WASHINGTON, Feb. 11 (UPI) -- The International Monetary Fund has asked Argentina to come up with its own economic plan, which it can then accept or reject. This is putting altogether too great an onus on Argentina's feeble politicians; if they knew how to make Argentina's economy work they would have done it already.
Nevertheless, other resource-rich economies in the Southern Hemisphere, notably Australia and New Zealand, haven't done so badly. It is therefore worth asking: If you were responsible for the Argentine economy without the constraints of the Argentine political system, what would you do?
The American Enterprise Institute Tuesday had some thoughts. Norman Bailey, of the Potomac Foundation, for example, attributed the Argentine collapse to no less than 16 factors, seven external and nine internal. The external factors were (i) the Brazilian devaluation of January 1999, (ii) the strong dollar, (iii) the Federal Reserve's increases in interest rates in 2000, (iv) low commodity prices, (v) the agricultural protectionism of the United States and European Union, (vi) the international recession of 2000-01 and (vii) the IMF's misguided policy advice.
Internal factors were (i) excessive public spending in the past three years of the Menem administration (1996-99), (ii) the profligacy of Argentina's provincial governments, (iii) the lack of a primary budgetary surplus (before debt service), (iv) tax evasion, (v) the rigidity of the banking system, (vi) corrupt privatization, with misuse of its proceeds, (vii) international over-borrowing, (viii) low export volume, and (ix) weak and vacillating government.
This gives a wide variety of possible causes to choose from, some of which surely can not have played too significant a role -- the Fed increases in interest rates in 1999-2000 were dwarfed by their cuts in 2001, for example. In addition, I would add as a cause Argentina's currency board policy of 1991, which allowed an excessive inflow of dollars in the middle 1990s, when Argentina was popular and the Fed was printing money, but then caused an excessive monetary tightening in 2001, when Argentine capital flight took place.
There were as I see it three central causes of Argentina's economic problem, and of all Argentina's economic problems since prosperity departed the country around 1930.
First, the country is not a member of any of the rich country "clubs" and hence suffers from gross protectionism against its primary agricultural products. This was the central reason why the prosperity of the 1920s and earlier disappeared; from the 1932 Ottawa Agreement, which provided for imperial preference on British consumption of agricultural products, Argentina had no substantial western market to which it could sell without at least ruinous tariff barriers. Australia and New Zealand, after World War II, did not suffer from this disadvantage until Britain's entry into the EU in 1973.
Second, fiscal profligacy has been a hallmark of Argentine government at least since President Juan Peron (1945-55) and to some extent before. This is a failure of democracy in general in Latin America, as can be seen more clearly now that we have Eastern Europe available as a comparison. In Eastern Europe, there are clear role models available close by in Germany and Britain, and hence there is a popular constituency for a government and business system similar to one or other of those two countries. In South America, the U.S. is too far away, too rich and too dominant; hence elections always turn to some extent on resentment of the giant to the north rather than on the desire to imitate it. The tendency toward populism and high public spending has not of course produced a more equal society, quite the reverse; Latin America in general has the highest Gini (inequality) coefficients in the world.
Third, the temptation to meddle politically in the management of monetary policy is more or less irresistible to Argentine governments. Before 1991, this produced the largest long term currency devaluation in the world, with re-denomination after re-denomination of the various pesos and Australs. The 1991 currency board, by which pesos could only be issued to the extent the central bank had dollars available, appeared to resolve this problem.
In the long run, however it placed control of monetary policy in the tender hands of the Federal Reserve Board, the last thing on whose mind was Argentina's needs. In the boom years, nobody took care to keep Argentine monetary growth under control. In the bad years, not only was the currency board deflationary at a time of capital flight, but its credibility was shot to pieces by finance minister Domingo Carvallo first attempting to shadow the Euro, then putting a tax on imports, thus effectively devaluing, then printing domestic money against IOU's of Banco de la Nacion, thus funding the public sector deficit through the central bank.
The three problems require three solutions, none of which is likely to prove politically attractive. Argentina's export problem can only be solved by diversifying the economy from basic agriculture, into manufactured goods, treated food products and products, such as wine, that are less subject to impossible trade restrictions. In the long run, Argentina needs to join a Free Trade Area of the Americas, but to do so it needs a substantial track record of economic growth and fiscal competence. In the meantime, the exchange rate needs to be seriously undervalued, and private enterprise needs to be encouraged by every means possible, especially by relaxation of labor laws and breaking the iron grip of the trades unions, so that the Argentine economy can finally be reoriented away from products that the rich West refuses to buy.
