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.”
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.
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.
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.
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
Under centralbanking the pesohad depreciatedagainst the dollarby a factor of about10,000,000,000,000.