January 15, 2002


The Center for Latin American Issues
"Forum on the Argentine Situation"


GW’s Center for Latin American Issues (CLAI) hosted a forum to discuss the current economic and political situation in Argentina. This timely presentation featured Michael Mussa, an international economist formerly with the IMF; Lacey Gallagher, Director of Latin American Research for Credit Suisse First Boston; and Gerard M. Gallucci, Director for Brazilian and Southern Cone Affairs at the U.S. Department of State.* Jim Ferrer, Director of CLAI, moderated the panel discussion.
Aspects of Economic Troubles

In the last few months, Argentina has experienced significant political disruption and is in the midst of an economic upheaval that harkens back to the lost decade of the 1980s. The unexpected resignation of President de la Rúa, the civil unrest, and the recent debt default have tested Argentina’s political institutions and forced a reevaluation of its economic policies. As President Duhalde decides on a long-term economic strategy, the current situation is critical: banks have been in a state of partial or full closure since December 3; there is an 18% unemployment rate; and the decision to end the peso’s parity with the dollar led to immediate currency devaluation. All this change is taking place in the midst of a 43-month recession. This crisis is more severe than the Mexican and Brazilian exchange rate devaluations of the 1990s, noted Gallagher. Ecuador and Russia, she added, had more reasons for optimism than does Argentina when they adopted drastic measures to stabilize their economies.
Roots of the Crisis

“Argentina is suffering the results of forty years of bad economic decision making,” said Mussa. That fact, combined with the failures of convertibility, makes it difficult to determine the best course of action for Argentine leaders to take. The root of Argentina’s current problems, says Gallagher, is fiscal: the government has continuously increased spending at a greater rate than it has increased its income. In spite of impressive economic growth in the early part of the decade, the government failed to produce primary surpluses greater than one percent of GDP. In spite of this fiscal weakness, its strong banking system and its small amount of short-term debt at the time allowed Argentina to leverage huge loans from domestic and external lenders, including the IMF. Important economic reforms stalled in the mid-1990s when President Menem, looking ahead to a second term and then to a possible third term, refused to deepen reforms and exercised no control over spending in the provinces. By 2001, the Argentine central government ran a budget deficit of $11B, accounting for 3-4% of GDP. Compounding the stress on the economic system was a drop in tax collections, which were down 28% in December 2001 alone. Mussa noted that the Brazilian devaluation and the continuing strength of the dollar have also contributed to Argentina’s problems.
Argentina’s Response

Thus far, the government’s primary strategies have been to devalue the peso and to limit bank withdrawals. According to Gallagher, it is now clear that a flexible exchange rate is preferable to the dollar peg, and Argentina should have moved toward this position earlier. The best economic strategy now for Argentina includes a flexible exchange rate, but before that happens the government will need to discipline the fiscal, monetary and banking policies to avoid high rates of inflation. Mexico and Brazil could be used as models in this process. In Mussa’s analysis, there are three primary fiscal issues that the government needs to address: first, there must be greater accountability for spending in the provinces; second, tax collection methods need to be improved to cut down on current massive tax evasion; third, the government must reduce spending on the social security system.
What Lies Ahead?

Even if Duhalde succeeds in instituting these reforms quickly, Argentina’s outlook is not good in the short term. The scenario for the coming year, says Gallagher, is a 10% contraction in the GDP, a three to one exchange rate with the dollar, and another major political transition is likely.
Because the Argentine implosion was anticipated, it is unlikely to have major ripple affects, as happened in the 1990s with the Tequila Crisis and the recession in East Asia. The restructuring or Argentina’s economy, however, “will be more complex and dragged out than that of either Russia or Ecuador,” says Gallagher. In Argentina, “there has been an explicit political and social rejection of the Washington Consensus and the free-market model,” which will make it politically difficult to institute the necessary economic adjustments. In addition, Ecuador and Russia benefited from high oil prices and have fewer commitments to social spending than does Argentina. Time is of the essence; Argentina must act decisively in the next few months to recuperate soon and avoid economic disintegration.
*Mr. Gallucci’s comments are not included in this article, as he asked that his presentation be off-the-record.
For recent news on the Argentine situation, see these articles from The Washington Post and The New York Times: