Argentina cannot be trusted
Reconstruction will take many years and will require the country to surrender its economic sovereignty, say Ricardo Caballero and Rudiger Dornbusch
Published: March 7 2002 20:07 | Last Updated: March 8 2002 11:24
Argentina is waiting for the next bail-out - yet another a hand-out from the International Monetary Fund that will not help resolve the country's myriad problems. Of course, everybody knows that more money is not the answer but it is easier than taking the path of radical reform.
The truth is that Argentina is bankrupt - economically, politically and socially. Its institutions are dysfunctional, its government disreputable, its social cohesion unstuck. Having fallen that deep, it comes as no surprise that reconstruction rather than quick-fix financial support has to be the answer.
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Argentina today is like the European economies in the early 1920s. It is not a country with a liquidity issue that needs a tough year and then gets back on its feet, such as South Korea, Mexico or Brazil.
It is time to get radical. Any plausible reconstruction programme must be built around three points.
First, it must recognise that a solution will take at least a decade, not a few years. Argentina's productive economy, its credit and its institutions have been destroyed. Both its physical and moral capital will have to be built up and that takes a very long time.
Second, because the Argentine polity has become overburdened, it must temporarily surrender its sovereignty on all financial issues. Financial soundness is the key area where a beach head of stability must be created to start thinking about sound public finance, saving and investment.
Last, the rest of the world should provide financial support. But it must do so only upon Argentina's acceptance of radical reform and foreign, hands-on control and supervision of fiscal spending, money printing and tax administration. Any external loan should bridge the gap between immediate fiscal needs and the day - a year or two away - radical reform creates sustainable finance.
Argentina today is bankrupt and slipping further. On the country's current course, money printing will cover up unresolved claims only temporarily. Before long, the resulting financial and public chaos will further destroy the bases for reconstruction. A wasteful distributional battle is taking place, a battle between workers and the wealthy; between those who are trapped by the bank closure and those who have their money in Miami; between the provinces and Buenos Aires; between unions and businesses; between foreign investors or creditors and a nation that wants to shed obligations in a vain effort to maintain some degree of normality.
Argentina is being cannibalised by this strife. Further IMF money without a deeply intrusive change of the rules will not prevent self-destruction. Argentines must humbly acknowledge that without massive external support and intrusion they will not resolve the mess. What kind of external support?
It should go well beyond funding. At the heart of Argentina's problems is a crisis of trust as a society and confidence in the future of the economy. No one group is willing to concede the power to resolve the claims and fix the country to any other local group. Somebody has to run the country with a tight grip; dictatorship is neither likely nor desirable. But since everybody thinks - often correctly - that everybody else is selfish and corrupt, no social pact can be reached. Without such a social pact, day-to-day cannibalisation of social and economic capital will continue. Ever more gruesome results seem inevitable.
Argentina now must give up much of its monetary, fiscal, regulatory and asset management sovereignty for an extended period, say five years. After the first world war, the League of Nations recognised the fundamental problem of a dysfunctional society in Austria. It resolved that issue and provided financial support by having - with the consent of parliament - a resident commissioner-general, appointed by, and responsible to, the League of Nations. The commissioner-general had to sign off on every spending bill, supervise the central bank and monitor reform. Here is the tough language of the League report: "But the successful accomplishment of the reform program, on which Austria's prosperity and the value of her assets depend, would necessarily be a difficult and painful task. The scheme therefore included the appointment of a commissioner-general, whose duty was to ensure, in collaboration with the Austrian government, that the programme of reforms was carried out and to supervise its execution. He would derive power from his control of the disposal of the loan."
That is what Argentina must accept in exchange for new loans. Commissioners should come from distant, disinterested small countries (Finland, the Netherlands, Ireland, for example) where people have understood that economic institutions safeguard stability and are the foundation of prosperity.
Specifically, a board of experienced foreign central bankers should take control of Argentina's monetary policy. This would have many of the virtues of a currency board without the costs of having to adopt a monetary policy tailored to somebody else's needs. The new pesos should not be printed on Argentine soil.
Another foreign agent would be required to verify fiscal performance and sign the cheques from the nation to the provinces. Solving the fiscal problem requires sharing responsibilities and resources in a way that is financially affordable. Tax evasion and corruption - and the government's acceptance of them - has to be stopped. Foreign micromanagement is not feasible but agreed incentive mechanisms and a sharing of experience are possible.
The present revenue-sharing pact between the federal government and the provinces should be reformed so that the provinces receive much less than at present. A more reasonable share would be about 30 per cent of the total. At the same time, there should be strong incentives for raising taxes locally. One possibility would involve the federal government giving the provinces more than one peso for each extra peso of revenue they raise above a certain threshold. In addition, the cumbersome tax code should be as simple and efficient as possible: flat.
The incentive mechanism in the new tax code should help control provincial corruption. Indeed, aside from the advantages in flexibility of such a system, it would add an extra layer of profit-monitoring and of tax evasion control to the system.
A massive privatisation campaign of ports, customs, and other big obstacles to productivity must now take place. There should be widescale deregulation to achieve effective competition in the wholesale and retail sectors. Another experienced foreign agent should control these processes, as well as make sure that the proceeds end up somewhere safe for all present and future Argentines to share.
With the commitment to a clear and radical plan, Argentina would offer a fresh and encouraging outlook. As the foreign monetary board is set up, Argentina should move quickly to a new temporary convertibility plan, say two pesos to the US dollar. It is also to release the frozen bank deposits and let the IMF and other international financial institutions decide which banks to support - it is their money, after all. Foreign capital is quick to change its mind but there has to be fundamental change, not more broken promises.
It is worth recording what the League of Nations said on the eve of the Austria programme: "At the best, the conditions of life in Austria must be worse next year, when she is painfully re-establishing her position, than last year when she was devoting loans intended for that purpose to current consumption. The alternative is not between continuing the conditions of life of last year or improving them. It is between enduring a period of perhaps greater hardship . . . (but with the prospect of real improvement thereafterthe happier alternative) or collapsing into a chaos of destitution and starvation to which there is no modern analogy outside Russia. There is no hope for Austria unless she is prepared to endure and support an authority which must enforce reforms entailing harder conditions than those at present prevailing."
Let there be no doubt, this is the situation of Argentina today. And let there be no doubt, IMF money as usual would be a big mistake.
The writers are professors of economics at Massachusetts Institute of Technology |
