Getting the Priorities Right: The new central bank law in Argentina

By John Weeks Over the last two decades of "inflation targeting" policies, one of the last paces to look for pragmatic economic policy was a central bank. In answer to the question, in what country does the central bank have a growth focused mandate, most would answer, "there are none" or "beats me". Yet, there is at least one. In Argentina the Ley Organica for the central bank, passed by the houses of the legislature and signed by the president in March 2012, incorporates an unambiguous growth mandate. And if this does not make the Central bank of Argentina unique, combining it with a woman as the Governor certainly so qualifies it. During the 1990s, the government dedicated itself to a neoliberal economic regime, most infamously with the adoption of a currency board. This excursion into monetary policy madness tied the domestic money supply to central bank holdings of foreign exchange. Initially lauded by neoliberals as the quintessence of sound monetary policy, it spectacularly imploded at the end of the decade. The disaster ushered in a twenty percent fall in national income during 1998-2002. Inflation went over 100 percent in 2002 when accumulating disaster forced the government abruptly to abandon its ill-advised currency regime (see chart). A central project of neoliberal ideology is removing economic policy from the democratic process, to render it "independent" and unaccountable, under the control of so-called experts. The ideology preaches the necessity of balanced budgets to decommission counter-cyclical fiscal policy. "Flexible" or "market-determined" exchange rates provide the vehicle to discard an interventionist currency regime. The decommissioning of policy tools is completed with central bank "independence" that excludes political oversight. This extreme insulation from the democratic process, epitomized by the dysfunctional European Central Bank, leaves governments with few policy instruments to pursue any goal other than deflation (aka "inflation targeting"). The election in Argentina of Nestor Kirchner in 2003 brought a dramatic shift, from neoliberalism to social democracy. This change continued and deepened with the election in 2007 of Cristina Kirchner, who was re-elected in October 2011 with almost 55 percent of the vote. Nestor died of a heart attack at the end of 2010. The change in national economic performance proved as dramatic as the shift in policy. After the five years of decline, real national income grew at an annual average of 7.5 percent during 2003-2011, and inflation averaged slightly less than ten percent (see chart). While hardly to the delight of the neoliberals, this rate of inflation is quite modest for post-war Argentina. Indeed, it may be that the country's structural inflation has been reduced by this growth, the longest sustained expansion in a generation (sustained except for the dip in 2009 due to the global crisis). Though economic policy changed dramatically, it remained constrained by the legal legacy of the dysfunctional currency board. This dysfunctionality manifested itself in 2010 when the governor of the central bank refused to use currency reserves to service the country's external debt. Faced with a central bank induced default, President Kirchner changed the governor, replacing him with Mercedes Marcó del Pont, then president of the largest commercial bank in Argentina. With a new governor has come a new legal framework for the central bank that institutionalizes the ability of the bank to implement counter-cyclical policy, in contrast to the previous framework that institutionalized the opposite. The new law eliminates the pro-cyclical link between foreign exchange reserves and the monetary base. The importance of this change cannot be exaggerated, for it enables rational policy making. If "inflation targeting" has a rational justification, it must refer to the lower boundary (avoiding destabilizing deflation) as well as the upper boundary (avoiding destabilizing inflation); that is, the change enables counter-cyclical monetary policy, to complement counter-cyclical fiscal policy. It simultaneously enables rational debt management, rather than constraining that management by an analytically unrelated reserve link. And, of course, it allows the central bank to coordinate currency market interventions with medium and long term industrial policy. But most important, the new Ley Organica institutionalizes the principle that the function of monetary policy is to achieve a range goals, and in coordination with fiscal policy to select among and prioritize goals. Forty years ago the coordination of fiscal, monetary and exchange rate policy to facilitate growth was standard practice in both developed and developing countries. In 1969, the Bank of Sweden awarded Jan Tinbergen its "Nobel Prize" in part for his famous "Tinbergen Rule" of policy coordination. Social democrats and other progressives all over the world owe thanks to the Argentinean government for the return to economic sanity embodied in the country's new central bank law. The legal formalization that monetary policy should be a positive instrument for the general welfare vindicates the arguments of generations of heterodox economists. More important, the re-inserting of the central bank into the political economy of policy making embodies the principle that all policy should be subject to democratic oversight. Just as "war is too important to be left to the generals" (Georges Clemenceau), economic policy should not be left to economists. Experts advise and elected representatives decide. It is called "the democratic process", and Argentineans think it should apply even to central banks. Source This article was originally published in here April 4, 2012.

