On May 5, 2004, Argentine president Néstor Kirchner and economics professor Paul Krugman held a conversation about Argentina’s economic predicament. They discussed the crisis of 2001, MERCOSUR, the Free Trade Area of the Americas (FTAA) and Argentina’s economic relations with the United States and the European Union. The event was sponsored by the Argentina Observatory of the Graduate Program in International Affairs at The New School University in New York City.
PRESIDENT NÉSTOR KIRCHNER: I am really looking forward to this because we listened carefully to what [Paul Krugman] said when he predicted the outcome of convertibility long before the end of it. I think back in 1996 or 1997, when convertibility showed the first signs of collapse, when the fiscal deficit could not be supported any longer by the privatization of companies, and Argentina entered a death spiral in which the economy ended up with a debt that was 150 times the GDP. There was increasing indebtedness, increasing inequality in income distribution, and when I took office, the ratio between rich and poor was one to 40. You know, in its good days, the ratio between rich and poor in Argentina was one to seven.
PROFESSOR PAUL KRUGMAN: I’d like to say a few things. The first thing is just to say, obviously, congratulations on the performance. Argentina had a worse crisis even than I had imagined. I think I may have been one of the first to say that convertibility was not going to survive. I said that convertibility would not survive the decade, and I was off by one year. But it did end, and it ended with a catastrophic crisis, which was worse than anything we had imagined. And recovery now is much more rapid than anything we had imagined, and that is a very good thing. It’s a combination of probably hidden strengths in the Argentine economy that we did not realize, and policy, which has been good … in not getting in the way. That is, the pressure to step back into an excessive fiscal and external orthodoxy is very strong and the government of Argentina has been moving to allow a certain ambiguity in terms of debt service and so on while the economy rebuilds and strengthens, and that’s been a good thing.
The convertibility era did not purely come out of people from Washington with bad ideas. There were people from Washington with bad ideas, but it came also out of Argentina’s history, which was 45 years of stagnation, great instability, of course bouts of hyper-inflation, also extremely distorting policies on trade and otherwise. It was an economy where, if you like, the Peronist legacy had gone very bad, and along came people saying, “This country needs reform,” which is true, and “It needs less distortion in the markets; it needs more room for private initiative; it needs stability.” And that, unfortunately, got turned into a program that was not a pragmatic response to the sins of the past, but an extreme ideological response where, instead of a general movement towards freer markets, it became an extreme “We’ll privatize everything.” And most important, instead of saying, “We should have stability; that we should establish a regime where we’re not going to have hyper-inflations,” it became the convertibility law. And what was obvious to me, to some of us, fairly early on, was that this put Argentina into a straightjacket that was inappropriate and was not, ultimately, going to be sustainable. And maybe we can come back to that, but it never made sense to have [the peso] pegged to the dollar. One more thing to say: this was not the United States remaking Argentina in its image. The reality is, we do not have a convertibility law in the United States. We have a very activist monetary policy. We do not respond with extreme fiscal austerity at the first sign of deficit, to say the least.
NK: But the fact of the matter is that in Argentina, when the convertibility law was enacted in 1991 … [it] helped curb inflation. In Argentina we had a culture of hyper-inflation, and convertibility initially brought monetary stability, which brought three or four benefits, which led some to downright fall in love with the system. Between 1992 and 1994, there was a small surplus and some fiscal balance under convertibility, and there was a certain improvement in Argentina’s economy. Poverty went down. Particularly, you could see improvement in the middle-class.
After the first fiscal deficit … we spent the funds from the privatizations of companies. Well, some of the money was spent; we are still wondering where another part of it might have gone, and I want to be polite in saying this. Of course, when what little funds that were left were used, we started to become heavily indebted. And here, Professor, I always recognize the responsibility of our local lenders, but also the responsibility of international lending agents, particularly the International Monetary Fund. And the World Bank is also another agency that we could talk about. When it comes to the IMF, today it demands that we achieve a very high surplus level and tells us off for not having been serious in the past and for not having fulfilled our contracts. Well, the IMF actually nurtured this system and protected it. It protected the indebtedness that now represents 120% of our gross domestic product. And so I think also that much of the responsibility for Argentina’s debt lies with the IMF, which allowed this sort of indebtedness and encouraged these policies, while praising our system as the best possible one. But now our country is growing at 8%; at least, that’s the figure for 2003, and we expect the figure to be a little higher for 2004. And the recovery has been without any fresh funds from the IMF—not a single cent. So we are surviving using our own funds. All of the recovery is based on the Argentine economy itself. You know that only three months before the collapse of convertibility in 2001, the IMF gave Argentina another $9 billion in credit for service. So I think you need to call a spade a spade.
