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inefficient government in a growing economy

who were correct in their analysis of the events

is more tolerable than a highly efficient gov-

leading to the present situation: those who

ernment in a shrinking economy. Real govern-

warned against floating the peso, protested

ment spending can be restrained by not

the freeze of bank deposits, decried the gov-

increasing the wages of government employ-

ernment's massive destruction of property

ees as fast as inflation. If inflation is 50 percent

rights, and emphasized the need for reducing

or more this year, as private-sector forecasts

tax rates. The implementation of Ecuador's

project, the reduction in real government

dollarization and other reforms of 2000 was

spending from retaining existing nominal lev-

hindered by the presence of officials in the

els of spending will be considerable. For the

central bank and ministry of economy who

future, one idea for making salary costs more

were known as strong opponents of dollariza-

flexible would be to index the wages of gov-

tion. Argentina should not make the same

ernment employees to those of private-sector

mistake. There is a small but capable group of

employees or to tax collections.65

economists, lawyers, financiers, and other per-

It has been suggested that government

sons in Argentina who should be willing to

spending should be the motor of economic

help politicians smart enough to ask them.

growth, in the manner suggested by John

The government

Maynard Keynes during the depression of

Conclusion

seems to have

the 1930s. Without entering into an involved

discussion of Keynes's ideas, it suffices to

confused tax

Argentina and the IMF

note that they were proposed for conditions

rates with

of deflation. Argentina today has begun

Argentina's negotiations with the IMF

tax revenues.

again to experience conditions of inflation. It

have so far resulted in no new loans, in part

is clear that under current conditions more

because the IMF thinks there is no "quick

government spending will lead to higher

fix" for Argentina, as its managing director,

Horst Köhler, has claimed.67 In reality, there

inflation but not higher growth--a combina-

tion familiar to Argentines from the 1980s.

is a quick fix, at least for the currency prob-

lem: dollarization. It could be done immedi-

Establish a More Transparent Fiscal

ately, and it would establish a truly fixed

Framework

exchange rate before eliminating pesos from

In addition to reducing tax rates and elimi-

circulation.

nating some taxes, the government should

Ecuador in January 2000 was also in the

introduce a new fiscal framework based on

midst of a depression, with a currency nobody

sound, transparent accounting. The govern-

trusted and a banking system far worse man-

ment should produce an annual balance sheet

aged than that of Argentina. In desperation,

and income statement, using a full accrual basis

on January 9, president Jamil Mahuad

(which is more complete than the cash basis the

announced dollarization, which had been pro-

government now uses) and applying generally

posed for months by a number of prominent

accepted accounting principles. The balance

local economists and businesspeople, as well

as by myself and a few other foreigners.68 The

sheet and the income statement should be

audited by private accounting firms. This type

next day the Ecuadorean sucre stabilized at

of fiscal framework was introduced in New

the announced rate of 25,000 per U.S. dollar

Zealand starting in 1989; among other things,

and remained there until sucres were eliminat-

it has discouraged corruption and promoted

ed from circulation. The interbank interest

honesty in government finances.66

rate tumbled from 200 percent on January 7

to 20 percent by January 11. Money began

Remember Who Was Right

flowing back into the banks, the economy

Finally, the government should entrust the

started growing, and tax revenue rose. Those

implementation of major reforms to persons

trends continue today.

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