February 28, 2014
The Wall Street Journal today published a report trashing Argentina based on an economic mistake which renders the article meaningless. The headline:
Devaluation Hurts Argentina’s Regional Standing: Colombia Has Likely Overtaken Argentina as Latin America’s Third-Largest Economy
The article is laden with gloating and derogatory language such as the opening sentence: “Following Argentina’s humbling currency devaluation, the country is suffering another economic embarrassment …” and “’This is symptomatic of a broader trend that is seeing Argentina’s economic model unravel..’”
Actually, it’s not symptomatic of anything, including the relative living standards in Argentina and Colombia or the rest of Latin America. When the peso is devalued against the dollar, the size of the Argentine economy measured in dollars is smaller. This does not mean that the living standards of Argentines have fallen.
If the U.S. dollar falls against the euro, Americans who travel in Europe will find it more expensive. But most Americans get their income in dollars and spend it in dollars, and will only be affected negatively by the exchange rate to the extent that some imports become more expensive. (In fact, there is a very strong argument that most Americans would be better off with a significantly lower dollar, as we would reduce our trade deficit, increase employment and therefore wage growth, and cease to be dependent on asset bubbles for growth as we have in the past two decades.) U.S. GDP measured in euros will be smaller, but who cares?
The same is basically true for Argentina, and most economies in the world. That is why economists have developed another measure for comparing the GDP of different countries, called purchasing power parity (PPP) dollars. This compares GDP and living standards across countries by taking into account differences in prices and the exchange rate, so that a PPP dollar, converted to the currency of each country, will buy approximately the same basket of goods and services.
In terms of PPP GDP, IMF figures for 2013 show Argentina to be the third largest economy, with a margin of 28 percent over Colombia. Much more important though, since having a bigger population doesn’t make your people richer, is comparing PPP per capita GDP. Here Argentina ranks second in the Americas, again according to IMF data, with PPP per capita GDP of $18,582, to Colombia’s rank of 11, with PPP per capita GDP of 11,088.
Ironically, the most recent devaluation that this article reports as causing “humiliation” and “an economic embarrassment” will very likely help the Argentine economy, as it has helped the government to stabilize the both the official and black market rate of the dollar – which is essential to stabilizing the economy and bringing down inflation. And it will also give the economy a boost by reducing the trade deficit.
The article also makes reference to a study, apparently not yet published, which claims that Argentina’s GDP is 12 percent less than official figures indicate. This is possible, since inflation had been underestimated since 2007. (As the article notes, a new inflation index went into effect in January which should correct this underestimation). If we assume this estimate to be accurate, Argentina’s economy (in real, i.e. inflation-adjusted terms) grew by 81 percent from 2002-2013, or 5.6 percent annually. This puts Argentina in 3rd place of 32 Latin American and Caribbean countries, with only Panama and Peru showing faster GDP growth over this period.