The International Debt Problem: The Case of Argentina
DECEMBER 01, 1985 by MICHAEL ADAMSON
Michael Adamson is a graduate business student at Arizona State University.
The government of Raul Alfonsin inherited a nation burdened with massive economic problems when it was elected in December of 1983. Seven years of military rule had all but de stroyed a once growing economy under the machinations of the state. During the period of military rule, the government tremendously increased its foreign borrowing, from $8.3 billion in March, 1976 to $43.6 billion in December, 1983.
The Argentine situation is one example of a larger problem: the incurrence of debt worldwide by government. Since August 20, 1982, when Mexico announced that it could no longer meet its debt service payments, some 30 nations have re-negotiated terms on up to $100 billion of external debt. Argentina itself declared a moratorium on its debt principal late in 1982. Interest payments, which consume roughly two-thirds of Argentina’s annual export earnings, were refinanced in March, 1984 by a package deal involving the governments of Brazil, Colombia, Mexico, and Venezuela so that American commercial banks would not have to list their Argen tine assets as nonperforming. Today, the Alfonsin government quibbles with the International Monetary Fund (IMF) over austerity programs which enable Argentina to borrow more money from the Fund. Because the strength of the dollar makes prices of imports to America relatively cheaper, the so-called “debt crisis” has abated temporarily. Yet the only solution to the problem—the market solution—has not been applied. When the relative value of the dollar falls (it is presently overvalued against most industrial-nation currencies), the debt problem will again become a major issue.
The idea behind many popular solutions to the sovereign debt problem (borrowing by government) is more government intervention in the form of continued capital flow through some IMF arrangement or similar mechanism until the debtor nation is “stable” enough economically to be able to accumulate sufficient dollars from the exportation of goods to meet its obligations. Such IMF-type austerity plans may avert the political repercussions to government of making the necessary adjustments to a market economy, but, through a misallocation of re sources, they exacerbate the problem in the long run.
A solution to the debt problem requires a market system based on the idea of private property rights. The approaches to the problem taken by the IMF are not producing, nor will they produce, an answer. IMF programs are matters of short-term adjustment, the goal of which is to buy time for nations to solve their economic woes. They are, in fact, a sort of protectionism which, in the end, subsidizes the interventionist policies of the debtor nations. They also rely on a macroeconomic approach by government to adjust such items as unfavorable balances of trade by fine-tuning monetary and fiscal policy in hopes of finding a way out of the woods, so to say. This assumes that the state is somehow capable of planning equitably and efficiently on behalf of millions of individuals it has deemed incapable of pursuing their own self-interest. Thus, many commentators have advocated an expansion of IMF quota limits, evidently unconcerned about the fact that it is individual taxpayers who must foot the bill for the programs of the IMF and World Bank.
Several nations, including South Korea and Taiwan, are servicing substantial debt requirements on the strength of relatively strong market economies. Yet, when a nation such as Argentina has a debt service problem as a result of intervention in the economy by the state, the IMF typically proposes a slower growth austerity program entailing exporting goods and accumulating dollars with which to service the debt. This so-called trade surplus is generally secured by restricting imports. By not regarding trade as a two-way exchange in which both parties benefit when it is done voluntarily, the individual is made to suffer as he becomes less well-off materially. As barriers around free trade are constructed, the problem grows.
The Growth of the Problem
Today’s debt problem in general can be traced to the reaction of interventionist governments to economic changes in the 1970s. The initiation of floating exchange rates in 1971 was followed by a decline in the relative value of the dollar, which facilitated the expansion of trade between the United States and many of the so-called developing nations. Governments, such as Argentina, financed this expansion largely by borrowing external funds. These increasing debt levels were expected to be serviced through continued economic growth.
The oil-importing developing nations adjusted to the OPEC oil price increases of 1973 by borrowing additional funds. These loans, made from “petrodollars” accumulating in American commercial banks, were considered to be of little risk, as economic growth and a weak dollar in creased export earnings from which the debt could be serviced. It should not surprise anyone, then, that from 1974-80, many governments used these borrowed funds to expand public expenditures and exports substantially at the expense of capital formation.
