A Interview on Argentina Economic Policies Jayati Ghosh

As Argentina gears up for a presidential run-off vote this Sunday, the economy and economic policy has been center stage. To shed light on some of these topical economic policy issues, the Communication and Engagements team at IDEAs had a chat with an eminent network member, Prof. Jayati Ghosh. Here’s a transcript of that conversation. 

Issue 1: Dollarization: The annual inflation rate in Argentina has risen to nearly 140 % and during the first semester the poverty rate reached 40,1%. In that scenario, an attractive economic proposal for many people is dollarization. You mentioned the risks of dollarization in a recent letter you signed with more than 100 eminent fellow economists. Can you elaborate a little bit more on the risks of this proposal for the country’s economy? 

JG: Dollarization is an extreme measure that some countries have resorted to in the face of galloping inflation, to force stability on to the economy. It seems like an attractive option because it completely removes any domestic policy control over the money supply and therefore is supposed to eliminate or at least reduce inflation. The problem with this understanding is that it does not adequately consider the real causes of inflation and instability, especially in an economy like that of Argentina. Inflation in sophisticated modern economies does not result from excessive money supply, commonly seen as “too much money chasing too few goods”, because the total money supply or liquidity in the economic system is the result (not the cause) of the behavior of economic agents. Money supply is passive: it can go up or down not only because of base money supply and changes in bank credit conditions, but also because of how individuals and companies respond to any changes in economic conditions. Instead, the more realistic theories of inflation recognise that it reflects the difference between total spending and total incomes earned, which can result from more demand or supply bottlenecks. Inflation then results from struggles over total income shares among competing groups (especially after an initial price shock in any one sector, such as say agriculture or imported goods), along with inflationary expectations, which make agents try to raise their own prices because they anticipate other price increases. 

Dollarization can dampen inflationary expectations, but it will not address these more basic problems. Most of all, it does not eliminate the distributional conflicts at the heart of this issue. Rather, by tying down both monetary policy and fiscal policy, it results in a deflationary policy that controls inflation at the expense of ordinary working people, who experience significant real income declines. The loss of policy autonomy also then can mean that states cannot intervene to protect the real incomes and social and economic rights of citizens.  

This is the general process, but in Argentina’s specific case, dollarization in the current situation will involve a very low implicit peso rate, which means the process will begin with a massive cut in real incomes of both people and the government. This in itself will be both destabilizing and unjust, and then the medium-term process will also be unequal. In addition—as Argentina’s own experience with the dollar currency peg in the 1990s showed—the country will then become dependent on global changes in the US dollar value, over which it will have no control, and these could add to the domestic problems as well as concerns about external competitiveness. 

Dealing with inflation in Argentina instead requires addressing the core problems. This may involve restricting the power of some sectors/market players; specific price caps; increasing production in specific sectors, and so on. But it is important to maintain social spending that ensures citizens’ rights and material conditions. More generally, Argentina definitely requires a change in economic strategy, focused on economic policies that are more sustainable and inclusive. The government has to focus on strategies to ensure more broad-based economic activity, including not just large capital but also small and mid-sized entrepreneurs, driven by public investment in areas where private markets will not come forward and enabling all sectors to move up the value chain while sharing rewards with workers and ensuring adequate provision of basic needs and care services.  

Issue 2: Impact on the daily life of people in Argentina: There is a strong feeling among some quarters that the Argentine economic and social situation couldn’t get any worse. In your assessment, how much worse could life be for ordinary Argentinian people if some proposals like dollarization and dramatic reduction in both taxes and public spending are implemented? 

JG: It is easy to understand and empathize with the plight of people in Argentina, who are facing serious problems of high inflation and instability. Unfortunately, it is very possible for things to get worse for ordinary people, even if inflation is contained- if this is done by attacking the real incomes of workers. The combination of reductions in both public revenues and public spending will cause reduced public services, lower employment, lower real wages and higher inequality- because the rich will be much less affected by declines and will benefit from tax cuts. If these are combined with dollarization (which as mentioned earlier will have a deflationary impact) then the outcomes are likely to be even more hardship for ordinary people than they are currently experiencing. Therefore, clearly people in Argentina need to be very careful what they wish for and should avoid being taken in by promises that appear very attractive but are both unrealistic and likely to end in disaster.  

Issue 3: IMF’s role: In June 2018, Argentina turned to the IMF for a $50bn loan (which later increased to $57bn). This loan was the largest in the IMF’s history. To what extent is Argentina’s current crisis a consequence of the IMF’s intervention in the country? 

