Southern Exposure

Desde as Entranhas dos Labirintos Latinos.

Thursday, November 27, 2003

Krugman, quoted by DeLong, told it like it was

Paul Krugman's most visible work might nowadays be his NY Times columns about budgetary issues and the war in Iraq, but let's not forget the reason why he got the job in the first place: he's one of the sharpest economists in the world, a referent in issues of international trade, and a damn fine writer. These days, with the relationship between the US and Latin America at its lowest point in a long while, let's go back to what Krugman wrote as early as in 1995, as quoted by Bradford DeLong:

...Mexico's crisis is neither a temporary setback nor a purely Mexican affair. Something like that crisis was an accident waiting to happen because the stunning initial success of the Washington consensus was based not on solid achievements, but on excessively optimistic expectations. The point is not that the policy recommendations that [John] Williamson outlined are wrong, but that their efficacy--their ability to turn Argentina into Taiwan overnight--was greatly oversold. Indeed, the five-year reign of the Washington consensus may
usefully be thought of as a sort of speculative bubble--one that involved not only the usual economic process by which excessive market optimism can be a temporarily self-fulfilling prophecy, but a more subtle political process through which the common beliefs of policymakers and investors proved mutually reinforcing. Unfortunately, any such self-reinforcing process must eventually be faced with a reality check, and if the reality is not as good as the myth, the bubble bursts. For all its special features, the Mexican crisis marks the beginning of the deflation of the Washington consensus....

Eight years later, with more leftist governments all over Latin America and a US that seems unable or unwilling to build any kind of consensus anywhere, the above paragraph looks even more insightful.

The good news is that, nonetheless, Latin American countries are still trying to increase trade with each other and with the rest of the world as fast and extensively as possible. While the emergent markets bubble of the '90s and Latin America's semi-automatic alignment with the US are both dead for the moment, the underlying lesson that trade helps growth was well-learnt by the continent.


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