Real-interest rates turned sharply positive in 1978, as the governments of Western Europe, followed by the United States, began to adopt restrictive monetary policies to reduce inflation. In addition, terms of trade fell significantly from 1979-82, as recession was accompanied by a rise in protectionist trade measures. With oil prices increasing again in 1979, governments were strained to meet their debt service obligations and by 1982 the banking system was on the verge of financial collapse.
The Case of Argentina
The case of Argentina illustrates the distortions created by state interventionism in the market economy. From 1973-84, public expenditures expanded enormously. To finance this expansion, the government resorted to deficit spending. From 1973-82, these fiscal deficits averaged 5.2 per cent of gross domestic product (gdp). They were largely financed through borrowing abroad.
The growth of the state and the debts which it incurred eroded the base of real saving and private investment. The state was becoming the sole investor. However, the absence of a market test for the state allowed it to waste a large amount of resources on prestige and ill-considered projects, which was done flagrantly by the military government. Accounting was so poor that much of the debt was not even registered in the Central Bank. Mr. Alfonsin and his elected Radical Party inherited the world’s highest inflation rate and its third highest sovereign debt in 1983.
From 1976-79, the military tried certain steps to solve Argentina’s economic woes. Consumption of beef and grain was restricted, while exports of both were increased. Real wages fell as government fixed wages while the market determined prices. In response to the unpopularity of these policies, the government increased the money supply. Thousands of Argentines then converted their pesos into dollars or other currencies to move out of the country. Capital flight was extensive; some $11 billion was moved into foreign bank accounts. Roughly half of the proceeds from loans to Argentina were reinvested abroad and remain there because economic chaos continues at home. The gdp in 1983 was lower in real terms than it had been eight years earlier.
Mr. Alfonsin did not apply the market solution to the economy. Instead, he promised that the government would fight inflation and pull business and labor out of the recession with easy credit and real wage increases. Hundreds of state-owned companies (which composed roughly 60 per cent of industry in terms of output) were to be closed or sold and government spending was to be cut. The actual program was limited to price controls on selected consumer items and a week-long ban on the sale of beef. Despite efforts to peg wages to prices, prices have risen by as much as 30 per cent per month. In such an environment, investment is reduced in favor of consumption and economic development becomes impossible. Argentina’s once modern industrial structure is in danger of becoming obsolete.
Most recently, in June, 1985, the government announced new measures to fight inflation through a dramatic reduction in the budget deficit, mostly through new taxes and new tariffs. An indefinite freeze on prices and salaries is now in effect. A new currency, the austral, is being introduced, which it is hoped will be more stable than the peso, and will therefore draw out some of the estimated $4 billion worth of American dollars now being saved by Argentines in mattresses and other places. None of these measures is a move toward a free economy. As long as the government commands the economy, Argentina’s woes will continue, and with them the external debt problem.
Attempts by the Argentine government to manage the economy have resulted in a distorted allocation of resources and a reduced standard of living for the people. Intervention in the form of wage and price controls, tariffs, public borrowing and investing, and inflation have neglected the ultimate user, the consumer, and have restricted his right to peaceful action. The society has become more and more stratified, with various groups in conflict with each other. The nationalistic policies of the state have retarded economic growth and will lead to ever lower per capita standards of living. The whole question of the proper role of government has been totally forgotten.
As to the debt problem itself, there are only three ways out: 1) an internal adjustment economically and politically within Argentina entailing a return to the free market system, 2) an assumption of bad debt loss by the lending institutions if Argentina is unable to repay its loans, or 3) an assumption of risk on the part of the governments of creditor nations (and ultimately on their taxpayers). Only alternative one insures that the problem will not recur. Alternative three is the method being employed today by the IMF and other government agencies to prevent the political consequences of alternative two.
If there is a return to a free economy, individuals, by pursuing their own self-interest, will direct resources to the production of those goods and services demanded by consumers. As consumer demands are satisfied, the returns to investment (profits) insure an ever expanding economy. Through this process, savings can be set aside which will service and eventually repay the debt. As government, reduced to its proper function of protecting life and property, is removed from the economic scene, its need and ability to borrow will be eliminated. The individuals, whom the government is required to protect, will pay for this service with some form of taxation. Whether Argentina, or any nation, will ever have the political means to apply the economic solution, is beyond the scope of this article. There are only two alternatives: a free economy based on private property rights or a command economy in which the state exists at the expense of the individual. The latter leads to economic chaos and social instability. Only the former results in peace and prosperity.