The economic orthodoxy of fighting inflation at all costs has indeed been costly for Argentina. As Eduardo Duhale – the fifth president in two weeks – took power this week, he will inherit a bankrupt economy. That is not hyperbole. The definition of a bankrupt is one who cannot pay their debts as they fall due – precisely Argentina’s position. But unlike an individual who can declare bankruptcy, deliver up their assets for part payment of the debt and start afresh, a nation has to struggle on with the debt burden. How Mr Duhale does this is a matter of major concern for those who cherish the ideal of political and economic liberty. The rioting and violence in the streets in Buenos Aires in the past week which is a direct result of the economic failure has threatened those liberties.
At the behest of the heavily-US-influenced International Monetary Fund, Argentina began a classic reform program about four years ago. It cut tariffs, privatised state enterprises, welcomed multi-national companies, cut government spending and pegged the peso to the US dollar. For a time, things looked good. Foreign investment poured in.
The fear of inflation in Latin America is perhaps more pronounced that elsewhere because in the past inflation has run riot on occasions as governments just printed money in an attempt to meet welfare spending and often to keep corrupt payments running. So pegging the peso seemed a good idea at the time. But it was not. The enemy was not inflation – that was a mere symptom. The real enemies were unrestrained government spending and corruption. A floating exchange rate is an important way for an economy to self-correct, especially when combined with the intelligent application of monetary policy. Australia is a good example. We may well moan about the falling value of our dollar, but it has prevented some of the horrors of the Argentinian situation.
The rest of the IMF medicine was appropriate, but it needed to be taken in smaller doses. Unfortunately, when things started to go wrong, the IMF urged more of the same austerity. The pressure built up. The President fled from office when he could not get support for a government of national unity. He was followed by three others in quick succession. Argentina defaulted on its debt. Limits were placed on cash withdrawals. Pension payments were threatened. People rioted, killing 28 people.
Mr Duhale is only in a slightly better position than his predecessors. The Argentinian Congress, sensing the gravity of the situation, gave him overwhelming support – 262 votes to 21. He has been given a term to end in 2003, rather than the usual interim arrangement which would have seen elections within three months.
This will help in the short term. Mr Duhale is an old-style Peronist. Peronists believe in big government, protection for industry — in the form of import controls and high tariffs – and in exchange control. In the short term, some of these measures may help a little, but in the longer term, Argentina will lose the huge benefits of free trade. The tragedy for Argentina is that the events of past two weeks will shatter any faith in free markets.
It is not a flattering comparison, but Australia – with a commodity-based economy like that of Argentina — has done reasonably well with its economic management since the mid-1980s. Critical parts of that success have been deregulation of the financial markets, privatisation and a floating exchange. Importantly for Australia, reform has been gradual and fairly widespread – through industry, financial markets, exchange rates, monetary policy, public financing — and we recognised and dealt with impending problems rather than letting them get out of hand. Also, Australia has been free of big-scale corruption.