Some notes about accommodative behavior and the institutional arrangements in Argentina

The latest years, Argentina has shown a great set of social and economic problems. The economic growth had been slowed on 2013, the unemployment has been increased, and the inflation has been growing compare to far from the other Latin America economies. Regrettably, there have been many more bad news. We have observed the retrenchment of the so called Quantitative Easing by the action of the US Federal Reserve. Many emerging market economies such as Brazil, India, and others, have suffered this change; mainly, by the financial channel. In fact, the financial fluxes have been less than the previous years. Although Argentina is trying to play a best role in the financial markets than the past decade; clearly, it is possible that the changes of the financial market have affected our economy.       

  

In such framework, perhaps not coincidentally, it has noted some irrational behavior in the policies makers’ decision for the last years. Consequently, the so called Dollars Blue price has been shown high volatility until the domestic interest rate increased. However, it is necessary to note that there are many lessons for us.

First and foremost, we should understand that this volatility is a result of several factors in the domestic economy, and these are the key issues that should be review in the near future.          

From our perspective, not only the constraints of political economy were activated but also the society has played a crucial role. Perhaps, it has been an essential difference regarding other countries. Currently, nobody thought about what would be happen if the price of our main commodities suddenly revert their increase tendency, and if the financial fluxes suddenly would revert by an increase of the international interest rates.  Indeed, it is an unfortunate question, but this point is not an impossible event in the medium term. Consequences of this would be a great problem, because it would be a n-great contraction in Argentina[1].  

In what follows, it is suggested that accommodative behavior, especially if we think on the financial market, is the main stylized fact in all events that precedent financial, and currency crisis. We must pay more attention if we would not like to fall in another great economic contraction. Although, we recognize that it is very difficult, perhaps a chimera, but policy makers must learn to manage the economic booms by an efficiently way, because the bust is always near. It is a necessary measure of political economy. In fact, currently people feel that our domestic economy has been change a lot since the last three years.       

The above point of view provides only some lessons for Argentina and, why not, for other emerging economies.

In the first place, we highlight a necessary revision of the current financial regulations. This suggestion takes place in the shortcomings of our financial regulatory institutions. We have many important examples from our history, but we going to remember only important case. In the mid-1970, the Latin America emerging market economies implemented liberalization financial programs. In the beginning of the program, everything seemed to indicate that it was a great program with many benefits, but it was fateful. Many agents had financial gains generated from the arbitrages but, at the same time, the balance sheets became increasingly fragile. Both, private and national accounts suffered the deterioration of their economic assets, and international liabilities had increased faster than these assets. It was essential to determinate the financial behavior. While people were buying US Dollars with great future benefits, our economy was falling down deeply, and the inflation was the main channel that attacked the economy. The accommodative behavior of agents plus weak regulation generated economic framework fragility and permeable to disruptions. We have to mention that the international financial system was different than in the beginning of 2000s. There were high interest rates, and the international financial investors were more skeptical about the region.   

In this context, the Minskyan macroeconomic cycles are presents and are very important to understand the volatility. In effect, the framework is supported by poor economic institutions and several financial problems. Therefore, we believe that the strong and consistent institutions would minimize the role of irrational behavior of agents. As Kiyotaki and Moore presented in their celebrated model (1997), the credit cycle may be change in the next moment, and if we would avoid a great crisis, we will build institutions to regulate the economic cycles, especially the financial dynamics.

We consider that this example has great lessons for us. One is related to our economic conception focusing on the time. We have tended to think that the positive economic dynamics will be there forever. Definitely, it has been a great mistake of us related with the misconception about the human processes, and the benefits in the short run. In fact, during the booms, only few people and researchers suggested that there would be a problem, but our accommodative behavior had more importance. On the other hand, this behavior stays at the bad moments too. It is related with the procyclical lifestyle. It is suggested from the argentine political experience. We have to remember the great crisis on 2001, and the presidential election on 2011. These are two contradictory examples, but these have similar lessons.      

In such a context, since the last two years the economy has several divergence dynamics with focus on the money market. It should lead to a systemic distress such as suddenly depreciation of the exchange rate and the later consequences. Additionally, people have felt less confidence related with specific changes in the economic policy. Clearly, the new action of the Central Bank has contributed to stabilize the money market, but it could affect the economic growth. In fact, it seems that some economic recession is necessary to attack the inflation process.       

Secondly, the behavior of the agents is decisive. Although we think that is almost impossible control the irrational decisions in the markets, it is necessary for a sustainable growth and development that the domestic economy must be less real and financial volatility. Institutions have the most important part of these suggestions. It should be support by a strong legal system with clear rules above the political interest. Additionally, all countries have to manage the level of corruption, and it seems that some our neighbors have tried it, such as Brazil. Argentina has not managed it. Undoubtedly, the negative spillovers from poor institutional arrangements have affected to the social and economic development. In fact, these effects could be limitless. Unless institutional arrangements change, people will bear the political mismanagement. However, nowadays we note that there is not an improvement of the institutions. Politicians are still in the same way, and people have to pay the costs.              

We are likely to conclude that there are two main reasons about these topics. As we have discussed today, political leaders must have done something wrong recently in this way. The suddenly growth of the price of national services is only one more fact about it. Everybody knows that some prices have to increase many years before.

On the other hand, we strongly believe that people have a challenge about their behavior. The accommodative behavior is still there. It seems that after the several economic crises, we have learnt nothing for our improvement, because we focus deeply on the short term benefits. From this respect, we have to recognize too that there have been poor financial institutions, and it generates a potentially more far-reaching and serious disadvantage as well.

Finally, we consider a part of a great book of a brilliant mind such as Douglas C. North called ``Understanding the Process of Economic Change´´ (2005), to provide an excellent conclusion which   had motivated us to write this post:

``…Beyond understanding the past, such knowledge is the key to improving the performance of economies in the present and future. A real understanding of how economies grow unlocks the door to greater human well-being and to a reduction in misery and abject poverty… I have placed institutions at the center of understanding economies because they are the incentive structure of economies. I also have focused on how economies that were composed of institutions that provided incentives for stagnation and decline could persist…´´

References

Friedman, M. y Schwartz, Anna J. (1963), ``A Monetary History of the United States, 1867-1960´´. Princeton University Press, Princeton.

Kiyotaki, N. y J. Moore (1997), ``Credit Cycles´´. American Economic Review. 

Reinhart, C. y Rogoff, K. (2009), ``This Time is different. Eight Centuries of Financial Folly´´, Princeton University Press.  

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[1] Friedman and Schwartz (1963) and, many years later, Reinhart and Rogoff (2010); called Great Contraction in reference to the facts and consequences of the crises in US on 1929 and 2008.