Argentina’s Current Political‐​Economic Crisis

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Mr. Chairman, thank you for this opportunity to express my viewson the causes of and cures for Argentina's currentpolitical-economic crisis. I first became seriously interested ineconomic reform in Argentina shortly after meeting Argentina'snewly elected President, Carlos Menem, in 1989. At that time, Iconcluded that, while stability might not be everything, everythingwas nothing without stability. To achieve stability, a cure forArgentina's endemic inflation and unstable money was required. Inconsultation with some members of Argentina's Congress, I developeda blueprint for monetary stability during 1990 with a felloweconomist, Kurt Schuler. In 1991, our proposal for an orthodoxcurrency board was published (Banco Central o Caja deConversión? Buenos Aires: FundaciónRepública). In 1994, I became President of TorontoTrust Argentina (TTA), a Buenos Aires-based domestic mutual fundthat can invest in stock and bonds. TTA has had a good record.Indeed, in 1996, Micropal, a company that rates investment funds,ranked TTA as the best-performing emerging market mutual fund inthe world. In 2000, S&P/Micropal ranked TTA third out of the169 funds monitored in Latin America for the 1997-2000 period.

During 1995-96, I was an advisor to the Minister of Economy,Domingo Cavallo. In 1999, shortly after president Carlos Menemsuggested dollarization for Argentina, Kurt Schuler and I wrote apaper explaining how to achieve that goal, step by step. Ipresented the paper to president Menem in February ("ADollarization Blueprint for Argentina," Friedberg's Commodityand Currency Comments Experts' Report, Toronto: FriedbergCommodity Management, Inc., February 1, 1999, available at https://www.cato.org/pubs/wtpapers/dollar.pdf).In December 2001, I updated the case for dollarization in twopapers, gave talks about dollarization in Argentina and presentedmy new proposal to Carlos Menem on December 6, 2001 ("ArgentineEndgame: Couple Dollarization with Free Banking," Cato InstituteForeign Policy Briefing No. 67, December 4, 2001 https://www.cato.org/pubs/fpbriefs/fpb-067es.html;"How to Dollarize in Argentina Now," with Kurt Schuler, December20, 2001, updated January 2, 2002, https://www.cato.org/pubs/papers/schuler-hanke011231.pdf).

All this is simply intended to inform you that I have beeninterested and involved in Argentine affairs for over a decade, andto indicate what the nature of that involvement has been.

What Went Wrong in Argentina?

Anyone attempting to make sense out of Argentina's fall fromgrace to economic and political chaos faces a real challenge. Mostof the commentary has been confused and confusing.

The road to good health began on April 1, 1991, when CarlosMenem's government installed what was known locally as a"convertibility system" to rid Argentina of hyperinflation and givethe country a confidence shock. Under the Convertibility Law, thepeso and the U.S. dollar both circulated legally at a 1-to-1exchange rate. The owner of a peso had a property right in a dollarand could freely exercise that right by converting a peso into adollar. That redemption pledge was credible because the centralbank was required by law to hold foreign reserves to fully coverits peso liabilities.

With the passage of the Law of Public Emergency and Reform ofthe Exchange Rate Regime on January 6, 2002, near-dictatorialpowers were conferred upon President Eduardo Duhalde and theconvertibility system was swept into the dustbin. The peso wasfloated and is currently worth less than half of its formervalue.

The confusing commentary about Argentina centers on its ratherunusual monetary regime, which although popular with the Argentinepublic, was not well understood by most economists, many currencyspeculators, or the International Monetary Fund.

Because the convertibility system was not well understood, ithas been blamed for a number of Argentina's ills that either hadlittle to do with convertibility or simply did not exist. Theconvertibility system was the linchpin for a decade of stableprices and a solid export and economic growth performance. Theprice level at the end of 2001 was about where it was in 1994.Exports grew each full year of the convertibility system, with theexception of 1999. And the real GDP growth rate during the decadeof convertibility was greater than any other decade since World WarII.

