Some Economists Say Argentine President Learning Wrong Lessons From Economic Meltdown - 2003-08-20 | Voice of America - English
Twenty months after suffering through an economic meltdown, many Argentines are laying the blame for their country's woes squarely on the neo-liberal or free market reforms implemented during the 1990s. But some economists say Argentines are drawing the wrong conclusions from the recent past and risk putting their country on a path to further economic damage.
Fabiana Torres stands amid a throng of demonstrators in Buenos Aires demanding government action to combat a national unemployment rate that stands at more than 20 percent. Her reply is swift when asked who is to blame for Argentina's current economic plight. Ms. Torres says, the fault lies with those who implemented the neo-liberal economic model, which concentrated wealth in a few hands while the rest of the people suffered and continue to suffer the consequences. Her words echo those of President Nestor Kirchner, who, in his inaugural speech in May, promised to plot a new economic course for Argentina. President Kirchner said in the 1990s efforts to control inflation took center stage. He said gains from these policies were concentrated in a few groups without concern for the growing numbers of poor people, the fragmentation of Argentine society, or the enormous debt burden that was incurred. For much of the last decade, Argentina was widely regarded as an economic success story. Under then-President Carlos Menem, and with the blessing of the International Monetary Fund, Argentina limited the growth of its public sector, sold off inefficient state-owned enterprises, and pegged the peso one-to-one with the U.S. dollar. Argentines enjoyed several years of vigorous economic growth with minuscule inflation, an unprecedented feat in a country accustomed to regular currency devaluations. By the late 1990s, however, Argentina was in recession and was racking up foreign debt at an unsustainable pace. The breaking point came in late 2001, when Argentina defaulted on its debt and abandoned the one-to-one currency peg. "What went wrong? Agricultural prices fell very steeply, and oil prices rose," said Andrew Powell, who served as chief economist at Argentina's Central Bank from 1996 to 2001. "The [U.S.] dollar rose, and of course the policy was to peg the exchange rate to the dollar. And there was a very significant recession in Brazil. All of these things were bad luck - one factor piled on the other. A 'perfect storm.'" Mr. Powell insists the basic foundation of Argentina's economic policies during the 1990s was sound. He does, however, admit that government spending should have been further constrained to reduce the impetus for massive borrowing. Mr. Powell says, if anything, the Menem reforms did not go far enough. On that score, he gets no argument from researcher Mark Falcoff of the American Enterprise Institute in Washington. "The most important lesson [of the Argentine crisis] is that you cannot borrow your way out of structural inefficiencies in a society. Eventually the numbers catch up with you," he said. "Obviously, Argentina's problems should have been perceived by the [foreign] lenders. But it is also true that Argentina could have carried a heavy debt burden if it had restructured its labor market so as to make it a more competitive, productive country." Such advice appears to be falling on deaf ears in Argentina. In his public pronouncements, President Kirchner often strikes a populist tone, dismissing any suggestion that Argentina embrace austerity measures that would require sacrifice and inflict further suffering. The president's spokesman, Miguel Nunez, says there will be no return to what he terms the discredited policies of neo-liberalism. Mr. Nunez says, it [neo-liberalism] has a bad reputation the world over. He says, the International Monetary Fund showcased then-President Carlos Menem in front of the world as its best student and one to emulate. He says, Argentina ended up on the verge of national dissolution. Economist Andrew Powell says the Kirchner administration is making a mistake. "There is a danger of learning the wrong lessons from the Argentine crisis," he said. "Some people would like to interpret it as a failure of free market economics, privatizations, etc. And I think that is really wrong. I do not think one can say this is the failure of relatively free market economics. I think, in some areas, Argentina actually had some very good policies, on a micro level." Conventional wisdom holds that, as a condition for renegotiating its foreign debt, Argentina will have to embrace some painful economic reforms. But just how far President Kirchner will be willing to bend to satisfy creditors remains unclear.