Posted by: Dirk | October 10, 2008

Lessons for Argentina

Laurence Kotlikoff ‘s otherwise insightful and interesting Cairoli Lecture, ch. VIII from 2003 concludes (p. 101):

One of the primary sources of the Argentine country risk is its monetary policy. Were the country to dollarize, this source of risk would be greatly reduced. … Permitting off-shore banking and, for that matter, completely free flows of capital into and out from the country will show the international financial community that Argentina is once again a safe place in which to invest because it lets capital leave as well as enter the country.

This is some strange advice. The dollarization of Argentina was a main problem when main trade partner Brazil depreciated and Argentina could not follow, having no control over monetary policy. Argentina returned from the ashes anyway, as their central banks Financial Stability Report 1/2008 shows (below). Apparently, the importance of financial markets had been overstated. (Argentina’s return to the world economy was helped by rising prices for primary products, but this is something an economist should take into account when giving advice.)

However, Kotlikoff is right about Argentina’s distributional tax problems, which is the main message of his book.

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