Under central
couraged production and encouraged tax eva-
Introduction: The Failure to
sion. They mistakenly blamed the peso's for-
banking the peso
Understand Argentina's
mer exchange rate link of 1 per dollar for most
had depreciated
of Argentina's economic problems. Most
Crisis
against the dollar
advised floating the peso, and quite a few pro-
Argentina was once one of the world's
posed coupling devaluation with forced con-
by a factor of
richest countries. Again and again, though,
version of dollar bank deposits into pesos
about
its people have chosen or at least tolerated
("pesofication"). They were oblivious to the
leaders who have had no idea how wealth is
immense destruction of property rights that
10,000,000,000,000.
created and preserved. Argentina's currency
following their advice entailed. One test of an
crisis and economic depression result from
economist's advice is whether he would apply
that disastrous failure of understanding.
it at home. No foreign economist has volun-
The failure extends well beyond Argentina.
teered to convert his own dollars into pesos at
The International Monetary Fund and the
the disadvantageous rate imposed on
Group of Seven nations have given bad advice or
Argentine bank depositors.
have failed to give good advice. It was reported
Argentina's government, the IMF, the
before the peso was floated that the IMF was
Group of Seven, and most economists have
advising either floating or dollarization (eliminat-
offered nothing but a diet of ashes. Critics of
ing the peso and making the U.S. dollar
the current policies must propose other
Argentina's national currency). The IMF gave
options, not just complain about existing poli-
advice as if both choices were equally good, even
cies. Nobody has offered a set of alternative
though under central banking the peso had
policies that is both comprehensive and benefi-
depreciated against the dollar by a factor of about
cial, though a few economists have made valu-
10,000,000,000,000. When asked about dollariza-
able analyses of and suggestions concerning
tion at a press conference on January 11, 2002,
particular topics, some of which are incorporat-
ed here.3 The Argentine government and most
Anne Krueger, the IMF's first deputy managing
director, said, "My understanding is that, at the
economists are opposed to the ideas proposed
moment, it is technically unfeasible."1 In reality,
here, particularly dollarization, but the failure
dollarization is always technically feasible at some
of the current policies is battering down resis-
exchange rate. John Taylor, under secretary for
tance. The government of President Duhalde
international affairs at the U.S. Treasury, admit-
continues to march determinedly in the wrong
ted in a congressional committee hearing that he
direction, but the day will come when a new
thought dollarization would have been better
government and fresh ideas can allow a more
than the freeze of deposits the De la Rúa govern-
prosperous Argentina to emerge.
ment imposed in December 2001, but he had not
communicated his opinion to the Argentine gov-
What Caused the Crisis?
ernment. Argentines should be aware that they
are largely on their own; judging from its public
statements, the executive branch of the U.S. gov-
Tables 1 and 2 show the basic facts of
Argentina's economy and economic crisis.4
ernment is not prepared to offer substantial help
through loans, a free-trade agreement, sharing
The conventional view of Argentina's crisis as
seigniorage (profit) from issuing the dollar
it unfolded in 2001 was that
should Argentina dollarize, or even helpful hints.2
· Argentina's
The failure of understanding extends to
monetary system,
most prominent foreign economists who have
locally known as "convertibility,"
written about Argentina. Their advice has con-
was a currency board;
· the peso's exchange rate of 1 per
stituted professional malpractice. Obsessed by
monetary policy, few noted the crippling
dollar made the peso persistently
effects of Argentina's high tax rates, which dis-
overvalued; and
2