Security Depends on Economic Stability

Argentina's economic and institutional problems are rooted in ineffective policies. These policies include high trade barriers, heavy regulation of labor markets, convoluted tax systems, numerous bureaucratic steps to start a business, financial restrictions on individuals' and businesses' funds, price controls, an electoral system that leaves government officials unaccountable for their actions, and a weak rule of law.

The riots, protests by the middle class, long lines to buy U.S. dollars, and high crime levels are the symptoms of the country's problems. These symptoms can be alleviated only by strengthening the economy and increasing the judiciary's independence and transparency, which is the only way to guarantee that the reforms will be carried out and that corrupt political leaders will go to jail. In addition, the government should end the "co-participation pact," a mechanism through which the federal government funds provincial government spending, and eliminate rigid labor laws.

Doing all this requires a political commitment to reform, not more money from the IMF. Argentina's leaders have chosen, instead, to politicize the crisis, making its symptoms--the riots and looting, for example--appear to be the problem, which they contend can be contained only with international assistance.

To be sure, Argentina's crisis can still get worse, and many predict that it will.3 The country has experienced a prolonged recession, during which the GDP growth rate declined, while amassing $150 billion in foreign debt. But international assistance cannot resolve the underlying economic problems. The $20 billion IMF loan package that was approved in January 2001 obviously has had little effect, and there are at least two persuasive reasons to believe that sending more international financing to Argentina before the Duhalde government advances the necessary economic and political reforms will not change the status quo:

• IMF money has never helped Argentina. Since 1983, successive Argentine governments have failed to meet the conditions attached to each IMF loan.4 In addition, the $30 billion in loans that the IMF has given to Argentina over the past 18 years has failed to foster economic growth or stability. To the contrary, the loan packages have had the perverse effects of encouraging faulty investment decisions by reducing the risk investors face from their choices, leaving the Argentine people with greater debt, a lower standard of living, and higher unemployment.
  
  For example, as depicted in the chart, foreign debt as a percentage of GDP grew from 44 percent in 1997 to 55 percent in 2001. During that same period, the GDP growth rate declined continuously from 8 percent in 1997 to -4 percent in 2001, poverty increased from 13 percent to 40 percent, and unemployment rose from 13 percent in 1998 to 18 percent in 2001.5 Additional funds will be equally ineffective because what Argentina needs to revive its economy is comprehensive structural reform.

How the United States can Encourage Reform in Argentina

The Bush Administration is right to insist that, before any additional financing is offered, the Argentine government must work with the national Congress and provincial governors to implement the policies that are necessary to attract foreign investment and foster job creation. More employment will restore some of the confidence Argentines have lost in their leadership, encourage people to spend more, and promote economic growth while reducing the frustration and despair that prompts many Argentines to riot and break into stores to steal food, clothing, household appliances, and many other goods. Foreign money is not needed to pass any of these reforms: What is needed is political will.

Although the solution to the Argentine crisis ultimately depends on domestic actions, the United States can create incentives that encourage the Duhalde government to adopt the necessary reforms to recover from the current crisis. To that end, the Bush Administration should:

• Stop all lending to Argentina until Argentine authorities propose a credible reform plan. Argentina needs a plan to rebuild its economy. Such a reform plan must include steps to:
• Reform the co-participation pact with the provinces into a system of decentralized government in which each province collects its taxes to support its own public expenditures;
• Reduce the size of the public sector;
• Simplify the convoluted tax system;
• Reduce bureaucracy;
• Lower trade barriers;
• Lift price controls and financial restrictions on individual and business funds;
• Institute political reforms to hold elected officials accountable for public funds management; and
• Strengthen the judiciary to enforce the law and punish corrupt officials.
Only when Argentina sets forth a credible strategy to achieve these goals should the U.S. government support financial help for Argentina in whatever area is necessary to carry out the plan.
• Advance reform of the lending practices of international financial institutions. Financial crises have increased over the past decade in countries around the world even as the IMF and the World Bank have committed ever greater resources to those countries. The basis for reforming the lending practices of the IFIs to improve their track records can be found in the report of the International Financial Institutions Advisory Commission, chaired by Allan H. Meltzer of Carnegie Mellon University.6
• With regard to the IMF, the report advocates establishing a system of lending that is based on preconditions that countries must meet before obtaining a loan.
• For the World Bank, the report advocates a system of performance-based grants paid directly to private-sector contractors based on the job they performed, circumventing the government and thereby avoiding potential corruption sources.
  
  
Overall, in Latin America, dependence on foreign loans and economic crises will decline if an environment develops that promotes the efficiencies and benefits of an open market.