Jul 16, 2018

Monica de Bolle on the Economic Challenges Facing Argentina and Venezuela

Argentina has not produced great policy in recent years and there are a number of avenues through which they can economically improve.
David Beckworth Senior Research Fellow , Monica de Bolle

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Monica de Bolle is a senior fellow at the Peterson Institute for International Economics and an associate professor at Johns Hopkins University. Monica is published widely on Latin American economies. She joins the Macro Musings podcast to discuss some of the recent financial and economic developments in Argentina and Venezuela.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu

David Beckworth: Monica, welcome to the show.

Monica de Bolle: Thank you very much for having me. It's a pleasure to be here.

Beckworth: Glad to have you on. With all my guests, I asked the same question I want to ask you. How did you get into economics?

De Bolle: That's an easy one to answer actually. My father was an economist who worked for many years at the International Monetary Fund. The whole having an economist at home who was traveling around the world and helping to sort out crisis in different parts of the world, I thought, was very exciting when I was really young.

Beckworth: Interesting.

De Bolle: It was really an easy choice. It was a no-brainer choice for me.

Beckworth: It was almost predestined that you'd be a macro economist and one day even work for the IMF as well as consult and work at think tanks. Very fascinating. We want to talk to you today about some of the recent developments going on in emerging markets, in particular in Latin America. You're an expert on that area. The one I want to begin with is Argentina. It seems to be on the brink of a financial crisis. You had a recent piece that was titled, Argentina Back to the Brink. Tell us what is going on right now in Argentina.

De Bolle: Argentina is always this sort of tragic or near tragic story. They had gone through several years, a decade and a half of economic strife, lots of problems and just a series of badly made decisions. Suddenly, Mauricio Macri, the current president, was elected, surprisingly actually, in 2015, promising to fix all the countries problems, promising a very ambitious reform package, promising to bring Argentina back to being the place everybody used to admire in the past. He was actually very successful at doing a number of really difficult things from the get go. For example, finally finishing off the problems that Argentina still had with the remnants of its debt restructuring in 2005 and the creditor fights that were still on going in the courts. He managed to resolve that. He also lifted capital controls which were really limiting, the ability of the economy to do anything, including to receive investment from abroad. He started down a path of reforms that seemed to be really good and seemed to be the right way to go.

De Bolle: The problem is that he inherited from his predecessor, Cristina Kirchner, a very, very difficult situation. The country had no economic statistics when he came into office. One thing actually that I've just recently been grappling with, I was trying to... along with a colleague of mine, we were trying to look at the degree of... what we call, exchange-rate pass-through, how much of an exchange rate devaluation gets passed into domestic inflation. In Argentina, because of course some of the recent things that have been happening there, have been the Peso run, the turbulence has been devaluing the Peso. This has all been contributing to even higher inflation than what Argentina currently has. We found that there is a gap between 2015 and 2016, the entire year of 2015 and the entire year of 2016, there are no inflationary figures because the National Statistics Office had been completely destroyed under the Kirchner administration. Imagine trying to run a country where you have no data. You have no trustworthy data on inflation, on GDP, on the basic things that you use to measure an economy by.

De Bolle: This is the kind of thing that he inherited. On top of that, Argentina had a very large fiscal deficit. It also had a current account deficit, so a deficit on its external accounts, not very high level of international reserves. The situation by and large was extremely fragile. But, because he had a plan, he was able to... Macri that is and his government, he was able to signal to markets and to the population at large, that he was going to fix the problems but he was not going to do everything all at once.

De Bolle: He was going to adopt this strategy that he called gradualist. Meaning that the adjustments that needed to be made, the reforms that needed to be made, were going to be done slowly, over time and not all in one go because all in one go would probably have thrown Argentina into a bad recession with very high inflation, which is something the country has seen a lot in the past and it never works. He proposed that and at the beginning, investors, markets, everybody was very enthusiastic about his proposed program. Everything seemed to be going relatively well. Argentina was even able to place this 100 year bond in the market-

Beckworth: That's amazing.

De Bolle: ... last year. Which was amazing, right? It had a lot of investor take for that. It's been accessing international markets ever since. It's made a big comeback. Last year, in 2017, they had their mid-term elections and the Macri Coalition came out in the elections really strong. I mean, they haven't yet... they're not the majority in congress but they managed to get a lot of seats from the opposition, which is currently crumbling. Everything looked like it was all on a good trajectory but they had all of these underlying fragilities.

