Glaspie/Hussein ...

Bradford DeLong jbdelong at uclink.berkeley.edu
Tue Nov 5 07:47:38 PST 2002



>----- Original Message -----
>From: "Bradford DeLong" <delong at econ.Berkeley.EDU>
>> I think so. The Kuwaitis *were* doing a *lot* of slant drilling, after
>all...
>
>Weren't they also doing a lot of slant drilling into Saddam's forex
>reserves, through repayment pressure on what I vaguely recall was a debt
>(Iraq to Kuwait) of some US$70 bn? Weren't the geopolitics of debt repayment
>somewhat to blame here?
>
>Speaking of which, that's an eloquent column of yours, Brad, that graces my
>morning Business Day op-ed page here in Jo'burg. But you seem to lay the
>blame for Argentina's problems entirely on political populism with nary a
>word about Wall Street loan pushers or US Treasury Dep't policy. Given the
>ID tag line, it looks really self-serving, given that the debate here (even
>in the neolib Business Day) has gone a very long way to fingering the
>Fischer/Summer tag team. How'd you forget that factor?
>
>Cheers,
>Patrick

??You seem to have read something different than I wrote:

The Argentinean government made a big push in the 1990s. It tried hard to implement 80 percent of the neoliberal reform program. It opened up its economy to world trade and international capital flows. It sought to guarantee a sound-money, low-inflation monetary policy. It strove to improve the functioning of its legal system, so that decisions handed down would accord with the law and create confidence that contracts would be enforced--whether or not one had made the proper donations to the proper political parties.

It failed.

This is not to say that the 1990s, even with the aftermath up through the summer of 2002, were in relative terms a catastrophic decade for Argentina. The 1970s were worse, when an army with no honor would push women out of helicopters into the cold South Atlantic, and an urban guerrilla movement would shoot people because... because... because... well, just because! The 1980s were worse, starting with a full-fledged debt crisis triggered by a massive rise in both U.S. interest rates and the value of the U.S. dollar, ending with a full-fledged domestically-generated hyperinflation, and during which Argentinean development fell another full decade further behind the world's best-practice economic frontier. The 1990s, by contrast, saw Argentinean GDP per capita grow by 25 percent from trough to peak--progress, albeit not nearly up to the potential growth rate of a developing country. (And even though *all* of those gains in income have been surrendered in the past four years, we still cling to the thin reed of hope that this surrender is only temporary.) Until the late winter of 2002, we could think that Argentina's current problems were merely an unpleasant but temporary bump, in the same way that the 1994-1995 Mexican or 1997-1998 East Asian crises proved to be not watersheds but temporary interruptions.

It is much harder to have that optimistic view of Argentina today.

The establishment view--the one you would hear in, say, U.S. Treasury Undersecretary Taylor's office with the blue-and-gold star-spangled carpet, and the one that I more than half agree with--is that Argentina's crisis and economic collapse was the fault of Argentina's politicians. Argentinean politicians had been repeatedly warned that keeping their exchange rate constant and fixing the value of the peso to the dollar ran the risk of sending their economy into recession if the dollar were to gain value. Argentinean politicians had been repeatedly warned that keeping their exchange rate constant and fixing the value of the peso to the dollar was not a policy that could be sustained unless the ratio of the country's national debt to GDP was falling. Yet between 1993 and 1998--five boom years--Argentinean public spending outran taxes by enough to push the debt-to-GDP ratio up from 29 to 44 percent. Then when the dollar appreciated and the recession came, politicians who had too little statesmanship to balance the budget when times were good had too little courage to balance the budget when times were bad and social needs were growing, and too little sense to abandon the fixed exchange rate policy. The coup de grace was then delivered by the government's decision when the crisis came to keep bank deposits fixed in dollars and to change debts owed to banks into pesos, thus with one stroke of the pen bankrupting the country's financial system.

From the establishment point of view, eliminate any of these three disastrous policy decisions--either the decision to stick to the fixed exchange rate until the very end, or the decision to let government debt mount without restriction, or the decision to treat bank loans differently from bank deposits--and Argentina would have had no crisis, or at worst a small Mexican 1995-style crisis, as opposed to the 20 percent fall in GDP we expect to see this year, the current absence of any signs of recovery, and the expectation that there will be no improvement in the situation at all until after the 2003 presidential election. From the establishment point of view, the neoliberal reform program that Argentina followed in the 1990s was nearly idiot-proof. But Argentinean politicians turned out to come from an unusually strong and unexpectedly ingenious class of idiots.

There is, however, another point of view, a point of view that looks deeper into Argentinean history.

This alternative starts with the observation that in Argentina governments have always promised more than they can deliver. They promise rich oligarchs that they will not collect much in taxes. They promise workers and consumers a generous social insurance state. They promise rapid economic development, large expenditures on infrastructure, cushy low-work jobs for politically well-connected boys, and so forth. Add to this a distribution of income and wealth long believed by many to be unfair, a lack of social comity between the working and the middle classes, a viciousness in politics going back to General Galtieri, the Dirty War, Juan Peron's enemies, Juan Peron, and even before. Together these mean that claims on national product and demands that the government enforce those claims will always mount up to more than 100% of national output. The basic political fight over how national product is to be distributed among social classes is unresolved. Any political movement that tries to curb the bidding by making only promises it can keep is doomed to defeat. Hence in Argentina government deficits--large government deficits--are a law of nature, a fact of life. Hence Argentinean interest rates can be low and reasonable only rarely and only for short periods.

From this alternative perspective, the neoliberal reform program in Argentina in the 1990s had exactly the same chance of avoiding disaster as one would expect if one gave a modern gene-splicing biochemistry lab to Doctor Frankenstein. The fundamental unresolved conflicts of Argentine politics meant that debt is going to mount. The fact that everyone knew that Argentine politics generates chronic deficits meant that the interest payments due on that debt were likely to explode. Exploding interest payments meant that the dynamics of Argentine debt were unstable, and thus that the hard-currency exchange-rate peg could not last. Free access to international capital markets, to dollar-denominated bank accounts, and so on, and so forth, meant that when the crisis caused by the contradiction between the hard currency peg and the fundamentals of Argentine politics came, it would be disastrous.

I agree less than half with this alternative point of view. After all, it looks as though Argentina almost made it out of its political-economic trap. If this current crisis had been finessed, and if Argentina had had another decade of rapid growth, its distributional conflicts would have been moderated by the fact that Argentineans would have "never had it so good." After all, Western Europe before World War II had the sharpest and nastiest politics on the planet: governments overthrown by rioting right-wing mobs in France, general strikes in Britain, civil war in Spain, the overthrow of democracy in Italy, and the German catastrophe. Yet Western Europe after World War II found itself with no political-economic problems that could not be solved in a way that preserved sound money and rapid growth.

It is true that the Argentinean government has made large mistakes. However, they tried so hard. They came so close. They did sin against the Gods of Monetary Economics. But why did the punishment have to be so swift and so severe?

And, given that an 80 percent success rate is, for a government, quite an unusually high one, what does this latest Argentinean catastrophe have to tell us about how other countries need to equip themselves before they try to take the neoliberal road?

Brad DeLong



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