Bruce,
This the Economist in March: Even before the latest disaster, Argentina's story is that of a decline unparalleled in modern times. Blessed with some of the world's most fertile land on the endless pampas, Argentina in the 19th century attracted a flood of British capital and European immigrants. By 1913, having grown at an annual average rate of 5% for the previous three decades, it was one of the world's ten richest countries, ahead of France and Germany. It has been downhill ever since. Exporting beef and grain to Britain ceased to be a passport to prosperity. But Argentina's leaders, starting with Juan Domingo Peron, a populist army colonel who ruled from 1946 to 1955, aggravated their country's problems by retreating into protectionism and financing generous benefits to workers by printing money. Four decades of political and economic instability culminated in the restoration of democracy in 1983. But the economy still languished: between 1976 and 1989, income per person shrank by more than 1% per year. Two bouts of hyperinflation, and two banking collapses, destroyed confidence in both the peso and economic policy. Argentines preferred to use dollars, and the wealthy shipped their capital abroad. In 1991, Carlos Menem, a pragmatic Peronist, and Domingo Cavallo, his economy minister, set out to reverse this decline through free-market reforms such as open trade. Their cornerstone was a currency board, under which the peso was fixed by law at par to the dollar, and the money supply restricted to the level of hard-currency reserves. Mr Cavallo called this "convertibility", deliberately harking back to Argentina's golden age: for much of the period before 1935, the country had operated a currency board, in which a body known as the Caja de Conversion was charged with maintaining the peso's value in gold.* Mr Cavallo's scheme seemed to work. After a lag, inflation was killed. With all risk of devaluation apparently removed, capital poured in from abroad. Mr Menem privatised almost everything the state owned, except for a couple of banks. Between 1991 and 1997, Argentina's economy grew at an annual average rate of 6.1%, the highest in the region (see chart 1). Productivity increased as investment modernised farms, factories and ports. But the currency board was a demanding regime. Having renounced both exchange-rate policy and monetary policy (interest rates were, in effect, those set by the United States' Federal Reserve, plus whatever risk-margin lenders assigned to Argentina), the government was left with few tools to respond to outside events. The first foretaste of difficulties came in 1995, after Mexico had been forced to devalue its peso. Nervous investors yanked their money from Argentina: the economy shrank by 4%, and a dozen banks collapsed. But the government responded effectively: it tightened bank regulation and capital requirements, and encouraged foreign banks to take over weaker local ones. By the next year, the economy was growing strongly again. This kind of forced adjustment, argued proponents of the board, was the beauty of the scheme: it would compel politicians to stay honest. In fact, not only did it fail to do that, but it placed the political system under intense strain. Internal rigidity, external shocks So how did it all end so badly? For some economists, the answer starts with the currency board itself. Pedro Lacoste, an Argentine economic consultant, argues that the assumption behind the scheme was that "globalisation was unstoppable". But then came four external shocks. Prices for Argentina's commodities stopped rising; the cost of capital for emerging economies began to go up; the dollar appreciated against other currencies; and Brazil, Argentina's main trading partner, devalued. The rigidity of the currency board made it difficult to respond to these shocks. In mid-1998, Argentine officials confidently told visitors that the economy would grow at 6% per year indefinitely—just as it was slipping into a grinding recession from which it has yet to emerge. Three years later, with no growth and no prospect of growth, investors finally realised that Argentina's debt might be unpayable. Bruce wrote: >Sorry Harry, > >Argentina went into the clutches of the IMF/WB long before 5,000% >inflation. It was their idea to tie the peso to the dollar. Try to at >least get your chrono in order. I know we could legitimately debate >causes til peron resurrects, but lets get order straight. > >Bruce Leier > > > -----Original Message----- > > From: Harry Pollard [mailto:[EMAIL PROTECTED]] > > Sent: Thursday, August 15, 2002 8:49 PM > > To: Bruce Leier; 'Keith Hudson'; [EMAIL PROTECTED] > > Subject: RE: Cry for Argentina > > > > Bruce, old lad, they were already belly up. As I recall they had a >5,000% > > inflation rate. > > > > However, privatization is no answer. Competition is the way to get a > > tottering into shape. Mostly, the idiots privatize a monopoly - >something > > they should have learned not to do in Economics 99. > > > > Usually, such a situation is the result of spending more than you've >got. > > So, you must cut back - preferably on over-extended public services. >Then > > you have to produce more before you go broke and trade is the obvious > > direction. > > > > Argentina was already a basket case (which is usually the case when >the IMF > > is called in). > > > > But, the reason was a completely venal, corrupt, and incompetent, > > government. Come to think of it - is there any other kind? > > > > Incidentally, Ed mentions the idiocy of pegging the peso to the >dollar. He > > is quite right. But this kind of thing has been the policy of >government > > after government. It's a kind of Walt Disney folly - you'll recall >"Wishing > > will make it so!" > > > > But, wishing doesn't stand a chance against Gresham. > > > > Harry ****************************** Harry Pollard Henry George School of LA Box 655 Tujunga CA 91042 [EMAIL PROTECTED] Tel: (818) 352-4141 Fax: (818) 353-2242 *******************************
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