Loris Zanatta - 12/2011

Ten years on from Argentina's default and in view of the concrete risk of a European default, there are many lessons to be learned from that precedent, and plenty of teachers to teach them – on both sides of the Atlantic. Europe, we are hearing from numerous pulpits, should learn from Argentina. Was its crisis not brought about by the happy-go-lucky financial liberism for which it had been held up as a model? Did it not dig itself out with robust lashings of statalism and public spending, protectionism and Keynesianism? Peronism, in other words? Have its growth rates since then not been comparable to China's? With beneficial effects on consumption and employment, equality and expectations? But no, they tell us: blind and deaf, Europe blunders on. It protects banks and liberalises markets, it cuts spending and pursues the myth of budgetary balance. In its arrogance and obtuseness, it will fall into the abyss: the euro will disappear and the recession will spiral out of control until the people, oppressed by injustice and misery, will rise up to the liberatory cry of se vayan todos. Maybe then we will get our very own Kirchner coming along to tell us how the world goes. Perhaps. Or perhaps not. Who would have thought a decade ago that we would to be in the situation we are in now? Who can say that in ten years from now we won't be back where we were then? Is this really the right time to be giving marks to Argentina and Europe? And if so, are we sure that Argentina is the high performer it is made out to be when pointing the way to the Europeans? Anyone with some degree of familiarity with Argentina and its history, with the intricacies of its politics and the distortions of its economics will be inclined to question the opportuneness of turning it into the new totem. There have been too many upheavals along the way to give it all the credit. Who can say that today's virtues will not be tomorrow's deficiencies? The very premise of these teachings is faulty. We are told that Argentina is growing. A lot. There is no question about it. But is it really due to its economic model? The truth is that the whole of Latin America has been growing at a prodigious rate over the past decade. Both countries like Argentina and Venezuela with their neo-statalist approach and those whose statalism has been restricted to the barest corrective measures are growing. Brazil is a case in point. But the ones that are growing fastest are the ones who never departed from the liberalist path, such as Chile and Peru. Could it not be that the economic model is for the moment irrelevant? Certainly in terms of growth, which is widespread due primarily to external factors, in particular demand from China which boosts trade and investment and pushes up the prices of Latin America raw materials. In the specific case of Argentina, it is demand from Brazil. All this is true for liberals and nationalists, monetarists and Keynesians, conservatives and Peronists. That being the case, is all that glitters in Argentina really gold? Those who point to the country's exemplary nature seem to miss certain points. Higher spending and easy credit, for instance, and expensive energy and transport subsidies aimed at keeping prices down have done much to stimulate consumption and bolster support for Peron's government, but have been feeding a spiral of inflation which will have to be accounted for sooner or later. The arbitrary manipulation of data by the government contributes to keeping it under control. But what happens if the economic cycle goes wrong? How many would tolerate the open secret of doctored inflation figures? Something similar is happening for salaries, which in numerous sectors have outstripped productivity in terms of growth. Not to mention the rigid controls imposed by the government on agriculture and finance aimed at securing the surplus which the current exceptional situation guarantees. None of this has helped innovation and research, nor long-term saving and investment. Suffice it to say that the compression of prices resulting from substantial government subsidies for consumption is keeping away from Argentina potential investors in key sectors such as energy. This means that Buenos Aires continues to pay a high price in this sphere. Now that the model is causing the currency, from whose spectacular devaluation the Kirchners derived so much benefit, to increase in value, the Argentine economy is manifesting all the difficulties it has in competing internationally: the slow decline in the trade balance says it all. Add to that the nationalist dogma which has induced Argentina to tap into its reserves without hesitation, overriding even the autonomy of the Central Bank, just so that it can close its debt with the Monetary Fund, while showing no such reservations about going into debt with Venezuela, despite the political repercussions and the precariousness of a similar situation, and the picture may seem less rosy than what some believe and say. Especially when one considers that Buenos Aires is a long way from finishing paying for its default, and has yet to regain the trust it lost, not having yet reached an agreement with a significant number of its creditors. The question this raises, therefore, if we are to consider what Europe has to learn, is whether the Argentine model doesn't in fact allow the most to be made of growth, but rather inhibits efforts to do so in order to implement reforms that are more suitable for times of plenty, not scarcity. At least, it will be said, so much growth supported by huge doses of public spending will have helped social cohesion by reducing marginality and inequality. Shame that this is true only in part, and in no way proportionally to the rate of growth, and that better results have been achieved in countries which have followed the liberal model such as Chile, or a moderate statalism like Brazil. In such a light, lessons from Argentina are not to be judged now that Argentina has the wind in its sails, but in terms of its sustainability when the cycle changes and problems start emerging. Then we shall see whether in fact it has been a grasshopper when it should have focussed on being an ant. Or in other words, whether it may in fact have missed the opportunity to lay the foundations for solid and lasting development by introducing courageous and often unpopular reforms. But what reforms? What if they are precisely the ones so many European countries currently teetering on the brink are preparing to set in motion? And is it really so obvious that ten years hence it won't be once again the Argentines, today's improbable teachers, lamenting the fact that they weren't good students? That they didn't reform the job market nor liberalise the economy to make it more competitive; that they fostered the vices and inefficiencies of the public sector bureaucracy without making necessary changes to its unsustainable habits; that they provoked the demagogic instincts in the education system without encouraging research, innovation, meritocracy; that they sought to please so many corporations that supply grist to the Peronist mill, thereby tying up resources that Argentina could otherwise deploy in far greater measure? Even if Europe does need models, perhaps it should look for them elsewhere.

Loris Zanatta
(University of Bologna)