DON'T CRY FOR ARGENTINA -- YET
By Albert Fishlow
Albert Fishlow is a senior economist and visiting professor at Columbia
University. His published research has addressed Brazilian and Latin American
development strategy as well as economic relations between the industrialized
and developing countries.
On Jan. 6, Argentina's senate finished the task of approving the new economic
program of President Eduardo Duhalde. The lower house had already concurred
the day before. Banks remained closed on Jan. 7 and 8 as the government
sought to publicize its components and to fill in many details. This is,
of course, the inevitable domestic side of the failure to remain current
on the $135 billion Argentine external debt.
Three features of the plan stand out.
Convertibility, as defined by the free exchange of dollars for pesos at
a fixed rate, is definitively finished after more than 10 years. So, too,
is the exchange rate of one peso for one dollar: a dual rate is anticipated,
one for trade at a rate of about 1 dollar to 1.4 pesos, another a free
rate for tourism and finance.
"Pesofication'' of private debts of small and medium-sized businesses,
as well as personal mortgages for housing and unpaid balances of credit
cards, up to $100,000, will occur. Similarly, the tariffs of telephone
companies, utilities and other public services will be changed from their
current level in dollars to the same rate in pesos. Banks will be partially
compensated for the losses they incur by a new tax on exports of energy.
This provision is a clear intent to assure middle-class support for the
A range of freedom has been granted to the government for the purpose
of implementation. It will have authority to restructure bank debts, fix
key prices, determine the exchange rate and so on. What will get done
will depend on what is seen to be necessary to avert an inflationary burst
already begun in the last two weeks of political succession.
Is this, as some have argued, the end of neo-liberalism and dependence
on the International Monetary Fund (IMF) and the beginning of old-fashioned
Peronism once more? Certainly the past performance of Duhalde as governor
of Buenos Aires province, and that of his then economic advisor and now
minister of economy, Jorge Remes Lenicov, is not encouraging. Then they,
and all of the governors, contributed to the present outcome by regular
and increasing provincial deficits. And Duhalde and his new minister of
production have spoken of the need to convert from reliance on international
investment and the financial sector to an emphasis upon domestic production
Or is this a 2002 Argentine version of Brazil in 1999, with a little bit
of Mexico in 1995? Both of those recent Latin American experiences reflected
significant devaluation and some internal financial restructuring. Both
saw large programs of external financial assistance from the IMF and foreign
governments and fairly rapid economic recovery and, in particular, limited
domestic inflation, as government accounts changed from primary deficits
to fiscal surpluses.
This is the heart of the matter. Can the Duhalde government manage fiscal
policy in such a way as to restore creditability at an early moment? To
be sure, the tie to a strong dollar after 1997 limited exports and encouraged
imports, but it has been more the failure of productivity to increase
on a regular basis and the expanding federal and state deficits that are
the real culprits in the matter. They have led to the rapid increase in
public debt. Yet despite this additional demand, continuing high rates
of unemployment of the magnitude of 20 percent have occurred as investment
has flagged. Devaluation as well as the current reduction in public salaries
reduce the cost of labor and provide an opportunity to begin to do better.
But any meaningful fiscal program will have to deal seriously with this
problem. Increases in exports will initially be limited, given the expectation
that global trade will increase only 2 percent this year. So immediate
insistence upon a zero deficit, such as the IMF had earlier done in former
Finance Minister Domingo Cavallo's waning moments, seems to be the wrong
place to start.
Argentina additionally starts from the important advantage of generalized
acceptance of the state's inability to pay its external debt as contracted.
That reality is already much in the news. Even the IMF recognizes it.
Already, the government has been able to secure a recent reduction in
its obligations to internal creditors.
This new element -- fundamentally different from the prior recoveries
of Mexico and Brazil -- affords a much greater relief on governmental
outlays and becomes a way to reduce expenditure. More than that, while
such an outcome will inevitably mean an initial greater reluctance of
private lenders to return, that period need not last forever. It used
to be the case that defaults meant exclusion from financial markets for
two decades and possibly longer. Yet we have already seen the recovery
of international finance in the case of Russia, and that official default
occurred only a little more than three years ago.
Cordoba Province Gov. Jose Manuel de la Sota has expressed the hope that
Duhalde, in his remaining two years, will be the Adolfo Suarez of Argentina.
That Spanish prime minister represented the real bridge between Francoism
and subsequent extension of democracy and rapid economic growth. Duhalde
has made a start by incorporating representatives of the Radicales and
Frepaso in his cabinet. He has received an overwhelming vote of approval
from the congress on his economic program. If he wishes to succeed, let
him now move forward on the second issue of national concern: the question
of official corruption.
Former President Carlos Menem was a Peronist who moved to a convertibility
board and privatized virtually all public assets. Duhalde can be the Peronist
who goes one step beyond to establish a fiscally responsible state, and
one that remains internationally open. In those circumstances, the obligations
of a fixed exchange rate, so necessary initially to achieve the end of
hyperinflation, will become irrelevant.
We will now see, and sooner rather than later, whether Argentina takes
a giant step forward or returns to the tragic past of a continuing decline
in relative income and international relevance.
(c) 2001, Global Economic Viewpoint. Distributed by the Los Angeles Times
Syndicate International, a division of Tribune Media services.
For immediate release (Distributed 1/7/02)
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