Last year with great fanfare China joined the World Trade Organization (WTO). For all the excitement this has generated it should be clear to everybody that China's WTO membership will bring with it many risks. China's famously inefficient industries are simply unable to compete with private sector companies without a massive increase in bankruptcies or unemployment. Either would put additional burdens on a banking system that already has enough holes in its balance sheet to collapse several times over.
In order to understand why China has embraced the risks of WTO membership, it is probably useful to recall Argentina's one-time infatuation with the convertibility plan. Argentina in the late 1980s was a country that had lived through nearly a decade of economic and financial chaos after several decades of remarkable economic decline. By the late 1980s, many Argentines were extremely pessimistic about Argentina's ability ever to put its economic house in order.
According to Argentine consensus, the basic problem was that Argentina's political structure made it impossible to rein in its notorious fiscal profligacy. Expenditures at the federal and provincial level were simply unstoppable, and since no one was willing to raise the necessary tax revenues to cover costs, Argentina's monetary policy consisted largely of printing money to accommodate the fiscal deficit. The result, not surprisingly, was monetary chaos.
The convertibility plan was finally proposed as a way to control the fiscal deficit, not by attacking fiscal mismanagement directly, but rather by removing the ability of monetary policy to accommodate it. By handing over control of Argentina's monetary policy to the US, Argentina's financial authorities hoped that monetary constraints would impose fiscal discipline where economic theory and political responsibility had been helpless.
Perhaps that approach could have worked under certain conditions, but Argentina was cursed by what at first seemed like very good luck.
