May 22, 2012

Argentinian Central Bank Targets Growth, Not Lower Inflation

John Weeks: The Central Bank of Argentina breaks ranks with neo-liberal banking policy and targets jobs over lower inflation
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John Weeks is a professor emeritus of the University of London's School of Oriental and African Studies and author of Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy. His recent policy work includes a supplemental unemployment program for the European Union and advising the central banks of Argentina and Zambia.


Argentinian Central Bank Targets Growth, Not Lower InflationPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.

Most central banks around the world preach fiscal discipline. Inflation is their biggest concern. And even when they do enter into some stimulus policies, the final objective is still the issue of lowering debt. Well, one central bank in the world apparently has a growth agenda, and that's in Argentina.

Now joining us to talk about this is John Weeks. John just was in Argentina not very long ago. He's a professor emeritus at the University of London School of Oriental and African Studies. He's the author of the book Capital, Exploitation and Economic Crisis. He runs And he now joins us again from London. Thanks, John.


JAY: So what did you make of what the central bank's doing in Argentina?

WEEKS: It's tremendously important, because in the 1990s Argentina was the epitome of a neoliberal monetary policy. It had something called a currency board, and that currency board involves taking the foreign exchange you hold, which is, in the case of Argentina, dollars, and that your domestic money supply is rigidly tied to the amount of dollars you hold. Of course, the amount of dollars you hold is a result of your imports and exports, the balance between the two, and so in effect you have no independent monetary policy. And it tended to be quite deflationary, that is, it tended to cause not only very low inflation, but actually negative rates, and also very slow growth.

At the end of the 1990s, the disaster that that policy had inherent in it was realized, and in 2001 and 2002 Argentina could no longer maintain that policy, because what it meant, basically, is that if you began to lose dollars because you were—Argentina was running a trade deficit, it meant you had to contract the economy, because you had to take your domestic currency out of circulation, more and more of your domestic currency out of circulation. And that led initially to a severe recession in the economy. When that could no longer be maintained and they temporarily went off the currency board, you had hyperinflation for a year.

Okay. The current government of Cristina Fernández has repudiated that policy. They have introduced a new central bank law (they had actually been practicing it, but they formalized it in this last March, just two months ago) which completely ends the currency board regime and replaces it with a central bank that facilitates a growth-oriented policy of the government. And it also is concerned about inflation, but inflation no longer becomes a constraint, the tail that wags the whole dog.

JAY: So how do they do that?

WEEKS: Yeah.

JAY: So what are they doing, exactly?

WEEKS: Well, the economy has grown very rapidly since the end of the currency board. It's grown at about 7 percent since the currency board collapsed in 2002. That has been brought about by the flexible monetary policy which was allowed within the confines of the old rules but was not sufficiently flexible to be sustained, but primarily through a government which pursued a policy of active fiscal policy, expansionary fiscal policy, combined with public investments in infrastructure.

JAY: Okay. Well, what does that mean, "by flexible monetary policy," specifically?

WEEKS: Well, what it means now is that—an inflation-targeting policy is what most governments in Latin America—well, no, that's true—Venezuela's doesn't, and—nor does Bolivia, but many, many governments in Latin America and, of course, the dreaded European Central Bank follow. That means you set an inflation target, usually a low inflation target. That happens to be 2.5 percent in Europe. And then, if it appears that the economy is going to exceed that rate, then you rein in the economy by using the central bank interest rate, by making it harder for businesses and for individuals to borrow. So that in effect means that you're compressing the economy, reducing the rate of growth, in order to keep the rate of inflation down.

A flexible monetary policy sets the rate of inflation consistent with a growth target. But that would be the simplest way. So instead of having an inflation target, you have a growth target. Say you have growth target of 5 percent, for example. Then it becomes a question of how much inflation you're going to allow with that growth target. And in the case of Argentina, the government has been prepared to allow an inflation target upwards towards 10 to 15 percent, though it hasn't been that in every year. In most years it has been well below that, on the argument that it is more important for people to be employed and for them to have rising incomes and to have incomes that are rising faster than the rate of inflation so their real incomes are going up. So with the real incomes going up, you can live. You don't have to have a 2.5 percent or 3 percent rate of inflation, because you have a real economy [incompr.] expanding, so your money wages are expanding faster than rate of inflation.