Was Argentina's monetary system an orthodox currencyboard? Argentina's monetary system from April 1, 1991 toJanuary 6, 2002 was known locally as convertibility. It was anunusual name for an unusual system. The convertibility system wasnot an orthodox currency board. Rather, it was a currencyboard-like system: a mixture of currency board and central bankingfeatures. In writings dating back to 1991, I proposed thatArgentina establish an orthodox currency board and criticizedconvertibility as an unstable, mixed system.

The three defining features of an orthodox currency boardare:

  • a fixed exchange rate with its anchor currency,
  • unrestricted convertibility into and out of the anchor currencyat the fixed rate, and
  • net reserves of 100 percent or slightly more of the board'smonetary liabilities, held in foreign assets only.

Together, these three features imply that an orthodox currencyboard is a narrowly focused, rule-bound institution. In particular,an orthodox currency board lacks the power to conduct sterilizedintervention, does not lend to the government, does not regulatecommercial banks, and does not act as an official or unofficiallender of last resort.

The convertibility system lacked one or more of the definingfeatures of an orthodox currency board throughout its lifetime.Last year, when the convertibility system began encountering severeproblems, the government fiddled with the exchange rate andrestricted convertibility. Throughout the lifetime of theconvertibility system, the Banco Central de la RepúblicaArgentina (BCRA)-note that it was never officially renamed acurrency board-held extensive domestic assets in addition to itsforeign assets. The BCRA was initially allowed to hold true foreignreserves of as little as 66-2/3 percent of its monetaryliabilities. It was allowed to hold the difference between its trueforeign reserves and 100 percent in the form of Argentinegovernment bonds denominated in foreign currency, valued at marketprices. Later, the minimum ratio was raised to 90 percent, althoughthe BCRA was allowed to breach that floor temporarily, which it didon a number of occasions, most recently from July 25 to September7, 2001 and from December 12, 2001 until the convertibility systemended on January 6, 2002.

The BCRA was never subject to any maximum ratio of foreignreserves. In contrast, if an orthodox currency board holds reservesbeyond 100 percent of its monetary liabilities, the purpose is tomerely provide a small cushion to prevent reserves from fallingbelow 100 percent. Many currency boards have held supplementaryreserves of 5 or 10 percent to guard against losses, but they havenot used their supplementary reserves to conduct discretionarymonetary policy and have remitted to their owners all surplusesbeyond what was necessary to maintain the core and supplementaryreserves. Over the course of 2001, the BCRA had a ratio of trueforeign reserves to monetary liabilities that varied from a high of193 percent on February 23 to a low of 82 percent at year-end. TheBCRA gained foreign reserves through the IMF loan of September 7.It lost foreign reserves by lending to commercial banks andindirectly supporting the market for government bonds, sincegovernment bonds were used as collateral for many loans.

The holding of domestic assets and the varying of the ratio offoreign reserves to monetary liabilities meant that the BCRAengaged extensively in a discretionary policy of sterilizedintervention, which an orthodox currency board does not do. Theproblem with sterilized intervention is that it forces a monetaryauthority to attempt to hit simultaneously two possiblyincompatible targets-an exchange-rate target and a money-supplytarget. The convertibility system thus eventually encountered theproblem common to all pegged exchange rates: which target to hitwhen the two came into conflict. Argentina chose the money-supplytarget, which involved giving up the exchange-rate target.

Under the convertibility system the BCRA also retained the powerto regulate banks, such as by setting reserve ratios. It wasunofficially a lender of last resort, though it retained aconstructive ambiguity about its role that reduced moral hazardrisk.

As evidence of the BCRA's hyperactivity, one has to only look atthe Bulletin of Monetary and Fiscal Affairs publishedquarterly by the BCRA. Each issue since April 1991 contained a longlist of measures taken by the BCRA. If the BCRA had been operatingas an orthodox currency board, these pages would have beenblank.

In a 1993 book, Russian Currency and Finance, which Ico-authored with Lars Jonung and Kurt Schuler, we predicted thatArgentina's monetary system would eventually behave more like atypical central bank than an orthodox currency board. After alonger delay than we ever expected, we were proved correct.