De Bolle: Then they made a mistake. Because in December of 2017, late last year, the Central Bank, which had at that point, an inflation target of anywhere between eight and 12%. This is what they were trying to achieve for the year. It was clear they were not going to come anywhere near that. Inflation was running at above 20% at that point. What the Central Bank decided to do was, it said, "Okay, we're going to change this inflation target to something higher because this is totally unrealistic." They changed it to 15%. That was fine. It's a realistic thing to do in these conditions. The problem is that they followed that decision by two interest rate cuts, which markets interpreted as, "Okay, here's some political interference in the Central Bank. This is not good. This looks like stuff that we've seen in the past in Argentina."

De Bolle: Really, the troubles started there. At that point, people started looking at Argentina, paying more attention to Argentina and starting to doubt, at least a little bit, in which direction the Macri government was actually going to go. Soon after that, the country was hit by this wave of risk aversion towards emerging markets that we've been seeing play out over the past several months. Then, of course, people started paying more attention to this current account deficit that I mentioned, the fiscal deficit that I mentioned, the reserve situation, which wasn't that great. Ultimately it all became a run on the Peso and Argentina had to go to the Fund.

De Bolle: The way that Argentina went to the Fund though, just to end on this note, so that I'm not talking all the time here.

Beckworth: This is interesting.

De Bolle: The way that Argentina ended up at the Fund this time was very different from the way that Argentina used to end up at the Fund in the past. In the past, Argentina would end up at the Fund whenever it had completely exhausted everything that it could do. In other words, it was always in a situation where the crisis had reached a peak. Everybody was panicking. There was widespread confusion in the country and then Argentina would go to the IMF for help. That's not what happened this time.

De Bolle: What happened this time was the government saw significant turbulence in foreign exchange markets. It quickly realized that it wasn't going to be able to deal, even though they raised interest rates by a lot and they tried intervening in foreign exchange markets, they quickly realized that none of those actions was going to be sufficient, that they needed a credibility boost from elsewhere. They made this very bold move of going to the IMF for help very, very quickly. It's very bold because in the context of Argentina, a country that's had a very, very difficult history with the IMF, including a very difficult recent history with the IMF. It was a bold political move by the Macri government.

De Bolle: But it was... because they went so fast and in a situation where everything was not completely dismantled or anything even close to that as in the past, they have been able, so far, to steer the narrative in their direction. In other words, they've been able... even though there's a lot of outcry in Argentina about going to the IMF, the Macri Administration, so far, has been able to play the game of saying, "Look, we went to the IMF because we thought it was the best course of action. It wasn't the IMF coming to us demanding anything. We just decided to go because we thought this was the best way to protect the same reforms that all of you voted for in the first place when you voted for me." in the case of Macri. It was a very smart move overall. We'll see what happens. They're in the process of negotiations with the Fund as we speak.

Beckworth: That's very interesting. There's a lot to unpack there. I want to maybe break that story into two parts. There's the external forces that you mentioned and there's some internal forces, internal developments. Just to go back and highlight them, you mentioned that the external ones have been things going on outside that Argentina cannot control. Interest rates in the U.S. are going up. The dollar is getting stronger. You mentioned that development makes it hard for Mauricio Macri to maintain his gradual fiscal consolidation. Is that right?

De Bolle: Yeah. That is right. One danger of this gradualist approach that the Macri Administration had was that because it was going to take longer to fix all of these underlying problems that Argentina had, that at some point... because we knew back in 2016 we already knew, that at some point overall, not speaking just of the U.S. and the Fed, but overall for the world as a whole, monetary policy and advanced economies was going to start to be less and less expansionary and perhaps be more and more normal. These exceptional stimulis that were stimulized that were given everywhere were going to start to be removed. The Fed, of course, was the first one to act. But now we have the ECB possibly getting ready to remove some of its monetary stimulus, which is adding to this whole shift in investor sentiment towards emerging markets.

De Bolle: The problem with the Macri gradualist approach was always that at some point in this span of time that he was going to need to fix the economy, the global situation would change. Specifically, global monetary policy would change. If that happened at a time when problems were still significant in Argentina this would make them look excessively fragile in comparison to other emerging markets, which is exactly what happened.

Beckworth: He needed a lot of luck.

De Bolle: Exactly.

Beckworth: He needed the stars to align perfectly. He needed the U.S. to maintain its stance as well as the rest of the advanced economies, as you said. You also mentioned in your piece though, that in addition to that, it would've been nice for Argentina if President Trump had not engaged in these trade skirmishes with China and other countries. That just further rattled investors. They're not sure about the outlook. On top of the fact that the Fed's tightening, the dollar is getting stronger, we now have trade uncertainty. It's the worse kind of policy mix for a place like Argentina, right?

