Ignorance and Influence: U.S. Economists on Argentina’s Depression of 1998-2002 by Kurt Schuler Econ Journal Watch, August 2005 Appendix 2: Quotations To document statements in the main text, I have quoted at length from some sources. Copyright remains with the copyright holders. Important words or phrases from the quotations are highlighted in yellow; some of my comments are highlighted in blue. Where no page number is given, the article in question was either just one page long or I viewed it through an electronic source, such as Nexis or a Web browser, that did not list page numbers. Pierre-Richard Agénor (Lead Economist and Director of Macroeconomics and Policy Assessment Skills Program, World Bank) “The key elements of the [Convertibility] plan consisted of a fixed exchange rate and a change in the central bank charter. The exchange rate was fixed at 10,000 Australes per dollar, and future exchange rate changes were required to authorized by congress, rather than left to the discretion of the central bank. The Austral was made fully convertible for both current and capital account transactions, and use of the U.S. dollar as unit of account and means of exchange was legalized. More importantly, the central bank was legally enjoined from printing money to issue credit to the government. Money could be printed only to purchase foreign exchange. In effect, this converted the Argentine central bank into a semi-currency board. [Footnote to last sentence above] Several loopholes in the central bank legislation actually gave the Argentine central bank powers beyond those of a pure currency board. Government dollar-denominated debt held by the central bank could be counted (up to a maximum amount) as foreign exchange reserves, and the central bank’s monetary liabilities were permitted to exceed its stock of foreign exchange reserves—by [a] maximum of 20 percent from 1991 to 1995, and 33 percent subsequently—in exceptional circumstances, a measure that was intended to permit the bank to cope with financial distress in the domestic banking system. However, except during the Tequila crisis of 1995 (described below) the foreign exchange cover of the central bank’s monetary liabilities was maintained at 100 percent.” Agénor and Montiel (1999, pp. 386-7) Robert Z. Aliber (professor of international economics and finance, University of Chicago) “’As long as Brazil’s currency was slightly overvalued, Argentine firms weren’t having difficulties in Brazil. Now they are,’ said Robert Aliber, an international economist at the University of Chicago.” Aliber (1999) “Argentina’s attempt to link its peso one-to-one with the U.S. dollar has effectively failed after a 10-year attempt. The economic policy was a ‘fiscal disaster’ said Robert Aliber, professor 1 at University of Chicago’s Graduate School of Business, because of the mismatched exchange ratio. “’In some sense this has been a widely anticipated event,’ he said. To that end, U.S. institutions should be positioned to weather the effects.” Aliber (2001) “In effect, [under a currency board] the central bank gives up any semblance of monetary independence; the money supply increases when the country has a payments surplus and falls when the country has a payments deficit.” Aliber (2002, p. 9) (Aliber does not describe any particular country as having a currency board.) Mark Allen (deputy director, Policy Development and Review Department, International Monetary Fund; deputy director during Argentine crisis) “In most cases, downward adjustment in nominal wages and prices is slow, politically difficult, painful, and leads to a reduction in real growth (as evidenced by Argentina’s difficulties in implementing such policies under the constraints of its currency board.) … “Similarly, Argentina more recently introduced capital controls in combination with a freeze on bank deposits when exiting from its currency board arrangement and suspending payments on its sovereign debt.” Allen, Rosenberg, Keller, Setser, and Roubini (2002, pp. 29, 33) “The plan adopted in 1991 centered on the establishment of as firm a nominal exchange rate as possible, i.e., a currency board peg to the US dollar, macroeconomic policies consistent with this anchor, and a sweeping structural reform programme.” … “The Convertibility Law, involving most of the elements of a currency board,…. However, exchange rate-based stabilizations have a number of costs, including the danger that the residual inflation will push the real exchange rate to a point that it endangers competitiveness.” Allen (2003, pp. 121, 122-3) David E. Altig (vice president and director of research, Federal Reserve Bank of Cleveland) “In 1991, Argentina established a currency board that fixed a one-for-one exchange rate between pesos and the U.S. dollar. To guarantee free conversion at this rate, the Convertibility Law that established the currency board requires Argentina’s central bank to back the peso monetary base