Argentina Needs an Amputation
The Argentine peso has lost a third of its value relative to the U.S. dollar in the space of three months and locals have been to this rodeo before. For seven decades, Argentina has addressed her social and economic problems with massive state interventionism and deficit spending, funded by the printing press. The result has always been the same: economic stagnation and inflation.
Now Argentina has one of the least free economies in the world and some of the worldâs most complicated and highest taxes. Further, the hidden inflation tax has been brutal, 50 percent annually between 1934 and 2012.
As the Economist magazine has written, âthe problem with saviors is that, sooner or later, countries have to try to save themselves from them.â Argentina has to save herself from Peronismo, the legacy of the former president, military general, and âsaviorâ Juan Domingo PerÃ³n (1895-1974). Other people may also call him a national socialist, or a fascist.
Since Argentina never became part of international socialist movements and the statism and interventionism always had a national rather than an international bent, this is what Argentina needs to save herself from.
The alternative to ridding Argentina of Peronismo is more of the same. Argentine people will suffer under a gridlocked economy, and they will face more humiliation as they beg to the International Monetary Fund for loans.
The Essence of Peronism
Defining Peronismo can be difficult, since it stems from a politician rather than a political philosophy. It is a peculiar mix of social justice, isolationism, and deficit-driven political patronage. PerÃ³n traveled to Italy in the 1930s, then a fascist dictatorship, and learned from Benito Mussolini. On the home front, as both a minister and then as president, he formed alliances with labor unions and doled out immense num bers of government jobs.
The two major manifestations of Peronism, therefore, are union dominance of the economy and a politicized central bank. In addition, centrally planned trade has jammed the ports, leading to Argentinaâs score of 0.29 out of 10 for trade openness, according to KPMG. Try to send anything to Argentina, you will soon see the arbitrary delays and exorbitant import duties.
Worker strikes, often violent and paralyzing, are a national sport in Argentinaâ"after soccer, of courseâ"as I witnessed during my year in Patagonia. Argentina leads Latin America for the number of strikesâ"1,235 in 2015 aloneâ"and the percentage of the population that participate.
The Independent Review, a journal of political economy, has published a lengthy critique of the Central Bank of the Argentine Republic. The coauthors, NicolÃ¡s Cachanosky and AdriÃ¡n Ravier, note its counterproductive mandate for âsocial fairnessâ and the âfact that th e [central bank] is unable or unwilling to efficiently manage the supply of currency isâ"or should beâ"undisputed.â
Given this dubious mandate of the central bank, Argentina has one of the worldâs highest inflation rates at 32 percent annualized as documented by the Troubled Currencies Project. To rub salt into the wound, the National Institute of Economic Census for many years fabricated official inflation rates far below the real rates.
As a countermeasure, nationally mandated price freezes leave supermarket shelves empty for many products because price cealings make it impossible for producers to supply the product at the below market price.
The epitome of the inflation denial came earlier this decade when Argentine officials fixed the McDonaldâs Big Mac price. The Big Mac Index is a tongue-and-cheek international metric that compares international price levels by comparing the price of a Big Mac in different countries. Because Argentina wanted to loo k cheaper, officials just fixed the price.
But the time for denial is over, however, and voters and politicians alike need to recognize that inflation stems directly from deficit spending.
Change Is Possible
The good news is that change is possible, and New Zealandâs liberalization of the 1980s would be an example to follow. At that time the British colony faced a similar fiscal crisis but came out stronger than before.
The prescription need not be complicated. Consider what you do when you face your own fiscal crisis. You can double down and seek more creditâ"which delays and worsens the inevitable painâ"or you can cut spending, work harder, and liquidate your assets until your debts are under control.
Argentina must do the latter.
The first step, necessary but not sufficient, is flexible dollarization, as advocated by Cachanosky and Ravier. They concur with Steve Hanke of John Hopkins University that the Argentine peso needs to go, t o be replaced with the U.S. dollar or whatever currencies or cryptocurrencies private businesses prefer. This sound money and low inflation policy would make it possible for businesses to plan and produce effectively again and would reign in rampant speculation and inflation arbitrage.
Ecuador has made the transition successfully, and removing the central bank would end elevated inflation and deficits funded by monetary expansion. Argentina has already experienced creeping dollarization, as people tie big-ticket items and contracts to the U.S. dollar. Bitcoin is also huge in Argentina as it is used to evade capital controls and as a store of value.
The second crucial step is rapid-fire reforms, to make Argentina competitive on the world stage, and serious cuts to government spending. A critical ingredient will be the end of union monopolies for each industry and a freeing up of the labor market, since hiring someone in highly protective Argentina invokes responsibiliti es akin to adopting a child. Unions dominate political discourse, stand in the way of economic competitiveness, and dissuade foreign investment.
President Macri has already started to implement some of these reforms but the unions have made every step of the way difficult and the government could not resist the temptation of using the printing presses of the central bank to cover shortfalls in revenue.
âHow can Argentina do what New Zealand did?â friends once asked me on the outskirts of Buenos Aires. In other words, how can this be politically feasible?
Reason for Optimism
There is reason for optimism. Embedded political classes and protected factions are the problem, not the Argentine people. In the 1990s, they supported President Carlos Menem in efforts to undo much of the Peronista legacy, even though he had earlier run as a Peronista.
However, he presented half measures and corrupt privatization deals. He gave monopoly protections and other guarantees, such as subsidies, to the new owners and even used the one-off revenue raised from privatizations to fund social programs, rather than to pay down debts. Without deregulation or competition, the purported privatizations were pure cronyism. So they people supported the right ideas, but the President didnât deliver.
In 2015, the people voted again for change and sound economic policy with President Mauricio Macri of the Letâs Change coalition. He has accepted a credit line of US$50 billion from the IMF, which includes limited fiscal-austerity stipulations. However, the pending question is whether he will go all the way in attacking the economyâs structural problems.
In order for Macri to succeed, Roger Douglas, former finance minister and chief architect of New Zealandâs liberalization, says âdonât blink.â There can be no exceptions or industry favorites, and the reforms must be swift and across the board. That way there ca n be no claims of unfairness, and the reform leaders will continue to enjoy voter approval. If they go down the middle way or even the corrupt way like Menem, Macriâs movement will soon falter and Argentina will fall into the old patterns of financial and economic crisis again.
Fergus Hodgson is the founder and executive editor of Latin American intelligence publication Antigua Report. He is also the roving editor of Gold Newsletter, and the managing editor of the American Institute for Economic Research.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.Source: Google News Argentina | Netizen 24 Argentina