Argentina’s Fudged Data Threaten Middle Class

Jan. 24 (Bloomberg) -- Economists dub the challenge of creating analysis with faulty data “GIGO,” or “garbage in, garbage out.” Fudged statistics may seem relatively innocuous within the context of problems confronting the global economy. However, faulty data can thrust millions into poverty and prevent others from reaching the middle class.

John Maynard Keynes argued vehemently that the International Monetary Fund should play a central role in ensuring quality statistics for the management of the world economy. “There is hardly any greater service the Fund can do than provide up-to-date barometers of the monetary problems of the world,” Keynes said at the Bretton Woods Conference in 1944.

Now, a case pending before the IMF executive board involves Argentina’s manipulation of data and a broader challenge of enforcement.

Official Argentine data suggest that prices rose by almost 70 percent from 2007 to the end of 2012, while private estimates put the total advance in prices at more than 200 percent. The cost of such faulty statistics is extremely high. Cooked inflation statistics reduce real wages, penalize savers, defraud holders of inflation-linked bonds, diminish investment, and tarnish the quality of knowledge and future policies.

Capital Flight

Risks extend well beyond the annual loss in purchasing power for participants in the Argentine economy. The persistence of such an environment -- where there are few incentives to keep funds in pesos -- sets the stage for another cycle of capital-flight-driven currency devaluation followed by accelerated inflation. The “blue-chip swap,” or unofficial exchange rate, strongly signals the risk of a roughly 40 percent devaluation of the peso over the next year. Sadly, this vicious circle is well-known, having wiped out individual savings many times over the years in Argentina and elsewhere.

Moreover, exchange-rate risk stemming from faulty inflation statistics and an unsustainable macroeconomic mix will keep investors sidelined. This will critically limit Argentina’s long-term growth potential, as boundless investment opportunities will probably remain untapped.

Conversely, the benefit from reliable data is enormous. Greater transparency and access to quality information have contributed to the near-doubling of the nominal gross domestic product of emerging economies in the past six years, despite the recent financial crisis. Although seemingly arcane, better information has provided corporations and individuals with the confidence to invest. Greater confidence and investment have provided the fuel for economies to grow and the ranks of the middle class to swell.

Unfortunately, for Argentines and the rest of the world, the IMF seems unwilling to give its statistical branch the political support needed to provide meaningful barometers for monetary problems in Argentina. Thus far, the country’s government is winning the cat-and-mouse game.

The IMF first sent a mission to Buenos Aires to advise on inflation and other economic statistics in December 2010. Since then, the IMF has issued a series of statements and reports, and organized meetings with staff, the executive board and senior management. Almost two years later, the IMF board publicly “regretted the lack of sufficient progress” by Argentina in implementing measures to improve reported data. It again called on Argentina to “implement measures without delay” and requested that IMF Managing Director Christine Lagarde report to the board on Dec. 17, 2012. At the meeting last month, the board postponed a final decision until the end of January.

Driving Force

The IMF has been a driving force for improving macro and financial data over the past three decades. Ironically, the improvement in data paralleled various financial meltdowns, beginning in August 1982 with the less-developed-country debt crisis. Early on, consolidated stocks of external debt in various LDCs were difficult to find. In the mid-1990s, statistics on foreign-exchange reserves were often inaccurate and infrequently reported. There have been remarkable improvements over the years in these areas, largely due to the IMF’s work with member nations.

The IMF must re-embrace its role as the provider of up-to-date barometers of the monetary problems in the world. A good starting point would be to review Argentina’s IMF membership.

(Lawrence Goodman was a director and senior fellow in the U.S. Treasury and is now president of the Center for Financial Stability, which recently published “The Bretton Woods Transcripts,” co-edited by Kurt Schuler and Andrew Rosenberg. The opinions expressed are his own.)

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