De Bolle: It definitely is because... for emerging markets as a whole but for the ones that are really vulnerable in particular. Argentina is right at the top of that list. The moment you start introducing that kind of uncertainty in the global macroeconomic outlook, the inevitable reaction by markets and by investors is, "We're going to seek safe havens." When we talk safe havens, we're talking, everybody runs off to dollar assets, specifically to the 10-year Treasury Bond. That's just the way things are. That's just the way things work. Whereas, a few months ago, before this whole trade war talk started, there was a sense that the global economy would be able to withstand well the monetary retraction that was likely to happen. The overall growth scenario was okay. Things were moving in a good way, including for emerging markets.

De Bolle: Suddenly, that turned on its head when we started getting these headlines of trade wars. If there's one thing that everybody knows, it's that trade wars are bad but nobody knows exactly how bad they can be. They can be really bad. They can be half-way bad. They can be moderately bad. In any event it is, for emerging markets, a risk off kind of event. It's an event where investors basically say, "We don't know what to do with this. We don't know how to quantify this. We don't know how bad this can be, so let's get out of risky assets." Emerging markets being issuers of a lot of these risky assets, are the ones that investors get out of first. The ones that run on even before they run on everybody else, are exactly the ones that are perceived as being really vulnerable. So, yeah, there were a lot of external factors going on that explain in a big way why things went down in Argentina in the way that they did.

Beckworth: Right. You could be an emerging market doing things fairly well, you might be having the right policy mix, maybe you're getting your fiscal balance in order, maybe some structural reforms but you're always going to be susceptible to what I call the U.S. monetary superpower acting and the dollar strengthening.

Beckworth: I had a previous guest on the show, Ethan Ilzetzki and he had a paper with Kenneth Rogoff and Carmen Reinhart, where they go out and measure the number of countries, as well as world GDP, they permit that way as well, in terms of how many of the countries or world GDP has its currency tied to the dollar in one form or the other. Maybe it's a loose peg or it's a currency board. They estimate upward near 70% of world GDP. In some form, loosely or strongly follow the dollar. When the Fed tightens, when it has a huge effect globally. It creates a financial super storm of sorts if you're not careful. You mentioned though, things were going on inside of Argentina as well. To put things into perspective, even if Argentina had been perfect, it still would've had to deal with this external force it has no control over.

De Bolle: It would. It would absolutely have to. Argentina has one thing that makes that particular point specially hard for them and makes it always true for them in a sense, as it does for any emerging market but even more so in their case, which is that Argentina is what we call a partially dollarized economy. It's an economy that operates with two currencies. It has the Argentinian Peso and it uses the dollar as well. This has been true for a very long time. This is the legacy of the period of hyper-inflation that Argentina went through in the late '70's and the '80's, when the value of the local currency was being eroded day by day by inflation. The "solution" to that was that the government allowed people to actually hold dollar deposits and hold their savings in U.S. dollars and so on.

De Bolle: To date, it is an economy that operates that way. The Peso is used for day to day transactions but the dollar is the currency that's used for savings. The fact that it is a partially dollarized economy, in that sense, it's not a formally dollarized economy, it has its own currency. But it is a partially dollarized one. The fact that it is, makes it even more susceptible to these changes in U.S. monetary policy than say a country like Brazil which is also susceptible to changes in monetary policy but is not dollarized.

Beckworth: That's fascinating. It takes me back to the '90's when Argentina had a currency board where it literally pegged its Peso to the dollar one to one, which further reinforced the dollarization. I remember reading some stories about people would take out dollar denominated mortgages in Argentina with the expectation that the one Peso to one dollar peg would hold forever. It further dollarized the economy on top of what already existed. They're very susceptible to the swings in the value of the dollar.

Beckworth: I like to frame it this way, the Federal Reserve when it sets monetary policy is not doing it just for the U.S. it's doing it for [inaudible]

De Bolle: No. It's doing it for everyone.

Beckworth: It's just crazy. Jay Powell, Janet Yellen, Ben Bernanke, when they sit down, their mandate is the U.S. economy but they truly are a monetary super power.

De Bolle: Yes. Exactly.

Beckworth: Let's go to the internal forces or developments. You've mentioned them already but I'm going go back over them and flush them out. I want to begin with this very fascinating development that the Central Bank of Argentina raised inflation target to 15%. Before, it was eight to 12%. For many of our listeners, for me even, this is a blow your mind perspective because we're so focused on what's happening in the U.S. where the Fed is having a hard time hitting 2% inflation and here we have a country that... man they are so good at hitting inflation above and beyond their target. Tell us why are they running inflation so high?

De Bolle: We Latin Americans are very good at having high inflation. We can teach the world about that. Because we just have the recipe right for that one.

