Letters to the Editor: Current Crisis Is Nothing New to Argentina

This article originally appeared in The Financial Times Limited 1995-2002 on April 4, 2002.

From Prof. Steve H. Hanke.

Sir, Your editorial “Argentina on the edge” (March 27) recounts the obvious: abandoning the convertibility system and adopting a floating peso regime coupled with the pesofication of Argentina’s economy has been a colossal flop. What you fail to mention is that the disastrous course followed by Argentina was the one endorsed in your editorial “Argentina’s hope” (October 30 2001).

You go on to conclude that the floating peso regime would work if only the Duhalde government could come up with a credible programme to ensure fiscal discipline. This conclusion represents, at best, muddled thinking. It is divorced from Argentina’s history and today’s realities.

Long ago, Juan Bautista Alberdi (1810-1884), one of Argentina’s most influential 19th century economic thinkers, prophetically proclaimed that inconvertible fiat money would be the ruin of Argentina. And, since 1810, that is the way it has been. Indeed, Argentina’s fiat money regimes have always resulted in fiscal and monetary profligacy, a plethora of quasi-monies, very high inflation and unstable economic conditions. The current episode is nothing new. It fits Argentina’s long and torturous monetary history like a glove.

If Argentina hopes to re-emerge from its current chaos, its fiscal regime must be fully subordinated to its monetary regime. The only way (not one of the ways, as you suggest) to do this is to dismantle the central bank, liquidate the peso, completely dollarise the economy and prohibit the issuance of quasi-monies.

Dollarisation would not only ensure fiscal subordination but also give Argentina a much-needed confidence shock. In addition, it would reverse the dramatic decline in the government’s tax revenues, which were 20 per cent lower in January and February 2002 than in the same 2001 period. This claim is supported by evidence from Ecuador, a country that dollarised in 2000. Ecuador’s non-oil tax collections in January and February 2002 were 41 per cent higher than in the same 2001 period. This follows on the heels of a 42 per cent increase in 2001 over 2000.

All this makes your remark about the alleged serious drawback of dollarisation “that Argentina would forfeit exchange-rate flexibility and domestic monetary control in the long term” ring hollow, at best. Before you repeat that cliche, consult the works of Juan Bautista Alberdi and, more important, crack a few books on Argentina’s monetary history.

Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore, Maryland; chairman of the Friedberg Mercantile Group of New York; and a senior fellow at the Cato Institute.