Argentina's never-ending tragedy

What's gone wrong?

By Jeremy Warner

I'm not going to get into the rights and wrongs of Argentina's claim on the Falklands, but if I were a Falkland islander, I'd continue to avoid the embrace, well meaning or otherwise, of these Latinos of the South Atlantic like the plague – for, largely unreported by the Western press, Argentina is once more an economic basket case.

But how can that be? Since abandoning the folly of its fixed exchange rate regime with the dollar, Argentina has surely come on in leaps and bounds, right?

Wrong, though that has certainly been the narrative regularly trotted out by opponents of the euro, who frequently point to Argentina to demonstrate the merits of free floating over fixed exchange rate regimes. I've even used it myself. Unfortunately, Argentina far from proves the case, as I've been discovering in the past few days in researching the Argentine economy. With Greece and possibly others set to exit the eurozone over the next year or two, it's worth exploring the lessons.

True enough, Argentina did rebound quite sharply after the initial trauma back in 2001 of abandoning the dollar peg and defaulting. But the climb back to pre-crisis levels of economic activity has been long and hard. Real incomes have only quite recently begun to exceed their pre-crisis levels.

What is more, it is plain as a pikestaff that there is another crisis just around the corner. Indeed, Argentina is essentially already in it, with a return to the bad old ways of hyperinflation and extreme capital flight. There has not been a published IMF staff report on Argentina since 2006, an omission which nearly always means that the IMF's assessments have become so uncomfortable that the incumbent government has refused to sanction subsequent publication.

Indeed the stand-off has become so bad that the IMF has recently been forced to fire a warning shot across Argentina's bows over the quality of the country's economic data, a process which with continued non compliance would mean eventual expulsion from the fund. So unreliable has the official data become that The Economist has dropped it from its website.

This might seem a trivial matter, but it is not. Argentina has been routinely misreporting both its inflation and GDP data. Inflation, recently reported at 9.7pc for January, is more likely three or four times that amount. It follows that real GDP growth is much less than reported.

Once a model for the region, Argentina's official statistical office, INDEC, has been bullied and perverted by the de Kerchner government to the degree where it can no longer be seen as anything but a peddler of lies and misinformation. Holders of inflation linked bonds are being regularly cheated out of their just rewards. The situation is just as bad as that which led to the meltdown of 2001, if not worse.

By the way, if you want to give yourself a giggle, take a look at this Paul Krugman blog, in which he cites Argentina as an example of how doing the unorthodox thing – defaulting and devaluing – can yield great results. Sorry Paul, but you've been working on the basis of fictitious data.

So what's gone wrong? The answer is that devaluation and default is not enough – it also needs to be accompanied by structural reform, which Argentina has failed to enact. Argentina's problem is that it remains mired in a politically and economically corrupt past. Until these things change, it will continue to stagger from one crisis to the next, regardless of the exchange rate regime it adopts. Devaluation is no substitute for structural reform.

Given the origins of its immigrant population, it is perhaps no surprise that the Argentine economy actually has quite a lot in common with the troublesome periphery of the eurozone. In terms of its problems, it's Italy, or even Greece, magnified several times over. Members of the technocratic governments that now run Italy and Greece often argue that in order to become modern, competitive economies, they need the straightjacket of the euro, they need to be forced into the economic reform which they have for so long ducked.

I've always found this a somewhat strange argument, for it implies that these countries cannot be trusted to modernise unless under the boot of Berlin. It's the same sort of argument as used to be peddled by the Major Government in the UK when Britain was part of the ERM. Unless we looked the Deutschemark in the face, it was said, we'd never exorcise our propensity to inflation and economic instability. In our case it turned out to be tosh, but in Argentina's?

Before the economic crisis of 1999-2002, Argentina had attempted to purge itself of its inflationary past by adopting a currency board system which sought irrevocably to peg the currency to the US dollar. Maintaining a currency board is not the same as establishing a currency union. Sovereignty is maintained and you can in extremis always exit the peg.

But the discipines it imposes are quite similar. Only a bit like Greece, Argentina never really played by the rules; the currency board was never properly maintained and it leaked badly at the edges. It was only a matter of time before it broke down. Spendid country that it is, Argentina cannot reasonably pretend to stewardship of the Falklands until it has addressed its own problems. By the look of it, it's going to take a while.