The government of Raul Alfonsin inherited a nation
burdened with massive economic problems when it was elected in December
of 1983. Seven years of military rule had all but destroyed a once
growing economy under the machinations of the state. During the period
of military rule, the government tremendously increased its foreign
borrowing, from $8.3 billion in March, 1976 to $43.6 billion in
December, 1983.1
The Argentine situation is one example of a larger
problem: the incurrence of debt worldwide by government. Since August
20, 1982, when Mexico announced that it could no longer meet its debt
service payments, some 30 nations have renegotiated terms on up to $100
billion of external debt. Argentina itself declared a moratorium on its
debt principal late in 1982. Interest payments, which consume roughly
two-thirds of Argentina's annual export earnings, were refinanced in
March, 1984 by a package deal involving the governments of Brazil,
Colombia, Mexico, and Venezuela so that American commercial banks would
not have to list their Argentine assets as non-performing. Today, the
Alfonsin government quibbles with the International Monetary Fund (IMF)
over austerity programs which enable Argentina to borrow more money from
the Fund. Because the strength of the dollar makes prices of imports to
America relatively cheaper, the so-called "debt crisis" has abated
temporarily. Yet the only solution to the problem - the market solution
- has not been applied. When the relative value of the dollar falls (it
is presently overvalued against most industrial-nation currencies), the
debt problem will again become a major issue.
The idea behind many popular solutions to the sovereign
debt problem (borrowing by government) is more government intervention
in the form of continued capital flow through some IMF arrangement or
similar mechanism until the debtor nation is "stable" enough
economically to be able to accumulate sufficient dollars from the
exportation of goods to meet its obligations. Such IMF-type austerity
plans may avert the political repercussions to government of making the
necessary adjustments to a market economy, but, through a misallocation
of resources, they exacerbate the problem in the long run.
A solution to the debt problem requires a market system
based on the idea of private property rights. The approaches to the
problem taken by the IMF are not producing, nor will they produce, an
answer. IMF programs are matters of short-term adjustment, the goal of
which is to buy time for nations to solve their economic woes. They are,
in fact, a sort of protectionism which, in the end, subsidizes the
interventionist policies of the debtor nations. They also rely on a
macroeconomic approach by government to adjust such items as unfavorable
balances of trade by fine-tuning monetary and fiscal policy in hopes of
finding a way out of the woods, so to say. This assumes that the state
is somehow capable of planning equitably and efficiently on behalf of
millions of individuals it has deemed incapable of pursuing their own
self-interest. Thus, many commentators have advocated an expansion of
IMF quota limits, evidently unconcerned about the fact that it is
individual taxpayers who must foot the bill for the programs of the IMF
and World Bank.
Several nations, including South Korea and Taiwan, are
servicing substantial debt requirements on the strength of relatively
strong market economies. Yet, when a nation such as Argentina has a debt
service problem as a result of intervention in the economy by the state,
the IMF typically proposes a slower growth austerity program entailing
exporting goods and accumulating dollars with which to service the debt.
This so-called trade surplus is generally secured by restricting
imports. By not regarding trade as a two-way exchange in which both
parties benefit when it is done voluntarily, the individual is made to
suffer as he becomes less well-off materially. As barriers around free
trade are constructed, the problem grows.
The Growth of the Problem
Today's debt problem in general can be traced to the
reaction of interventionist governments to economic changes in the
1970s. The initiation of floating exchange rates in 1971 was followed by
a decline in the relative value of the dollar, which facilitated the
expansion of trade between the United States and many of the so-called
developing nations. Governments, such as Argentina, financed this
expansion largely by borrowing external funds. These increasing debt
levels were expected to be serviced through continued economic growth.
The oil-importing developing nations adjusted to the
OPEC oil price increases of 1973 by borrowing additional funds. These
loans, made from "petrodollars" accumulating in American commercial
banks, were considered to be of little risk, as economic growth and a
weak dollar increased export earnings from which the debt could be
serviced.2 It should not surprise anyone, then, that from
1974-80, many governments used these borrowed funds to expand public
expenditures and exports substantially at the expense of capital
formation.3
Real interest rates turned sharply positive in 1978, as
the governments of Western Europe, followed by the United States, began
to adopt restrictive monetary policies to reduce inflation. In addition,
terms of trade fell significantly from 1979-82, as recession was
accompanied by a rise in protectionist trade measures. With oil prices
increasing again in 1979, governments were strained to meet their debt
service obligations and by 1982 the banking system was on the verge of
financial collapse.
The Case of Argentina
The case of Argentina illustrates the distortions
created by state interventionism in the market economy. From 1973-84,
public expenditures expanded enormously. To finance this expansion, the
government resorted to deficit spending. From 1973-82, these fiscal
deficits averaged 5.2 per cent of gross domestic product
(gdp).4 They were largely financed through borrowing abroad.
The growth of the state and the debts which it incurred
eroded the base of real saving and private investment. The state was
becoming the sole investor. However, the absence of a market test for
the state allowed it to waste a large amount of resources on prestige
and ill-considered projects, which was done flagrantly by the military
government.5 Accounting was so poor that much of the debt was
not even registered in the Central Bank.6 Mr. Alfonsin and
his elected Radical Party inherited the world's highest inflation rate
and its third highest sovereign debt in 1983.