JAY: So the argument one hears against this is that it gets out of control and inflation starts growing faster than real wages, so there's no real advantage to workers. That's the argument that given.

WEEKS: Yeah. That's the argument. It says yes, a little bit of inflation leads to a lot. I would say that's similar to saying conventional war always leads to nuclear war. You know. Rapid inflation, high rates of inflation, are an entirely different phenomenon than what we're talking about. Rates of inflation of zero to 25 percent, all empirical evidence shows that rates of inflation from zero to 25 percent do not lead to hyperinflation. Hyperinflation results when there's some terrible breakdown in the economy, such as—in another interview I was talking about Greece. If Greece—if the Greeks were to abandon the euro, they would get hyperinflation, because all of a sudden the whole institutional framework has changed so dramatically. Alright?

I'm not in favor of 20 percent inflation, but I'm in favor of growth. And so the question becomes managing inflation in the context of growth, not managing growth in the context of inflation.

JAY: So what are the numbers in Argentina, then? What is inflation, and are wages keeping up with it?

WEEKS: Wages are keeping up with inflation. There's considerable debate about what the current rate of inflation is, less about what it's been in the past. The critics of the government say that the rate of inflation is about 25 percent. The government says it's about 15 percent. This is partly a question of how you measure it and whether you're measuring low incomes or high incomes or GNP as a whole.

The point, the central point, is not the exact rate of inflation but the fact that the economy is growing and real incomes are growing, that is, in real terms, in terms—when we say real terms, what I mean by this: how much is being produced, the goods and services being produced, the real things people are consuming, the amount of food they eat, the amount of durable goods they can buy are going up. And this is true of the working class and of the middle class. And that's partly, I should say, the result of the government's taxation policy to prevent inequality from getting out of control.

Let me put this slightly in context. So you asked me, you said that the argument against [incompr.] quite correct—against permitting or tolerating a certain degree of inflation is: further along the road you're going to come to regret it, because inflation will grow faster than wages and then there'll be a decline in income. Turn that argument around. If you pursue low inflation, you have low growth. You can never recapture the growth you missed. You know. If you're in a country that this year grows at 2 percent when it could grow at 4 percent, you'll never get those two percentage points back. And if you have unemployment, as in the United States, around 8 percent and you could have unemployment down around 5 percent, that 3 percent of the workforce that's unemployed this year, they will never get this year back. You know. So it's—I think raising the question of what is foregone as a result of allowing inflation is completely spurious. The real question is: what do you forgo as a result of having low growth and high unemployment?

JAY: Now, the other argument against this is what happens to people on fixed pensions. In Argentina, are pension rates being raised at the same level as inflation?

WEEKS: This is a somewhat complicated question, because there are public pensions and there are private pensions. It's difficult to pursue them all. But basically the answer is: yes, they are. But I think again that is a spurious—to a certain extent a spurious argument, because the real people who gain from a low-inflation regime are the banks, and they are the losers, usually, in a high-inflation regime. So those people on fixed pensions are brought forth as an argument by the right wing in order to say, oh, we're not arguing for us; we're arguing for the little old ladies, you know, that have to go down to the market and make their pennies and make their pesos go so far. And inflation—sure, inflation undermines people's expenditure in the sense that it makes things more expensive, but you can deal with that if the economy's growing. You can deal with it by raising the state pension. You can do it formally by indexing and you can do it bit by bit. You can index wages. In the case of Argentina, they have not indexed wages, but they do it through national bargaining. So there are mechanisms of dealing with moderate inflation. If you have slow growth and you have unemployment and you aren't prepared to reduce that employment, there's no way to deal with that except to pay poor relief.

JAY: Thanks for joining us, John.

WEEKS: Well, thank you.

JAY: And thank you for joining us on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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