The Argentine Financial Crisis

Causes and Cures

The author is a professor of economics at the University of Buenos Aires.

Buenos Aires, Argentina, Dec. 11, 2001: A man steps over unfinished road work in front of a branch of the Galicia Bank (Photo: AFP).

In the future, when historians explain how the economy of Argentina evolved during the last part of the 20th century and the beginning of the 21st, they will probably determine that the measures implemented by [Economy] Minister [Domingo] Cavallo on Dec. 1 marked the close of a cycle begun by José Alfredo Martinez de Hoz [minister of economy under military dictator Jorgé Rafael Videla] on April 2, 1976.

That date marked the announcement of an economic program which brought a "fundamentalist vision of globalization" to Argentina. According to this vision, the market is the sole arbiter of how resources should be divided and how income should be distributed, while the state is the mere guarantor of public order and of the unrestricted exercise of market forces.

Under such conditions, a nation like ours can only enact policies that cater to the market's criteria, and must renounce any ambitions of constructing its own destiny in the globalized world. Any deviation from this realism, the program's adherents argue, would result in disorder, unemployment, and poverty.

Twenty-five years after the institution of this economic program, Argentina is suffering from the worst quarter-century in its economic history, with unemployment and poverty at unprecedented levels, a national debt so high the country is at the brink of bankruptcy, and with its principal resources now owned by people outside the country. All this is the fault of government ministers who have obeyed neoliberal economic theory to the letter. The situation is so bad that not even the banks can carry out their normal functions, nor can their depositors gain access to their funds.

The Wrong Responses to Globalization

Argentina's current mess is not the result of attacks by the vultures of speculation. Vultures only attack defenseless prey, and in financial terms, they only look for countries in vulnerable situations. So the question remains: How did we get into this predicament?

The current crisis is the result of misguided responses to globalization: over-valued parity, indiscriminate opening of the economy, massive privatization, and paralysis of economic policies in a world where all the variables were changing. This destroyed the competitiveness of the Argentine economy and a good part of our industry, cleaned-out savings accounts, and led to a gigantic balance-of-payments deficit.

Over the past 25 years, the government's policies have generated enormous speculative profits, under-financed the budget, and supported the worst type of corruption: It sold off our national patrimony and impoverished the majority.

The decisions taken on Dec. 1 represented an about-face. The government will retain decisive power in deciding the country's economic affairs, an idea anathematic to neoliberal theory. The state will re-impose strict controls on currency exchanges, regulate interest rates, and set limits on the public's ability to spend its money as it sees fit. As we have known for a long time, convertibility cannot survive a run on banks and the massive flight of capital.

These measures demolish the neoliberal myths that markets may not be tampered with, that the state is impotent when it comes to regulating the economy, arbitrating conflicts, and defending the general interest. It can, as it is now doing, impose controls on exchange, and it can also de-index rates paid for public services, renegotiate the public debt, promote competition, and encourage multinationals with operations in Argentina to reinvest their profits here as well as purchasing goods and services locally.

These recent decisions restore the state's economic powers, but they do not resolve the terminal crisis the old policies created. Philosophical differences aside, Argentina's economic policies remain essentially the same today as they were on April 2, 1976.

The crisis will not be resolved by adopting the dollar. Nor will it be solved by devaluing the peso. No matter what happens to the peso, the Central Bank's reserves amount to only about 20 percent of the amount in circulation or on deposit.

It would take massive support from abroad, which is improbable, to reestablish confidence and prevent a run on banks and the flight of capital. The idea that the "foreign-ization" of the greater part of the banking system provides security is another fantasy: no bank's head office will support its Argentine affiliate if there is a run on banks.

The current economic policy is reduced to maintaining the fiction of convertibility at a huge cost in loss of production, jobs, and welfare. The crisis is critical and the longer it takes to assume the consequences, the worse the damage will be. By now, the damage is inevitable. Faith in the fundamental contracts that underlie all organized economic activity has come unraveled.

As the present government has decided, this reality is incompatible with present credit agreements, and with banks' obligations to their depositors. The government has already stopped honoring its perceived obligations to its own employees and to pensioners. We must reestablish a system of contracts based on current economic realities, and at the lowest cost to all parties involved.

To Live on Our Own

In order for the government to resolve this crisis, it must immediately abandon the fiction of convertibility and convert all accounts and obligations now denominated in dollars into pesos at current exchange rates. It is possible to guarantee the purchasing power, in Argentine money, of the vast majority of savings depositors. The Central Bank would resume its capacity to be the creditor of last resort, and the guide of the nation's monetary policy. This would make it possible to immediately reestablish the full functioning of the banking system. As long as the emergency lasts, it is vital to maintain exchange controls while liberating funds, as much as possible, to process necessary transactions. A well-run renegotiation of the national debt would take maximum advantage of the present international situation. That would reduce debt payments to sums compatible with what the budget, the balance of payments, and reactivation of the economy can all support.

When designing a plan to reactivate demand and stimulate production, it is necessary to keep public spending in balance, and fortify the balance of payments while protecting the domestic market and providing export incentives. A massive attack on tax evasion and tax reform would permit a rapid increase in government revenues.

Reestablishing macroeconomic equilibrium would make it possible to make the Central Bank's intervention policies more flexible. The evolution of exchange rate policies will be up to the behavior of the economy, as guided by the government. Given the current situation, and the system's fundamental equilibriums, there is no reason to expect drastic changes in parity or in prices.

The country has learned from the consequences of maintaining myths of convertibility, as well as from the disorder of the past, disorder that led to hyperinflation and the destruction of our currency.

Argentina must live within its own limits, with a responsibly run economy, to produce a strategy that will allow Argentina to realize its potential. Only then will we be able to assume our proper place in the global economy.