Friday, May 4, 2012

Argentina and Brazil, Income and Wealth

Paul Krugman compares the economic record of Argentina and Brazil, giving us an Excel chart of real GDP growth:

Yes, it’s true: wicked Argentina, which has violated every rule in the book, is growing more robustly than virtuous Brazil.  From the standpoint of employment and income generation, this is the main event.  Says Paul:
Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged?
But here is another case of focusing on income versus wealth.  From an income point of view, Argentina looks good, but what about wealth?  Argentina defaulted on its sovereign debt, Brazil didn't.  For a Keynesian, this is important only in terms of its impact on future growth, and clearly Argentina’s default was a constructive policy move.  If your perspective is the preservation of wealth, however, it’s a huge, huge deal.

And the confiscation of wealth was not a one-time event.  Here, courtesy of the World Bank’s Development Indicator database, is the record over the same years of “the real interest rate”.  (This is a measure of the private sector lending rate minus the concurrent rate of inflation—not ideal, but a reasonable indication of the real return on capital.)

In Brazil wealth-holders can count on rapid accumulation of more wealth.  In Argentina the situation for wealth is dire.  In fact, if Argentina’s inflation is underreported as some claim, the real return is even more negative than what we see.  In essence, claims on output are being reallocated from current wealth-holders to net borrowers and the state.  It is no surprise that people with money are trying to take it out of the country, which is why the Argentine government deploys a canine corps to sniff out suitcases of cash at the Buenos Aires airport.  Are all the folks trying to give their money a Swiss vacation rich?  The rich are certainly the most influential of the lot, but many are likely to be middle class as well.  When they worry about what the country is doing to their personal finances they are not hallucinating.

Just to be clear, I think that producing more of the goods that sustain a high quality of life and providing productive, decently paying work to those who need it should be light years ahead of wealth preservation in priority.  Nevertheless, from a political point of view, the balance of priority between income and wealth is rather different.  Opposition to the Kirchners is based primarily on their confiscation of wealth, and it will not disappear because Argentina’s GDP is growing faster than Brazil’s.

Footnote: Even from a Keynesian point of view there is some cause for concern.  Inflation in Argentina has drifted upward to the point where a takeoff into hyperinflation is no longer a negligible risk.  At some point soon the policy will have to turn toward disinflation, and unless they can pull off an incomes policy miracle, it will take the form of reduced growth.  Even so, of course, the decade-long run of rapid growth is almost certainly worth it.

Footnote #2.  For another example, consider Ireland and Iceland.  If your main concern is stemming the slump and restoring GDP growth, Iceland beats Ireland hands down.  But Iceland defaulted on the obligations of its banking system, while Ireland has gone profoundly into hock in order to avoid defaulting on theirs.  From a wealth point of view, it’s like comparing saints and criminals.


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