Asia Times: The sinking of Argentina


	January 12, 2002	atimes.com

Global Economy

The sinking of Argentina
By Uwe Parpart
Editor, Asia Times Online

What sunk Argentina? That's obvious, say not only the likes of neo-Keynesian economist Paul Krugman, but a majority of international commentators of varying persuasions: The currency board system that tightly pegged the Argentine peso one-to-one to the US dollar and guaranteed full convertibility. "It crucified the Argentines on a cross of dollars," opined Krugman.

And that's obvious nonsense. Were that monetary system (designed by then Economy Minister Domingo Cavallo and adopted in 1991) as such to blame, how would one explain its stellar initial success in reducing 3-5,000 percent inflation to single digits, of creating the circumstances for very substantial capital inflows and of underpinning 6 years of stable economic growth? Sure, a country that adopts a currency board system deprives itself of certain economic policy options, principally the option to print money at will - hardly the worst of deprivations. It also ties its monetary fate (and in part the fate of its external account) to that of the "anchor currency" - and that isn't necessarily too bad either if the economic policy consequences are fully understood and acted on.

But therein lies the rub: If policy consequences are not sufficiently appreciated or the government lacks the political will or muscle to implement appropriate policy measures, then the best of monetary regimes cannot forestall disaster. Domingo Cavallo, a one-time chairman of Forbes Global, the international edition of the premier American business magazine, is a fiscal conservative who in the 1980s saw his country's entrepreneurial middle class undermined and its spirit of enterprise and wealth destroyed by rampant corruption in the state apparatus, profligate patronage spending and hyper-inflation. When then President Carlos Menem gave him the chance, he implemented the currency board system which provided the opportunity of quickly regaining monetary stability, the precondition of productive investment. He also argued for far-reaching reform of Argentina's regulatory and administrative systems and its labor laws and privatization of corruption-ridden public enterprises.

Alas, he instituted the currency board and the economy initially took off during the first Menem term. But most of Cavallo's other reform proposals were ignored or countervened by the Peronist patronage machine at the national level and reactionary provincial governors who could care less about fiscal discipline or the regulatory requirements of encouraging entrepreneurial initiative. Huge deficits, constitutionally guaranteed by the central government, were run up at the provincial level. Public debt increased by leaps and bounds; Argentina's foreign debt nearly doubled in Menem's second term to reach the present level of over US$140 billion by late 1998. The crisis was on.

Argentina is principally a commodity producer and exporter. When global commodity prices declined following the 1997 onset of the Asian crisis and the US dollar appreciated against most other currencies, Argentina's terms of trade declined drastically as did its ability to serve the external debt. But again, don't simply blame the dollar peg for the country's misfortune. Cavallo knew and had said on numerous occasion that his structural reform program must transform the economy and induce a productivity push through investment in new high-tech industries if the country was to remain internationally competitive. Those reforms foregone, the present misery and external debt default became inevitable.

New President Eduardo Duhalde, the former governor of Buenos Aires, is the very embodiment of the corrupt, anti-reform, local lord that sunk Argentina. While the budding middle class that should have defined Argentina's future is standing in line in front of banks to get out some of their hard-earned savings, street mobs have been plundering supermarkets - the very street mobs on which Duhalde now wants to rely to buttress his rule, and to hoodwink with fiery Peronist rhetoric. Argentina is back to where it was in the 1970s and '80s.

Are there any lessons in this for Asia? Of course there are - and not just for the Philippines, whose family-oligarchy controlled economy and society most closely resembles Argentina's. As long as the big chaebol of Korea remain unreformed, as long as Japan's ruling Liberal Democrats resist reform and insist on protecting their political power through a corrupt patronage apparatus, as long as Indonesia's ruling families and their military protectors hold on to their privileges, the dangers of an Argentina-style disaster in Asia will not be banished.

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