Analysis & Opinions - Wall Street Journal

The Tragedy of Argentina

| April 19, 2012

Commentators on Greece are drawing all the wrong lessons from my homeland's tragic default.

President Cristina Kirchner's decision to renationalize YPF, the Argentine oil company controlled by Spain's Repsol, took many by surprise. But to someone who grew up in Argentina, it was all too predictable. My country has once again become a byword for economic folly. What I find truly incredible is that serious commentators like economist Nouriel Roubini are offering Argentina as a role model for Greece.

Recent scenes in the streets of Athens vividly recall the last months of the Argentine currency peg in the early 2000s. Countries spiraling toward collapse, it seems, are doomed to see their politicians bickering on the precipice while hooligans throw Molotov cocktails at public buildings.

Yet in calling for Greece to follow in Argentina's footsteps—toward a hard default, a steep devaluation, and out of the euro zone—commentators are drawing all the wrong lessons from my motherland's recent history.

When instituted in 1991, Argentina's peg to the U.S. dollar was astute economic policy: It ended the cycle of hyperinflation and chronic devaluations that had thwarted development for decades. Argentina had finally escaped the tumult of post-dictatorship democratic instability. Reforms, privatizations and the peg gave a new government legitimacy.

Hard-won low interest rates, however, led to a domestic borrowing and spending binge, not unlike Greece's after it joined the euro zone. Price stability, growth and renewed faith in the country's economic fortunes eventually gave way to sky-high unemployment, widespread poverty and credit lines from the International Monetary Fund.

In 1999, amid recession, Argentines elected a sober, uncharismatic politician as president. Fernando de la Rúa promised to cleanse the corrupt public sector and leave monetary policy unchanged, maintaining his predecessor's popular "one peso, one dollar" parity.

Chronic deficits and capital flight worsened as the recession deepened. In what can only be described as a leadership failure, politicians clung to an overvalued exchange rate that had, albeit fleetingly, reminded the country of its bygone economic glory. Spending cuts amid recession were insufficient to restore fiscal balance, and the government proved too weak for harder, productivity-enhancing reforms like decreasing bureaucracy or improving labor-market dynamism.

Before long, Argentines were clamoring to "get all politicians out." By late December 2001, Mr. de la Rúa obliged, fleeing the presidential palace by helicopter and leaving institutional havoc in his wake. On Dec. 23, the third Argentine president in four days declared a unilateral debt default before Congress. Seeing the footage of lawmakers cheering him, you would have thought he had announced Argentine victory in the World Cup. Rather, it was the largest debt default in modern history.

In power since 2003, successive Kirchner administrations—led first by the late Néstor and now by his widow Cristina—have painted the default as an act of heroism against illegitimate creditors and the IMF. "Neoliberal" in Buenos Aires remains a harsh insult. It is in this context that some economists, impressed by Argentina's high nominal growth rates, urge Greece to follow Argentina's example.

Yet in Argentina, growth has happened despite the default, not because of it. A largely soy-driven commodities boom is at the core of the country's performance, helped by structural and technological investments from the neoliberal 1990s and the trade link with burgeoning Brazil.

The devaluation and default wiped out a decade of savings by middle-class Argentines and retirees, while rewarding those with enough dollars to hide them in foreign banks. It also put an end to much-needed structural reform, bringing to power people eager to grow the state to perpetuate their political power.

The devalued peso made Argentine labor cheap, but productivity fell even further. Competitiveness was short-lived. Kirchner governments went back to a disgraced 1980s strategy: high growth rates with even higher inflation. A decade after default, Argentina is still shunned by the credit markets. It is unable to finance long-term investment and needs periodic devaluations to maintain "productivity." When the government borrowed money from Kirchner "comrade" Hugo Chávez a few years ago, the high interest rate did not illustrate socialist brotherhood.

The government has instituted draconian controls over all imports. Vintage 1970s-style capital controls are back, coupled with arbitrary trade balancing schemes. Now that all imports require approval, essential drugs have vanished from pharmacies—though somehow friends of the government are able to import whatever they please. "Company-specific trade balancing" leads to the madness of car importers having to buy Argentine wine for export so they can be allowed import quotas.

Meanwhile, the Kirchner government releases official statistics that misrepresent inflation and the country's distributional battles. The government first raided ("nationalized") the private pension system and then appropriated ("reassessed") the central bank's reserves, abruptly ending the bank's independence—itself one of the most important 1990s reforms.

Cash-strapped again and wary of energy imports, the government set its sights on YPF. Government apparatchiks are right to complain that the Spanish owners did not fulfill their investment promises, yet they fail to mention that the government has fixed oil prices so that no independent energy company has incentives to invest. Back in government hands, YPF will pump more political gravy than oil.

Unilateral, hard default also created a decade-long legal mess that refuses to vanish. Judges around the world still hear cases brought by creditors claiming Argentine foreign assets. In this context, it's unsurprising that domestic investments from energy to communications have all but stalled and only government cronies can get reasonable credit.

In short, those praising the Argentine path should look behind the country's deceptive nominal growth rates. The commodities boom conceals falling competitiveness, rampant corruption, and a collapse of productive investment.

The lessons for Greece are clear. While adjustment is unavoidable, Athens is part of a larger, worthy European project. Sure, the German "core" needs to move more swiftly toward a true economic union, complete with fiscal federalism and investment to arrest unemployment, but Greece has been sustained through reform and granted a substantial haircut over private debt.

So Athens has a choice: It can press on with painful but ultimately necessary structural reform, or it can go the Argentine route. It should beware, however, that exit from the euro is likely to bring back the cycle of inflation and instability. Argentina is a reminder of the past Greece escaped, and a future it would be well advised to avoid.

Mr. Barbieri is a fellow at Harvard's Kennedy School. His book, "Hitler's Shadow Empire: Nazi Economics and the Spanish Civil War," will be published by Harvard University Press this winter.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Barbieri, Pierpaolo.“The Tragedy of Argentina.” Wall Street Journal, April 19, 2012.

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