Beckworth: I joked with someone else, I said, "We need to have an exchange program where Central bankers from Argentina come to the U.S. and then Fed officials go down to Argentina." Go ahead and tell us the story.

De Bolle: The basic story there is, A: A whole bunch of macroeconomic distortions. The fact that Argentina has been running for a very long time these high fiscal deficits which have created a lot of problems for the economy but in addition to that and very importantly, during still the Kirchner administration, when the economy was clearly overheating and inflation was going up, what the government should've been doing at that point was trying to reduce the fiscal deficit, trying to do something on the monetary side that would contain inflation.

De Bolle: Rather than doing that, what the Kirchner government opted to do was to introduce a whole bunch of price freezes and price controls. That's a very artificial thing that never holds for very long. You can introduce price controls. You can introduce price freezes. You can start subsidizing a lot of things, for example, you can subsidize utilities. You can subsidize fuel prices. You can use the budget to do all of these things. But then eventually that's just going to add to your fiscal problems and on top of that eventually you're going to have to let prices adjust to where they would've been had you not instituted these controls.

De Bolle: When Macri took over, one of the things that he said he would do but not immediately, not everything in one go, was to start gradually removing some of these subsidies, price freezes, price controls, which were everywhere in the economy. This he started doing as soon as he took office. Of course, once you start doing that, as prices adjust to where they would've been, you get a natural kick in inflation, right? Inflation just goes up by the amount.

Beckworth: Pent up pressures.

De Bolle: Exactly. All the pent up pressures. We'd been seeing that in Argentina. It could've been a lot worse, if Macri had decided to... it would've been politically unpalatable but he could've decided to just remove everything all at once. This is what Brazil did, by the way in 2015 but we're not talking about Brazil today. Brazil did that in 2015 and then inflation skyrocketed all of a sudden. Macri did not want to go down that route but nonetheless he had to remove some of these controls. Then all of that appeared very quickly in the inflation numbers.

De Bolle: It's also why... I mean, the fact that these price controls, price freezes, subsidies, whatnot, have not all been completely removed is another reason to look at these inflation targets that the Central Bank has been setting and look at them with a wary eye. The eight to 12% was never really achievable given all of these price adjustments that needed to be done. Even the 15%, which is now the target, yes, over a longer period of time that is beyond a year or two, maybe that's achievable. But within a year or two, if you're going to be gradual about the way you remove these controls and subsidies and so on, it's hard to see how inflation comes down that fast. It is at 25% right now by the way.

Beckworth: This is super fascinating. So, 15% inflation target is an ambitious goal.

De Bolle: Very ambitious goal.

Beckworth: Which is again, the reverse problem of what we have here. The fascinating point you bring up, price controls. If you go after price controls, you use them, you're really addressing a symptom and not the underlying cause. As you mentioned, the underlying cause is the government is monetizing these fiscal deficits or at least a good portion of them. I was reading the IMF's report, their article four report from last year. They mention that the Central Bank continues to monetize, to buy up government debt and that makes it challenging for it to hit its inflation target. Honestly, it does.

Beckworth: Something else interesting that the report mentioned is the Central Bank is doing some quasi fiscal operations. When it buys up this debt, so it issues more money, the monetary base grows. It then goes and issues short-term Central Bank liability. It's like it's issuing its own treasury bill to mop up the money it just put out there. It's a shell game. In the short run it maybe takes off the pressure but eventually, that's going to have to be monetized as well.

De Bolle: Yeah. That's been a problem. That's one of the things that in the current discussions with Argentina, the current negotiations between the Fund and Argentina, this is definitely one of the things that the Fund wants Argentina to address. In other words, if you're going to be a serious inflation targeter, okay, yes, we understand that there are all these institutional transition issues. The previous government had no Central Bank that was in any way autonomous, it had basically... the Kirchner government had a Central Bank who's sole objective was to monetize the deficit. That's all they were doing. Instituting capital controls and intervening in foreign exchange markets at the whim of the government.

De Bolle: You're transitioning now from that system, which is really an institution that has no credibility whatsoever, to one where you need full credibility of this institution if it's going to be an inflation targeter. Because of course, we know that credibility is everything when it comes to hitting your inflation targets and signaling to markets if that's what you're doing.

De Bolle: In the process, however, because this is still a transition, there's still these glitches. The things that you mentioned, that the Central Bank has been issuing are the so called Le Baques. These are the actual instruments the Central Bank uses to intervene in liquidity management in day to day monetary management. It's been doing a lot of that. It's been doing a lot of these things. You're right, that eventually if you don't completely sterilize these operations, they turn into money creation which of course goes exactly against your objective of bringing your inflation rate down toward your target. They have an issue there that they need to resolve.