Moral: An unorthodox, currency board-like system is aninternally contradictory mixture of currency board and centralbanking elements. An orthodox currency board system is internallyconsistent and therefore does not encounter the sameproblems.

Was the original convertibility system in effect untilJanuary 6? The original convertibility system began tocrack in April 2001, when Domingo Cavallo, who had been recentlyappointed minister of the economy, sent a bill to Argentina'sCongress to change the peso's anchor from the dollar to a 50-50basket of the dollar and the euro. As economy minister in 1991,when the convertibility system was established, Cavallo hadconsidered but rejected a similar idea. Also in April, Pedro Pou,the independent-minded president of the central bank who preferreddollarization to devaluation, was ousted on a pretext in favor ofthe more pliable Roque Maccarone.

By June the original convertibility system was definitivelyfinished. Congress approved changing the exchange rate link if andwhen the euro ever appreciated to one per dollar. More importantly,Cavallo announced a preferential exchange rate for exports-a dualexchange rate. This was contrary both to the intent of the originalconvertibility system and of an orthodox currency board. Cavallo'smeasures showed that the government was quite willing to tamperwith the convertibility system. In previous episodes whenconfidence in the peso declined, the government had responded,sometimes after an agonizing delay, by reaffirming the link to thedollar and the commitment to a single exchange rate. By removingthe cornerstones of the convertibility system, Cavallo left theedifice shaky.

By meddling with the convertibility system, Cavallo tightenedmonetary conditions. Indeed, peso interest rates shot up andremained at punishingly high levels until peso interest rate capswere imposed in December 2001.

In December 2001 the government imposed a freeze on bankdeposits. It was the last straw. Angry Argentines remembered howhigh inflation during similar freezes in 1982 (engineered byCavallo) and 1989 had robbed them of the real value of theirsavings. Cavallo and president Fernando de la Rúa resignedin the face of widespread protests.

There was another way out: official dollarization, which wouldhave eliminated questions about confidence in the peso byeliminating the peso itself. Unfortunately, a lack of resolve bythe Argentine government and a lack of support from the U.S.government prevented this economically beneficial, but politicallysomewhat difficult, option from being implemented either whenpresident Menem first proposed it in 1999 or subsequently. Instead,Argentina temporized and eventually suffered both a currency crisisand a political crisis.

Moral: When a currency board-like system faces a crisiscaused by lack of confidence in the currency, a "hard" exit, forexample via dollarization, is preferable to the "soft" exits ofdevaluation or floating.

Was the peso overvalued? Many people assertthat the crux of the Argentine crisis was an overvalued peso.Supposedly, the peso's link to the strong US dollar made the pesoovervalued, rendering Argentina uncompetitive, causing the economyto slump, and forcing the government to default.

Does the story withstand examination? A classic sign ofuncompetitiveness caused by an overvalued currency is decliningexports. But Argentina's exports increased every full year of theconvertibility system except 1999, when Brazil, its largest tradingpartner, suffered a currency crisis. Exports during the first 11months of 2001 were 3.2 percent ahead of the same period in 2000.Considering that estimated real growth in world trade was only 0.9percent last year, Argentina's export performance was relativelystrong. Indeed, the export sector has been one of the few brightspots in the Argentine economy. If the rest of the economy had beengrowing as fast as the export sector during the last two years,Argentina would not be in a recession.

In an attempt to bolster claims that the peso was highlyovervalued under the convertibility system, some observersasserted, on the basis of taxi rides from the airport or othercasual impressions, that prices were high in Buenos Aires, and thathigh prices were evidence the peso was significantly overvaluedagainst the dollar. A recent Union Bank of Switzerland survey ofprices in 58 of the world's largest cities found that for a basketof 111 goods and services, weighted by typical consumerhabits-including three categories of house rent-Buenos Aires ranked22nd, about midway between the most expensive city, Tokyo, and theleast expensive, Bombay. The survey also found those taxi ridesthat were allegedly so expensive cost about 8 percent less than inRio de Janeiro.

