Heritage Foundation Leadership for America

WASHINGTON, Apr. 20, 2001—Only by adopting capitalist reforms that encourage economic freedom and promote free trade can Argentina recover from its 33-month-old recession and high unemployment, says a new paper from The Heritage Foundation.

Poor economic policies and political instability have pushed Argentina down the list of the world's wealthiest nations from 10th in 1913 to 36th in 1998—the largest drop of any economy in recent times, say Ana Eiras and Brett Schaefer, policy analysts in Heritage's Center for International Trade and Economics. Loans and bailouts from the International Monetary Fund have made the situation worse.

The Bush administration should encourage Argentina to adopt a stimulus package that includes reduced government spending, tax cuts and lowered trade barriers, Eiras and Schaefer say. Argentina also must strengthen the rule of law and scale back wage laws and rules that dictate when employers can conduct layoffs.

In addition, Argentina should abandon the peso and adopt the American dollar as its currency, as El Salvador and Panama have done successfully, the analysts say.

Increased government spending hasn't helped, Eiras and Schaefer say. Throughout the 1980s, expenditures climbed steadily, and the government printed money to cover the shortfalls. This led to inflation that ranged from 90 percent in 1986 to nearly 3,000 percent in 1989.

Later that year, when Carlos Menem took over as president, confidence of foreign investors was low. However, Menem, a Peronist elected on a typical protectionist platform, surprised his countrymen by taking significant steps toward economic reform. He established a currency board to tie the peso firmly to the dollar. He privatized state enterprises such as railways, gas, airlines and telecommunications. He liberalized foreign investment laws, eliminated price and exchange rate controls and removed export taxes and import quotas.

Things got better. Argentina went from negative growth to among the world's fastest-growing countries through most of the early 1990s, and its percentage of families living below the poverty line dropped from 38 to 13. But failure to fully commit to liberalization, to root out unproductive public-sector jobs and to enforce true budget discipline reversed those gains and sent Argentina into its current recession.

To recover, Eiras and Schaefer say, Argentina should forego future IMF loans and negotiate a bilateral trade agreement with the United States, already its second-leading trading partner. In addition, it needs to promote competition, not simply transfer monopolies to the private sector.

Clear establishment of the rule of law would do much to improve conditions in Argentina. Its weak judiciary undermines the confidence of both its citizens and foreign investors.

"Future crises will be less likely in an environment that promotes the efficiencies and benefits of open markets," Eiras and Schaefer write. "Unless the Bush administration addresses the absence of capitalism that afflicts economies around the world, economic crises will become more frequent and more severe."