In the United States, the mismanagement of the financial crisis, in particular the ill designed Troubled Asset Relief Program (TARP), has led to a wave of populist protests, and to a narrow confirmation vote for Bernanke. In Argentina, where the recession was considerably milder than in the United States and had no financial cause, the president Cristina Fernandez de Kirchner fired the head of the central bank, Martín Redrado, a holdout from the neoliberal 1990s.
The problem was caused by the plan to the use US$ 6.5 billion of the almost US$ 50 billion of the international reserves accumulated over the boom years, between 2003 and 2008, in which the economy grew at an average of 8.5% per year, recovering spectacularly from the 2001-02 crisis and external default. Redrado, harking back to his neoliberal years, refused arguing that this would violate central bank’s independence.
There are two surprising aspects to the whole affair. The Argentine economy has maintained in 2009, even in the face of the crisis, both a primary budget surplus and a current account surplus. Twin surpluses NOT deficits! It is true that the budget and balance of payments surpluses have shrunk with respect to previous years, and that even though the primary budget is still positive, the same is not true of the global budget balance [the difference between a primary and a global balance is the payment of interest rates]. Still the red ink is not alarming by any standards with a global deficit of around 1.2% of GDP.
If the country has a current account surplus of 3.7% of GDP, meaning that exports are sufficient to pay for imports and servicing the debt, and the government, once excluded financial payments, has, in fact, a surplus, one should be puzzled as to the reasons for using the central bank’s reserves. In principle there should be no problem. The dollars that enter the country as a result of the trade surplus are exchanged for pesos and kept at the central bank. If the government needs dollars to service its dollar denominated debt, they can exchange pesos for dollars in the central bank and use them. The use of the previously accumulated reserves should be unnecessary.
The fiscal stance is irrelevant in this respect, since the payment on foreign debt obligations must be done in dollars. Hence, the current account surplus, and in extremis, if the surplus vanishes, the reserves are the only source of dollars, with the exception of borrowing in international markets (which should be avoided for obvious reasons). The problem in the Argentinean case is that the institutions remain tied to the resilient dogmas of the Washington Consensus, in particular, the view that all fiscal deficits are nefarious. The central bank is then forbidden to finance the treasury, even in a crisis, by expanding the monetary supply or buying peso denominated debt.
In other words, even though the economy grew only around 0.5% in 2009 and unemployment increased to more than 9%, the government cannot expand its fiscal deficit. It is important to note that if the government increased the global budget deficit (and even run a primary deficit) to get the economy out of the current recession, there could be no demand pressures on inflation because of the slack in the economy, and no risk of a foreign default because increased imports could be covered by the current account surplus. In this particular case, the idea of creating a fund (the so-called Bicentennial Fund) using the central bank’s reserves to lend to the treasury is an innovative idea, in the midst of the crisis, to increase the government deficit without challenging the sound finance dogma that shackles the Argentinean institutions.
Sound finance and central bank independence are alive and well in the developing world, and the ability of governments to pursue counter-cyclical macroeconomic policies is still severely constrained. Creating mechanisms for increasing the space for full employment policies like the Bicentennial Fund are central for eliminating the pro-cyclical bias of macroeconomic policies in the development world. The firing of Redrado should make everybody rethink what purpose does central bank independence (from the treasury, but not from financial markets) serves. Maybe it is time to rethink the independence of the central bank from the treasury in the developed world too, or at least fire the central bankers that are too submissive to their financial market masters!