Deflation did not cause Argentina's economic boom

It should be acknowledged that under certain conditions, devaluation can boost growth. But Argentina's boom was caused by rising commodity prices, not deflation.

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    In this file photo, Argentine President Cristina Fernandez, center, gives a speech during her closing campaign rally in Buenos Aires, Argentina. Karlsson argues that Argentina's economic boom has little to do with its period of extreme deflation in the early 2000s.
    Vistor R. Caivano/AP/File
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After suffering a deep contraction in 1999-2002 (GDP down by 11% in 2002 alone), Argentina had according to official statistics a strong boom in the 2003-07 period, with growth at 9% per year. Some argue that this strong recovery proves that the devaluation in early 2002 was a great success and that it shows that devaluation can boost the economy, and so if Greece and others were able to re-introduce their currencies and devalue them then they would recover too.

It should be acknowledged that under certain conditions, devaluation can boost growth, namely if deflation causes real interest rates to rise above the natural interest rate level, something that we saw during the Great Depression. Argentina had deflation in 1999-2001, but because deflation was so moderate (1-2% per year compared to the 10% deflation during the Great Depression), it played at most a very small role.

but why did it grow so fast then? Well, first of all it should be noted that official statistics likely exaggerates growth. Although the government angrily denies it and even prosecutes some who points it out, it is widely known that it has in recent years systematically underestimated inflation. And given a level of nominal growth, a too low estimate of inflation means a too high estimate of real growth.

Still, although not as high as the official numbers there is little doubt that the economy has grown fast since 2002. However, that is mainly due to the commodity price boom since 2002. Argentina's exports consists mainly of commodities, particularly agricultural commodities like soy beans, wheat, corn and beef, but also for example oil and gold. Soy beans for example, which alone is 25% of total exports has increased by 150% since 2002.

The story behind Argentina's boom is thus pretty much the same as that of North Dakota's, whose boom is obviously not due to devaluation since its U.S. dollars has had the same 1:1 exchange rate to U.S. dollars in the other 49 states during the period.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.

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