Beckworth: Yeah, very fascinating for people who like to study money to see this operation. In some ways it's similar in spirit to what the Fed's doing with excess reserves, although the Fed has a better control and better inflation expectations, more credibility than the Central Bank of Argentina. I want to go back to the data issue. You mentioned for 2015, 2016, the inflation data was missing or is missing. I've seen some estimates. I've gone to the IMF and I've looked for that data too and they leave it blank. I've seen some private sector estimates. I believe 2016, some people put it up to as high as 40%, is that right?

De Bolle: Yeah. During all this period when Argentina had no real proper statistics to speak of, there were a number of private consultancies down in the country that were basically calculating some of these things themselves. Inflation is fairly easy to calculate in a way, especially if you're a country like Argentina where if you're able to calculate inflation for Buenos Aries, which is the capital and the main city in the country, the largest city. You basically capture a lot of what's probably going on all over the country. If you're able to calculate an inflation rate for Buenos Aires, you're probably coming close to what the actual inflation rate for the entire country is.

De Bolle: That's what a lot of these private consultancies and other private sector players were doing throughout this time. Those figures, they probably come close to what was actually happening. Yes, the inflation certainly peaked at somewhere around 40% per year, which is very high but let's just remember it's not nearly as high as what Argentina had in the past. Argentina had four digit inflation in the past, which these days is even harder to imagine. You're right. The worst it got was somewhere around 40% at precisely around that time period when we don't have any kind of official data whatsoever, not even from the calculations of the IMF.

Beckworth: Yeah, so Mauricio Macri has his work cut out for him. He definitely inherited a mess from the previous administration. A few more thoughts on inflation targets. Inflation is running 25%. The goal is to get it to 15%. Again, the challenge they face is they're still going to be peeling off or bringing back some of these price controls which will inevitably lead to these one time increases going forward. You're suggesting that we shouldn't hold our breath too long in terms of the inflation target. They're going to have some struggles going forward.

De Bolle: They are. They are definitely going to have some struggles going forward.

Beckworth: Okay. Now, also, on the inflation target, just going back, revisiting this change in the target, when they raised it they made this announcement. It's realistic on one hand, you're admitting inevitability, look, 15%, like you said, it's ambitious. Let's be realistic about this. On the other hand, the way it looked probably wasn't very ideal. I was reading one account where the President's Chief of Staff was in the room when the Central Bank had this news conference and some things you've mentioned, it looked like or it could be interpreted as the President's playing these funny money games again, as opposed to they really are trying to be serious and admit the realities of the situation.

De Bolle: That's exactly right. That's always the problem in a country like Argentina that is really in the process of rebuilding its reputation after years and years of macroeconomic mismanagement, political interference and all of these things. That particular episode was especially problematic for them. Two things happened. On the one hand they raised the inflation target, on the other they reduced interest rates. In all of these announcements, there was somebody from the President's office or somebody close to Macri who was sitting in the same room as the officials from the Central Bank were announcing these things. It made it look as if there was political interference going on. Of course, the first thing that people are going to suspect given that the history of Argentina, the recent history at least, has been one of political interference all the time. The first thing that's going to come to mind when you see something like this is oops, it's back again. Here we go again. We're going down the same path.

Beckworth: Right. People are reasonable to have those suspicions given the history.

De Bolle: Very reasonable.

Beckworth: Maybe to paint this out for an American perspective, imagine if the Fed announced shortly they were going to raise their inflation target to 4% and President Trump's Chief of Staff was in the room as J. Powell was saying this. It would definitely look a little bit fishy and make one wonder if the President was wanting some easier monetary accommodation for his fiscal policy plans.

De Bolle: Exactly.

Beckworth: As you mentioned, this is a very fascinating turn of events this past year because 2017, things were looking great. As you mentioned, Argentina was the darling of emerging markets. They issued 100 year bond, which is really kind of neat from the capital markets perspective. Although, Argentina is not the first place you would imagine a country doing that. Maybe the U.S., maybe the UK, maybe Germany. Argentina went out and they boldly went where no country has been in a long time. That was fascinating. As you mentioned, emerging market investors were all over that bond. They were excited about it. The IMF itself, I read the report again from 2017. I'm going to read some excerpts from the first paragraph.

Beckworth: It says, "Argentina's government has unwound multiple distortions and made important progress in restoring integrity and transparency in public sector operations. These policy changes have put the economy on a stronger footing and corrected many of the most urgent macroeconomic imbalances. Argentina is experiencing a solid recovery from last year's recession and even in the face of planned fiscal consolidation and ongoing efforts of disinflation, growth is expected to consolidate in the coming years. Inflation continues to fall albeit is slower than placed in target by Central Bank."

