Learning from Argentina

Having survived persistent periods of economic unrest, Argentina might hold some lessons for more so

Financial crisis is nothing new for Argentina, which has undergone too many of its own in the last 20 years.

The South American country has experienced everything, from the fallout of the Mexican crisis in 1995, bouts of hyperinflation in the 1990s that took the cost of living to over 5,000 percent a year, to a 10-year reliance on neoliberal economic policies imposed by the International Monetary Fund that led to the world’s biggest sovereign debt default ever.

The results of each of these crises, whether domestic or global, have always been traumatic for the Argentine economy, which has seen wide swings in its economic variables as it adjusted to the new scenario after each successive crisis.

Argentina may be famous for its beef, wine and the tango, yet the resilience it has shown in bouncing back from each economic debacle are worthy of some recognition, and could, who knows, even provide some lessons to the current credit crunch that has sent financial markets around the world into a tailspin.

With no mortgage market as such in Argentina (only those with suicidal tendencies take one out at rates that can be as high as 20 percent a year) and what exists being governed by extremely strict prerequisites, there is little understanding of how a sophisticated financial system such as the one in the United States could have handed out such a vast volume of mortgages with few, if any, controls.
Argentina lacks this sophisticated financial system. What it has tends to be linked closely to the real economy, whether closed-end investment funds for farming projects or other packages put together to finance exports, to name some. It would be difficult to sell anything else to investors who need to see where their money is going. Perhaps this is something that more sophisticated world markets should remember.

However, after years of receiving advice on how to manage its economy, it is probably time for Argentina, and other emerging markets that have had the same recipes rammed down their throats, to offer some advice in return.

Stop-gap market intervention doesn’t work. If you don’t believe this then ask former US Federal Reserve Chairman Alan Greenspan whether this is good advice.

Many analysts attribute Greenspan’s tinkering with interest rates in the 90s, to control the internet bubble, to the chain of events that were to lead to the current crisis. Any Argentine could have told Greenspan about the effects that ill-advised short-term measures can have on the economy.

There is another area where Argentines could probably provide some advice, having undergone the process on numerous occasions, and that is the issue of financial speculation. In Argentina’s case it reached the point where investments in financial assets became more profitable than investments in the real economy, and it was only after concerted government action that funds eventually began to flow back into productive investments.

Unfortunately, the ones that end up bearing the losses are the Smiths and Jones of this world, with savings that disappear overnight and pension plans that lose a large part of their value. The middle men, or the financial institutions that dealt in the market were rarely the ones to get their fingers burnt, until recently at least.

It should be said that even as Argentina’s economic meltdown led it to becoming a pariah in world financial markets, no banks or other financial institutions ever folded. This is despite the difficult situation the country went through for a number of years, although it is also true that no government in Europe or the United States has resorted to some of the draconian measures that Argentina adopted – such as deposit freezes – in 2001 to prevent total economic chaos.

Other comparisons with Argentina would be difficult to find or even advise on unless one focuses on human nature itself and the corporate culture that has predominated in the world over the last two decades. Financial measures such as return on equity or the price earnings ratio of stocks, although essential yardsticks, appear to have blinded investors and the corporate sector to other responsibilities that they could have with society at large. At times it is a cause of envy in the Argentine corporate sector, yet in a country that frowns on visible signs of wealth and luxury, the culture has never developed and many Argentines argue that the absence of this “exuberance” could have done much to reduce the virulence of the current crisis.

However, Argentina still has a long way to go before it can start offering advice in this global village, if the events of 22 October are anything to go by. On that date the government of President Cristina Fernandez de Kirchner announced that it was “nationalising” the funds under management by the private-funded pension plans – some US$30 billion – probably the biggest heist in modern history.

Maybe Argentina should continue to seek advice from its more experienced peers on how to manage its economy rather than give it.

Peter Johnson is managing editor at the Buenos Aires Herald