Neo-liberalism's Argentine Failure

In the 1990s Argentina implemented perhaps 80% of the neoliberal economic policy agenda. It opened up its economy to world trade and international capital; it sought to guarantee low inflation and sound money. It strove to improve its legal system so that decisions would accord with general rules and foster confidence that contracts would be enforced--whether or not a bribe had been paid.

It failed. This is not to say that the 1990s, even with their aftermath leading into the terrible summer of 2002, were catastrophic. Life was clearly worse during the Dirty War of the 1970s, when an army with no honor threw women out of helicopters into the South Atlantic, and urban guerrillas shot people because... because... well, just because!

Support Project Syndicate’s mission

Project Syndicate needs your help to provide readers everywhere equal access to the ideas and debates shaping their lives.

Learn more

The 1980s were hardly better. Starting with a full-fledged debt crisis triggered by a massive rise in both US interest rates and the value of the American dollar, the decade ended with domestically-generated hyperinflation, causing Argentina to fall a decade further behind the world's leading economies.

In the 1990s, by contrast, Argentina's GDP per capita grow by 25% from trough to peak--only to lose this entire income gain over the past four years. Until late last winter, Argentina's problems seemed merely an unpleasant but temporary bump, in the same way that the 1994-1995 Mexican "tequila" crisis or the East Asian crises of 1997-1998 proved to be only temporary interruptions, not watersheds.

Such optimism is impossible today, and there is little hope that the country's recent meltdown is only temporary. The establishment view--say, in US Treasury Undersecretary John Taylor's office--is that Argentina's collapse is the fault of its politicians.

I half-agree with this view. Argentine leaders were repeatedly warned that keeping the exchange rate constant and fixing the peso's value against the US dollar risked sending the economy into recession if the dollar gained value. Argentine politicians were also warned that their peso policy could not be sustained unless the ratio of national debt to GDP was falling.

Yet during the boom years of 1993-1998, public spending outran taxes enough to push Argentina's debt-to-GDP ratio from 29 to 44%. When the dollar appreciated and recession came, politicians with too little statesmanship to balance the budget in good times turned out to have too little courage to balance the budget when times turned hard.

The coup de grâce was delivered by the government's decision (when the crisis came) to keep bank deposits fixed in dollars and to change debts owed to banks into pesos, thereby bankrupting the country's financial system with a single stroke of the pen.

The establishment position is that if any of these three disastrous policies had not been implemented, Argentina would not have fallen into crisis, or at worst it would have suffered a small tequila-style crisis. Argentina's 1990's neo-liberal program was nearly idiot-proof, according to this view, but Argentine politicians turned out to form a large and ingenious class of idiots.

There is, however, another way of looking at the Argentine tragedy. It is based on the observation that the country's political system has long performed in a predictable way, consistently producing governments that promise more than they can deliver. They promise rich oligarchs that they will not collect much in taxes. They promise workers and consumers generous social insurance. They promise rapid economic development, generous infrastructure spending, cushy low-work jobs for the politically connected, and so forth.

Taken together, these promises mean that claims on national product always exceed 100% of the total. Popular demands that the government fulfills all of them cannot possibly be met. Add to this an unfair distribution of income and wealth, lack of social comity between the working and middle classes, and a long tradition of political violence, and you have the recipe for a politics of all-against-all.

The basic political fight about how wealth should be distributed in Argentina remains unresolved. Any political force that tries to curb the bidding by promising only what it can deliver is doomed to defeat. So in Argentina big government deficits are a law of nature, a fact of life. Hence Argentine interest rates can be low and affordable only for rare, short periods.

Everyone knew that Argentina's political system generates chronic deficits, and this meant that interest payments on the debt were likely to explode. Because the dynamics of Argentine debt were so unstable, a hard-currency exchange-rate peg could not last. Free access to international capital markets and dollar-denominated bank accounts meant that when the exchange-rate peg finally collided with the deficit-producing logic of Argentine politics, the result could be nothing short of catastrophic.

Had today's crisis been finessed, had Argentina another decade of rapid growth, its conflicts over wealth distribution might have moderated. After all, Europe before WWII possessed the nastiest politics on earth: rioting right-wing mobs in France, general strikes in Britain, civil war in Spain, fascism in Italy, and the Nazis' vicious consolidation of power in Germany. Yet postwar Western Europe encountered no public problems that could not be resolved in ways that preserved sound money and growth.

I half-agree with this view, too. Yes, Argentina's government made huge mistakes; its politicians sinned against the gods of monetary economics. But did the punishment need to be so swift and so severe?