JG: The story of the lead up to and subsequent taking of the IMF loan is a deeply concerning one. It is noteworthy that Argentina had managed an economic recovery from the severe crisis of 2001-03, without needing access to international credit markets. The government of Mauricio Macri (which had campaigned on promises of taming inflation, cracking down on corruption, and reviving Argentina’s stagnant economy) did not actually manage to do any of these things. Instead, it negotiated a problematic settlement with a holdout creditor (a vulture fund) in order to gain access to global credit markets once again. This was used to finance growing fiscal deficits that emerged because of massive tax cuts and grew even though many types of subsidies (such as on energy, water and transport) and public spending (on health and social protection) that had benefited ordinary people were cut. This fiscal strategy not only greatly added to inequality, but it also meant falling aggregate GDP and higher inflation. The trajectory very quickly led to a balance of payments crisis because of an inability to repay the foreign debt that accrued very quickly.  

It was well-known that President Macri had a special relationship with then-President Trump. The details of how exactly Argentina was able to ensure the largest-ever loan from the IMF, the conditions attached to that loan, and the ways in which all this was then rushed through within Argentina, are opaque and still very controversial. This is surely an episode that should require internal soul-searching in the organization as well as serious examination by the IMF’s independent auditor. This did indeed lock the next government in Argentina into problems that became even more complex and difficult, in terms of overall debt repayment as well as constraints on domestic economic policies.  

This is worth remembering because similar strategies are being offered once again in Argentina, so the past experience and the experience of other countries should really be taken into consideration. 

Issue 4: Over-indebtedness in the Global South: Argentina’s debt crisis seems to be unique but if one looks at neighboring countries and other countries of the Global South, over-indebtedness seems to be a more general problem. As an expert, what would you say about this? 

JG: It is true that every debtor country is “unhappy in its own way”. But there is a more general problem. Around one-third of low- and middle-income countries are facing moderate or severe sovereign debt stress, and even many who are not categorized like this are paying much more in total debt servicing than on all public spending on health, education and social protection taken together. This cannot be blamed on these countries and their governments alone. Instead, they have all been buffeted by changes generated by macroeconomic policies in the rich countries, especially the US and the EU. After the Global Financial Crisis, easy monetary policies in the form of very low interest rates and massive liquidity provisions that mainly benefited banks led to private financial investors using this cheap money to search for higher returns in other financial markets all over the world. As a result, economies that were previously not able to access private capital markets, whether as loans or in the form of bonds, suddenly found that they could borrow, often indiscriminately. Of course, they paid higher interest rates and had larger spreads on their sovereign bonds than borrowers in rich countries, but the rates were still significantly lower than before.  

This continued until the shocks created by the Covid-19 pandemic, the Ukraine war and subsequent increases in world fuel and food prices, followed by the monetary tightening in rich countries. This led to reversals of capital flows, back to the rich countries, and the low- and middle-income countries were then disproportionately punished by bond markets even though they had NOT really increased their public spending even during the pandemic, and their total debt-to-GDP levels barely went up and remained well below those of advanced economies, whose spending and public debt both increased sharply. IMF data show that, between January 2020 and March 2023, the spreads on sovereign bonds over the US Federal rate declined slightly, increased for advanced economies on average and in any case remained well below 1 basis point. Conversely, they increased by 355 basis points for low- and middle-income countries on average over the same period. For some low-income countries they increased by as much as 1100 basis points! With such dramatically rising borrowing costs, it is not surprising that more countries are battling external debt problems that are not caused by their own policies. In fact, Ponzi borrowing—whereby the borrower takes on new loans from other sources simply to repay earlier loans is becoming much more common across a range of countries, a fundamentally unsustainable process. 

The moral of this story is that low- and middle-income countries need to be more circumspect about external borrowing in the first place. Since credit and repayment conditions can change dramatically because of events, policies and processes outside the control of individual sovereign borrowers, this risk needs to be actively factored in and alternative sources of foreign exchange should be sought or be developed.  

Issue 5: Dollarization and debt in the region: Regarding dollarization and over-indebtedness, from a regional perspective, parallels can be drawn with the experience of Ecuador. Yet, the country has twice defaulted on its debt (in 2008 and 2020). Are there lessons to learn from this experience? 

JG: There is a lot of evidence that Ecuador’s tryst with dollarization has not been particularly positive. It has imposed deflationary macroeconomic policies, made the economy completely dependent on the global value of the US dollar, and thereby reduced its trade competitiveness. Nor has it reduced macroeconomic instability. Since oil is a major export, and oil trade is denominated in dollars, Ecuador is doubly affected by this. It has suffered two major balance of payments/debt crises since 2008, and several minor crises.  

Issue 6: Gendered impacts: Last but not least, what are the likely implications for women and for the feminist agenda with these economic proposals? 

JG: The economic proposals I have considered here are particularly dangerous for half the population: women and girls. The proposed cuts in public spending would be even more adverse for them because they are more directly affected by declining access to social goods and public services, and reduction of such access reduces their own consumption (often much more than for men and boys within the same households) and adds to the unpaid labour they have to perform for their families and communities. In addition, when employment levels fall and jobs decline in both quantity and quality, women workers are the first to suffer, and so they will be disproportionately hit by these policies. An environment of economic stagnation and/or real decline has also been found to be strongly associated with increased levels of violence against women.