fully with reserves dominated in U.S. dollars or in currencies easily converted into dollars. The central bank holds these reserves as dollar-denominated deposits or other interest-bearing instruments. “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. The monetary base of a country with a pure, dollar-backed currency board can change in response to adjustments in U.S. monetary policy, to shifts in overall demand for dollars, or to swings in the worldwide distribution of dollars. Holding all else constant, for example, a U.S. monetary expansion would raise the U.S. price level relative to the Argentine price level and put downward pressure on the peso price of dollars. To defend its peg, the Argentine currency board would trade pesos for dollars, effectively expanding its own monetary base in concert with the change in the supply of dollars. 2 “Though not a pure currency board, Argentina’s arrangement ties its monetary policy to that of the United States. By 1995, its inflation rate approached U.S. levels. By adopting a currency board, Argentina traded monetary independence for the credibility associated with Federal Reserve policies. … “Argentina contemplated these problems [of the tradeoff between rules versus discretion in monetary policy] when instituting its monetary reforms and, in contrast to a pure currency board, elected to retain some latitude for discretionary policies. The central bank may, for instance, hold up to one-third of its reserves in dollar-denominated Argentine government bonds, but it may not increase its holding of these bonds by more than 10 percent over the previous year’s average (except in emergencies and then only with congressional approval). Although the government has never used this provision, transacting in Argentine government debt allows the central bank to alter the monetary base.” Altig and Humpage (1999, pp. 2-3) “Even at the height of success, however, there were indications that the currency board was not an absolute panacea. The perception that the peso remained a relatively risky bet was hard to shake, and investors in peso-denominated securities demanded higher interest rates as compensation for bearing this risk. What’s more, the magnitude of the risk premia tended to be quite volatile, suggesting that the economy remained susceptible to speculative attack. “In January 1999, then-President Carlos Menem proposed complete dollarization, in effect eliminating the peso entirely. Although dollarization would have had little technical advantage over the existing currency board arrangement, many proponents of dollarization argued that markets had retained some residual doubt about the long-run viability of the board, doubts that only complete elimination of a circulating peso would vanquish. “But the drive for dollarization was not to be, and the fears that the currency board would prove unstable were all too prophetic. As of February 11, the peso was wholly untethered from the dollar, and the last vestiges of the currency board, in the process of being dismantled since late last year, were finally reduced to rubble. “The advocates of dollarization may have seen it coming. Argentina had begun the recession from which it has yet to recover in mid-1998, as fears mounted that the faltering Brazilian economy would place irreparable strains on the Argentine economy. The problems of the country, however, appear to be more fundamental than the details of its monetary arrangements. Writing in the January 9 edition of the Wall Street Journal, the Cato Institute's Brink Lindsey quoted a survey conducted by Harvard University and the World Economic Forum’s 2000 Global Competitiveness Report showing that, of 59 countries studied, Argentina ranks ‘40th in frequency of irregular payments to government officials; 54th in the independence of the judiciary; 55th [in] litigation costs; 45th for corruption of the legal system; and 54th in the reliability of police protection.’ (The questions of the survey were asked such that high numbers are bad.) “These statistics reveal an overwhelming fault in Argentina’s political infrastructure. It is not surprising that truly independent central banking could not be sustained in such an environment. As if to underscore the point, the disintegration of the currency board took shape in May 2001 when Fernando de la Rua dismissed Pedro Pou, the central bank governor, for resisting attempts to weaken the country’s promise of peso parity with the dollar. “In the case of Argentina, the reforms that gave rise to the currency board were not sufficient in the absence of broader institutional reform. But that fact should not mislead us into 3 the false belief that long-term prosperity can be achieved in Argentina (or any country) without a strong, stable, and credible monetary standard. A currency board, dollarization, or the like may not be a sufficient condition for prosperity, but it is certainly a necessary one.” Altig (2002a, p.