From 1976-79, the military tried certain steps to solve
Argentina's economic woes. Consumption of beef and grain was restricted,
while exports of both were increased.7 Real wages fell as
government fixed wages while the market determined prices. In response
to the unpopularity of these policies, the government increased the
money supply. Thousands of Argentines then converted their pesos into
dollars or other currencies to move out of the country. Capital flight
was extensive; some $11 billion was moved into foreign bank
accounts.8 Roughly half of the proceeds from loans to
Argentina were reinvested abroad and remain there because economic chaos
continues at home.9 The gdp in 1983 was lower in real terms
than it had been eight years earlier.10
Mr. Alfonsin did not apply the market solution to the
economy. Instead, he promised that the government would fight inflation
and pull business and labor out of the recession with easy credit and
real wage increases.11 Hundreds of state-owned companies
(which composed roughly 60 per cent of industry in terms of output) were
to be closed or sold and government spending was to be cut.12
The actual program was limited to price controls on selected consumer
items and a week-long ban on the sale of beef. Despite efforts to peg
wages to prices, prices have risen by as much as 30 per cent per
month.13 In such an environment, investment is reduced in
favor of consumption and economic development becomes impossible.
Argentina's once modern industrial structure is in danger of becoming
obsolete.14
Most recently, in June, 1985, the government announced
new measures to fight inflation through a dramatic reduction in the
budget deficit, mostly through new taxes and new tariffs. An indefinite
freeze on prices and salaries is now in effect. A new currency, the
austral, is being introduced, which it is hoped will be more stable than
the peso, and will therefore draw out some of the estimated $4 billion
worth of American dollars now being saved by Argentines in mattresses
and other places.15 None of these measures is a move toward a
free economy. As long as the government commands the economy,
Argentina's woes will continue, and with them the external debt problem.
In Conclusion
Attempts by the Argentine government to manage the
economy have resulted in a distorted allocation of resources and a
reduced standard of living for the people. Intervention in the form of
wage and price controls, tariffs, public borrowing and investing, and
inflation have neglected the ultimate user, the consumer, and have
restricted his right to peaceful action. The society has become more and
more stratified, with various groups in conflict with each other. The
nationalistic policies of the state have retarded economic growth and
will lead to ever lower per capita standards of living. The whole
question of the proper role of government has been totally forgotten.
As to the debt problem itself, there are only three
ways out: 1) an internal adjustment economically and politically within
Argentina entailing a return to the free market system, 2) an assumption
of bad debt loss by the lending institutions if Argentina is unable to
repay its loans, or 3) an assumption of risk on the part of the
governments of creditor nations (and ultimately on their
taxpayers).16 Only alternative one insures that the problem
will not recur. Alternative three is the method being employed today by
the IMF and other government agencies to prevent the political
consequences of alternative two.
If there is a return to a free economy, individuals, by
pursuing their own self-interest, will direct resources to the
production of those goods and services demanded by consumers. As
consumer demands are satisfied, the returns to investment (profits)
insure an ever expanding economy. Through this process, savings can be
set aside which will service and eventually repay the debt. As
government, reduced to its proper function of protecting life and
property, is removed from the economic scene, its need and ability to
borrow will be eliminated. The individuals, whom the government is
required to protect, will pay for this service with some form of
taxation. Whether Argentina, or any nation, will ever have the political
means to apply the economic solution, is beyond the scope of this
article. There are only two alternatives: a free economy based on
private property rights or a command economy in which the state exists
at the expense of the individual. The latter leads to economic chaos and
social instability. Only the former results in peace and prosperity.
At the time of the original publication, Michael
Adamson was a graduate business student at Arizona State
University.
1. Andrew Thompson, "Alfonsin Walks on a Knife Edge,"
South 43 (1984): 88-89.
2. William C. Freund, "What's Behind the Debts of
Developing Countries?" Journal of Accounting, Auditing, and Finance,
Fall, 1983, pp. 90-95.
3. Inter-Arnerican Development Bank, External Debt and
Economic Development (Washington, D.C., 1984).
4. International Monetary Fund, International Financial
Statistics: 1981, 1984 (Washington, D.C., 1981,1984).
5. Mary Speck, "The Argentine Dilemma," Inquiry, June,
1984, pp. 22-25.
6. Linda Schuster, "Politics Played a Crucial Role in
Argentina Lending," Wall Street Journal, 17 May 1984, p. 34.
7. "The Breaking of a Continent," The Economist, 30
April 1983, pp, 17-21.
8. Schuster, op. cit
9. Larry A. Sjaastad, "International Debt Quagmire-To
Whom Do We Owe It?" World Economy 3 (1983), 305-24.
10. Thompson, op. cit,
11. Speck, op. cit.
12. Neil Ulman, "Argentina Lists Plans To Curb Deficit,
Inflation." Wall Street Journal, 27 January 1984, p. 35.
13. "A Gambler's Throw?" The Economist, 22 June 1985,
pp. 68, 70.
14. "The Breaking of" op. cit.
15. "A Gambler's Throw?" op. cit
16. Sjaastad, op. cit.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
December 1985, Vol. 35, No. 12.
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