Argentina Blew Its Big Chance

We do cry for Argentina these days--as the great experiment of backing the peso with the dollar ends in total failure. The impoverishment of a great country is a calamity on a grand scale. But who really "lost" Argentina? So much went wrong that it is natural to spread the blame around to all participants: the politicians, the International Monetary Fund, the creditors. We think this is the wrong approach. Let us apportion responsibility properly so that policy can change and a new future can be built for Argentina.

The new President, Eduardo Duhalde, blames the neoliberal model of economic liberalization for his country's woes. He argues that, in the end, open markets, fiscal austerity, privatization, and hard money drove Argentina into poverty. There is some truth to that. The IMF and the U.S. Treasury both forget that open markets can operate efficiently only within a strong regulatory and legal environment, such as exists in the U.S. and Europe. Short-term capital flooded into Korea and other countries in the late 1990s, when the region didn't have serious banking and capital-flow rules. It set the stage for financial trouble, which came with a vengeance. In Argentina, the privatization of the state sector in a country with weak legal and regulatory systems led to enormous corruption and too little competition, much as it did in Russia.

The IMF and Treasury are also often wrong in emphasizing austerity rather than growth, no matter what the circumstances. Indonesia, Korea, and other Asian states fell into deep recession in 1998 because of the imposition of heavy belt-tightening measures ordered up by the IMF. Yet Korea and most of the governments in the region were actually running budget surpluses at the time. Korea began to recover only when it defied the IMF and expanded fiscal policy.

Argentina is no Korea. Argentina has been running fiscal deficits for most of the '90s. The budget shortfalls have widened in the last four years as the economy slipped deeper into recession. The sad truth is that Argentina has squandered an opportunity to make a breakthrough into the ranks of the top-tier developed world. After linking the peso to the dollar and crushing hyperinflaton, it sold off state assets and redistributed the wealth. Argentina didn't use that onetime bonanza to create conditions that would generate sustainable growth. In effect, the country gave it to corrupt provincial politicians who bolstered their own positions by hiring hundreds of thousands of people. The money transfer was done through the banking system and everyone accepted it, including the Argentine people.

In the end, Argentina didn't build a neoliberal economy. It grafted a hard-money policy onto a traditional system of crony capitalism, making it stronger. For a brief moment in the early '90s, a new entrepreneurial class developed that built new enterprises, but it was soon crushed under the heavy hand of corruption. Old companies never transformed themselves into global players. When Brazil devalued, Argentina couldn't compete anywhere in the world.

Argentina has recently defaulted on $141 billion in public debt. But Argentines themselves have stashed tens of billions of their own money outside the country. The politicians may blame outsiders for the country's woes. The people themselves voted "no confidence" in their politicians a long time ago.

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