I have been searching for the best explanation I could find of what went wrong in Argentina, and this article in Forbes sums it up, I think. What it boils down to is that they fixed their money supply, and then printed/borrowed money with no regard to the first thing they had done. Idiots! What can you expect, they are politicians.
Current Events
Ernesto Zedillo, Forbes Magazine, 02.18.02
CRY, ARGENTINA, CRY
Because the worst is yet to come. For the nth time during the last three-quarters of a century, Argentina has been plunged into a severe financial crisis that, as during some previous episodes, has mushroomed into a severe political crisis. Anybody who thought President Fernando de la Rúa's resignation would magically make things better was wrong. Argentineans are just beginning to suffer the worst of this crisis, which actually began back in late 1998, when the economy went into recession. It's ironic that, given the pain that lies ahead, some Argentineans might soon feel nostalgic about the recessionary De la Rúa presidency.
The Danger of Populist Nostalgia
This, however, would not be the most dangerous nostalgia around. Adversaries of free markets and responsible fiscal policies--who are still too common in Latin America--have quickly claimed that these policies are the cause of Argentina's present crisis and are ardently calling for a return to the populist and protectionist policies of the past. Both the diagnosis and the nostrums of the nostalgic populists are dangerously wrong. In fact, their proposals will dig a deeper hole for Argentina. Tragically, populist ideas have influenced not only the new government's policy responses but also the decisions Argentinean politicians have made over the last several years. External shocks apart, this is what led to the present crisis.
It's a lie if anyone says the present tragedy is rooted in the policies adopted in the early 1990s--policies that ended hyperinflation and for a few years provided Argentina with a prosperity it hadn't known in a long time. The real cause? The establishment contracted severe "reform fatigue." I'm not a great fan of convertibility systems--ones in which a currency board pegs the exchange rate and foreign reserves fully back the money supply so that on demand all local currency can be converted into dollars. Usually I prefer a freely floating exchange rate. Conceivably Argentina's system could have survived, with good results on balance, had the necessary economic discipline been kept in place. Obviously, this was not done.
With a currency board you lose one macroeconomic instrument, monetary policy, so you have to be much more rigorous with the other major one, fiscal policy. Had Argentina been rigorous, had it spent less or collected more taxes, borrowed less and disciplined fiscally irresponsible provincial governments, this story would have had a profoundly different ending. Admittedly, external conditions didn't help, either.
Disaster was made inevitable by the stark inconsistencies that kept popping up throughout 2001. Argentineans were repeatedly told that a feasible short-term objective was to get the economy growing again. Impossible. Foreign investment and loans were shrinking, and a worldwide slowdown was already evident. The government declared the convertibility system untouchable, yet it messed around with the system, announcing in April the inclusion of the euro in the Convertibility Law. A more efficient economy was needed, yet import duties, export subsidies and many other inefficiency-prone policies were enacted. Provincial political leaders sometimes mouthed the right words but never fully cooperated with the federal government to put their houses in order. Some even went so far as to print their own money, thereby circumventing the essential monetary discipline. The worst came on Dec. 1, when unwarranted and ill-conceived foreign-exchange controls and arbitrary restrictions on withdrawals from individual bank accounts were decreed. No doubt, the latter was the straw that broke the camel's back. A few days later both Economy Minister Domingo Cavallo and President De la Rúa went home for good.
No Easy Way Out Possible
Their departure, as furiously as it was demanded by many, has not yet resulted in even a dim light at the end of the tunnel. True, the convertibility system is gone, the peso has been devalued and the largest default in history was declared. But nothing is going to work in the absence of a thorough and consistent program, which, as this is being written, is not yet in sight.
A profound recession (a 10% decrease in GDP in 2002 is not unthinkable), even greater unemployment, an inflationary bubble and a further fall in real wages are now unavoidable. But policies that deepen the fiscal deficit, repress financial markets, inhibit production and investment and promote corruption through black markets will simply worsen and prolong the inevitable pain.
The crisis would be shorter and socially less costly if the ex-change rate were unified and allowed to float freely; exchange and deposit controls were eliminated; a coherent program to restore the operation and recapitalization of the banking system were produced; a fiscal austerity program were implemented that was endorsed by all, not just part, of the Argentinean state; stringent monetary policy were applied; trade- and production-distorting measures were discarded; price controls were avoided; and serious external-debt negotiations were launched. Needless to say, none of the above measures would be popular. For a while, their implementation would give rise to further social and political unrest. But at the end of the day, the suffering would be substantially less than it will be with the populist dictates. The right policies would also make it easier for Argentina to obtain indispensable external financial support.
Ernesto Zedillo, former president of Mexico |
