responses to the thoughtful points you and Brad Setser raised. They express my personal views, which are not necessarily those of the U.S. Treasury Department.

1. I did not claim that the economists whose writings I surveyed caused the severe problems Argentina experienced in 2002. Rather, they provided intellectual cover for decisions by the Argentine government. Those decisions made 2002 a much worse year than it need have been.

2. A “pure” currency board is presumably one that measured along certain dimensions is 100%. Your article did not define “almost pure” numerically. I consider a generous allowance to be within 20 percentage points of “pure.” Table 3 of my article shows several ratios calculated from IMF statistics of balance sheet numbers for Argentina’s central bank. *No* median of the monthly statistics fell within the “almost pure” range. The two statistics that I consider most important are (a) the correlation between the change in net foreign assets and the net monetary base and (b) reserve pass-though, that is, how much of every dollar of change in foreign reserves passes through to a change in the monetary base. For Argentina during the convertibility system, (a) was 47% and (b) was 31%.

3. My criticism is not only that economists got important points wrong about Argentina. Even where I think they were right, they often failed to provide evidence. For example, most economists who expressed an opinion thought, as I did, that dollarization was feasible towards the end of the convertibility system. Few showed signs that they had examined the central bank’s balance sheet, which had a direct bearing on the subject.

4. Turning now to Brad Setser’s points, I reviewed postmortem commentary on Argentina’s depression, such as his, along with commentary written at the time of the crisis.

5. Although Argentine government officials sometimes referred to the convertibility system as a currency board, conscientious economists should compare words with deeds. Perhaps even government officials and agencies should do so in their public statements; from what I could find, the U.S. Treasury at the time did not. After the fact, Domingo Cavallo, who was minister of economy when the system began, wrote, “El texto de la Ley de Convertibilidad es muy claro al establecer la multiplicidad de monedas y nunca creó un “Currency Board” convencional, como lamentablemente muchos economistas interpretaron.” (The text of the Convertibility Law is quite clear in establishing [the right to use] multiple currencies; it never created a conventional currency board, as many economists unfortunately interpret it to have done.)

6. Yes, other things equal, a currency board would have produced a larger contraction of the monetary base in 2001 than the convertibility system did. But would other things have been equal under a currency board or the still more “cast-iron” system I proposed starting in early 1999 — official dollarization? (I proposed official dollarization after it became clear that Argentina would not change the convertibility system into a currency board.) No direct evidence is available, but the experience of Ecuador provides some indirect evidence. Ecuador dollarized in January 2000 in the midst of an economic meltdown. Bank deposits soon began rising and the monetary base apparently grew. (“Apparently” because no accurate breakdown of dollars in circulation in Ecuador is available.) The Argentine and U.S. governments estimated that “mattress money” held in dollars exceeded the monetary base in pesos. Under a monetary arrangement that generated more confidence than the convertibility system did, mattress money could have flowed into the banking system, as it seems to have done in Ecuador.

7. Steve Hanke wrote as early as October 1991 that the convertibility system should be changed into a currency board, and he and I were pretty consistent in stressing throughout the life of the system that we considered it an improvement over what it had replaced but thought its deviations from currency board orthodoxy invited problems. Footnote 8 of the article documents this point and Appendix 2 supports it with half a dozen or more sample quotations.

8. In my opinion, the problem by mid 2001 was not that the peso was overvalued, but that the government was too heavily indebted. Hence I favored default, if necessary, in preference to devaluation. Devaluation unnecessarily punished the private sector for the mistakes of the government.

9. Table 4 of my article shows that after 1999, a very bad year because of Brazil’s devaluation, Argentina resumed a pattern of growing export volume. Argentina’s share of the dollar value of world exports also grew, indicating that Argentina did well relative to the world average. The value of Argentina’s exports would have been higher in 2001 had bank deposits not been frozen for the month of December, causing economic activity to grind to a halt. For the first 11 months of the year they were 2.5% ahead of 2000, but in December 2001 they were almost 16% below December 2000. Export growth for the full year 2001 was therefore 0.8%. Even that was respectable given that world trade actually shrank in 2001. Since the convertibility system ended, Argentina’s share of world exports has fallen every year despite big increases in the prices of its major commodity exports.

