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April 4, 2005

Lessons From The Good News From Brazil

Last week I noted the news that things are looking up in BrazilBrad Setser suggests that this episode holds some lessons for the how the International Monetary Fund ought to go about its business.

So, if all goes to plan, Brazil will repay the IMF (in full) after six years.  That is a longer than the three years that the IMF demands (in theory) for large-scale loans made through its crisis response facility (that facility is called the SRF). Brazil would not have been able to repay the IMF on the 3 to 5 year time frame associated with the IMF's normal "lending facility " for smaller-scale lending (a "Stand-by arrangement or SBA) either...

So why couldn't Brazil repay the IMF more quickly, on something like the terms of the IMF's crisis response facility? Simple: Brazil has lots of debt, mostly domestic, and relatively low reserves for an economy of its size -- it needed the IMF's money to allow it time to grow out of an (almost) unsustainable debt burden, and to allow it time to rebuild its reserves. It was never realistic to think that Brazil only needed a very short-term loan...

This is one of the issues Nouriel and I tried to highlight in our book on responding to financial crises in emerging economies: if the IMF to going to be used to help out (or bail out, depending on your point of view) emerging economies with far more debt than Mexico or Korea, the IMF -- realistically -- is not going to get repaid all that quickly, even when everything works well.

You can find out about the Roubini and Setser book via this link.

March 29, 2005

Some Good News From Brazil

From the Wall Street Journal Online (subscription may be required):

In another milestone in Brazil's comeback from the brink of financial collapse, the government said it won't renew its standby-credit accord with the International Monetary Fund...

Finance Minister Antonio Palocci announced yesterday that Brazil's strong recent economic performance made renewing the pact unnecessary. In 2004, Brazil posted its fastest economic growth in a decade, a record trade surplus, a strong budget surplus and the first drop in its level of debt-to-gross domestic product since 2000.

Not only that,

Brazilian Treasury Secretary Joaquim Levy said the nation owes the IMF $23.2 billion, and said all money owed is "currently available in government reserves." He added that Brazil is due to repay the money in full by 2007.

March 29, 2005

More Hurrahs For Free Trade

Cafe Hayek brings to our attention a fascinating-sounding paper by Erwin Bulte, Richard Horan, and Jason Shogren.  The results are summarized at Newswise:

Creating a new kind of caveman economics in their published paper, they argue early modern humans were first to exploit the competitive edge gained from specialization and free trade. With more reliance on free trade, humans increased their activities in culture and technology, while simultaneously out-competing Neanderthals on their joint hunting grounds, the economists say.

Archaeological evidence exists to suggest traveling bands of early humans interacted with each other and that inter-group trading emerged, says Shogren. Early humans, the Aurignations and the Gravettians, imported many raw materials over long ranges and their innovations were widely dispersed. Such exchanges of goods and ideas helped early humans to develop “supergroup social mechanisms.” The long-range interchange among different groups kept both cultures going and generated new cultural explosions, Shogren says.

Pretty cool.  Moving to a more modern example, the Dallas Fed reviews recent economic successes in Mexico, putting free trade front and center:

The success of Mexican macroeconomic policy can be seen in the course of recent history.  Together with the North American Free Trade Agreement and the opening of Mexican markets to trade, it contributed to the rapid recuperation of the Mexican economy after  1994–95. And it was essential in limiting the 2001 Mexican downturn to a mild recession, a landmark in a country where every downturn of the prior 30 years had been accompanied by a financial crisis.

December 28, 2004

Why Did Argentina's Economy Improve?

Continuing with the theme of great blogging on the Sunday New York Times, Brad Setser reacts to an article noting "Argentina's Economic Rally Defies Forecasts."  Setser sees a pretty conventional route out of the meltdown in 2001-2002.

The number one reason for Argentina's financial and economic stabilization is its belated conversion to fiscal discipline -- or what in the old days might have been called a conservative fiscal policy. Why no hyper-inflation after Argentina's default? The government matched revenues and expenditures, avoiding the need to print money. Hardly radical.

... the government has not ran an expansionary fiscal policy after its default. The initial impetus for Argentina's recovery came from the devaluation, which led to a surge in export revenues (measured in local currency terms), not government policies to spur consumption. Government spending initially had to fall to match falling revenue.

The strongest indictment of the IMF is that an Argentine government that explicitly defines its policy in opposition to the IMF has adopted a far more conservative fiscal stance than any Argentina government that embraced the IMF in the 1990s.

Brad goes on to further critique the IMF strategy and generally cast some doubt on the wisdom of fixed exchange rate policies (by dollarization, or otherwise).  Read this one too.