Why Argentina Must Learn the Virtues of Economic Orthodoxy
By Adrián Ravier
Orthodoxy is, according to the first definition of the Royal Spanish Academy, “conformity with generally accepted doctrines or practices.” Those in the economics profession and academic discipline have reached a broad consensus about the importance of fiscal balance (in public finances), monetary stability (in macroeconomics, and in the sub-discipline of monetary theory), and open economies (in international economics).
However, Argentinean economic policymakers have struggled with these three areas historically, instead embracing a heterodox approach.
On the fiscal front, the recent economic history of Argentina has seen successive deficits. The sole exception came in the 2003-2008 period, which was entirely due to an enormous currency devaluation after the policy of convertibility — whereby the exchange rate between the Argentinean peso and the US dollar was fixed at 1 to 1 — and the consequent dilution of public sector salaries. When pay levels recovered after six years, Argentina returned to registering successive fiscal deficits up until today.
It must be observed that servicing a deficit has consequences.
The reader might ask what precisely is problematic with maintaining such fiscal deficits. First, it must be observed that servicing a deficit has consequences. On several occasions in recent history, the associated debts have been paid for with new taxes, which have now left us struggling under the greatest tax burden in our history, and the highest in all the American continent. This reduces the efficiency of the productive sector, impeding its ability to generate jobs and wealth.
When society at large begins to refuse to accept ever greater taxes, governments instead turn to internal and external public debt. This was the case during Argentina’s military dictatorships, which saw the first great leaps in our public debt, and was duplicated in the 1990s. Fiscal imbalances may also be financed by printing money, as done during the return to democracy under President Raúl Alfonsín (1983-9), which left us with the worst hyperinflation of our history.
Our Ministry of Finance is now the proud owner of relatively low levels of public debt in relation to GDP, following a decade of economic recovery after the 2001 crisis, while external debt was largely kept low. However, this isn’t the result of a conservative or orthodox economic policy. Rather, it is due to the fact that Argentina has deployed other tools — taking on internal debt with the Central Bank and Social Security Administration (ANSES), and the monetization of her public debts. An enormous proportion of current Central Bank assets are made up of government bonds, which leaves the nation’s future financial viability in an extremely precarious situation.
Second, we should remember that historically Argentina has struggled to keep public spending down and to control the deficit. The above chart shows the 1975 deficit at 12.1 percent of GDP, which ended in a hyperinflationary episode, dubbed the Rodrigazo after then-Economic Minister Celestino Rodrigo. Currency devaluation managed to deflate spending and bring it to less than 4 percent of GDP, only for the problem to return six years later — following a series of policies, involving pegging the peso to the US dollar, known as the Tablita — to a fiscal deficit of 11.3 percent.
The return to democracy was also characterized by successive fiscal deficits financed by printing money, as well as repeated currency devaluations. The result was the same as before: when the fiscal deficit reached 6.5 percent of GDP in 1988, its monetization brought us to hyperinflation.
The policy of convertibility during the 1990s was accompanied by several orthodox policies, including the privatization of public services, which allowed the government to at least reduce the deficits then being registered by state-owned companies. However, the above chart clearly shows that, aside from 1993, when the government received the profits of the sale of public companies, the government failed to achieve fiscal balance throughout the entire decade.
In this case, following the Brady Plan, public deficit financing came from legitimate public debt, although that clearly risked the sustainability of the government’s economic model. It was only through the support of external creditors who were prepared to finance this imbalance that Argentina was able to maintain economic growth. However, beginning with the Asian financial crisis of 1997, the Russian default in 1998, and Brazil’s devaluation of its currency in 1999, creditors decided to cut off their loans, and pressure grew on the government to abandon convertibility.
Far from the “zero deficit” envisioned in orthodoxy, Argentina registered still further growing imbalances, reaching 7 percent of GDP in 2001, marking the end of convertibility with a monstrous devaluation.
When Néstor Kirchner came to power in 2003, he was met with a strangely favorable situation. As Argentina was barely climbing out of the hole, the 2004 fiscal surplus was some 3.8 percent of GDP. It wasn’t that Kirchnerism involved orthodox, prudent, or conservative policies to reduce the fiscal deficit, but that the hyper-devaluation required to end convertibility significantly reduced the real value of public-sector salaries.
Argentina’s rulers have systematically ignored basic economic lessons … and systematically impoverished their citizens.
From 2004 onwards, these same employees began to recover their purchasing power, which added to successive social spending plans and led us to new fiscal deficit of 0.3 percent in 2007. Since then, Argentina has continued to widen the gulf between tax receipts and spending, nationalizing the system of pensions, appropriating ANSES funds worth more than US$30 billion, and making heavy use of the money-printing machines of the Central Bank. 2014 is set to close with a fiscal deficit of an estimated 5.9 percent, which is certain to force the government to turn to external debt.
The outcome of this model is still unclear, but it’s unlikely to be very different to our previous economic history throughout the greater part of the 20th century. Argentina’s rulers have systematically ignored basic economic lessons, broken from orthodox fiscal policy, and systematically impoverished their citizens.
Even the limited successes of the military model, or that of the 1990s, weren’t due to the adoption of orthodox policies. Both periods remained extremely far from this line of thinking.
Argentina needs orthodoxy, and has always needed it — although this word has been wrongly interpreted and maligned from almost every quarter within our society.
Adrian Ravier is an economics professor at the Francisco Marroquín University Business School, Guatemala, and holds a PhD in applied economics from Madrid’s Rey Juan Carlos University.
Translated by Laurie Blair. Edited by Fergus Hodgson.