10. Anybody who has read this far other than David, Brad and me needs to get a life.

Posted by: Kurt Schuler | August 18, 2005 at 12:50 PM


1) Ecuador dollarized after a massive depreciation of the sucre. That makes a difference. The comparable policy proposal for Argentina was "Devalue and dollarize." Ecuador also benefited from a major rebound in oil in 2000.

2) I do not quite see how a default would be consistent with dollars under the mattress (or dollars in Miami) flowing into the banking system. Remember, one of the main assets of the banking system was GOA dollar bonds. For more details, see the 2004 balance sheet paper from the IMF (rosenberg, keller, nystedt, setser and a cast of thousands). Moreover, if the economy would have continued to deflate, and with a shrinking nominal GDP and constant dollar debts, i suspect lots of private debtors would have defaulted as well. The quality of the assets in the argentine banking system was deteriorating rapidly. (I'll leave the banks loans to utilities that could not only price in dollars but index their price increases to us inflation in a deflating argentine economy aside, but suffice to say that i don't think continuation of that bargain was politically feasible)

3) Argentina had sufficient dollar reserves to replace pesos in circulation with dollars. But presumably, all peso denominated bank deposits would also have been dollarized -- and the banking system's dollar liquidity would have been constrained. Realistically, after the default, I suspect that the dollar deposits in at least some banks would have started to run, and barring a massive infusion of dollar liqidity from the IMF, the dollar deposits would have had to be frozen and restructured.

4) Argentina was not willing to live with the constraints of convertibility. It started issuing quaisi-currencies rather than cut salaries to match falling peso revenues. Barring a miraculous recovery/ the end of capital outflows -- even with a default -- the same deflationary forces would have remained. to fund capital outflows, Argentine needed to squeeze its economy to generate a current account surplus. A restructuring that cut external interest payments would reduce net interest payments in th current acocunt, but would (in my judgement) increase capital outflows. So the squeeze on the domestic economy would have remained. I am not convinced that a dollarized Argentina would not have started to issue quaisi-currencies rather than accept the constraints of dollarization.

Posted by: brad | August 18, 2005 at 03:27 PM

David, BRAVO!!!!!!!!!! This is FANTASTIC, thanks. It's reminded me how tough self-examination & change are for any profession. I don't have a clue how one would transpose the argument to U.S. relevance, but what you've done is what's called for. GREAT JOB, thanks again. (I WAS right.)

Posted by: bailey | August 19, 2005 at 06:36 AM

Wow, interesting comments. Looks like I'm going to have to stop playing Peter Pan, and grow up, even if for just one day. Firstly a slightly off-topic point to Brad (Delong) - although it is partly relevant since it reflects how many of these things look from a UK (rather than a US) perspective (the UK is *not* remember, in the euro).

"I think we know what to make of somebody who argues that he is right and Milton Friedman and Anna J. Schwartz are wrong on issues of monetary economics"

Brad, this is not a good argument, and I think you know it isn't. In fact I myself (ahem, ahem) have criticised Friedman and Schwartz on said issues, and you said this on your blog:

"His point is a definite "touche": Milton Friedman's and Anna Schwartz's belief that Fed policy greatly expanding the monetary base would have stopped the Great Depression in its tracks in 1930 and 1931 hinges on a belief that the Fed's throwing more high-powered money at the economy would not have induced countervailing contractions in the money multiplier or in the velocity of money itself. In Hugh's view, they don't even ask the right question because their framework, naively, "...take[s] virtually no account of the asset side of the bank's balance sheets. bla bla bla"

Actually this is not an original argument on my part, since I learnt a lot about all this from the late Christopher Dow, and I think intellectually the line runs through Nicholas Kaldor, but still: this would be a UK view with a proud history :).

And it is not without relevance to a lot of these debates if we examine the problems the ECB is currently having with Germany, and the so-called 'breakdown' in the monetary transmission mechanism. The lesson: the lending environment is important, listen to what the bankers are saying.

Posted by: Edward Hugh | August 22, 2005 at 05:10 AM

Now on the substantive issue, there seem to be *three* (at least) principal points of view.

Firstly, that the currency board wasn't sufficiently a currency board, secondly that the peg wasn't sufficient in any event and that full dollarisation was needed (this one reminds me of the Krugman point: Iraq was for the boys, Teheran for the real men), and thirdly the view that taking flexibility out of a currency via a hard peg (or even worse removing the currency altogether) is really to remove an important safety valve from the system control apparatus and is to ask for even bigger trouble when the problems actually come.

Now, I think Brad (Setser) is almost certainly very to the point with this:

"Ecuador dollarized after a massive depreciation of the sucre."

Indeed David begins his article as follows:

"By almost any objective measure, Argentina surely stands as one of the outstanding economic success stories of the past decade."

So really we are dealing with apples and pears. These two stories have very little to do with one another, except for the fact that some people have advocated the abandonment of independent monetary policy for both of them.

But Ecuador, if you will pardon the expression, is 'train wreck' stuff,which Argentina wasn't till the peg really started to bite, and isn't really now as it begins to move out of the 'impact zone'.

Dollarisation in a case like Ecuador might be justified 'in extremis' as an emergency measure, although since it gives you a kind of 'corner solution' it isn't quite clear to me how you move back later to a sovereign currency.

Obviously one other 'detail' which was clearly important was - as Brad Setser suggests - the devaluation of the real. Some of the peg advocates really weren't looking carefully enough at the issue of just who trades with who.

One way of looking at this might be the UN clasification system of developed economies, developing economies, and LDCs.

Argentina is a developing economy, and might by now have been doing quite nicely thank you very much, like others in its class
(Brazil,Turkey) if it hadn't been receiving some very unsound advice in the late 90's.

Institutional and confidence problems cannot be solved by a peg, anymore than China's oil problems can be solved by an artificially tied petroleum price: queues inevitably form, and refined gasoline products leak through the frontier. The same with fixing the price if money in Argentina.

In Ecuador it is people who are vomited out, in order to send the much needed dollars back as remittences (I should know,my lunch is cooked several times a week by a nice lady who has come all the way to Spain to look after my Alzheimer riddled mother in law, and yes, she is in the process of regularising her situation).

So I don't really agree with the conclusion in Dave's article that there may be free lunches. What there are here are trade-offs, and hard decisions.

On a more optimistic note, Brad Setser has already pointed out on his blog that people are once more lending Argentina money. I think as things normalise, which will still need time, the prospects are reasonably good. There are a lot of creative and talented people in Argentina, it probably has the most educated middle class in Latin America. At the height of the internet boom it had in fact more domain names per capita than any country on the planet, and I don't see why in terms of business and IT services Argentina shouldn't be to the Spanish speaking world what India is becoming to the English speaking one.

Ecuador still has some way to go before its time will come. Those of you who know me well enough know what I am going to say next. Ecuador, median age 23.27, Argentina, median age 29.42, Brazil median age 27.81 (so Argentina should be doing marginally better) and Turkey median age 27.7.

Posted by: Edward Hugh | August 22, 2005 at 06:55 AM

beating a dead horse and posting on a dead thread, but for more on Argentina's export performance in the late 90s/ 00, 01, look at Hausmann and Velasco's charts in hard money's soft underbelly. All the increase in exports in 00 was due to a commodity price rebound -- virtually no growth in volume terms. basically volume growth stalled out after 98, given the real's devaluation in early 99. looking at a longer time frame a la schuler is a bit misleading. truman notes that argentina's export performance in the late 90s/ early 00s was the worst of any major emerging economy. and remember, 99 and 00 were great years for world trade -- us .com bubble and all. truman's comments are summarized in the comments section of the brookings trade papers volume that includes soft money's hard underbelly.

