A Recovery Plan for Argentina

Argentina's president, Eduardo Duhalde, has been making impassioned pleas for international support to rebuild his country. Argentina needs and deserves such help, and the foundations for economic success-skills (a literate and well-educated population) and institutions (a federal constitutional democracy)-have been in place for a long time. But Mr Duhalde has yet to specify what must be done to take advantage of Argentina' favorable endowments.

He does at least recognize that only Argentina is responsible for the bad policy choices that led to today's morass. No one forced Argentina to adopt the currency board devised by Domingo Cavallo, the former economy minister, which pegged the peso to the dollar at a fixed exchange rate of one to one. (The IMF, however, clearly should not have helped finance the currency board's operation without demanding fiscal adjustment when the country liberalized its foreign trade.)

As a result of the currency peg, Argentina's interest rates were largely determined in the US. Lacking access to basic economic tools such as exchange rate and monetary policies, Argentina could not surmount the profound external shocks of the second half of the 1990s, when export prices fell, the US dollar appreciated, and Brazil, the country's main trading partner, devalued its currency. The only alternative was severe fiscal austerity, for which the government never mustered the political will.

Argentina is now in a deep recession, with unemployment above 30%, and a shattered banking and financial system. Fiscal austerity and balanced budgets should be priorities in the longer term, but they are inappropriate now.