Argentina, Catamarca, and Globalization

1. Argentina, Catamarca, and Globalization Joseph E. Stiglitz Argentina April, 2008

2. Argentina, Catamarca, and Globalization Celebrating 350th anniversary of Andalgalá Founding based on early globalization—migration from Spain to the New World Argentina’s growth and prosperity has been based on globalization Selling agricultural commodities and natural resources Importing manufactured goods Subjecting Argentina to the vicissitudes of the global market place Argentina’s future prosperity will depend on how well it manages globalization Looming recession in the US and global slowdown presents the most immediate challenge How it manages its natural resources and agricultural commodities, as well as its finances, presents the long term challenge

3. In the past, Argentina did not manage globalization as well as it should/could Fixed exchange rate—tied to the dollar—was an impossible exchange rate regime Especially a mistake, given that only 10% of Argentina’s trade is with US Excessive borrowing—to finance consumption—gave the illusion of success; GDP grew, but it was not sustainable Following advice of IMF (Washington Consensus Policies) provided wrong economic framework Privatization of government enterprises—with proceeds largely consumed—meant the country was poorer Liberalization Capital market liberalization was at the root of the global financial crisis of 1997 Mismanaged financial market liberalization is at the root of the problems facing America today, in 1987, 1989, late 90s, and early years of this century

4. Argentina has been buffeted by global forces East Asia crisis/global financial crisis of 1997/1998 led to higher interest rates, that helped bring on the Argentine crisis Other policies pushed by IMF contributed greatly to the crisis—and to the post-crisis risk Including utility prices fixed in dollars Investment agreements pose huge potential liabilities It was a mistake to sign these agreements Rights without responsibilities Deficient judicial standards

5. But after the crisis, Argentina has managed its economy impressively Didn’t accept dictates of the IMF—recognized that no agreement was better than a bad agreement Renegotiated debt Grew robustly Performance in last four years has made it one of best performing economies in the world Last two years growth has averaged 8.55%; last quarter of 2007, exceeded 9%.

6. Managing globalization well is not easy Argentina, like many developing countries, benefited from global commodities boom Also benefited from low global interest rates But developing countries are left to bear the risk of exchange rate and interest rate fluctuations Even though with well functioning markets, developed countries would bear these risks Argentina’s de-dollarization was an important move in the right direction Implication: Important not to borrow excessively from abroad Especially in dollars or euros Live within one’s means Generate adequate tax revenues Resource taxes (including land taxes) non-distortionary Export taxes may be a second best response Encourage savings

7. Special problems posed by natural resources/mines Natural resource curse—on average, countries with large endowments of natural resources have not done as well as those without resources And have been marked by greater inequality Even though in theory, there should be less inequality No need to worry about incentive effects on savings or work Same is true of regions within countries with an abundance of natural resources

8. Explanations Not receiving full value of resources Prevalent problem Sometimes associated with corruption Secret contracts Even when contract is good, resource companies often do not honor it Even when country receives full value, little of it may go to region Even though region may bear environmental costs Especially severe with gold Especially severe in many developing countries With net loss of jobs International companies often exploit asymmetric bargaining position Natural resources may create wealth, but not jobs

9. Explanations (cont’d) High volatility of natural resource prices Dutch disease problems Rent seeking behaviors—fighting over who controls wealth rather than working to create wealth Misuse of wealth Taking wealth from below the ground and consuming it is decreasing future wealth: not sustainable Need to view problem as one of wealth management Reinvesting wealth in high yielding assets Human capital Infrastructure That can provide the basis of further investments

10. The Challenge of Globalization Standard theory says that globalization, liberalization may (if well managed) enhance GDP There are large winners The winners could compensate the losers But they seldom do Unless social policies are put into place, the losers could be far more numerous than the winners And there will be a political backlash

11. The Challenge of Globalization There is a growing global problem with globalization as it has been managed In the US, even before the recession, most Americans are worse off than they were in 1999 All of growth has gone to the top Trickle down economics has not worked

12. Challenge for Argentina Mixed Picture on poverty Among developing countries, poverty ranking #4, behind Uruguay, Chile and Barbados, above Costa Rica But in health indicators, the picture is mixed Probability of not surviving past 40—ranked 20th Percentage of children underweight—3rd People without access to improved water—19th (Tied with Turkey, Costa Rica - 18th, Botswana - 20th)

13. An Agenda for Responding to Globalization Improving productivity of individuals Improving productivity of firms Improving social protections

14. Taking Advantage of Globalization: People Education Globalization will require faster change Globalization forces faster adaptation of new technologies More educated people are more adaptable, more capable of doing well with new technologies Life-long learning With schools focusing on learning how to learn Reshaping curriculum In global competition, Argentina will have to do better Of 57 countries in an OECD Student Assessment, Argentina ranked 54th in reading, 52nd in Math, 51st in Science In combined primary, secondary, and tertiary enrollment, Argentina ranked 48th of 172 countries in UNDP Human Development Report

15. Taking Advantage of Globalization: People Active labor market policies Training people for jobs that exist Macro-economic policies that ensure full employment Enhancing productive employment for all Argentinean people, including women Child care facilities

16. Taking Advantage of Globalization: Firms Technology is key to success Research universities play a central role Private sector will underinvest in research because of high risk and spillovers (externalities) Important role for government, through partnerships Well designed programs’ leverage will combine public programs with entrepreneurship in the private sector Manufacturing extension services Adapting an idea that worked well in the nineteenth and twentieth century to the twenty-first Especially important for small businesses, the locus of dynamism and job creation Support of place based and industry based producer cooperatives, especially for small businesses A model that has worked well in Italy Linked to research universities

17. Taking Advantage of Globalization: Firms and Financial Markets Important to strengthen financial markets, with a focus on expanded credit availability and better risk sharing Remedying a market failure—access to credit and imperfect risk markets A new generation of development banks Strengthening local and regional banks Expanding small business lending Youth entrepreneurship program Giving opportunity for those without inherited wealth Using one of our untapped resources, the energy and dynamism of our youth

18. Globalization and social protections Responding to globalization requires strengthening social protections, not stripping them away Evidenced by most successful countries (Scandinavia) But how these are provided will have to change Increasing personal security—not job security—will not only increase individual and family well-being, but will contribute to productivity Individuals that are more secure are more willing to take higher risks Risk-taking is key to success in the world of globalization and new technology Poorly managed globalization can destroy community, bonds that are valued in themselves and contribute to productivity

19. Globalization and social protections Strengthened unemployment benefits—in return for a commitment to retrain: a new social compact Enhancing opportunity Through education, training, and retraining Including through Enhancing Financial Accessibility to Higher Education Through youth entrepreneurship program Through commitment to full employment Reducing the strains on families will enhance productivity Health care security Employment (not job) security Child care/paternity-maternity leave Enhanced financing for higher education A new government mortgage program—variable rate mortgages with fixed payments (variable maturity)

20. Taking Advantage of Globalization: firms and the social pillar Allowing firms to focus on what they should be doing—producing—and not providing social services Assumption of responsibility for social protections by the government Facilitate labor market mobility—helping to embrace change, increasing labor market efficiency

21. Argentina is poised to take advantage of globalization Performance in last five years has made it one of best performing economies in the world It now faces the challenge of moving from a situation in which aggregate demand has been the constraint to one in which aggregate supply is the constraint But in which there is high global volatility and uncertainty The agenda of enhancing productivity of Argentina’s workers and of its firms, combined with enhanced social protections, is designed to enhance productivity, leading to sustainable and equitable growth.