There are other indicators that contradict the overvaluationstory. For example, the Economist magazine's Big Mac Index, whichcompares the price of McDonald's hamburgers around the world,indicates that the peso, before its devaluation, was 2 percentundervalued. In 1999 the index had indicated that the peso was 3percent overvalued and in 2000 it had indicated no overvaluation.Even so, from May 15, 1999 through February 2, 2002, the Economistcontained twenty-six articles claiming that the economy was beingdragged down by an overvalued peso. And although the Big Mac index,as well as more sophisticated estimates of equilibrium exchangerates, should be treated with great skepticism, a recent carefulstudy of the matter using data from 1993 to 1999 indicates that thepeso was always within 6 percent of its so-called fundamentalequilibrium real exchange rate (Kalin Hristov, "FEER and CurrencyBoards: Evidence from the 90's," unpublished manuscript, BulgarianNational Bank, presented at the Centre for Central Banking Studies(Bank of England) Conference on Exchange Rates, November 26, 2001,p. 25).

Moral: Look carefully at the evidence before claiming that acurrency is overvalued.

Will the devaluation restart the economy? Forbetter or worse, devaluation is now a fact. The big question goingforward is: Will it revive the economy? Let's go through thearithmetic. The short-run price elasticity for Argentine exports isabout -0.1. So, to stimulate exports by 1 percent, the real valueof the peso (adjusted for inflation) would have to depreciate by 10percent. Exports in Argentina only accounted for 9 percent of GDPlast year. Consequently, if the current devaluation of 50 percent(the floating peso is trading at about two to the dollar) doesn'tpass through to any domestic inflation-in short, if the nominaldevaluation is a real devaluation-exports will increase by about 5percent. Under this optimistic scenario, the current level ofdevaluation would add less than a half percent to GDP-a GDP that,thanks to the new exchange-rate regime, has collapsed. And eventhough estimates of price elasticity cannot be treated with veryhigh confidence, the short-run price elasticity for exports wouldhave to be about ten times as great as its estimated value tooffset the 5 percent officially-projected contraction in GDP thisyear. If you use private-sector forecasts of the Argentina'scontraction in GDP for 2002 (which are much more pessimistic andrealistic than the official estimate), the elasticity would have tobe even greater.

Moral: When considering a regime shift, use the back of anenvelope and make a few calculations.

Why was Argentina's devaluation unique? TheConvertibility Law gave a peso holder the right to convert a pesointo a US dollar. That redemption pledge was made credible becausethe central bank was required by law to hold foreign reserves tofully cover its peso liabilities. It was this redemption pledgethat made the convertibility set up unique and distinguished itfrom the typical fiat money system.

With the repeal of the Convertibility Law, the redemption pledgewas thrown to the wind and the peso holders' claims on foreignreserves held at the central bank were revoked. Argentina'sdevaluation, then, represented more-much more-than a garden-varietydevaluation. It was a great bank robbery. Foreign reserves equal to17.8 billion dollars that were the property of peso holders wereconfiscated by the government.

That was just the beginning. In addition to taking the foreignreserves from people who held pesos, the government of EduardoDuhalde has passed other laws and issued regulations to "pesofy"the economy (that is, convert dollar assets, liabilities, andprices into pesos, almost always at a rate that is not the marketrate). These have annulled property rights and ignored the rule oflaw. The Congress acquiesced in the government's actions byapproving the Law of Public Emergency and Reform of the ExchangeRate Regime on January 6, 2002. The law transfers extraordinarypowers to the president and allows him to, in effect, rule bydecree for two years (when his term is scheduled to end).

Moral: In a country that fails to adhere to the rule of law,the domestic currency should be replaced with a foreign currencyproduced in a country that embraces the rule of law.

