(This column is part two in a two-part series. Part one, “Argentines aren’t learning right lessons from debacle,” discusses the historical events that led up to the current situation.)
News media are focusing their stories on Argentina almost exclusively on the short-term question of how that suffering society will dismount from the back of the tiger that is their decade-long peso-dollar tie.
But Argentina will achieve long-run prosperity only if its citizens squarely face longer-run, deeply embedded structural problems. These problems are surprisingly straightforward.
Argentina, like most other Latin American nations and conspicuously unlike the Asian countries of Taiwan, Korea and Singapore, has a very low savings rate. That means Argentine households apparently produce little capital that can be lent to businesses to finance purchases of new factories and machinery.
Argentina’s government, again like those of Latin neighbors and again unlike governments of the Asian tigers, chronically runs budget deficits. This is a long-term problem. It is safe to say that the majority of Latin American countries have had fiscal deficits in the majority of years since achieving independence.
A low national savings rate combined with a government that spends more than it receives in taxes has predictable results. Government borrowing absorbs most, all or more than all of the available domestic capital. Domestic businesses find little or none available to procure the plant and equipment necessary for output to rise and, with it, household incomes.
When domestic government and business borrowing needs exceed domestic savings, the circle can only be squared by borrowing from abroad. If Argentines do not want to borrow from abroad, they must increase domestic savings or cut government or business borrowing, or all three.
Borrowing is already low—one reason why growth has been nonexistent during the last four years. And not only is the Peronist party of newly chosen President Duhalde the most free-spending of major Argentine parties, but Duhalde is also from the wing of the party that historically has shown the most cavalier disregard for fiscal solvency. It was precisely Peronist opposition to spending cuts that stymied the de la Rua government in the two years between that hapless leader’s inauguration and resignation.
Argentine voters have made it abundantly clear that they do not want unemployment and recession. But they don’t want any cutback in mandated fringe benefits or protection against layoffs. They don’t want their bank accounts frozen, nor do they want the peso devalued. They don’t want cuts in pensions nor in public employment. They don’t want to lose jobs to imports, and they don’t want to pay more for domestically produced goods.
These strongly articulated desires inherently conflict with each other. No Argentine leader is willing to say so. No economic theory, no financial wizardry on the part of any government minister, no anti-corruption campaign and no charismatic leader can change the impossibility of the situation of meeting these conflicting desires.
No permanent growth will occur until the Argentine people realize this. One out of five Argentine workers lacks a job. Getting people back to work, to regain even the level of output achieved four years ago, would be an accomplishment. Conventional economic theory says the government should apply fiscal or monetary stimulus. That is, it should spend more than it taxes and it should increase the money supply.
In the midst of the largest sovereign default in history, private capital markets will not lend Argentina funds to cover stimulating a budget deficit. Other nations and the International Monetary Fund will not either, unless they see clear signs that fundamental political and economic changes will be made. Nor should they.
Devaluing the peso is inherently a monetary stimulus. In a country that did not suffer from economic post-traumatic stress syndrome as Argentina does, it might bring a return to growth. But given Argentina’s bitter economic history, the devaluation may translate into almost immediate inflation, without any improvement in real household purchasing power or the real exchange rate.
The most painful irony is that this most recent financial debacle will only accentuate Argentina’s fundamental problems. Argentina borrows from abroad because its citizens do not save, at least not in their own country. Freezing everyone’s bank accounts and arbitrarily imposing post facto changes on millions of loan and savings agreements can only reinforce the message citizens have gotten for decades: “Don’t save money in Argentine banks. Take it to Uruguay or Miami or change it into another country’s currency and put it under your mattress. But don’t expose any savings to the whims of Argentine governments.”
This most recent international default tells foreign lenders: “Don’t lend to Argentina unless interest rates are substantially above those in other countries, because lending to this deadbeat country is risky. Don’t invest in Argentine firms because any government can effectively confiscate your equity.”
Thus, at a time when the country’s needs are great, recent events send powerful messages that once again accentuate the vicious circle. Breaking this circle may only come at extreme social cost.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.