Posted by: brad | August 24, 2005 at 04:59 PM

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June 10, 2005

Capital Controls In Argentina -- On Inflows!

Most of us probably associate restrictions on financial transactions with governments trying to keep funds from fleeing their countries (often because their currency is under attack).  The opposite is the case in Argentina these days.  From the Financial Times:

Argentina on Thursday announced stricter controls on capital inflows in an attempt to discourage “speculative” funds and protect the peso from strengthening further against the dollar.

The measure, which is expected to come into force on Friday, obliges investors bringing capital into the country to lock away 30 per cent of the total amount for 12 months. The decision, to be enforced by decree, adds to existing rules that force inflows to remain in the country for at least one year.

However, Roberto Lavagna, the economy minister, said on Thursday that there would be exemptions for trade finance and direct foreign investment in productive sectors as well as investment in primary issues of bonds and shares.

He said the main objective was to prevent the peso from strengthening further, and added that maintaining a competitive exchange rate had been one of the keys to Argentina's economic recovery since it devalued the peso in January 2002...

Argentina's economic recovery since its financial collapse in December 2001 has made the task of keeping a competitive peso much harder. For example, private-sector capital flows switched from net outflows to net inflows towards the end of last year, which has placed further upward pressure on the local currency...

Vladimir Werning, an economist at JP Morgan in New York, said: “This is not something that investors will look at from the perspective of state intervention versus free market economics. Instead, they will see it as a signal of the government's emphasis on keeping a competitive exchange rate policy.”

If you are interested in the path to reform in Argentina (and elsewhere) Nouriel Roubini and Brad Setser have a book just for you.

UPDATE: You can find Brad's latest on Argentina here.

June 10, 2005 in Latin America/South America | Permalink


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thanks for the plug -- tho the book is really about getting from say end 1999 to the restructuring rather than managing times of plenty. its focus is crisis resolution, not "crisis prevention" --

I am sympathetic to inflow controls, tho in this case, i think argentina should allow a bit more appreciation -- inflation is a bit high.

Posted by: brad setser | June 10, 2005 at 06:35 PM

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May 10, 2005

Meanwhile, In Mexico...

From the Wall Street Journal (page A14 in the print edition):

Signs of higher inflation in Brazil and Mexico dimmed hopes of a break in interest-rate increases.

In Mexico, inflation rose 0.36% in April, and 4.6% for the 12 months through April. That was higher than the 4.39% recorded for the year through March. The latest increase, largely coming from a jump in vegetable prices, has put inflation even further beyond the bank's target range of 2% to 4% a year.

Core inflation, which excludes fresh fruit and vegetables, energy and education, rose only 0.21% in April, however, bringing annual core inflation down to 3.46% from 3.61% at the end of March. It was the sixth straight month of declines in annual core inflation.

Some economists think that given the decline in core inflation, the Bank of Mexico will hold off further monetary tightening this month. Others, however, are forecasting further tightening from Mexico's central bank Friday.

"The figure is high," said Eduardo Avila, an economist with consulting firm Prognosis. "Given that mid-term inflation projections are still far from the [central bank's] target, I think monetary policy will be tightened on Friday."

A year of monetary tightening by the central bank, coupled with rising U.S. rates, has led Mexican overnight rates to practically double in the past year to about 9.8%.

Further south:

In Brazil, meanwhile, inflation expectations continued to nudge higher yesterday. According to a central-bank survey, markets now expect Brazil's benchmark IPCA inflation index to rise 6.3% in 2005 and 5.85% over the rolling 12-month period ahead. The central bank's target for 2005 inflation is 5.1% with a tolerance band up to 7%.

The central bank has raised its benchmark Selic rate to 19.5% in a bid to contain inflation. Analysts now believe the bank may have to maintain higher interest rates for longer than expected.


The news wasn't all bad, however.