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The Reform of the Central Bank Charter is Necessary for Growth and Stability

By Sergio Cesaratto, Marc Lavoie and John Weeks

“Give me a one-handed economist! All my economists say: on the one hand… on the other…” once famously said the U.S. President Truman. In his interview to La Nación professor Lance Taylor provides the perfect example of a two-handed economist: he supports growth, but he warns of the dangers of inflation; he approves of a central bank that cooperates with fiscal authorities, but he warns of excessive public spending; he gives his support to import controls, but he warns of their possible “micro-inefficiencies”. Professor Taylor thus plays the two-handed game of criticizing whatever the Argentineans could possibly do, even if we are not completely convinced that he actually said in the interview that he is in favor of an Independent Central Bank, as the headline would make you believe.

Of course we share, and we are sure that the Argentinean government shares, some of these preoccupations – although we are less concerned with the idea that import controls only protect domestic inefficient sectors. To begin with, comparing Argentina with Europe, where the inability of the Central Bank to cooperate with the national treasuries has created the crisis, Argentina looks pretty good, with a central bank that is mandated to cooperate with the democratically-elected government to pursue growth and employment rates that are consistent with the lowest possible inflation rate. In Europe, a non-cooperative European Central Bank has let interest rates on sovereign debt jump to unsustainable levels. In that respect the Argentinean central bank acts more like the North American Federal Reserve.

In addition, European central bankers and political leaders have advocated austerity measures that are causing a serious recession and that exacerbate the public budget problems caused by the financial crisis, very much like Argentina did during the Convertibility period, in which the former Central Bank Charter was imposed. By contrast, in Argentina now, there is a pro-growth central bank that carefully uses its foreign exchange reserves to reduce the needs of the government to borrow on international financial markets, and that wishes to sustain domestic investment through a public investment bank. This can only be good news.

Nobody would deny the importance of a competitive real exchange rate to sustain exports and favor the development of a competitive manufacturing sector. We believe that the reliance of exports on the vagaries of soya prices and harvests is a preoccupation of the Argentinean authorities too. Many Argentinean economists are however skeptical about the positive effects of currency depreciation on manufacturing exports; instead they are more concerned about the inflationary effects that exchange depreciation might have in a country like Argentina, with its strong tradition of labour militancy in defending real wages. They also warn that a policy of real wage compression through a depreciating exchange rate, if successful, would depress domestic consumption, growth and unemployment, with little compensation from an unlikely export-led boom. So, in any case, the objective of a competitive exchange rate should not be accompanied by restrictive fiscal and monetary policies, but rather should be accompanied by income policies that would preserve real wages.

Finally, the government with the support of many economists, in its attempt to diversify the export sector and reduce the import dependence, is relying on a pro-active industrial and trade policy, rather than relying on the real-exchange-rate-depreciation cum fiscal-contraction model proposed by critics. One cannot forget that Brazil has public control of long-term finance through BNDES, and that given Argentina’s higher GDP growth rate, the Argentinean government might have legitimate reasons to impose imports controls. As to the inefficiencies allegedly brought about by import substitution policies and import controls, the de-industrialization outcomes of decades of neo-liberalism are a much worse heritage. We do favor, in general, a more depreciated exchange rate to reduce the external constraint, but because devaluation is inflationary, on the cost side, and there often is wage resistance, one must be moderate. Exchange rates are only one price, and the notion that there is a perfect level that would solve everything, leading to growth, stability and sustainable current account by itself, might be a chimera.