NEW YORK, Oct. 21 (UPI) -- The Cato Institute's 20th annual monetary conference last week in New York looked in detail at the Argentine financial crisis, and the prognostications were not optimistic.
Ricardo Lopez-Murphy, the Argentine finance minister fired in April 2001 because his recommendations were politically unacceptable, was remarkably clear on what was needed. Government spending figures in Argentina are masked by creative accounting; to get the true figure, you need to look at the total of government debt, which has risen far more quickly than could be explained by the nominal deficit.
The big problem, according to Lopez-Murphy, was that fiscal and monetary policy were inconsistent; from the first quarter of 1981, the Argentine economy grew by less than 40 percent in real terms, while public spending grew by 150 percent. Such an increase in public spending, and the corresponding deficit, was inconsistent with a currency board regime.
This was exacerbated by the dollar's strength. When the currency board was adopted, in 1991, it was thought that the dollar would be fairly weak -- it had inflated by 1,000 percent, or 4 percent per annum, from 1929 to 1989. However, in the event, the dollar was very strong, particularly in terms of Argentina's exports, which are the key factor -- Argentina's dollar export prices declined by 7 percent per annum in the 1990's, while its access to external debt markets, essential in such a situation, was cut off after the 1998 Russian crisis.
Argentina needs fiscal and monetary policies that are consistent with each other, otherwise the economy's ability to perform is destroyed. The currency board system, while appropriate in a situation of fiscal stability, destroyed Argentina's flexibility when it was needed; without reliable bankruptcy laws, and with fiscal policy that was out of control, default was inevitable. Nevertheless, the Duhalde government's declaration of December 2001, in which bank assets were translated into pesos at a different exchange rate from deposit liabilities, greatly exacerbated the problem, since it removed the banks' capital base while destroying savers' confidence in the integrity of the system.
In the future, according to Lopez-Murphy, Argentina will need to reorient its economy to replace the major defects of the last 20-30 years, towards exports and investment and away from government spending and consumption. The institutional framework must be improved, in particular in the areas of fiscal and monetary policy, and the banking system must again be strengthened. Fiscal policy must be run on the basis of austerity in good times, in order to provide reserves for the downswing. In summary, the Argentine public sector needs "not a haircut, but a scalping."
Allan Meltzer, Professor at Carnegie-Mellon, has advised several Argentine governments, and was Chairman of the 2001 Meltzer commission examining the role of the international financial institutions. He made the point that the IMF's proud boast that countries do not default to it is spurious; they do not default to it because it always rolls over its debts. One year after the initial Argentine crisis, at the end of the grace period in the IMF agreements with Argentina, it is clear that a new agreement is about to be reached, which will roll over existing debts without providing significant new money; this will thus have little effect.
In Meltzer's view, political reform in Argentina must precede economic recovery. The current Argentine government has taken none of the steps necessary for recovery, instead allowing the crisis to fester after it had broken private contracts unilaterally by pesification.
Argentina's foreign debt crisis can be resolved by an exchange offer; the $45 billion principal amount of dollar debt outstanding could be redeemed at a cash cost of around $9 billion, in the current market. The IMF could usefully underwrite such an exchange offer, at a maximum cash cost of $6.8 billion at today's market price of 15 percent of par. The IMF should however offer no new money for the current "command and control" economic system, whose workability is evidenced by the fact that over 1 million Argentines, from a population of 38 million, have left the country since last December.
Steve Hanke, Professor at Johns Hopkins University, and a well known proponent of currency boards, pointed out that the 1991 Argentine "currency board" was in fact no such thing, but a hybrid under which the central bank was permitted to operate a highly active monetary policy. During the course of 2001, Argentina's foreign reserves fell by $12 billion, but 122 percent of those foreign reserve outflows were offset by increases in the central bank's net domestic assets. During the period 1994-2001, the net domestic asset position of Argentina's central bank, which should remain close to constant under a currency board, was six times more volatile than that of Chile, a country that was operating under a free floating exchange rate.
Contrary to popular view, according to Hanke, dollarization would have been possible in Argentina in January 2002; the pesification of January 6 confiscated $17.8 billion of Argentine depositors' property, compared to $18.8 billion of foreign currency reserves which, according to the IMF, the Argentine central bank held at that time.
Charles Calomiris, of Columbia University and the American Enterprise Institute, pointed out that Argentine monetary policy had been driven all along by the need to fund the public sector deficit. Economic "emergence" would work much better if governments did not see the opening of the foreign borrowing markets, following stabilization, as an opportunity to ramp up government spending, thus killing off the economic growth that should follow such stabilization.
Even the well regulated Argentine banking system was vulnerable to this political force, the strength of which was illustrated by the fact that Raul Alfonsin, responsible for hyperinflation in the 1980's, remained a Senator until mid 2002, whereas Lopez-Murphy, who attempted to correct Argentina's economic problem, was immediately forced out. The IMF facilitated the government overspending, by providing additional finance in 2001, when default would have forced government expenditure reform and trade liberalization, while maintaining the peso-dollar exchange rate.
Brink Lindsey, fellow of the Cato Institute, emphasized that Argentina's failure was institutional, with public spending rising from 27 percent of Gross Domestic Product in 1991 to 35 percent in 2000 despite privatization having removed substantial burdens from the public sector. Argentina's political culture remains deeply corrupt and anti-market -- 57th out of 91 on Transparency International's corruption index, 40th out of 59 in the Global Competitiveness Report's ranking of payments to government officials, 54th out of 59 in the independence of the judiciary, 55th in litigation costs, 45th in legal system corruption and 54th in the reliability of police protection.
To summarize the discussion, the Argentine problem stemmed from corruption and bad policy at all levels of government, which is unlikely to be cured or even addressed by the elections next March. Argentine policy-makers, such as Lopez-Murphy, who have a credible solution to Argentina's economic problems, currently have the support of only a tiny minority of the Argentine electorate.
Consequently, the next several years will be grim ones in Argentina; we can only encourage political reform in the hope that at some future date the Argentine electorate will choose policymakers such as Lopez-Murphy whose economic solutions have a good chance of success. In the meantime, further international resources devoted to Argentina are simply reinforcing failure, as was the case during the 1990's.