Of course, we need to deal with the problem of private debt. ... Because often some people say that Argentina doesn’t want to pay, and actually Argentina does want to pay, but we want to be a serious and responsible country once again. When we say that we can pay 26% or 25% of our debt, and if you think about that $91 billion in private debt, when you actually responsibly and seriously think about it, the bonds that were issued paid perhaps 20% a year, and in the rest of the world the interest rates were between 1% and 2%, or perhaps 3%. So in Argentina, bondholders could earn in a year what it would have taken ten years to earn in the rest of the world, which is obviously, completely illogical.
Now all those who opened the market, who went into these major debt swap programs, and all the things you are aware of, said, “Go and invest in Argentina.” But it was obvious that these people ended up being responsible for much of what happened. When a business goes bankrupt you will sustain losses. Now, Professor, we are told that we need to pay more, but Enron, for instance, went bankrupt in the U.S. and it pays 14 cents for each dollar. So I think we could say that we’re almost extremely generous. We want to pay 25 cents for each dollar.
PK: Let’s talk about the crisis first and how it happened, and my interpretation of what went wrong. There are two extreme views. One, which is the one that you will still hear from much of the financial community and from the true believers, is that it was all about Argentina being fiscally irresponsible. That Argentina simply did the liberalization wrong and it was irresponsible and ran big budget deficits and ran up all of this debt, and therefore these sins were then punished. That is not completely untrue, there clearly was some loss of fiscal control. … But if you actually look at Argentine deficits during the nineties—particularly if you look at the primary budget, not the interest payments—there’s nothing really dramatically irresponsible there.
The other extreme version, which you hear a little bit, is that it’s everything about liberalism—everything about opening the markets and so on—that was part of what went wrong. And everything about reducing tariff rates or removing restrictions contributed to the crisis. I don’t think that’s right either. Much of that, had it been in the right environment, would have been productive. The real key to what went wrong—I mean there are many things—but I think the central point has to do with convertibility on the currency. Argentina made this bet on “one peso-one dollar,” which from the beginning seemed to me to be a very foolish thing to do.
The fact of the matter is that Argentina … is not in the U.S. periphery. It’s a long way from the United States and it trades heavily with many parts of the world, and by locking itself to the dollar it found itself locked to a currency of a country with whom its economic relations are not that intense. And, therefore, a rise of the dollar against the euro could be a big problem for Argentina, though it had nothing whatsoever to do with Argentine policies.
There was an important enabling role for the international financial institutions. The IMF has a lot to answer for here, particularly during the last two years when it was—actually I would say from 1998 on—it was dead obvious … the system was not sustainable. I knew it, everyone I talked to knew it, everyone who was trying to understand the situation said, “This is just not going to work.” And still, Washington was continuing to say, “It’s good, it’s good, and we’ll lend you some more money, and just a little more pain. A little more austerity and you’ll be out the other end.” That was a very bad time, a very bad set of signals.
Where are you now? It’s certainly wrong for Argentina to come anyplace close to paying that debt at par. You don’t want to live another ten years under the shadow of unresolved debt issues. I think the IMF does not have a lot of moral authority here, but again … we don’t want to turn the clock back to 1989 either. So the question is to find this sort of middle way.
NK: To begin with, I’m an advocate of very healthy fiscal policies. I like very balanced monetary policies and I’m a full advocate of a free-floating exchange rate. I think the country should also have a very high level of reserves. When I took office the country had $8.8 billion in reserves, almost $9 billion, and now we’re about to reach $16 billion, which means that there has been very strong growth. This gives us strength and provides a strong foundation and makes us a much more predictable country.
Having said this, it is also true that Argentina must consolidate its situation. Think about it, during the 1990s investment was in services. Actually, between 1995 and 2000 Argentina destroyed its own domestic industry. It stopped producing. Our domestic industry was completely de-nationalized. It actually disappeared; there wasn’t even foreign capital anymore. We were importing and that was a very hard blow to our economy. If you look at the financial system, it suffered this foreign ownership process that led capital to be mostly taken abroad, instead of investment staying in Argentina.
Now what I can’t believe, I don’t believe, is that international financial consultants and others in 1996 and 1997, particularly after the Tequila Crisis, could still believe the system was sustainable. And ultimately, they were the ones who gave advice and formed lobbies to defend certain policies that they were interested in.
PK: Let me say a word on behalf of international financial consultants. They’re not necessarily evil; sometimes they really are just stupid. At the time you were speaking about there—about 1996—I thought that the lesson of the Tequila Crisis was that convertibility was eventually going to produce a disaster, although I didn’t realize how big of a disaster. But it was very difficult to get anyone to agree with that. On the contrary … there were a number of articles written in places like Forbes or The Wall Street Journal taking the Tequila Crisis to be a demonstration of the superiority of the Argentine system and how convertibility assured Argentina’s future, unlike those foolish Mexicans who had allowed their currency to float. … I think the correct description is that a lot of the financial analysts are essentially herd animals, and they follow the stampede in whichever direction it’s going. And there was a great belief that Argentina, because it sounded very responsible—one peso-one dollar forever—that that was going to be the answer to all the problems.