Beckworth: They go on to give a more nuanced story once you dig into the document but the executive summary is a little more sanguine than what we're seeing today. It's fascinating to see how these things can turn really quickly.

De Bolle: Yes. It is. It reminds one of the late economist or great economist, actually, Rudi Dornbusch, what he used to say about Argentina. He used to have this very good phrase to define country. He'd say, "There are poor countries, there are rich countries, there's Japan and there's Argentina."

Beckworth: Really. That's fascinating.

De Bolle: Which brings us exactly to what you said.

Beckworth: It's tragic because Argentina at one point was one of the richest countries in the world. I've read that up until about 1930, the great depression before the Peron's governments took over. Argentina was literally one of the richest countries in the world on a per capita basis. It has all these resources, all this potential. It's frustrating to see a country that could be something so much more repeatedly going through the cycle to have its own distinction from Dornbusch.

De Bolle: Yeah. Absolutely. As you say, Argentina was for the better part or the pre-world war II part of the 20th century. It really was way out there in terms of in the region. It was a rich country by any standard. If we had had a world bank at that point... we did it until after the war. But if we had, Argentina would likely have been classified as an advanced economy.

Beckworth: That's fascinating.

De Bolle: If you think about it's a really big fall, right? From grace in a way.

Beckworth: It is. Yeah. It's very fascinating.

De Bolle: You're right. All of it, when you go back over Argentina's history and economic history and so on, you can pretty much pinpoint everything. The starting point of Argentina's downfall was Peronism, was Peron, was import substitution, all the other things that were done in Argentina in the late '40's and '50's. The way that politics and economics just moved from there on. That's really a turning point.

Beckworth: This also raises the interesting counter-factual, what if there hadn't been a great depression? What if the world had not been tied to the gold standard of the interwar period so tightly and things have gone better? Maybe the door would've been open for that reign of governments in Argentina.

De Bolle: That's one good point. The other point is, what if Argentina and Brazil... which actually had policies that were very similar to Argentina at that particular point in time. What if they had adopted the development model that the Asian countries adopted? By the way, the Asian countries here, I mean South Korea and Taiwan, which at that point in time, the '40's and the '50's were very poor countries and their incomes per capita were way below those of Brazil and Argentina. Yet within 20 years they were far above the income per capita of Brazil and Argentina because of the development models that they introduced. It begs the question, what if Argentina had for example, followed through or adopted a similar development model to the one that the so called Asian tigers used, where would the country be today?

De Bolle: What if they had been less populous? Since that word has become so common these days, what if it had been less populous under Peron? What if it had been more pragmatic in terms of opening up its economy, trying to have an industrial sector and that could walk on its own feet without having so much government intervention. What if it had used the technology transfers from being a much more open economy at that point to further its development, where would it be? That question I also think is fascinating to dwell over and to think about.

Beckworth: That's a great observation because many countries did go through the great depression and yet came out with good runs of growth and that could have been Argentina and Brazil as well had they had different policies. Let me move to the Kirchners... because they're a very fascinating pair of couple. Néstor and Cristina Kirchner, they both ruled at different times. They brought on a lot of these policies we're talking about that are now plaguing the economy and have plugged the economy. You mentioned they doctored the statistics, which is fascinating. Let me quick diversion here. Do they literally like fire all the economists at the statistical agencies there? They just shut them down, cut their funding.

De Bolle: They did. They really asphyxiated the national statistics office. They pulled up funding. Then you had all of these career people, very good people who had been... who were excellent technical people and who had been doing that kind of work for years. They basically left.

Beckworth: You lose all that human capital…

De Bolle: They lost a lot of humans. Yeah. Exactly. They lost a lot of human capital.

Beckworth: They got to rebuild. They did that. There's also the famous 2008 complex with farmers. They try to squeeze resources from the economy. They went after farmers. But I want to go back prior to what they're best known for. That is the defaulting on their debt, you mentioned this. They had... Argentina had built up a a hundred billion dollars in debt. They defaulted in 2001. I was actually at the U.S. Department of Treasury. I was working in the office of Western Hemisphere Affairs, my colleague cubicle next to me was the Argentine desk officer occasionally help them a little bit on this. But he had the exciting portfolio in the office because he was covering this in the midst of the negotiations, which eventually in 2005 resulted in Argentina offering a deal where basically every... where the creditors, we get 33 cents on the dollar and quite a big write down.