So, then, what caused Argentina's crisis?Argentina's economy went into recession in September 1998 in theaftermath of the Asian and Russian currency crises, which resultedin a general decline in flows of investment to emerging marketeconomies. The Brazilian currency crisis of 1999 dealt the economyanother blow. Signs of recovery appeared in late 1999 and early2000, but the incoming de la Rúa government choked therecovery by enacting large tax increases that took effect at thestart of 2000. The government (and the IMF, which lent support tothe government's program) thought the tax increases were necessaryto reduce the budget deficit. Instead, tax collections fell. WhenDomingo Cavallo became minister of the economy in March 2001, hepushed through a financial transaction tax, which was increased inAugust to its current rate of 0.6 percent on bank debits andcredits. Although the tax rate may appear low, it is not.

The tax increases added to the already heavy tax burdenArgentines bear if they are part of the legal economy. Tax evasionis high in Argentina because the tax savings from going into theunderground economy are huge. The value-added tax is 21 percent;social security and medical care taxes are 31.9 percent; and thetop income tax rate of 35 percent starts at 102,300 pesos-currentlyabout 50,000 dollars. Compare these with US state sales taxes of0-9 percent (there is no federal tax); Social Security and Medicaretaxes of 15.3 percent; and a top federal tax rate of 38.6 percentstarting at about 300,000 dollars (plus state taxes of 0-11percent). Unlike Argentina, the United States does not tax bankcredits and debits at all.

The distortions created by Argentina's sky-high tax rates showup in the labor markets. For example, the tax wedge between grosslabor costs and net wages is 42 percent, comparable to the largestwedges in Europe and almost double that of the U.S. It is notsurprising, therefore, that the unemployment rate is relativelyhigh and the underground economy is so vibrant.

It is also not surprising that tax revenue fell as higher taxrates aggravated the recession. Falling tax revenue made thegovernment's debt more precarious. Particularly after DomingoCavallo's changes to the convertibility system, concern about theconsequences of a debt default spilled over into the currencymarket. Forward rates reflected an expected devaluation of thepeso, and interest rates in pesos shot up to 40-60 percent. Concernabout the consequences of a default also spilled over into thebanking system, reflected by withdrawals of deposits and interestrates in dollars of 20-30 percent. (Most bank deposits and loanswere, in fact, in dollars rather than pesos.) People feared thatthe government would not let the default remain compartmentalizedas a problem of government finance, but would make it spill overinto the rest of the economy.

Again, dollarization would have helped contain the problem, bydepriving the government of a national currency as a tool fordevaluation and inflation. Dollarization would not have guaranteedsuccess-no monetary system can-but it would have improved thechances for success. It still would help today.

Moral: During a recession, avoid raising tax rates and don't"tighten" monetary conditions by meddling with monetaryinstitutions.

The IMF's Role in Argentina'sCrisis

During the boom years, 1990-94, when Argentina's per capita GDPmeasured in dollars grew by 72.8 percent, the IMF played a minorrole in Argentina's economic affairs. Argentina implemented theconvertibility system without the IMF's aid or advice. Followingthe Mexican devaluation of December 1994, Argentina suffered acrisis of investor confidence, which it overcame by enactingpolicies that included a reaffirmation of its commitment to anexchange rate of 1 peso per dollar. The IMF lent Argentina funds tosupport these policies, and ever since has been heavily involved inArgentina. Unfortunately, the IMF threw cold water on PresidentMenem's dollarization proposal in early 1999. As a result,Argentina was forced to forego a much-needed positive confidenceshock. When Fernando de la Rúa became president in December1999, things went from bad to worse. His administration's neweconomic plan, approved by the IMF, was supposed to lower interestrates and produce a boom by raising taxes, which was meant toreduce the government's deficit. Its timing was awful. Worldinterest rates in December 1999 were on the rise, so Argentina'srates also rose and the economy slumped further into recession.Argentina was headed for a crisis of confidence, one that wouldplunge the economy into a deeper recession and cause debt-servicingproblems. The rest is history, almost.

