Vito Tanzi’s (the former head of IMF’s Fiscal Affairs Department) book Argentina: An Economic Chronicle. How One of the Richest Countries in the World Lost Its Wealth is a must read for every student of economic policy;
Argentina has had the same experience of a family who was rich and became poor. It is not easy to adjust to the new position. This may explain why Argentina has one of the highest ratios of psychologists per person in the world…
“By 1910 . . . Argentina was one of the foremost countries in the world. It was one of the most important grain and meat exporters. Its GDP represented 50 percent of all Hispanic America, ranked 10th in the world’s economy, and its trade amounted to 7 percent of the world’s total.” (See José Ignacio García Hamilton, 2005. “Historical Reflections on the Splendor and Decline of Argentina”. Cato Journal, vol. 25, no. 3; 528.) In 1913, its per capita income was higher than that of France, twice that of Italy, and almost five times that of Japan.
Tanzi is also critical of the IMF’s operations in Argentina during 1990s;
The loans that Argentina got from the IMF over the 1990s were by far the cheapest source of credit that it could get. This created a strong incentive on the part of the Argentine authorities to continue pressuring the IMF for more financing. During my last year at the IMF, I became progressively more frustrated because the Fund was not able or willing to see what was happening in Argentina. It failed to realize that the financing it had been making available to that country was not being used to make essential structural reforms, as it was intended to, but it was financing politically motivated projects and was simply extending the day of reckoning, which would make the final outcome more costly for both Argentina and foreign creditors. I was not overly concerned about the lenders from Wall Street, who had made a lot of money out of Argentina over the years, but I began to worry about other lenders. I began to feel that, in case of default, the IMF would bear some responsibility toward those who were lending money to Argentina believing that, because of the Fund’s presence, an economic adjustment was going on. These creditors were different from the large financial institutions, which were able to spread the risk and were aware of the risks they were taking. These institutions would be quicker in getting out at the first evident sign of danger thus minimizing their losses, but the non-institutional lenders did not have the benefit of good, private analyses.
Two other books of interest for those following Argentina economy.
- No Reserve: The Limit of Absolute Power, written by Martín Redrado, president of Argentina’s Central Bank (2004–2010)
- And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina by Paul Blustein
But Mr Macri has put off some of the hardest decisions for his second term, which he hopes to secure in elections to be held in 2019. His advisers say that the reforms so far are just a “first draft” of the changes he will eventually bring about. The labour reform that he plans to enact this year, which will make it easier to sack workers and hire part-timers, is a timid version of the overhaul Argentina needs. Improvements to education, more ambitious tax and pension reforms and a shake-up of the judiciary will also have to wait.
To give himself a chance to write the second draft, Mr Macri is pursuing policies that seek to balance economic stability with the need to placate groups that could disrupt his presidency and thwart his re-election. Argentina pays an economic price for this caution in the form of high interest rates, weak exports and a rising debt burden. If Mr Macri misjudges, and lets the price rise too high, he could undermine the economic revival that he has promised to bring about.
His main macroeconomic decision has been to reduce the budget deficit gradually rather than abruptly. The word “adjustment” is taboo, says an official in the treasury department. The pension reform, which provoked shoving on the floor of congress as well as clashes with police outside it, is expected to save the government the equivalent of 0.5% of GDP this year. That is a good start, but the government has to go further, for example by making sure that contributions cover a bigger proportion of benefits, argues the IMF. Mr Macri did not offset the corporate tax cut with revenues from other sources.
A survey by the polling company Ricardo Rouvier and Associates showed that two out of three Argentines rejected the overhaul, which the opposition has characterized as an austerity move.
“This is clearly an unpopular measure no matter how you look at it,” Mr. Rouvier said. “For the first time it hit at the heart of one of Macri’s key bases of support.”
Pension changes are politically fraught across much of Latin America, as politicians have sought to rein in spending during a period of recession or economic slowdown.
“Most pension systems in Latin America were designed with the demographics of the 20th century” in mind, said Carlos Végh, the chief economist for Latin America at the World Bank. “Life expectancy was far lower.”