An Argentine Solution?
7 January 2002
The crisis in Argentina serves as a warning to us that humankind still does not have sufficient economic and political knowledge to be able cure let alone prevent economic depression.
Argentina is in the midst of a depression - similar to what New Zealand faced in the summer of 1932/33. The three most important features are a huge decline in domestic spending, a dramatic increase in poverty and a greater than usual degree of inequality.
Hence there is a social crisis, as the lowest socio-economic groups have borne the brunt of the crash. And there is a political crisis as the interests of the rich and of the poor are even more divergent than usual.
There are many more poor people in Argentina in part because of redundancies, but in larger part because the semi-formal cash economy has dried up following the restrictions on cash withdrawals from banks. Those who do not have bank accounts are the most affected by the cash drought.
We know how to fix this kind of problem in a "closed economy" - meaning an economy not engaged to any great extent in international trade or investment. The government simply spends more to compensate for the reduced consumer spending by households and capital spending by firms. It's called "expansionary fiscal policy".
To do this effectively, the government funds its extra spending by borrowing from the nation's Reserve Bank. (In New Zealand in 1933, the government faced the extra task of having to create a Reserve Bank.) The budget balances in the medium to long run, because the extra government spending revives the whole national economy, and, once revived, tax revenues flood into the Treasury.
Argentina's situation is complicated by an already high level of government debt, a high level of private $US debt and a fixed exchange rate that is overvalued by as much as 40%. The overvalued exchange rate means that just about the only goods that Argentines can afford to buy are imports; and that Argentine exports cannot compete on global markets with, in particular, goods from Brazil, Australia and New Zealand.
New Zealand faced most of these same issues in 1933. As in Argentina, when the crisis really came to a head, the first political casualty was the finance minister.
The recovery in New Zealand, from 1933, contained four key elements: devaluation, increased productivity, increased British demand for our exports, and, especially after 1935, increased government spending.
While international initiatives failed in 1933, part of New Zealand's recovery was "extranational", in the form of "empire preference". Britain got out of its depression by encouraging domestic consumption while cutting back on imports by a variety of means including the reintroduction of customs duties. British imports from within the Empire increased, however.
Now let's imagine that it is Spain rather than Argentina that is in deep economic depression in 2002. Devaluation would not be an option; Spain is in Euroland. Rather the European Union (EU) would be obliged to provide the necessary transfers to Spain, an economic province of Europe.
So where does that leave Argentina? It has to look to a purely national solution because it is not a member "province" of a properly constituted economic union.
The Argentine authorities have to create extra spending power urgently. And the poor majority must get immediate access to that spending power. Further, the new spending power needs to be spent within Argentina, thereby restoring the confidence of local entrepreneurs to hire workers and to raise capital. (We might note that a large number of new companies were started in New Zealand in 1934 and 1935 - companies like Watties, Fisher and Paykel, and Sleepyhead.)
Argentina cannot float its currency (the peso) at present. The memory of hyperinflation before the peso was fixed in 1991 is too fresh. The market will expect a floating peso to sink into oblivion, and that expectation would prove to be self-fulfilling
A devaluation of the peso, without other supporting policies, will just push many of the $US indebted middle class into the bankruptcy and poverty that is all too visible among the growing underclass.
Argentina's best bet would appear to be a new "non-convertible" currency - the argentino - that would have to be spent domestically. Argentinos should be allocated equally, in sufficient amounts to restore consumer confidence, to each Argentine resident.
This new money would be equivalent to a nationwide "green dollar" scheme. Indeed, as Jane Kelsey has noted, two Argentine provinces have already responded to the cash shortage by operating their own non- convertible currencies.
The new government must re-empower the poor - especially the new poor - without a damaging inflation of the peso. It would make sense, eventually, to float the peso and to phase out the argentino. But only after a full restoration of consumer and business confidence.
Argentina will recover, despite rather than because of international attention to its plight. The new government cannot afford to fail. The price of failure would be a return to the fascism that destroyed Argentina as a society 20-25 years ago.
Once the Argentine emergency is over, the Americas must bring forward plans to build a Pan American (or American Pacific) Economic Union; a union that will prevent Argentina from having another such crisis. After all, in reality Argentina is at least as much an economic province of the Americas as Spain is of Europe.
While New Zealand is unlikely to experience a similar crisis in the next decade or so, we must learn from what Argentina does wrong and from what it does right. We are more alone now than we were in 1933. We need to be prepared.
© 2002 Keith Rankin
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