From there the de la Rúa administration would commit asteady stream of policy errors that would undermine the successfulreforms of the early 1990s: stable money and sound banking. Andduring this period, the IMF stood by silently and at the same timeextended more credit to Argentina.

Then, during the early days of the Duhalde government, the IMFagain threw cold water on the dollarization idea. When asked aboutdollarization for Argentina during a press briefing on January 11,Anne Krueger, first deputy managing director of the IMF, said:"Well, my understanding at the moment is that [dollarization] istechnically unfeasible. So I don't think the authorities arethinking about it; I don't think we are thinking about it."

Dr. Krueger's statement implies that the BCRA did not haveenough foreign reserves to liquidate its peso monetary liabilitiesand dollarize the economy. According to the BCRA's balance sheet ofJanuary 10, this was not the case, however. The BCRA's pesomonetary liabilities were 17.92 billion pesos and its "pure"foreign reserves in US dollars were $14.75 billion. In addition,the BCRA had 14.96 billion pesos of domestic assets valued atmarket prices that could be sold to acquire U.S. dollars.Consequently, at the time Dr. Krueger made her statement, it wouldhave been feasible for Argentina to dollarize at an exchange rateof 1 peso to 1 U.S. dollar, the rate in force under theConvertibility Law.

This, of course, leads to a number of questions. Was Dr. Kruegermisinformed? Or does the IMF know something that the rest of usdon't know? In short, does the BCRA have an "Enron problem"? Eitherway, the IMF does not look good.

If that were the end of the IMF-Argentina story it would be badenough. But there is more. While Dr. Krueger's remarks aboutdollarization were quite specific, the IMF's mantra has been avague stipulation that the Duhalde government must produce acomprehensive and sustainable economic program. The IMF has notbeen forthcoming publicly about what such a program might looklike, so it is hard for outside analysts to evaluate whether theIMF's advice is even in the right ballpark. In contrast, I haveproposed a detailed set of monetary, banking, and tax policies thatI believe would bolster confidence in Argentina's economy and setit on the road to a sustainable recovery (https://www.cato.org/pubs/papers/schuler-hanke011231.pdf).Such policies include dollarization, significant reductions in taxrates, and fiscal reforms to enhance transparency.

What Should the U.S. Role Be inArgentina?

The Duhalde government's measures, especially those connectedwith the exchange rate and the banking system, have drawn praisefrom many observers as steps in the right direction. The observersare wrong. They neglect that the government's program amounts todestruction of the rule of law, to the imperfect extent that itexisted in Argentina. The government has changed the terms of somecontracts between private parties, suspended the validity of othercontracts, and seized wealth from some members of the public toredistribute to other members or to itself.

The Duhalde government has so disrupted rights to privateproperty that they hardly exist any more. The government's measuresare disastrous for Argentina's future. Without a reversal of mostof the measures, Argentina will remain for years to come what ithas been for more than half a century: a once-rich country that hasstagnated while other countries, once poorer, surged ahead of it.If private property has no stability, there will be no reason forArgentines or foreigners to invest much in Argentina.

Observers who have praised the government's measures have alsosomehow failed to notice that a depreciating peso, which is theonly kind Argentina is likely to get, is massively unpopular. Sincecentral banking was established in Argentina in 1935, the peso hasdepreciated against the dollar by a factor of approximately6,000,000,000,000. In the Argentine context, a floating exchangerate has always meant a depreciating rate. The convertibilitysystem, though imperfect, was the cornerstone of Argentina'seconomic growth in the 1990s. Now that the cornerstone has beenremoved, much of the structure has already crumbled.

At a hearing of thissubcommittee on February 6, 2002, John Taylor, the Under Secretaryof the Treasury for International Affairs, remarked that he thoughtArgentina should have dollarized rather than frozen bank depositson December 1. To me, it is astonishing that he did not communicatethis view to Argentina's government, since it would have carriedconsiderable weight. Although the United States is not responsiblefor Argentina's economic problems, it is in our national interestfor the Treasury Department to offer advice that would promoteeconomic growth and political stability in Argentina. The result ofthe Treasury's hesitant attitude about recommending dollarizationhas been that Argentina is now asking the IMF and otherinternational financial institutions for billions of dollars in newloans. Since the United States is the largest provider of funds tothose organizations, if they lend to Argentina at their customarybelow-market rates, U.S. taxpayers will in effect be paying for theTreasury's hesitation. This leads me to my two recommendations forU.S. policy towards Argentina.