Beckworth: As I ran understand about 90% of the bond holders accepted these terms. But then there were holdouts and eventually this... maybe it's not a fair term but if they'd been called vulture funds, these hedge funds and other investors bought up the bonds really cheap cents on the dollars. They held out and they went after Argentina. The court systems made life hard for them. They seized ships, they seized assets outside the country. Eventually a U. S. judge, judge Thomas Griesa, in 2012 said that no one else could receive payments from Argentina until the government settled up with these vulture fund, these holdouts. This really set a precedent. I guess my question to you is, do you think it's a bad one or do you think it was just something that had to be done for Argentina to get back into the capital markets?

De Bolle: They had no choice. They had to resolve that legal issue because otherwise they would have been locked out of capital markets until that issue had been resolved. It was really very far from a first best situation but one that was basically inevitable. The Macri government had to settle that one. Does this set up bad precedent? At the time I remember that a lot of us, including a lot of colleagues at the Peterson Institute that worked on debt restructuring we're very concerned because of course when you had a debt restructuring as ruinous as an Argentina's and as noisy as Argentina's was, finally you managed to settle on something and you actually get the restructuring done, anything that later unused that process, throws the whole thing up in the air.

De Bolle: A lot of people were concerned and right we still I think, with the possibility that the whole restructuring would unravel because for the investors who had actually accepted the terms of the restructuring. This seemed like a contract breach. With the government going and doing what these hedge funds and vulture funds wanted them to do. But as things came to pass, it didn't actually turn out that way. The investors were accepted. The original terms of the restructuring, they weren't too happy. But I think at that point they were all pragmatic and they all said, "This had to get done. They had to do this. They had no other choice. Now it's a different game. It's a different Argentina, it's a different government. Let's just move on."

De Bolle: I think that's pretty much how we played out. Would this affect any... in the broad spectrum of that restructuring? Would that particular Argentina issue set a precedent for other countries or the fear that that could happen to other countries? In a way I don't think so because the Argentina, that restructuring was so complicated in many ways because of Argentina itself. The government took so long. After it defaulted in 2001. It wasn't until 2005 that they actually sat down in good faith with their creditors to negotiate. Before that it was a lot of back and forth between Argentina and creditors and most of that was just a lot of infighting between the two camps.

De Bolle: I remember this well because at the time I was working at the IMF. While I was on a different team I was working on Uruguay. Uruguay had gone through a debt restructuring that had actually been very successful and the Argentina team was trying to apply some of the lessons of the Uruguay case to the Argentina case. We were working closely together with the Argentina team. I got to see some those problems between the government and the creditors. It was really very Argentina specific. My own sense is that a generalization that says, "The Argentina case sets a bad precedent for any other, than restructuring." I'm not so sure.

Beckworth: That's reassuring. Let me ask this question then. When I was at treasury, there's a lot of talk about this and I know they've been incorporated but they were discussing collective action clauses so that there can be no holdouts, I guess. Is that right?

De Bolle: Yeah. What the CACs do, the collective action clause's do, is that they... if there is agreement on a debt restructuring by a qualified majority and that qualified majority is defined, there's a threshold that defines it. It can be 60, 70, 75%, countries adopt different thresholds for that. The norm is 70, I think that's what most countries use. That's what Brazil has in its bonds. I think that's what Mexico has in its bonds. When you have that kind of clause in your bond, what it basically says is... let's say it's 70%, what it basically says is, if 70% of a country's creditors accept the terms of a restructuring, that binds everybody else. That binds the other 30% that haven't yet said whether or not they accept. That essentially eliminate the risk of having holdouts and having this long protracted judicial fights that Argentina had over several years.

Beckworth: Another reason to be hopeful that this won't be repeated in the future.

De Bolle: Yeah. Most emerging markets these days issue... when they issued debt externally, they issue debt with collective action closets. Most of the debt of a lot of countries these days, has these things in them which prevents that sort of thing from happening.

Beckworth: Very fascinating developments in Argentina and we will be following them closely throughout the next few months. See what happens. I want to move on to Venezuela and the time we have left. Now we won't be able to do it justice in the limited amount of time we have but I do want to focus on maybe the monetary side of the story here. There's lots of discussions out there about what fundamentally has gone wrong. But I wanted to just zoom in on the fact that Venezuela is now the poster child for hyperinflation. They dealt with it in different ways. People are suffering. Venezuela is losing population.

Beckworth: A lot of developments have fallen out of that. My understanding... correct me if I'm wrong, is that during this last election, which is understandably been called a bit of a setup, not a truly legitimate one, Nicolás Maduro, he won a six year term. But one of the key points of discussion was what to do for monetary reform and Maduro was talking about an oil-based crypto currency, the Petro and the one opposition candidate was talking about dollarization. What are your thoughts on this? I mean, on one level, I see this as maybe dealing with a symptom of a deeper problem but if they are going to go about reforming monetary conditions moving forward, do they have any good ideas down there?

