Marcelo Diamand’s 1972 article, “La Estructura Productiva Desequilibrada Argentina y el Tipo de Cambio,” is having a moment in Argentina.

Thanks to last year’s currency crisis, Dr. Diamand’s nearly five-decade-old analysis has regained relevance, offering a structural interpretation of Argentina’s crisis-prone economy that speaks to the anxieties and frustrations of many Argentines.

Dr. Diamand grounds his analysis in the productivity differences between Argentina’s agricultural and industrial sectors, and the effects on Argentina’s terms of trade (a ratio comparing the value of a country’s exports to the value of its imports).

In the article, Dr. Diamand argues that the productivity of these two sectors is unbalanced; Argentina has a world-class, export-oriented farm sector, but its industrial sector is inward-oriented and uncompetitive. As a result, when agricultural exports grow, it increases demand for domestically produced products. In response, industry increases its imports of intermediate and capital goods to ramp up production. At the same time, since the value of the currency is tied to the most competitive sector (a flavor of “Dutch Disease”), the strengthening peso further disadvantages Argentine manufacturers competing in international markets. That leaves industrialists without a way to generate the dollars needed to import intermediate and capital goods, forcing firms to borrow internationally.

The economy becomes vulnerable to crisis, as foreign loans dry up, causing a balance of payments problem and eventually a devaluation. The devaluation, in turn, triggers inflation (so-called pass-through), as imports become more expensive in peso terms, causing declining real wages and a recession that disproportionately affects industry. In other words, the agriculture-led boom turns to bust. Sound familiar?

Although Dr. Diamand’s analysis is a half-century old, it feels surprisingly contemporary. Since 2000, Argentina has experienced four large devaluations (2002, 2014, 2016 and 2018). Last year’s devaluation was so severe it forced President Mauricio Macri to solicit a giant International Monetary Fund bailout to stabilize Argentina’s economy.

This time, however, the IMF program included an exchange rate mechanism to ensure a more competitive peso – and avoid the Diamand trap.

Has it worked?

Well, the peso has remained relatively stable. But last year’s steep devaluation led to persistently high inflation, lower real wages and a recession. With low internal demand, Argentina’s inward-oriented industrial sector has seen its worst performance in a decade, with industrial capacity utilization near post-2001 lows. It will take time for a more competitive peso to boost industrial exports, and that transition will be painful. Even in the long term, Mercosur’s resistance to free trade agreements limits the upside to a peso devaluation.

Fans of Dr. Diamand’s paper say it demonstrates that Argentina’s economic structure means classical economic theories – built on the experiences of advanced economies – do not explain Argentina’s economic troubles. Rather, according to this view, the source of Argentina’s periodic balance of payments problems is not only its chronic fiscal prolificacy, but its lack of competitiveness outside the pampas.

Image Credit

Emma Sarfity

CFK: Teflon

In 2016, Donald Trump famously boasted of the loyalty of his base: “Did you ever see that?” he asked, “where I could stand in the middle of Fifth Avenue and shoot somebody and I wouldn’t lose any voters?” Indeed, despite a tumultuous tenure, Mr. Trump’s job approval rating has been unusually stable compared to past U.S. presidents, with only a 10-percentage point range in his first two years in office, compared to 24 points for Barack Obama and 39 points for George W. Bush. In Gallup’s February poll, Mr. Trump’s approval rating stood at 43 percent, the same as in February 2017.

So, is Mr. Trump the world’s most Teflon politician? Perhaps not.

In Argentina, former President Cristina Fernández de Kirchner has not shot anyone on the Avenida de Mayo, but her image has suffered severe blows since she left office in late 2015 amid a slowing economy and high inflation. Mr. Macri, repeatedly citing a “pesada herencia,” has blamed his predecessor for wrecking Argentina’s economy, institutions and international standing. Meanwhile, the former president has been dogged by corruption charges, including related to revelations in the “cuadernos” megascandal. Earlier this month, she suddenly traveled to Cuba to visit her 29-year-old daughter, after releasing a pre-dawn video that assailed the corruption investigations into her and her family as a “fierce persecution” that had damaged her daughter’s health.

Yet through it all, Ms. Fernández de Kirchner’s approval rating has been preternaturally flat. In the March Ricardo Rouvier & Asociados poll, 57.2 percent of respondents held a negative image of the former president, exactly the same as when she left office. Support is at 42 percent, compared to 41 percent at the end of her second term. For all the talk about her high floor but low ceiling, she remains by far Argentina’s most popular opposition figure.

Image Credit

Breanna Krzyzak