Why Argentina again?

As an Economist looking at Argentina you may think that it is a place where you hardly will find any economic sense in their economic policies. What is economic common knowledge all around the world it is proudly challenge there as something that can be change by Argentinians. Someone may think that this is only showing a lack of proper economic wisdom. If this is the case, the question is how to develop a sound economic wisdom where learning-by-doing principles do not hold.

Argentina had experienced numerous economic crises for the last forty years - hyperinflation episodes, government defaults, exchange rate crises, and so forth. Beyond these economic crises, there is almost no one that was caused by foreign impact as international financial markets. All the crises have their basis on either lack of governmental decent behaviour or too strict economic measures as well as a short-sighted outlook on how economics really works.

The peso crisis in 2001 was a well predicted funeral, anyone that have been following the economy in the mid '90 had a certain feeling that Argentina needed to jump at a higher level of productivity if it were to hold the convertibility scheme. But Argentinians did not draw attention on that. They kept expanding public expenditure hoping that this would turn out to be the remedy. They did not even try to devaluate gradually to foster short-term competitiveness giving oxygen to the economy. They did it only when the economy collapsed. Not to being too harsh with Argentina, it is fair to say that the IMF had a part on the malady. Even so, Argentina did not foresee the crisis, but why? The hypothesis is that the average Argentine economic agent is short sighted and over too confident with his own decision. This is passed on to the government, so one has well predicted crisis with very awkward solution.

The same is happening now, though the context is different. The government did a great job taking out the economy from the hole, but then took every kind of mischievous measure that lead the market to loose its confidence gradually. First, drawing INDEC numbers, then nationalizing Pension Funds, at the same time they expanded public expenditure importantly giving an enhancement on the social security net. Evidently, people realized that the Peso was loosing is purchasing power. Inflation was knocking the door although INDEC is using earplugs. The solution was relying on a more stable currency - US dollar. When the government became aware of this, they foolishly attempted to block transaction with foreign currency. In this way, contrary to what they were expecting, they fuelled uncertainty and disbelief towards the national currency. Was not a gradual depreciation, an honest acceptance of inflation, and a more sustainable public expenditure pattern, the main measures towards the solution? Who knows! What is for certain is that Argentinians are scared of the Peso and the Government even scarier of depreciation.

In the mean time, wealth is not growing at fast as it could be. Investment in fixed capital plunged, no one can really believe official figures, and there is an atmosphere of a fore-coming crisis. None of this was caused by a specific external threat to Argentina, neither for a long-term structural problem. All of them were made in home by policy-makers. What once was the beauty of South America, at the first half of last century, has increasingly leaning towards the ugly side. Not for aging, but for lack of wisdom – learning-by-doing seems not hold there, at least up to now.