I get a little nervous placing foreign ownership of the banks as a central problem. There was a time when people were telling me that because Argentine banks were foreign-owned there could not be a financial crisis, because the banks would all be backed by their First World parents, and that turned out to be untrue, of course. But I think yes, those banks did pull a lot of money out of the country at the first sign of danger; so did people in Argentina. My general view is that when greed and fear interact, it doesn’t really matter what nationality the owner of wealth is.
I’d like to hear your thoughts about external relations, about trading areas, trade policy, and perhaps then I can respond a little bit to that.
NK: I think Argentina must first work very hard on Latin American integration. Argentina and Brazil have a very prominent role to play to complete the integration of MERCOSUR. We have a lot of commonalities and agreements with President Lula of Brazil. We believe in the enlargement of MERCOSUR and in bringing in the other Latin American countries. But as you know, Professor, integration also has to do with solidarity in investment and with helping those who are in a difficult position. The E.U. found its way out, and could find its future, because it showed a lot of solidarity towards those who were weaker. The strongest ones helped those who were weak. Look at Spain, which now grows at 2.5%. There was actually an infrastructure fund that helped [Spain], and that was a fund provided by the other E.U. members. If you look at MERCOSUR, if Argentina and Brazil can normalize, they should strongly help Uruguay and Paraguay, and also work for Bolivia to become integrated—for us to achieve real results. Otherwise, you just deepen asymmetries and end up creating total integration at the institutional level that would end up being void in terms of the possibilities for actual progress. There are countries in Latin America like Ecuador and Peru that pay 30% of their GDP towards their debt. This is why the approval ratings of the Peruvian president are so low—8%.
It’s not just about growing, by the way. The point is how do you grow? We think that integration into trade blocs, when dealing with the E.U. for instance, can be very important, and when dealing with the U.S. of course. But I think the U.S., which pushes so hard for the FTAA, must realize that someday it has to do business even when it won’t get immediate profits and immediate returns. It must have the courage to go into business that may, perhaps, bring a return in the not-so-immediate future. And this is what I also tell Mr. Bush, and he looks at me puzzled when I say this. I think that if we want to achieve integration in the Americas, the investment of the U.S. in the Americas is essential. This is essential to end asymmetries because if we integrate by fighting these asymmetries you will find that the FTAA will truly be beneficial to the U.S. and to all the countries that take part. This is why I’m not against integration in that framework, but I wouldn’t like an FTAA that worsens injustices and differences in the region, and that is key.
Also, we must understand that we need to manage our economies in a competitive way; we need to strongly open up markets around the world. You know, one of the countries that Argentina sells to most is China. We intend to visit China in the next several months, and this is something we are doing with President Lula from Brazil: we are trying to open up all of the world’s markets. We’ve prioritized our bloc-to-bloc discussions with the E.U. We’ve also prioritized our relations—not carnal relations, but serious and responsible relations—with the U.S. And mainly what we want to do is to find a solution to our problems. This is something I’ve discussed with my finance minister and with my foreign minister, and I said, “Just as there is OPEC, we need to have a common food market.” Consider if, as we intend to do, we got Argentina and Brazil to pursue a common policy in the field of soybean production. Consider that we represent 70% of the world’s production. What we need to do is to use all of our imagination and creativity—this is just one example, of course.
PK: I think that the Free Trade Area of the Americas is, at the moment, a mirage. It’s a mirage in two ways. I don’t think that the United States is, at this point, prepared to make the sort of effort that would be required to make it something genuine. Also, the geography is misleading. We say that we’re all in the Americas, but as you say, Argentina’s major export markets are in many other places as well, and it doesn’t really make sense. And before, some people were asking me, “Well, what about the European Union? Isn’t that a model for the Americas?” I think that the answer is that it may be a model for MERCOSUR. That means it’s a group of geographically close countries sharing common values, where it’s much more than just a trade agreement. I don’t see that as a possibility in the near term for the FTAA.
When I think about Argentina … the pace of recovery is so rapid that quite soon, at this rate, Argentina will be back to having regained the ground lost in the crisis. And any further gains after that are a question of what an economist would call “potential growth.” I guess the question would be, perhaps you can tell us, what is your vision of how that will happen in the years ahead?
NK: We must consolidate the micro- and macroeconomic policies for stability and predictability, that is clear, and we must properly deal with our current default problem. It is true that we’ve breached all contracts in Argentina. So talking about a potential for growth would probably be inappropriate. I shouldn’t be doing that irresponsibly. But I think that if we continue to work seriously the way we are doing now—with a healthy fiscal policy and with sound monetary policies, with a proper competitive shift, legal security, and of course with integration and social inclusion policies—the country has big chances to grow, and for a long time.