Public spending, which will in any case be very tightly limited, must be ruthlessly devoted to the future not the past, to education and training (with the twin shibboleths of recalcitrant teachers' unions and dozy Marxist university academics taken on and smashed) and not social programs or defense.
In the monetary area, neither a free floating exchange rate nor dollarization are likely to provide the credibility needed for Argentina to recover. Here New Zealand is an example; when faced in the middle 1980s with more or less Argentina's problem, it deregulated, cut taxes and made the central bank fully independent, with a prohibition against lending money to the government, an ironclad mandate to keep inflation down, and a governor's salary that was inversely linked to the rate of inflation (so that if inflation was zero his pay rose 2 percent in both nominal and real terms, if it was 5 percent his salary declined by 3 percent in nominal terms, or 8 percent in real terms.)
In Argentina, a country which lacks New Zealand's Anglo-Saxon devotion to the rule of law, in every detail and without evasion or bribery, this would probably not be enough. The true solution to the Argentine monetary problem requires a currency policy that is entirely independent of the political process and unable to be affected by human agency, even that of Alan Greenspan. In practice, that means a Gold Standard, with the populace allowed to hold their wealth in gold coins, and not forced to put it in the now deeply suspect banking system. With such a tangible, independent store of wealth readily available, and the currency tied firmly to gold, Argentine monetary policy would finally be independent of political interference, which is what is needed.
Finally, on the fiscal side, Argentina can again learn from New Zealand, and pass a constitutional amendment enshrining in the constitution, not to be changed without say a three quarters majority of the National Assembly, provisions similar to those of New Zealand's Fiscal Responsibility Act of 1994. That remarkable piece of legislation, which was the world's first of its kind, cemented agreed standards of fiscal discipline into law so that no New Zealand government, of whatever party, could engage in fiscal irresponsibility. Of course, legislation in Argentina would not be enough, because of the local tradition of ignoring laws that are politically inconvenient, but if enshrined in the constitution, so that it could not easily be repealed, it would at least provide a seawall against irresponsibility, and a mechanism whereby irresponsibility could be identified, pilloried in the local press, and used by the international community to bring pressure on a recalcitrant government.
At a minimum, a Fiscal Responsibility Act should provide all state guarantees require legislative pre-approval, that the central bank be prohibited from lending to the government, that parastatal agency borrowing be forbidden altogether, and that provincial budget deficits be forbidden without express consent of the Ministry of Finance. Ideally, it should further provide that the consolidated federal, parastatal and provincial budget deficit not exceed a modest percentage of GDP, that public spending in any three-year period should be lower as a percentage of GDP than the average in the preceding three year period, and that gross public debt not exceed a maximum percentage of GDP. There would also be a provision that budgets be prepared 3-5 years in advance, and that various reports be provided to the National Assembly regarding for example tax compliance, with an estimate of the yield of the major different taxes at various rates -- thus if a particular tax was too steep, so that evasion was high and the yield low, the need to reduce it would be clearly spelled out.
If reforms along the lines of those outlined above were carried out, and pursued on a consistent basis with no backsliding, then within a decade or so Argentina would be safely launched onto a path of rapid growth towards a standard of living for its people approaching Western levels. The example of Chile, from 1973 on demonstrates that this is possible. However, for this to be achieved Argentina requires a fiscally highly austere government, that is cemented in power for at least a decade and preferably 15 to 20 years -- the pain of such austerity always appears before its benefits, so a further election on the usual four-to-five year cycle would simply produce a revulsion against the austere government and a reversion to Argentina's ghastly populist norm.
Ideally, a process could take place whereby a strong leader (or preferably, a team of leaders) would run in an election on the platform of an economic policy as outlined above, and of a suspension of the normal electoral cycle for at least a decade. If it won, the team would take its victory as a mandate to put its full economic program into effect, and to avoid further electoral appeals for a period long enough for the program to work.
Only by compromising (but if possible not eliminating) democratic legitimacy in this way does it seem feasible, given the political beliefs of the Argentine people, to produce a regime that might finally succeed in putting Argentina securely on the road to prosperity. Sound economic policy has been compromised in Argentina for long enough.
