Argentina’s lessons for Greece
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.