De Bolle: They can't reform monetary conditions unless they do an entire overhaul of everything. Until they have credible fiscal institutions in place, until they have an actual strategy for fixing all of the huge institutional problems that they have, until they have a treasury, until they have a ministry of finance, until they actually have a central bank. You can't... there is no silver bullet. The cryptocurrency stuff is really about trying to capitalize on a what is not anymore, a fad, what was a fad few months ago. Obviously, there are lots of trust issues associated with that. Apart from all the other issues that we know of, the U.S. sanctions, who can buy Venezuela in cryptocurrency and all of that. That was never going to fly.

De Bolle: The dollarization idea is something that maybe can work in Venezuela but not now. Before you get there, you actually need to rebuild the country. That's not going to happen under Maduro, clearly, because that's not what he's doing. It would have to be a new regime that would come in, would try to rebuild all of these other institutions to have a proper finance ministry, have a proper treasury, have the semblance of an economic framework. Then if there is a complete lack of monetary policy credibility as there usually is in a country that's gone through hyperinflation, perhaps you can consider a dollarization as an option.

De Bolle: Although, it comes with a lot of costs. Because think Zimbabwe, Zimbabwe went through a massive hyperinflation and not too long ago, they saw their only way out adopting the dollar as their currency. The problem is that when you do that, you lose the ability to do your own monetary policy, to have your own exchange rate, to have these additional macro policy instruments and tools that allow you to adjust in times of stress. It's not an obvious case in the case of Venezuela that dollarization is necessarily a good thing. It's something that can be thought amongst several other options. But only after there's been a change in regime. I mean at this point, again it won't do anything. It doesn't resolve anything.

Beckworth: To try and fix inflation is really dressing a symptom, not the underlying structural problems that have led to inflation in the first place.

De Bolle: Exactly. If you have to... it's basically putting a band-Aid on something that is festering down there. You have to attack the infection. You can't just simply put a band-Aid on top. That's what these solutions are, dollarization, cryptocurrencies, these are band-Aids to a terrible problem that hasn't yet been addressed.

Beckworth: The state will continue to monetize it but it hasn't been fixed. A question I have is, how likely is it we will see reform in Venezuela? One of the challenges that Venezuela faces is it has so much oil. There's always going to base the resource... curse words. It's always going to want to rely overly so on this resource to fund operations. Whenever oil prices go up, they go down. It makes it easy for someone to come in and make big promises. Do you see the oil resource as a key impediment in getting some reform done down there?

De Bolle: Not necessarily, because if we think before Chávez, this was always true in Venezuela. Venezuela has been trying for decades to diversify its economy but the oil sector is such a big thing in Venezuela that that is really a very, very difficult thing to do. Resources just end up going to the oil sector. Before Chávez came in, what used to happen in Venezuela... Venezuela was actually not a badly run country. This is the tragedy of Venezuela as well. You look at South America, there are all these economies that have been so badly managed in so many different times in history. The one that we just just been discussing, for example, Argentina. Then you take Venezuela. Venezuela doesn't have the history that Argentina has.

De Bolle: In fact, Venezuela has quite an okay history. It didn't have... before Chávez, it had pretty much a well-functioning democracy. It had some bad times when oil prices were down and then they had some good times when oil prices were up. By and large, as I said, it was an okay managed economy, with proper institutions functioning and doing relatively well. Then Chávez came in and for the first few years he actually wasn't too crazy. But then he started dismantling a lot of institutions in the country. He died, Maduro took over and Maduro was not Chávez, is not Chávez. He just didn't know what to do. He also inherited a situation that was going bad in the first place and he made things worse.

De Bolle: So really the tragedy of Venezuela is that it's become something that is never was compared to other countries in the region. Then now it has to find its way back. Finding its way back means changing the political regime. There is no other way to say it. That's what is required.

Beckworth: And oil could be a blessing if used in the right way.

De Bolle: Yeah. For much of the time, at least when you compare to.... when you compare Venezuela to other oil producing countries, prior to Chávez, yes, there was corruption. There always is when you have one big resource sector, it's inevitable unless you're Norway. But it wasn't that bad. It wasn't a situation that ever was going to blow up the country or anything like that. What really blew up Venezuela was the terrible management of the economy that came with Chavismo. In addition to that, all of the other "revolutionary" ideas linked to Chavismo that basically generated this massive institutional destruction.

Beckworth: There is hope for Venezuela?

De Bolle: There is but we don't know when it's coming.

Beckworth: Okay. On that somewhat positive note, our time is up. Our guest today has been Monica De Bolle. Monica, thank you so much for coming on the show.

De Bolle: Thank you. It was a great pleasure.

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