Ar­gentina’s lessons for Greece

Financial Mirror (Cyprus) - - FRONT PAGE -

Thir­teen years ago, Ar­gentina was in dire straits. Its peso was pegged to the dollar at a level that far ex­ceeded its value. Its ex­ter­nal debt was un­sus­tain­able. And po­lit­i­cal pres­sure from the United States pre­vented its weak gov­ern­ment from rene­go­ti­at­ing a bailout pro­gramme that even the In­ter­na­tional Mon­e­tary Fund knew was un­re­al­is­tic.

To­day, with Greece fac­ing many of the same chal­lenges, it is worth tak­ing a closer look at the lessons learned from Ar­gentina’s cri­sis. At the time, we called the pol­icy re­sponse “eco­nomic and po­lit­i­cal lu­nacy…. Each fur­ther round of bud­get cuts has wors­ened the re­ces­sion, in­creased so­cial ten­sion, and fur­ther re­duced con­fi­dence… Nei­ther the IMF nor any­body else would ad­vise any de­vel­oped coun­try to adopt such masochis­tic and self-de­struc­tive poli­cies… . It is time for this to stop.”

For the most part, we were right. It was in­deed time to stop. The gov­ern­ment quickly col­lapsed and was re­placed by one that de­val­ued the cur­rency and de­faulted on the coun­try’s debts. And yet, the wide­spread pre­dic­tions of catas­tro­phe did not come to pass. The eco­nomic cri­sis was real enough, but it had al­ready bot­tomed out. Growth re­sumed a few months later – av­er­ag­ing an as­ton­ish­ing 8% for the next five years.

We were wrong, how­ever, about one thing: our as­sump­tion that no de­vel­oped coun­try would have such dam­ag­ing po­lices in­flicted upon it. Econ­o­mists may have learned from his­tory, but politi­cians seem doomed to re­peat it. Again, in Greece, the IMF has been pres­sured by short­sighted politi­cians into en­dors­ing a pro­gramme that it knows full well is nei­ther sus­tain­able nor in the coun­try’s best in­ter­est.

Sac­ri­fic­ing Greek in­ter­ests in the name of Euro­pean or sys­temic fi­nan­cial sta­bil­ity may have once been the cor­rect path for the IMF to pur­sue, but the cri­sis there is well past the point at which th­ese poli­cies ceased be­ing jus­ti­fi­able. Now that Greece’s in­ef­fec­tual and un­pop­u­lar gov­ern­ment has been swept away (an­other ac­cu­rate pre­dic­tion), it is time for the rest of Europe to clean up the fi­nan­cial mess. This will not be achieved by en­forc­ing im­pos­si­ble debt re­pay­ments for the sake of mak­ing a “moral” point – which un­for­tu­nately is the ap­proach eu­ro­zone pol­i­cy­mak­ers now ap­pear in­tent on tak­ing.

The first les­son from Ar­gentina is that if the eco­nomics are on your side, you can and should ig­nore politi­cians proph­esy­ing dis­as­ter. The vast ma­jor­ity of econ­o­mists (out­side of Ger­many) agree that Greece’s debt should be writ­ten down and its fis­cal pol­icy re­laxed. There is also lit­tle doubt that this is the view of se­nior econ­o­mists within the IMF; for ex­am­ple, the re­cently de­parted head of the Fund’s Euro­pean Depart­ment, Reza Moghadan, has called for Greek debt to be halved.

The sec­ond les­son of the Ar­gen­tine cri­sis is that a short pe­riod of po­lit­i­cal tur­moil can cost sur­pris­ingly lit­tle com­pared to a long pe­riod of mind­less pur­suit of mis­con­ceived poli­cies. The fact that Greek stocks are tum­bling and bond yields are soar­ing means al­most noth­ing; af­ter seven years of eco­nomic con­trac­tion and hu­man suf­fer­ing worse than that dur­ing the Great De­pres­sion of the 1930s, even a large amount of volatil­ity is no rea­son to persist with failed poli­cies.

Ar­gentina’s ex­pe­ri­ence sug­gests that af­ter a change of pol­icy, re­cov­ery can fol­low sur­pris­ingly quickly. A deal that re­struc­tures Greek debt, to­gether with a sta­ble, pro-re­form gov­ern­ment, would re­sult in a rapid restora­tion of con­fi­dence and a speedy re­sump­tion of growth.

But the third les­son con­tains a large caveat. Greece must ac­knowl­edge that its fun­da­men­tal prob­lems are of its own mak­ing. Its soar­ing deficits and un­sus­tain­able debts were symptoms of se­ri­ous patholo­gies: a dys­func­tional public sec­tor, an un­com­pet­i­tive pri­vate sec­tor, and an elite that ab­di­cated its re­spon­si­bil­i­ties and, rather than fac­ing the chal­lenges of the day, used the state as a means to sup­ply jobs to po­lit­i­cal loy­al­ists.

The new Greek gov­ern­ment should not use the Euro­pean Union – or Ger­many – as a scape­goat. Greece does need rad­i­cal struc­tural re­form.

To be sure, this does not mean that the new gov­ern­ment must con­tinue all of the poli­cies to which its pre­de­ces­sors agreed. Plans to raise the min­i­mum wage, for ex­am­ple, should pose few prob­lems, as it will re­main no higher rel­a­tive to labour pro­duc­tiv­ity than in France or the United King­dom.

Sim­i­larly, ex­ten­sive ex­pe­ri­ence in both de­vel­oped and de­vel­op­ing coun­tries sug­gests that pri­vati­sa­tion of­ten leads to dis­as­ter when un­der­taken in the mid­dle of a fis­cal cri­sis. Rather than en­hanced ef­fi­ciency, the re­sult all too of­ten is a fire sale of state as­sets to well-con­nected in­di­vid­u­als or com­pa­nies. Putting pri­vati­sa­tion on hold is en­tirely sen­si­ble.

And yet Greece has much work to do. Its gov­ern­ment should co­op­er­ate with the IMF to de­vise a pro­gramme that com­bines eq­uity and ef­fi­ciency. That means pro­mot­ing com­pe­ti­tion, break­ing up oli­gop­ol­ies, and sup­port­ing en­trepreneurs and in­no­va­tion. At the same time, Greece needs a ma­jor pro­gram to tackle youth un­em­ploy­ment: a New Deal for a gen­er­a­tion that has been be­trayed.

Ar­gentina’s fourth les­son takes the form of a cau­tion­ary tale. In 2002, the new gov­ern­ment promised not only re­cov­ery, but also re­form of the dys­func­tional po­lit­i­cal sys­tem. And on that it failed to de­liver. The new ad­min­is­tra­tion used its ini­tial eco­nomic suc­cess and the po­lit­i­cally con­ve­nient story that the coun­try’s prob­lems were the fault of for­eign­ers to back­slide on its prom­ises.

A decade-long com­mod­ity boom gave Ar­gentina eco­nomic breath­ing room. But the un­der­ly­ing causes of Ar­gentina’s eco­nomic and po­lit­i­cal patholo­gies were never ad­dressed. More than a decade later, de­press­ingly lit­tle has changed.

Greece is un­likely to en­joy the breath­ing space pro­vided by a com­mod­ity boom. If it is to place it­self on the road to a sus­tain­able re­cov­ery, it has no time to lose.

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