TCS Daily

Tango Lessons: Argentina Shows Austerity Is No Way Out

By Duane D. Freese - December 21, 2001 12:00 AM

Talk about a country in need of an economic stimulus, Argentina sure could use some.

Three years of recession have provoked riots at supermarkets and in the streets. Sixteen people were killed in showdowns this week. Unemployment tops 18 percent. Did I say recession? It sounds more depressing than that. It marks a decline of huge proportions over the decade I've spent visiting that South American land. And it doesn't need to be that way.

Here, with unemployment at a considerably more modest 5.1 percent and a recession that began only last March, the Bush administration is pursuing tax cuts and spending increases with vigor in hopes of getting the economy growing again. Faced with complaints that threaten to deepen federal deficits, presidential spokesman Ari Fleischer argued the contrary. "The President thinks the best way to make certain the budget returns to a surplus is to give the economy a boost. It`s the growth in the economy that creates revenues," Fleischer told reporters.

That bottom line, whether you go along with the specifics of the stimulus plan or not, is perfect economic common sense. Even as some economists might not agree with the need for stimulus now, you won't find hardly any - Keynesians through supply siders - who think a recession is a good time for huge cuts in spending and big increases in taxes. That is, unless they work for the International Monetary Fund.

For as the Argentine economy has tanked, the IMF prescription for Argentina lifting itself from out of its doldrums is exactly that -- tax hikes and budget cuts. That and inflation - by eliminating the soundness of the Argentine peso by cutting its one-to-one convertibility to the dollar.

The Chicago Tribune got the issue precisely backward in an editorial Dec. 6 in which it credited Argentine President Fernando de la Rua for attempting to "rein government pensions and federal spending." It claimed a growth in such spending from $29 billion to $37 billion from 1992 to 1999 underlay Argentina's problems.

While government spending for any purpose needs careful watching, the source of Argentina's problem is hardly its pensions and welfare system. In fact, the growth -- until 1999 when the country entered recession -- of its entire budget was less than the growth of the economy as a whole. And as a percentage of the economy - less than 20 percent -- it is still below levels for federal spending here. As for floating the currency and cutting back demand as a way to reduce domestic spending and thus increase its balance of trade, Argentina now runs a rather large trade surplus - nearly $800 million in the last quarter alone -- on total imports and exports of $3.6 billion. To really make a dent in the overall debt, its exports would likely have to at least double while imports stagnated. That means continuing low levels of domestic demand, and no real economic growth.

That sort of export led boom - a 21st Century iteration of the Depression Era's beggar thy neighbor policy on trade - hasn't worked for Japan for the last decade. Its unemployment at 5 percent is now considered at perilous levels for that economy. And even Japan has attempted to stimulate to prevent a further downturn.

The Bush administration rather than admonishing Argentina to work with the IMF on its debt crisis should encourage it instead to follow what Russian President Putin did. He rejected IMF proposals for raising taxes and cut them instead. That led to increased tax revenues, as it brought more of the economy from hiding.

Nearly a third of Argentina's economy is estimated now to be underground, and heavy taxes are one thing that keeps it there. A smaller bite would encourage more of that underground economy to the surface, producing far more revenue than additional budget and tax stringency ever could.

Meanwhile, the IMF should seek other kinds of reform than budget controls. The real problem in government spending in Argentina isn't on pensions or welfare plans - it's the featherbedding. Every congressional politician in Argentina has a host of family that sop up money without providing even a modicum of service. They are known as "gnocchis," because they show up only on the Tuesday - payday -- that also happens to be the traditional day in Argentina for enjoying that potato pasta.

Cleaning out those potato heads would do more for fixing up Argentina's economy than any of the prescriptions of the IMF. All they do is strip money from the private sector to feed the friends of the politically powerful.

The Bush administration has the right idea -- austerity is not the way to prosperity. To save Argentina, give Argentineans a little stimulus to help themselves.


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