First, recommend dollarization. As a purely technical matter,dollarization is always feasible at some exchange rate, and asEcuador's experience of dollarization in 2000 indicates, it isfeasible even when established in the midst of political andeconomic chaos. The question in Argentina's case is what exchangerate is appropriate now and, if dollarization is not adopted soon,how to determine the exchange rate that would be appropriate shoulda future government decide to dollarize. Dollarization remainsdesirable because the prospects are poor for making the peso into astable currency that people will want to use without coercion.People trust the dollar; they do not trust the peso.

It may no longer be possible to return to an exchange rate of 1peso per dollar, but Argentina can do what Ecuador did when itdollarized in 2000: establish a uniform exchange rate forconverting local currency into dollars and apply it to all assetsand liabilities denominated in local currency. This rate should notbe determined mechanically, by simply looking at what exchange ratewould be necessary to make the central bank's dollar assets coverits peso monetary liabilities. The confidence that dollarizationwould inspire might enable dollarization to occur at an exchangerate considerably more favorable for the Argentine public than amechanical calculation indicates.

Interest rates in pesos are far above rates in dollars becauseof expectations of substantial inflation. They can be adjusted asthey were in Ecuador, by establishing procedures for reducingnominal interest rates downward to reflect lower expectations ofinflation.

My second recommendation is that the Treasury respect laws thatCongress has passed, which establish the wise principle thatAmericans as taxpayers should not support a government that robsAmericans as investors. A number of provisions of Title 22 of theU.S. Code state that the President shall deny foreign aid togovernments that seize the property of or nullify contracts withU.S. citizens or corporations. These provisions also state that thePresident shall instruct U.S. executive directors at internationalfinancial institutions to vote against loans (except humanitarianaid loans) for such governments unless the governments have, withina specified period, provided compensation for the property taken orsubmitted claims for compensation to arbitration in accord withinternational law. The relevant provisions of Title 22 includesections 283r; section 284j; section 2370, subsection (e); andsection 2370a, subsections (a) and (b).

In my view, the actions Argentina has taken should clearlytrigger U.S. opposition to loans by international financialinstitutions to which the United States belongs. In testimony tothe Joint Economic Committee on February 14, 2002, Dr. Taylorindicated that Argentina's actions have not triggered theprovisions of Title 22 because Argentina has treated all foreigninvestors equally. That is not the standard the provisions referto, however; rather, the provisions are supposed to be triggered byspecified violations of property rights that affect Americanswhether or not other foreign investors have suffered similarviolations. Mr. Chairman and members of this committee, whether theadministration will enforce the laws Congress has passed dependsmainly on you and your fellow legislators. If American as taxpayersend up supporting a government that has robbed them as investors inArgentina, it will send a terrible signal.

Secure private property rights are an essential ingredient ofour prosperity and that of every other wealthy country. To turn ablind eye to the massive violations of property rights in Argentinawould not only harm U.S. investors, it would reinforce longstandingtendencies that have made Argentina a problem-prone country formost of its history. Without well-defined, secure property rights,people cannot plan for the future. Consequently, there is littleincentive to invest, to create jobs, to innovate-in short, to doall the things to produce the economic growth Argentina's peopledesperately need. Therefore I urge you to ensure that the laws areupheld and that the United States vote against aid for Argentinafrom the IMF and other institutions until Argentina reverses itsseizures of property or provides compensation for them. Promotingthe security of property rights is not simply in the interest ofU.S. and other foreign investors; it is in the interest of theArgentine people.

Steve H. Hanke

Subcommittee on International Monetary Policy and Trade
Committee on Financial Services
United States House of Representatives