Nicolás CACHANOSKY
Argentina is in trouble again. Even after a substantial aid package from the International Monetary Fund (IMF), it is struggling to service its sovereign debt. One should not be surprised: when you keep employing the same policies, you are likely to end up with similar outcomes. This, however, is not the lesson Harvard economist Ken Rogoff draws from Argentina’s experience. Instead, he calls for even more aid flows to Argentina.
Rogoff is right to criticize President Macri’s decision to cut the fiscal deficit gradually, rather than attacking the issue more forcefully early on. That strategy ultimately required Macri to seek help from the IMF. But he is wrong to characterize the Macri tax cuts and liberalization efforts as “Big Bang reforms.” The tax cut was marginal at best. And, while capital controls were lifted under Macri, more comprehensive measures of economic freedom show no significant improvements.
Getting the story straight is important. If Macri is a great economic reformer, as Rogoff suggests, it calls into question the standard view that countries facing a sovereign debt crisis should engage in structural reforms (cutting marginal tax rates, liberalizing labor and financial markets, etc.). “Argentina tried structural reforms,” some will say, “and those reforms did not work.”
Moreover, since structural reforms cause political instability, the argument goes, they might make matters even worse.
If, instead, the Macri reforms are seen as they were — a slow, inadequate response to a huge, pressing problem — then one need not call on the IMF to provide even more aid to those countries struggling to service their sovereign debt. Indeed, aid from the IMF and other organizations might even make matters worse by shielding policy makers from the consequences of their policies.
Rogoff’s case for more aid would be stronger if Argentina’s problems were temporary. An unexpected emergency can be handled with emergency funding. But the problem in Argentina is not temporary. It is structural. Argentina must deal with its chronic budget deficits. Additional funds enable the profligate spending and inadequate taxation to continue. It doesn’t solve the problem. It perpetuates it, requiring even-more-painful structural reforms in the future.
The IMF may be reluctant to dictate domestic policy. Yet, as Rogoff explains, the IMF does not give out (free) grants, but loans. And, as such, its loans can be issued conditionally on required structural-reform requirements. It might require specific fiscal or market liberalization reforms.
Or, it might require an increase by so many points on a given index (e.g., Economic Freedom of the World, Doing Business report, labor-rigidity index, Global Competitiveness Report) and allow domestic policy makers to decide how best to achieve those results. In either case, however, it would be recognizing that the reforms — and not the short-term funding — are what is ultimately required. And governments failing to make those reforms would bear the costs.
