a time when most governments seem incapable of doing anything about
unemployment, worsening economic inequality, and continuing financial
instability, Argentina has adopted a set of striking new reforms that will
enable its central bank to play a much more proactive role in addressing all of
these problems. In fact, the reforms, adopted in March, may be the first shots
fired in a quiet revolution in monetary policy. If successful, they could
threaten to overturn 25 years of conservative central bank policies that have
long been considered best practice by the IMF and central banks around the
new central bank president, Mercedes Marcó del Pont, said the reforms challenge
the conservative axiom that central banks should play a very limited role in
the economy. The bank is now rediscovering its sovereign capacity to formulate
and implement economic policy, she explained, adding that some of the portraits
on the bank's hall of fame would be coming down -- "beginning with Milton
of free markets and "central bank independence" were aghast. The Economist proclaimed that the Argentine
central bank had become the "piggy bank" of the government, "losing the last
shred of its legal independence." It claimed the government's meddling in the
central bank would lead to reckless fiscal deficits and spark out-of-control
inflation. Similarly, The Wall Street
Journal's Mary Anastasia O'Grady reported
the state had "stormed the central bank... destroying the last vestiges of
independence," and told its readers to "Cry for Argentina."
by President Cristina Fernandez de Kirchner and approved by Congress, the reforms
formally abandon the central bank's focus on maintaining low inflation to the
exclusion of other economic goals. From now on the bank will pursue a triple
mandate of monetary stability, financial stability, and economic development.
other words, rather than merely fighting inflation, the central bank will now
play a broader role in economic management. It will safeguard financial
stability through the application of corresponding regulation and it will
promote job creation and more equitable development through the allocation of
subsidized credit to priority sectors. The shift requires the central bank to
coordinate more with government policies and priorities -- a radical step away
from the 25 years trend of "central bank independence."
key reform enables the government to use more of the central bank's $47.3
billion in international reserves for servicing external debt payments, which would
enhance Argentina's creditworthiness. Previously, the bank was required to have
a high level of reserves, but now the central bank's board decides what level
of reserves is consistent with its monetary and exchange-rate policies.
second reform gives the central bank an increased role in supervising the
financial system by regulating domestic credit conditions, including loan
maturities, interest rates ,and commissions, and preventing excessive
risk-taking. A third reform allows for increased central bank help to the
government for financing domestic banks and institutions involved in job
creation and productive investments.
say the changes will help Argentina address its diminishing fiscal and trade
surpluses in the short term. But more importantly, it will allow for greater
financial stability and the use of incentives and disincentives to steer
investment capital and loans toward businesses and projects that increase jobs
and boost domestic production. Critics say the reforms will lead to
over-regulation that will constrain finance, and worry that the government will
go too far with new spending.
changes break a host of taboos in the dominant school of monetarism in
neoclassical economics and conservative policy circles -- a bold effort to show
that central banks can play more proactive roles by providing credit to promote
productive investment and job creation, and doing so with an eye to ensuring greater
interventionist policies have been rare in recent years. In the 1970s, the
financial services industry complained that interventionist central banks were
too easily "captured" by populist governments who recklessly increased public
spending in order to get re-elected. They famously complained that too much
central bank financial oversight was constraining investors' "animal spirits"
and amounted to "financial repression," prompting leaders such as U.S.
President Ronald Reagan and British Prime Minister Margaret Thatcher to promise
liberalization reforms and "independent central banks."
began the trend in the 1980s of IMF loan conditions and policy advice that
pushed central banks to make decisions in increasing isolation from the fiscal
demands of governments -- and thus from voters' preferences. Over the last few
decades, low inflation became the leading goal of monetary policy, regardless
of what else might be happening in an economy, and any fiscal policy goals had
to be constrained to accommodate it. In other words, monetary policy came first,
and fiscal policy goals were second. The financial sector benefited from the
low inflation and the greater degree of freedom to invest capital in
speculative activities afforded by deregulation, but government-spending and
public investment consequently suffered.
dramatic turn will now allow fiscal policy goals to lead, while monetary policy
takes steps to accommodate it. But even after 25 years of having their way, economic
conservatives disagree with the new tactic; Abel Viglione, an economist at the Bueno Aires free market think tank Fiel,
objects to the new mandate precisely because it once again subordinates
monetary policy to fiscal policy.
response to her critics, Central Bank President Marcó del Pont denied
that printing currency necessarily leads to inflation, especially when
inflation is rooted in other causes. While monetarists may view inflation as primarily
the result of too much money in circulation, Marcó del Pont argued that
economists should also consider additional sources of inflation, such as
bottlenecks in supply routes or external factors like price hikes on international
markets -- factors that have been known to spur inflation in Argentina and
other countries like it. In such cases, simply raising domestic interest rates
-- as the IMF often demands -- does little to solve the root of the problem.
What's really needed, in many cases, is increased public investment targeted at
clearing up supply bottlenecks or buffering against external shocks.
it is precisely such increased public investment that is often discouraged by
the IMF, which claims that rising fiscal deficits will lead to higher inflation
and crowd out more efficient private sector investment. Others point out there
is little evidence that deficits lead to higher inflation, and more
importantly, it all depends on what exactly the governments spend: If the
deficit is used to increase public investment in infrastructure, human capital,
technology, and R&D -- measures that will ultimately increase the economy's
future productivity (and more than pay for themselves with higher taxes over
the long run) -- such deficit spending should be OK. Yet critics of this
approach worry the government will squander the expenditures on unproductive
investments or wasteful consumption, only adding to the debt burden.
to economist Gerald Epstein, co-director of the Alternatives to Inflation
Targeting Project at the Political Economy
Research Institute of the University of Massachusetts Amherst, the
Argentine reforms are in line with the historical
practices of many central banks. In both industrialized and developing
countries, central banks were historically more integrated with governments on
macroeconomic policymaking, even coordinating credit allocation policies with
them. Epstein cites several successful economic recoveries after the Second
World War that were based on such collaboration, including examples from South
Korea, Taiwan, China, and India.
will be interesting to see whether Argentina's reforms inspire other countries
to adopt similar changes, thus bringing about a sea change in monetary policy
around the world. International enthusiasm for Argentina's reforms is building:
economists in the UK, the U.S.,
Turkey, and elsewhere have been sending letters of support. Epstein, a signatory
to the U.S. letter, says: "I hope other countries will look closely at the
Argentine experience and be inspired to go down a similar path: To transform
their central banks to act less as agents of finance and instability and more
as agents of equity promoting economic development."
enthusiastic about such prospects are champions of financial liberalization,
such as those at The Economist and The Wall Street Journal, and at least
two generations of economists who've built their careers on the efficacy of
central bank independence. In queries for this report, the IMF press office
would only say, "No comment."
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