Argentina and LACs current account reversals. Domestic causes, global shocks and contagion

San Pablo, Brazil

Conferencia; 8th Conference of the International Association for Comparative Economic Studies IACES. 8th Arnoldshain Seminar Designing Strategies for Sustained Growth and Development. EU and LA Compared; 2008

Universidad de San Pablo

For the last 25 years, LACs have experienced sharp and persistent current account fluctuations; hindering investment and growth in these typically low saving countries. This paper compares internal and external causes of current account reversals in Argentina and others LACs. Focus is placed on Argentina for domestic causes estimating, in the framework of the intertemporal approach to the current account, the solvency equation, in terms of the difference between expected and required exports or “export gaps”. Negative export gaps are found to be followed by a current account reversal in seven out of eight cases in 1949-2006. Is external solvency equally relevant in the other LACs? In order to explain the reversals of current accounts in the group of LACs a random effect probit is run for alternative definitions of reversal suggested in the literature. Growth, exports, and changes in terms of trade, are significant at 1%, 5% and 10% respectively, and have the expected signs. In an alternative estimation including country risk this variable is also significant at 10%. Simulations for a typical LAC using estimated parameters, show that the joint impact of low growth, high risk and high burden of the debt are an explosive cocktail. These results highlight the critical role of trade variables in the genesis of reversals in LACs