Harold James From J.B. Alberdi: Argentina and The Vultures
Estimado Professor James:
Thanks to the ether networks in the vaults of La Recoleta I have internet and keep an eye out for articles which mention the fate of Argentina. As principal author of our Constitution of 1853 I feel culpable that I was not ever able fully to convince my compatriots to be good managers of our debt destiny, save and invest productively, and live within their means.
My attention was drawn to your interesting article at Project Syndicate mainly because of these words: “Two fundamental facts have turned countries like Argentina and Greece into victims of an impossible logic. First, debt continually grows; second, there is no really satisfactory way of getting rid of it.” I recognise your point that exceptionally large debt due to exceptional growth in financial services has intensified the long game of mounting new debt upon old debt so as to avoid default. There exists such a thing as “inextinguishable debt” (old bones for archeologists). A clean start without any debt is impossible. Accepted.
But I take issue with the perhaps unintended inference that Argentina has been a “victim” of external logics (debt would be only last in a long line of these). You say: “A cleanup is impossible. That leaves only one solution: pile on new claims to such an extent that old debts appear paltry”. I have memory of Argentina’s past, so if you would permit my ghostly intrusion, I will undertake a partial deflation of this claim with a brief history of our cycle.
The point I wish to make is that for over a hundred years Argentina has recurrently reached turning points -- punctuated by debt crises -- when it had the opportunity to ‘cleanup’ its political economy and permanently reduce burdens of foreign debt.
In our case, the “impossible logic” is not an external logic of globalisation and dependency as the Left claims, or your “inextinguishable debt", but rather the internal logic of our faulty institutions.
Exclusive explainers, thematic deep dives, interviews with world leaders, and our Year Ahead magazine. Choose an On Point experience that’s right for you.
In my Estudios Económicos (Economic Studies), a book deeply influenced by Adam Smith, Hobbes, and Juglar, you would find the following observations, which were my thoughts during the crisis of 1876. I considered them still to be satisfactory as an explanation for our national humiliation in 2002 when Argentina entered the pantheon of a Universal History of Infamy with the world’s largest ever sovereign default. They remain good today as an explanation of Argentina’s obstinate wearisome conflict with the Vulture Funds.
Sovereign credit has its useful applications and conveniences, and can serve the creation of wealth. But additional credit is not necessarily the best means for rescuing commerce from a pecuniary crisis produced in large part by the bad use of credit itself. In certain forms, credit -- rather than being a cure -- is something aggravating the crisis, a chronic national ailment as old as violence.
The crisis today is the same crisis as the crisis of 1870, of 1865, of 1860, of 1852, of 1840, etc. The country has lived in these crises since it left off being a colony of Spain. Their cause is the lack of cohesion and organic unity of the Argentine Republic. The corruption and dysfunction of the nation’s credit and monetary system arises from the decomposition and disorder of the institutions, centres of power and the vested interests of the country.
The people of this vast and fertile land which is South America, with its generous climate, lacked moderation or self-control and the capacities of order and sacrifice to produce wealth by means of intelligent and persevering work and thrift. One cannot become rich without these qualities. Saving is a whole education; a virtue comprised of many other virtues, and it presupposes an advance in civilisation.
The South American states are weakening themselves increasingly rapidly because of the prodigious use their governments make of public borrowing. Money borrowed from foreign powers disappears on luxuries and political patronage instead of production. Periodic prosperity was illusory. The crisis, when it arrives, is a sudden generalised impoverishment produced by the frenzy of sudden enrichment. Misuse of credit is the abuse of a noble effort, and reflects all that is wrong with Argentine political and economic life.
It is well known that all crises explode at end of a period of great prosperity. That is not the reality, but rather the way it appears to be. What was taken for prosperity was profligacy, the squandering of capital investments in bad businesses and vain possessions.
The sickness of [debt] crises is very difficult to cure because it has its roots in the basic laws of the nation, in institutions which have been sacred for many years and, finally in the beliefs or prejudices of the country itself. These laws, institutions and traditions are what organise public and private debts in the dangerous forms which they now take.
The quotations above were my thoughts sparked by the crisis in 1876. Thumbing now through the history books I tell you, Sir, there were foreign debt crises mixed in with provincial debt crises, discussions of “debt repudiation”, and cycles of "stabilisation policy" in Argentina after my death in …
1890, 1930s, 1952, 1956, 1959, 1962, 1966, 1970s (twice), 1980s (twice), 1990s (twice), and the 2000s (twice) … !!!
The language of all these debt crises was the same. Each had their own peculiarities, triggers, symptoms, justifications, dramas, personalities, and conflicts. But all were the outcome of profligacy, corruption, public mismanagement, and patronage. The sickness in 2001, like in 1876 and in 2012-13, was institutional. A sizeable number of Argentina’s policymakers, opinion makers and citizens alike were blinded to realities, unwilling to recognise that problem areas like corruption, autarky, and political populism with agricultural or industrial nationalism were intimately interconnected.
I gave impetus to the so-called Liberal Pause of rapid institutional and economic progress lasting until the 1920s. Before Gerschenkron was even born I wrote: “The very backwardness of South America is an advantage. Instead of inheriting a bad industry, South America has at her disposal the most advanced European industry of the nineteenth century”.
Paul Lewis describes the legacy of my generation preceding President Perón and the spiralling decline into populist-nationalist economics: “So far as capitalist development is concerned, the landowning oligarchy and domestic industry had, in the pre-Perón era, embarked on a path of development which, had it been followed, would [have permitted] Argentina to establish itself as a solid member of the first world. Instead, Argentina opted to become a third world nation … and held up capital – both foreign and domestic – to scorn”.
So, now the vultures are circling. And they are not the cute local Condors.
I can only think of one moment, in the mid-1990s (the 1995 election), when there was a possibility of escaping the cycle of chronic debt crises. The hands of the politicians had been deliberately tied in the effort to control budget deficits and public borrowing. The technocrats with PhDs from Harvard struggled (as the Greek ones must) to assert impartial technical autonomy in policy areas like labour law, budget balancing, and privatisation to substitute for devaluation.
But the technocrats lost the struggle with the politicians and ‘mafia’.
Argentina like Greece and every other country always had a choice -- A) whether to borrow and in what quantity, B) how productively to employ the borrowed money, and C) whether to adjust structurally during crises and so keep the ‘inextinguishable’ portions of debt to manageable levels. Argentina even had the choice -- if inflation was a problem and the exchange rate overvalued with hot money coming in -- to introduce the kind of market-friendly capital controls which its neighbour, Chile, had by then made an art form.
Predictably, South Korea and Chile managed the debt destiny quite well and Argentina did not.
The birds come home to roost, and this time the birds are Vultures. The Argentine political elite could stop throwing out carcasses for them to feed on.
Le saluda atentamente,
Disclosure: The author of this semi-fiction Michael G. Heller was employed as an economic policy adviser by the Presidential candidate José Octavio Bordón throughout the watershed election campaign of 1994-1995.