MacroScope

Ironically, an increase of capital inflows to Latin America in the last few years due to unappealing ultralow yields in industrialized countries and the region’s relative economic success is posing a threat for development, according to a recent paper that provides wider background to BRIC criticism of the latest U.S. Federal Reserve´s quantitative easing.

The article, written by Argentine economists Roberto Frenkel and Martin Rapetti for the World Economic Review – an international journal of heterodox economics –  warns about the possibility of a Latin American variant of the so-called “Dutch Disease”. This is a situation where a country suddenly finds a new source of wealth that makes its currency more expensive, hurting local exports and causing traumatic de-industrialization.

“Our concern is that massive capital inflows to Latin America may have pernicious effects via an excessive appreciation of the real exchange rates, which could lead to a contraction in output and employment in tradable activities with negative effects on long-run growth”, says the paper.

Real exchange rates in Latin America are now stronger than those required to promote economic development, reducing corporate earnings in export-oriented sectors intensive in labor, say the authors, adding: “There are in fact some hints indicating that tradable profit squeeze is negatively affecting the performance of manufacturing activities in Latin America”.

Frenkel and Rapetti focus on Brazil, where a currency appreciation trend that began in mid-2004 was followed by a relative worsening in industrial exports and value added since late 2005. “The case of the Brazilian manufacturing sector illustrates what in our view is the main threat that Latin American countries are currently facing with the sustained real exchange rate appreciation”, says the paper.

Holdouts against a settlement of Argentina’s defaulted debt are opening a new front in their campaign for a juicy payout more than a decade after the biggest sovereign default on record.

Lobbyists for some of the investors who hold about $6 billion in Argentine debt are in London to persuade Britain to follow the lead of the United States, which last September decided to vote against new Inter American Development Bank and World Bank loans for Buenos Aires.

Washington believes Argentina, a member of the Group of 20, is not meeting its international obligations on a number of fronts. Apart from the dispute with private bond holders, Argentina has yet to agree with the Paris Club of official creditors on a rescheduling of about $9 billion of debt. It has refused to let the International Monetary Fund conduct a routine health check of the economy. And it has failed to comply with the judgments of a World Bank arbitration panel.

As the crisis in Greece continues, the comparisons with Argentina’s chaotic bankruptcy a decade ago start to look more justified. In Argentina, a bank deposit freeze was the tipping point, triggering mass violent protests. People took to the streets banging pots and pans to protest against an economic collapse that plunged millions into poverty. The government declared a stage of siege and presidents resigned one after another. Greek unemployment and industrial production numbers out yesterday were dreadful but how to they compare to Argentina in late 2001?

The table and charts below show some key economic series in Argentina in the run up to 2002 and after. Argentinean real GDP fell nearly 20% from its peak in 1998 to 2002 -that compares with around a 12% fall so far in Greece. The unemployment rate in Argentina reached a peak of 24% not far above the 21% Greece reported yesterday. On other metrics Greece looks much worse; the IMF puts public debt at 50.8% of GDP in Argentina compared to an expected 166% in Greece this year.

The IMF published its Lessons of the crisis in Argentina in 2003 (approved by Tim Geithner no less). Looking at the conclusions, the IMF faced many problems now becoming familiar in Greece as this passage shows:

Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat’s rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world’s top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls “imbalance- and bubble-building”.

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to “sequence” the great unwinding.