Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more ➡
Download
Standard view
Full view
of .
Add note
Save to My Library
Sync to mobile
Look up keyword
Like this
3Activity
×
0 of .
Results for:
No results containing your search query
P. 1
Fixing Argentina, Cato Policy Analysis No. 445

Fixing Argentina, Cato Policy Analysis No. 445

Ratings: (0)|Views: 864|Likes:
Published by Cato Institute
Executive Summary

Argentina's currency crisis and economic

depression have been caused by the bad policies

of its government--not by banks, speculators,

the International Monetary Fund (despite the

bad advice it has given), or other scapegoats. The

De la Rúa and Duhalde governments have made

several gigantic blunders, namely,



increasing tax rates,

freezing bank deposits,

devaluing the peso, and

forcibly converting dollar bank deposits and

contracts into pesos ("pesofication").





At present, all property is potentially subject

to government control or confiscation. There is

little reason for anybody to produce, save, or

invest in Argentina. The country is returning to

the failed economic model that caused so much

trouble in the 1980s and had to be jettisoned

from 1989 to 1991.



Fixing Argentina's currency and economy

requires reversing those blunders and returning

to policies that respect private property and

encourage the private saving, investment, and

initiative that create economic growth. The main

steps necessary in the short term are



officially dollarize, converting all peso

assets, liabilities, and prices into dollars;

to the extent possible, reverse the damage

done by pesofication of deposits;

reconstruct the financial system; and

drastically reduce tax rates.
Executive Summary

Argentina's currency crisis and economic

depression have been caused by the bad policies

of its government--not by banks, speculators,

the International Monetary Fund (despite the

bad advice it has given), or other scapegoats. The

De la Rúa and Duhalde governments have made

several gigantic blunders, namely,



increasing tax rates,

freezing bank deposits,

devaluing the peso, and

forcibly converting dollar bank deposits and

contracts into pesos ("pesofication").





At present, all property is potentially subject

to government control or confiscation. There is

little reason for anybody to produce, save, or

invest in Argentina. The country is returning to

the failed economic model that caused so much

trouble in the 1980s and had to be jettisoned

from 1989 to 1991.



Fixing Argentina's currency and economy

requires reversing those blunders and returning

to policies that respect private property and

encourage the private saving, investment, and

initiative that create economic growth. The main

steps necessary in the short term are



officially dollarize, converting all peso

assets, liabilities, and prices into dollars;

to the extent possible, reverse the damage

done by pesofication of deposits;

reconstruct the financial system; and

drastically reduce tax rates.

More info:

Published by: Cato Institute on Mar 26, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See More
See less

10/10/2013

pdf

text

original

 
Argentina’s currency crisis and economicdepression have been caused by the bad policiesof its government—not by banks, speculators,the International Monetary Fund (despite thebad advice it has given), or other scapegoats. TheDe la Rúa and Duhalde governments have madeseveral gigantic blunders, namely,
increasing tax rates,
freezing bank deposits,
devaluing the peso, and
forcibly converting dollar bank deposits andcontracts into pesos (“pesofication”).At present, all property is potentially subjectto government control or confiscation. There islittle reason for anybody to produce, save, orinvest in Argentina. The country is returning tothe failed economic model that caused so muchtrouble in the 1980s and had to be jettisonedfrom 1989 to 1991.Fixing Argentina’s currency and economyrequires reversing those blunders and returningto policies that respect private property andencourage the private saving, investment, andinitiative that create economic growth. The mainsteps necessary in the short term are
officially dollarize, converting all pesoassets, liabilities, and prices into dollars;
to the extent possible, reverse the dam-age done by pesofication of deposits;
reconstruct the financial system; and
drastically reduce tax rates.
Fixing Argentina
by Kurt Schuler
_____________________________________________________________________________________________________
Kurt Schuler (kurt_schuler@jec.senate.gov) is a senior economist at the Joint Economic Committee of the U.S.Congress. The views expressed here are those of the author, not necessarily those of the Joint Economic Committee or the U.S. government.
Executive Summary
No. 445July 16, 2002
 
Introduction: The Failure toUnderstand Argentina’sCrisis
Argentina was once one of the world’srichest countries. Again and again, though,its people have chosen or at least toleratedleaders who have had no idea how wealth iscreated and preserved. Argentina’s currencycrisis and economic depression result fromthat disastrous failure of understanding.The failure extends well beyond Argentina.The International Monetary Fund and theGroup of Seven nations have given bad advice orhave failed to give good advice. It was reportedbefore the peso was floated that the IMF wasadvising either floating or dollarization (eliminat-ing the peso and making the U.S. dollarArgentina’s national currency). The IMF gaveadvice as if both choices were equally good, eventhough under central banking the peso haddepreciated against the dollar by a factor of about10,000,000,000,000. When asked about dollariza-tion at a press conference on January 11, 2002,Anne Krueger, the IMF’s first deputy managingdirector, said, “My understanding is that, at themoment, it is technically unfeasible.”
1
In reality,dollarization is always technically feasible at someexchange rate. John Taylor, under secretary forinternational affairs at the U.S. Treasury, admit-ted in a congressional committee hearing that hethought dollarization would have been betterthan the freeze of deposits the De la Rúa govern-ment imposed in December 2001, but he had notcommunicated his opinion to the Argentine gov-ernment. Argentines should be aware that theyare largely on their own; judging from its publicstatements, the executive branch of the U.S. gov-ernment is not prepared to offer substantial helpthrough loans, a free-trade agreement, sharingseigniorage (profit) from issuing the dollarshould Argentina dollarize, or even helpful hints.
2
The failure of understanding extends tomost prominent foreign economists who havewritten about Argentina. Their advice has con-stituted professional malpractice. Obsessed bymonetary policy, few noted the cripplingeffects of Argentina’s high tax rates, which dis-couraged production and encouraged tax eva-sion. They mistakenly blamed the peso’s for-mer exchange rate link of 1 per dollar for mostof Argentina’s economic problems. Mostadvised floating the peso, and quite a few pro-posed coupling devaluation with forced con-version of dollar bank deposits into pesos(“pesofication”). They were oblivious to theimmense destruction of property rights thatfollowing their advice entailed. One test of aneconomist’s advice is whether he would applyit at home. No foreign economist has volun-teered to convert his own dollars into pesos atthe disadvantageous rate imposed onArgentine bank depositors.Argentina’s government, the IMF, theGroup of Seven, and most economists haveoffered nothing but a diet of ashes. Critics of the current policies must propose otheroptions, not just complain about existing poli-cies. Nobody has offered a set of alternativepolicies that is both comprehensive and benefi-cial, though a few economists have made valu-able analyses of and suggestions concerningparticular topics, some of which are incorporat-ed here.
3
The Argentine government and mosteconomists are opposed to the ideas proposedhere, particularly dollarization, but the failureof the current policies is battering down resis-tance. The government of President Duhaldecontinues to march determinedly in the wrongdirection, but the day will come when a newgovernment and fresh ideas can allow a moreprosperous Argentina to emerge.
What Caused the Crisis?
Tables 1 and 2 show the basic facts of Argentina’s economy and economic crisis.
4
The conventional view of Argentina’s crisis asit unfolded in 2001 was that
Argentina’s monetary system,locally known as “convertibility,”was a currency board;
the peso’s exchange rate of 1 perdollar made the peso persistentlyovervalued; and
2
Under centralbanking the pesohad depreciatedagainst the dollarby a factor of about10,000,000,000,000.
 
as a result, Argentina’s exports suf-fered, triggering recession and default.According to the conventional view, theway to end the recession was to allow thepeso to float. However, Argentines had manyof their bank deposits and loans in dollarsprecisely because they were afraid that float-ing would result in severe depreciation, so theconventional view advised pesofication.
5
The government followed that advice.Argentines have already tasted its bitterfruits, including a rapidly depreciating peso.Knowing why the conventional view was sowrong is essential to a proper diagnosis forending the crisis.
6
3
WouldArgentina’s cen-tral bank makefewer mistakesthan the FederalReserve over thelong run?
Table 1Main Economic Indicators for Argentina, 1996–2001
199619971998199920002001Gross domestic product (bn pesos)272292298283284271Growth of real GDP per person (%)4.26.30.8-6.5-0.6-7.0Inflation (consumer prices, %)0.20.50.9-1.2-0.9-1.1Inflation (producer prices, %)3.7-1.1-3.3-4.1-3.7-5.6Unemployment rate, October (%)17.313.712.413.814.718.3Exports of goods (bn US$)23.826.3726.4423.326.326.7Imports of goods (c.i.f., bn US$)23.830.531.425.525.420.3Current account balance (bn US$)-6.9-12.3-14.6-12.0-8.9-4.4Monetary base, December (bn pesos)14.115.016.416.515.116.9Net foreign reserves, December(bn US$)13.516.920.822.821.914.8Peso bank deposits, December (bn)25.932.434.433.731.918.6Dollar bank deposits, December (bn)28.336.942.547.251.947.6Average money market rate, pesos (%)6.236.636.816.998.1524.90Average money market rate, US$ (%)5.916.396.556.077.5312.76Average lending rate, pesos (%)10.519.2410.6411.0411.0928.6Average lending rate, US$ (%)9.127.848.959.079.6717.5Federal tax and nontax revenue(bn pesos)47.755.456.758.556.651.1Fed. spending and revenue sharing(bn pesos) 52.959.660.665.663.259.0Total government spending (bn pesos)83.288.992.696.796.094.5Gross government debt(e.o.p., bn US$)97101109118128141
a
Country risk premium (e.o.p., %)4.944.617.075.337.7343.72
Sources: Ministry of Economy, Secretariat of Finance, Undersecretariat of Financing, “Main MacroeconomicIndicators,”www.mecon.gov.ar/download/financiamiento/newinf.xls; Banco Central de la República Argentina,
 Información Monetaria y Financiera Mensual,
www.bcra.gov.ar; International Monetary Fund,
 International Monetary Statistics;
Ministry of Economy, Secretariat of Economic Policy, “Información Económica,”www2.mecon.gov.ar/infoeco/apendice6.xls(total government spending); and J. P. Morgan Emerging MarketsBond Index Plus (country risk premium).Notes: c.i.f. = cost, insurance, and freight; e.o.p. = end of period. Amounts in dollars or pesos are in current units(nominal amounts for the year in question, not adjusted for inflation). Net foreign reserves are for the centralbank. Curiously, there do not seem to be standardized figures for total government revenue.
a
September.

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->