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Lessons from Australia in solving Argentina’s economic crisis

Steven Hail

With Argentina facing dire economic challenges, Steven Hail offers recommendations for recovery based on lessons learnt from Australia’s fiscal mistakes.

Argentinian President Milei plans to dollarise the nation’s economy (Screenshot via YouTube)

Ten years ago, frustrated with economic policy debates in Australia and many other countries, I gave a public talk entitled ‘Exposing the Myth of a Commonwealth Budget Emergency’. It used insights from modern monetary theory (MMT) to attack not only the budget of the Abbott/Hockey Administration but also the broken and badly misinformed promise of a budget surplus that both Kevin Rudd and Julia Gillard had made in earlier years.

Since then, I have been campaigning for the wider use of an MMT frame for thinking about public policy, and the culmination of this will be touring with an award-winning documentary entitled Finding the Money and renowned MMT economist Stephanie Kelton in March 2024.

I said that Australia’s government is a full monetary sovereign. This means that it issues the currency in which our tax liabilities are denominated, that currency is not convertible at a fixed rate into gold or U.S. dollars or anything else and that it has no significant foreign-currency-denominated debt.

That also means that the only constraints on its spending relate to our productive capacity. In other words, whatever we can do, it can pay for. There exists an inflation risk relating to federal spending, but no insolvency risk.

Modern monetary theory opens range of economic possibilities (credit: source)

After years of being ignored, the Modern Monetary Theory (MMT) school of economic thought is escaping its controversial reputation and is growing in popularity.

I also pointed out that government surpluses are non-government deficits, so in the absence of a persistent trade surplus (which we have now but didn’t have then), any government surplus must either force the private sector into more debt (as under the Howard-Costello government) or alternatively drive the entire economy into recession (think Hawke/Keating).

We should not be aiming to run a fiscal surplus, or see it as a great achievement if we happen to do so, as that is not a guide to a responsible fiscal policy. In the absence of supply shocks, a responsible fiscal policy is aimed at non-inflationary full employment. The federal government budget will normally be in deficit for the simple reason that the private sector normally needs to run a surplus, but no specific budget outcome should be seen out of context as an appropriate target.

The cost of getting this wrong under all the above administrations, and then under the Turnbull and Morrison governments was unnecessary unemployment and insecure employment, as well as underfunded public services and missed opportunities.

Way back in 2014, one of the questions I received was “What about Argentina?” With a few seconds to respond at the time, I said it was hard enough talking about Australia and had to avoid the question. But what about Argentina? What about Turkey or Sri Lanka? What about Zimbabwe in 2008, or so many other cases of financial crises?

If you want a general answer, it is that these countries are not full monetary sovereigns. But looking for a general one-size-fits-all answer would be a mistake – one that International Monetary Fund and World Bank economists have made down the years at great cost. Every country has its own economic and political history, social institutions, endowments and vulnerabilities.

In the case of Argentina, it has experienced a return to hyperinflation since 2022 – the seeds for which were sown in 2016 – and last October elected a president with more extreme economic shock policy proposals than any in recent Latin American history. President Javier Milei has recently passed a law marking the stripping away of workers’ rights, further privatisations, eliminating remaining controls on foreign investment and seems proud to oppose social justice.

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Milei apparently intends to scrap Argentina’s currency and adopt the U.S. dollar as Argentina’s legal tender currency. Such dollarisation already exists in Ecuador and El Salvador, but not in such a large economy as Argentina or one for whom the U.S. is far from its largest trading partner. It is a policy widely regarded as suicidal but may be impracticable anyway, as it requires the government to buy up pesos in circulation with U.S. dollars and Argentina has hardly any official U.S. dollar reserves to accomplish it.

There is a chance that Milei might have some short-term success, barring a revolution, if he doesn’t dollarize and if foreign investors can be tempted to buy cheap Argentine assets, which will prop up the peso for a while. But it will end in tears sooner or later.

Argentina has had hyperinflation in the past in the late 1980s, after the fall of its military regime. Back then, in the early ’90s, they tried “convertibility” against the U.S. dollar, under what is called a currency board system. The issuance of pesos was limited to central bank reserves of U.S. dollars, for the sake of credibility. People started to think of the peso and the dollar as the same thing. It brought inflation down, but at the expense of austerity, rising inequality and eventually an overvalued currency which made it impossible to compete against Brazilian firms and others. There followed a banking collapse and mass unemployment, as well as more or less a revolution in 2001, which lead to regime change, a floating (and initially heavily depreciated) peso, a default on foreign debt, a job guarantee scheme and a complete change in direction. From 2002 at least until 2008, the Argentine economy was the best-performing economy in the Western hemisphere. You might like to read that last sentence again. High export prices helped, especially after 2005, but were not the whole story. The exchange rate was floating, but fairly stable. Inflation was low by Argentine standards. And from 200211, the economy virtually doubled in size. By 2011, with a weak peso and strong dollar, inflation was back above 25 per cent and external conditions were getting tougher. Argentine residents looking to switch pesos into dollars put further downward pressure on the peso and there was the danger of a depreciation-inflation spiral, so the Government moved back towards fixed exchange rates and introduced further controls on the movement of funds into and out of the country.

While “movement” MMT economists agree with mainstream economists in supporting big deficits during the economic crisis, the problem is who should pay.

The period 201121 was one of stagflation, made worse by the election of the Rightwing Macri Government, which as in the ’90s and 2024, pivoted towards neoliberalism, deregulation and fiscal austerity, but this time moving towards a floating exchange rate and central bank inflation targets. Of course, it didn’t work. Initially, hot money came in and held the peso up, but by 2018 it was flooding out again. The peso was in free fall, and the Macri government was reduced to borrowing more U.S. dollars to support the currency while being unable to hit its fiscal or inflation targets.

A centrist government got back in in 2019, began to reverse some of Macri’s policies and negotiated yet another IMF loan package in 2022. But the consequences of Macri’s policies, the impact of the pandemic, European war and climate change, the lack of trust of the population in the country’s political and economic institutions, and an ongoing social conflict between labour and capital over income distribution turned the inflation into hyperinflation once more.

Then in came Mr Milei.

What does it mean to say Argentina is not a monetary sovereign? Even while it retains the peso, there are excessive foreign-currency-denominated debts, in both government and private sector institutions. Given the structure of the economy, peso depreciation feeds
domestic inflation which feeds further depreciation. More foreign debt to resist this adds to the threat of insolvency. A lack of trust encourages capital flight from the peso to the dollar.

It might take another crisis like 2001 to change things for a while, but in the longer term, Argentina needs to diversify its industrial base. It needs to produce more value-added goods and services, reduce dependence on extraction and agricultural exports, and offer savers attractive peso-denominated financial products. Political leaders need to use the power of the government as a price setter to stop the widespread indexation which means external shocks have such devastating effects on the Argentine economy.

When all these things are in place, Argentina could attain the high degree of monetary sovereignty that Australia already enjoys and the logic of my 2014 talk will apply to them, too.

Independent Australia, 8 February 2024,18310

Assoc Prof Steven Hail is associated with Modern Money Lab, Torrens University, Australia. He is also a member of the ERA editorial committee.
This article has been reproduced with the permission of the author.

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