May 10, 2005 in Latin America/South America | Permalink


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Less than 1% and maybe up to 4%. I know of some US business advisors who claim to be experts on Mexico who think its inflation rate is still double digits.

Posted by: pgl | May 10, 2005 at 03:50 PM

pgl --

Interesting. Is this impressionistic evidence, or is there some clear bias in the reported statistics?

Posted by: Dave Altig | May 11, 2005 at 09:52 AM

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April 04, 2005

Lessons From The Good News From Brazil

Last week I noted the news that things are looking up in BrazilBrad Setser suggests that this episode holds some lessons for the how the International Monetary Fund ought to go about its business.

So, if all goes to plan, Brazil will repay the IMF (in full) after six years.  That is a longer than the three years that the IMF demands (in theory) for large-scale loans made through its crisis response facility (that facility is called the SRF). Brazil would not have been able to repay the IMF on the 3 to 5 year time frame associated with the IMF's normal "lending facility " for smaller-scale lending (a "Stand-by arrangement or SBA) either...

So why couldn't Brazil repay the IMF more quickly, on something like the terms of the IMF's crisis response facility? Simple: Brazil has lots of debt, mostly domestic, and relatively low reserves for an economy of its size -- it needed the IMF's money to allow it time to grow out of an (almost) unsustainable debt burden, and to allow it time to rebuild its reserves. It was never realistic to think that Brazil only needed a very short-term loan...

This is one of the issues Nouriel and I tried to highlight in our book on responding to financial crises in emerging economies: if the IMF to going to be used to help out (or bail out, depending on your point of view) emerging economies with far more debt than Mexico or Korea, the IMF -- realistically -- is not going to get repaid all that quickly, even when everything works well.

You can find out about the Roubini and Setser book via this link.

April 4, 2005 in Latin America/South America | Permalink


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March 29, 2005

Some Good News From Brazil

From the Wall Street Journal Online (subscription may be required):

In another milestone in Brazil's comeback from the brink of financial collapse, the government said it won't renew its standby-credit accord with the International Monetary Fund...

Finance Minister Antonio Palocci announced yesterday that Brazil's strong recent economic performance made renewing the pact unnecessary. In 2004, Brazil posted its fastest economic growth in a decade, a record trade surplus, a strong budget surplus and the first drop in its level of debt-to-gross domestic product since 2000.

Not only that,

Brazilian Treasury Secretary Joaquim Levy said the nation owes the IMF $23.2 billion, and said all money owed is "currently available in government reserves." He added that Brazil is due to repay the money in full by 2007.

March 29, 2005 in Latin America/South America | Permalink


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More Hurrahs For Free Trade

Cafe Hayek brings to our attention a fascinating-sounding paper by Erwin Bulte, Richard Horan, and Jason Shogren.  The results are summarized at Newswise:

Creating a new kind of caveman economics in their published paper, they argue early modern humans were first to exploit the competitive edge gained from specialization and free trade. With more reliance on free trade, humans increased their activities in culture and technology, while simultaneously out-competing Neanderthals on their joint hunting grounds, the economists say.

Archaeological evidence exists to suggest traveling bands of early humans interacted with each other and that inter-group trading emerged, says Shogren. Early humans, the Aurignations and the Gravettians, imported many raw materials over long ranges and their innovations were widely dispersed. Such exchanges of goods and ideas helped early humans to develop “supergroup social mechanisms.” The long-range interchange among different groups kept both cultures going and generated new cultural explosions, Shogren says.

Pretty cool.  Moving to a more modern example, the Dallas Fed reviews recent economic successes in Mexico, putting free trade front and center:

The success of Mexican macroeconomic policy can be seen in the course of recent history.  Together with the North American Free Trade Agreement and the opening of Mexican markets to trade, it contributed to the rapid recuperation of the Mexican economy after  1994–95. And it was essential in limiting the 2001 Mexican downturn to a mild recession, a landmark in a country where every downturn of the prior 30 years had been accompanied by a financial crisis.

