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Coming to America: An Argentina-Style BustFailure to Embrace Free Markets Has Doomed Argentinaby
Paul Gessing Feb 28, 2002 Recently, bureaucrats from the International Monetary Fund have joined a
chorus of ill-informed commentators in blaming Argentina’s economic
crisis on everything from the peso-dollar peg to free market reforms of the
1990s. Not only are these viewpoints inaccurate, but they also obscure
the real culprits: the economically harmful laws and regulations written by
Argentine politicians and the equally destructive remedies promoted by the
IMF. In the end, Argentina’s economy is another victim of high
taxes and uncontrolled government spending.
Systemically, the poorly designed system of “Coparticipation” that governs the fiscal relationship between the provinces and federal government
is the first major problem. With 56 percent of provincial expenditures
directly funded by the federal government and with federally determined tax
policies that rule out provincial tax competition, spending in the provinces
is insatiable and determined by politics, not the promotion of economic growth.
A symptom of this problem is the philosophy of recently-installed President
Duhalde who, as the governor of the largest and most populous Buenos Aires
province during much of the 1990s, repeatedly overruled attempts to balance
the provincial budget. His big-spending ways led to a $4.6 billion borrowing
binge, more than doubling the provincial debt level during his eight years
in office. He also increased spending by 22 percent in only two years
in preparation for his failed 1999 presidential bid. These scenarios
have been played out in provinces throughout Argentina during the last ten
years and will continue until the provinces are forced to compete among themselves
in a true federalist system.
Getting rid of the fiscally irresponsible “Coparticipation” system
is only the beginning. Even after having privatized most of the nation’s
utilities, the telephone industry, and highways (among other items) Argentina’s
government simply spends too much. For starters, Argentine students
pay no tuition at all to attend public universities. The costs of this
system are extremely high as students choose to remain in school for years
rather than test the difficult job market. Government employees account
for 50 percent of workers in many provinces; their numbers must be reduced
dramatically. Heavy taxes have played a large role in driving nearly
40 percent of Argentina’s economy underground.
Contrary to advice from the IMF, the best way for Argentina to capture more
tax revenue in the long term is by reducing taxes. By promoting economic
growth and allowing much of the underground economy to surface, federal tax
receipts will begin to rise. Among the most onerous taxes is the 21
percent Argentine equivalent of a sales tax. In addition, labor policies
that promote corrupt and confrontational unions have contributed greatly to
the staggering 18.3 percent unemployment level and continue to cause low productivity
among the Argentine work force. These steps are just a start, but if
taken together, the reforms would halt the inexorable decline of Argentina’s
economy.
Free market policies cannot be blamed for Argentina’s collapse because
nothing resembling the free market exists there. The reforms and privatizations
of the early 1990s temporarily halted a decline that began in the 1940s, when
Juan Peron nationalized much of the economy and restricted foreign capital
and free trade. Instead of looking back themselves to the nationalist
and socialist economic principles of Juan Peron, Argentines and their leaders
must re-dedicate themselves to free markets and low taxes. Only sound
economic policies can save Argentina and its people from becoming a third-world
nation.
Paul J. Gessing is a Policy Associate at the National Taxpayers
Union. Last year he studied the Argentine economy as a Research
Fellow at Fundacion Libertad in Rosario, Argentina. |
