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Argentina's Welcome Turn Toward The Open Road


Economic Viewpoint

ARGENTINA'S WELCOME TURN TOWARD THE OPEN ROAD

In trying to console a young man who feared that England was ruined by its defeat at Saratoga in 1777, Adam Smith said: "There is a great deal of ruin in a nation." During the past 60 years, Argentina has severely tested this assertion with disastrous economic policies promoted by governments of all political stripes. At the invitation of a private Argentinian foundation, I recently traveled to Buenos Aires to better understand the lessons of the Argentine experience.

At the beginning of this century, Argentina attracted large-scale immigration from Italy, Spain, and Eastern Europe because its per- capita income ranked among the 10 highest in the world. But after its unparalleled fall in economic standing, more than 70 countries now have higher incomes.

In the 1930s, driven by populist sentiment and the advice of prominent Latin American economists, Argentina began to abandon the open economy and free-market policies that were responsible for its prosperity. High tariff walls were erected to shield domestic companies from international competition. The state nationalized most heavy industry, regulations and price controls became pervasive, and unions dictated policy on labor issues. Successive governments resorted to the printing press rather than taxation to finance growing public expenditures, so hyperinflation began to destroy the economy in the 1980s.

DOLLAR DAYS. When Carlos Saul Menem of the Peronist party was elected President in 1989, Argentines and the international business community prepared for the worst. Instead, Menem firmly supported the efforts of Domingo Cavallo and other economic ministers to control inflation and dismantle state management of the Argentine economy. To open the economy to global competition, tariffs have been drastically cut. In a little over three years, most state-owned enterprises have been privatized, including telephone, gas, and airline companies. And the government recently proposed selling 50% of the giant state oil company. Price controls over most products have been eliminated, and regulations have been sharply reduced. To allay fears about inflation, the number of pesos that can be issued has been tied to dollar reserves. Transactions no longer have to be in the Argentine peso, and dollars freely circulate among businesses and consumers.

In a private meeting, President Menem told me that he will continue to back free-market policies. Despite his Peronist protectionist background, he proudly said the speed of reform was unprecedented.

In my view, Menem's support is explained by the shadow cast over all of Latin America by the free-market reforms of Argentina's small neighbor, Chile. Under the authoritarian rule of General Augusto Pinochet, Chile dismantled controls that had been similar to Argentina's. Domestic companies were forced to compete on the international market through steady reductions in tariffs, which have now reached a uniform 11%--among the lowest anywhere. Chile sold off many state enterprises, including airline and bus systems, electric power and telephone companies, and large quantities of state land. Here I must declare a personal interest: Many of these reforms were carried out by former economics students at the University of Chicago.

GROWING FAST. These and other free-market reforms under Pinochet have been maintained by the government that was elected democratically in 1989. As a result, Chile's growth in the past 10 years has surpassed that of all other Latin American countries. The reforms also helped diversify the economy so that the importance of copper in total exports is now far below its 80% share in the early 1970s.

There is a sharp rivalry between Chile and Argentina, and Argentines tend to regard themselves as culturally superior. Thus, many Argentines concluded that if Chile could succeed by adopting market solutions, they could, too--and do a better job. Paradoxically, Chilean businessmen and companies have become major participants in Argentina's newly privatized economy.

Although Argentina's economy has begun to grow, it is not yet out of the woods. To increase the value of the state-owned companies up for sale, many of them were given protected monopoly markets. Social Security and other employment taxes and regulations are still much too expensive. Stiff quotas on imported cars and other goods still shelter some domestic producers from competition. A higher rate of inflation than in developed countries has caused the Argentine peso to be overvalued compared with the dollar and other world currencies. Yet a devaluation risks destroying investors' fragile confidence that Argentina will no longer print its way to hyperinflation.

Crucial decisions lie ahead for the Menem government, complicated by congressional elections in October. But most people seem willing to endure hard times to make the future brighter. Reform there, as in the rest of Latin America, now means privatization, freer markets, and democracy. If Argentines continue to follow the trail blazed by Chile, their nation will have a chance to recover the economic standing it had when this century began.GARY S. BECKER


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