March 29, 2005 in Latin America/South America, This, That, and the Other | Permalink


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" Archaeological evidence"? This isn't research but pure speculation, spouted in the interest of a free-trade ideology that drapes itself in a quasi-darwinian scientism. In other words, total cr*p.

Posted by: camille roy | March 30, 2005 at 01:26 AM

Geez Camille, that seems a little harsh. I admit I have not read the article yet -- I intend to -- but archaeological evidence is where we get most of our evidence on the social behaviors of ancient peoples. It's speculative, for sure, but it doesn't seem much more foolish than, say, forecasting the course of current account adjustments.

On a related note, I just started reading Jared Diamond's new book "Collapse: How Societies Choose to Fail or Succeed." Two of his case studies are the Polynesian Island societies on Pitcairn and Henderson Islands. He claims -- using archaelogical evidence! -- that a prime culprit in the total demise of those populations was a loss of their major trading partner, Mangareva, to its own problems. Diamond definitely does not put sole weight on trade -- it is but one of the factors he emphasizes, with environmental irresponsibility being something like first among equals in a list of five key factors. (The other three are exogenous climatalogical catastrophy, hostile neighbors, and the social institutions in place when the stress hits.) But trade is definitely an important piece in some cases. Is that really that hard to swallow?

Posted by: Dave Altig | March 30, 2005 at 08:27 AM

As an non-economist outsider, I see much interesting and significant data collection and interpretation in the field. But I am frequently annoyed by the way economists don't seem to understand that their models are not science and can never be science. What economics needs is not an injection of darwin-styled scientism, which mystically absorbs the characteristics of natural selection as a justification for free markets, but rather a serious reading and application of the principles of social science and history. One of the best historians I know (my father, a world-renowned anthropologist) told he regarded the historical analysis in Jared Diamond as second-rate, because he doesn't understand history and uses biologically based models in ways that are simply inappropriate.

Posted by: camille roy | March 30, 2005 at 10:42 PM

Hmmm. That's worth a discussion. Is there a written critique somewhere that cogently lays out Diamond's mistakes? Or any misdirection in the Bulte et al article?

PS -- As an economist insider, I really do support the application of the principles of social science and history. And I welcome the opportunity to be educated.

Posted by: Dave Altig | March 31, 2005 at 01:58 AM

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December 28, 2004

Why Did Argentina's Economy Improve?

Continuing with the theme of great blogging on the Sunday New York Times, Brad Setser reacts to an article noting "Argentina's Economic Rally Defies Forecasts."  Setser sees a pretty conventional route out of the meltdown in 2001-2002.

The number one reason for Argentina's financial and economic stabilization is its belated conversion to fiscal discipline -- or what in the old days might have been called a conservative fiscal policy. Why no hyper-inflation after Argentina's default? The government matched revenues and expenditures, avoiding the need to print money. Hardly radical.

... the government has not ran an expansionary fiscal policy after its default. The initial impetus for Argentina's recovery came from the devaluation, which led to a surge in export revenues (measured in local currency terms), not government policies to spur consumption. Government spending initially had to fall to match falling revenue.

The strongest indictment of the IMF is that an Argentine government that explicitly defines its policy in opposition to the IMF has adopted a far more conservative fiscal stance than any Argentina government that embraced the IMF in the 1990s.

Brad goes on to further critique the IMF strategy and generally cast some doubt on the wisdom of fixed exchange rate policies (by dollarization, or otherwise).  Read this one too.

December 28, 2004 in Latin America/South America | Permalink


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November 26, 2004

Argentina, Chile, And Other Case Studies In Social Security Reform

Tyler Cowen at Marginal Revolution offers a cautionary tale on Social  Security reform from Argentina.

In contrast, Chile, as Cowen notes, is the poster child for succesful Social Security reform.  Here's a description of how it worked, from one of the architects

This link, also provided in the Cowen post is another good source of information about the experience of other countries with  public pension reform (as of 1999).

November 26, 2004 in Latin America/South America, Social Security | Permalink


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