January 15, 2002
The Center for Latin American Issues
Presents
"Forum on the Argentine Situation"
GW’s Center for Latin American Issues (CLAI) hosted a forum
to discuss the current economic and political situation in Argentina. This
timely presentation featured Michael Mussa, an international economist
formerly with the IMF; Lacey Gallagher, Director of Latin American
Research for Credit Suisse First Boston; and Gerard M. Gallucci, Director
for Brazilian and Southern Cone Affairs at the U.S. Department of State.*
Jim Ferrer, Director of CLAI, moderated the panel discussion.
Aspects of Economic Troubles
In the last few months, Argentina has experienced
significant political disruption and is in the midst of an economic
upheaval that harkens back to the lost decade of the 1980s. The unexpected
resignation of President de la Rúa, the civil unrest, and the recent debt
default have tested Argentina’s political institutions and forced a
reevaluation of its economic policies. As President Duhalde decides on a
long-term economic strategy, the current situation is critical: banks have
been in a state of partial or full closure since December 3; there is an
18% unemployment rate; and the decision to end the peso’s parity with the
dollar led to immediate currency devaluation. All this change is taking
place in the midst of a 43-month recession. This crisis is more severe
than the Mexican and Brazilian exchange rate devaluations of the 1990s,
noted Gallagher. Ecuador and Russia, she added, had more reasons for
optimism than does Argentina when they adopted drastic measures to
stabilize their economies.
Roots of the Crisis
“Argentina is suffering the results of forty years of bad economic
decision making,” said Mussa. That fact, combined with the failures of
convertibility, makes it difficult to determine the best course of action
for Argentine leaders to take. The root of Argentina’s current problems,
says Gallagher, is fiscal: the government has continuously increased
spending at a greater rate than it has increased its income. In spite of
impressive economic growth in the early part of the decade, the government
failed to produce primary surpluses greater than one percent of GDP. In
spite of this fiscal weakness, its strong banking system and its small
amount of short-term debt at the time allowed Argentina to leverage huge
loans from domestic and external lenders, including the IMF. Important
economic reforms stalled in the mid-1990s when President Menem, looking
ahead to a second term and then to a possible third term, refused to
deepen reforms and exercised no control over spending in the provinces. By
2001, the Argentine central government ran a budget deficit of $11B,
accounting for 3-4% of GDP. Compounding the stress on the economic system
was a drop in tax collections, which were down 28% in December 2001 alone.
Mussa noted that the Brazilian devaluation and the continuing strength of
the dollar have also contributed to Argentina’s problems.
Argentina’s Response
Thus far, the government’s primary strategies have been to devalue the
peso and to limit bank withdrawals. According to Gallagher, it is now
clear that a flexible exchange rate is preferable to the dollar peg, and
Argentina should have moved toward this position earlier. The best
economic strategy now for Argentina includes a flexible exchange rate, but
before that happens the government will need to discipline the fiscal,
monetary and banking policies to avoid high rates of inflation. Mexico and
Brazil could be used as models in this process. In Mussa’s analysis, there
are three primary fiscal issues that the government needs to address:
first, there must be greater accountability for spending in the provinces;
second, tax collection methods need to be improved to cut down on current
massive tax evasion; third, the government must reduce spending on the
social security system.
What Lies Ahead?
Even if Duhalde succeeds in instituting these reforms quickly, Argentina’s
outlook is not good in the short term. The scenario for the coming year,
says Gallagher, is a 10% contraction in the GDP, a three to one exchange
rate with the dollar, and another major political transition is likely.
Because the Argentine implosion was anticipated, it is unlikely to have
major ripple affects, as happened in the 1990s with the Tequila Crisis and
the recession in East Asia. The restructuring or Argentina’s economy,
however, “will be more complex and dragged out than that of either Russia
or Ecuador,” says Gallagher. In Argentina, “there has been an explicit
political and social rejection of the Washington Consensus and the
free-market model,” which will make it politically difficult to institute
the necessary economic adjustments. In addition, Ecuador and Russia
benefited from high oil prices and have fewer commitments to social
spending than does Argentina. Time is of the essence; Argentina must act
decisively in the next few months to recuperate soon and avoid economic
disintegration.
*Mr. Gallucci’s comments are not included in this article, as he asked
that his presentation be off-the-record.
For recent news on the Argentine situation, see these articles from The
Washington Post and The New York Times:
http://www.nytimes.com/reuters/world/international-argentina.html
http://www.washingtonpost.com/wp-dyn/articles/A51888-2002Jan15.html
http://www.washingtonpost.com/wp-dyn/articles/A41036-2002Jan13.html
http://www.washingtonpost.com/wp-dyn/articles/A34226-2002Jan11.html
http://www.washingtonpost.com/wp-dyn/articles/A6299-2002Jan6.html