Argentina Devaluation Role Model No More
For years we have been told that Argentina was once like Greece or Spain, but that they devalued and that they then had a strong boom, the implication being that if only the Southern European countries also devalued they would boom too.
I have previously pointed out the errors of that argument. The boom in Argentina was greatly exaggerated because Argentinian authorities greatly underestimated inflation, and since real growth is nominal growth deflated by price inflation, this implies that real growth was overestimated. Furthermore, to the extent the boom was real it was because Argentina's terms of trade improved dramatically as the prices of its commodity exports rose dramatically, even in U.S. Dollar terms.
Now that the Argentinian economy has entered a deep crisis, it doesn't look like much of a role model anymore. So how do the pro-inflationists who have previously extolled it as an example of the benefits of currency debasement react?
Well, Paul Krugman first just ignored it and pretended that Turkey is the most troubled economy and doesn't even mention that Argentina has problems.
Then in a later post written after this post was originally written, commenting on Yglesias post below, he conceded that inflationary policies can be bad if pursued as radically as in Argentina. While coherent, this doesn't explain at what level inflation goes from good to bad, and why.
Matthew Yglesias says that Argentina has problems because of bad policies unrelated to its currency. Well, I certainly don't dispute that the Argentinian government has pursued a lot of bad non-monetary policies, but so have Greece and the other Southern European countries, and by admitting the importance of non-monetary policies in Argentina, you're admitting that such factors could be important in explaining Southern Europe's problems.
Jeremy Warner essentially repeats Yglesias argument while repeating that Southern Europe has problems and points to how South Korea was able to recover by combining devaluation and policies sounder than Argentina's. It is true that South Korea has recovered but so has several countries that haven't devalued, like the Baltic countries, and more recently Ireland.
The lesson is thus, that recovery doesn't, at least not primarily depend on monetary policy, but on how sound other policies, as well as probably some cultural factors, are.