Judging by his appointment of a first-rate economist to his cabinet as Minister of Economy, Argentina’s new president, Alberto Fernández, is off to a good start in confronting his country’s economic problems. Martin Guzmán, with whom I have frequently collaborated in recent years, is among the world’s leading experts on sovereign debt and the problems it can cause, making him the right person in the right place at the right time.
After completing his PhD at Brown University under Peter Howitt (co-author with Philippe Aghion of seminal work in modern growth theory), Guzmán obtained a coveted position at Columbia University, where he forged an academic career and became an influential expert on crucial policy debates at the domestic and global level. He has testified before the US Congress on Puerto Rico’s debt crisis and spoken at the United Nations about the need for a better international system for resolving sovereign debt crises. In recent years, he has divided his time between New York and Argentina, where he is a professor of macroeconomics at the University of Buenos Aires.
When former President Mauricio Macri took office, his economic team openly admitted that while they had inherited many problems, they started with one major advantage: A low level of debt. They gambled on a set of policies — making, for instance, untimely and unnecessarily large cuts in export taxes, paying off old, defaulted debt to so-called vulture funds with unconscionably high returns, and taking on new high-interest, long-term, dollar-denominated debt, all in the hope that market-friendly signals would lead to a rush of growth-spurring foreign investment. Even at the time I thought it was a foolhardy gamble.
The rest is history. It didn’t work out, and as matters went from bad to worse, Macri compounded the mistakes. More borrowing, including a $57 billion programme with the International Monetary Fund. Austerity. Misguided sterilisation efforts to prevent inflation, which built up a debt overhang. The worst of all possible worlds was soon at hand: More inflation (reaching almost 60 per cent in the current year), higher unemployment (already at double digits and rising), and the re-imposition of the exchange controls, the removal of which Macri had hailed at the outset of his administration as the cornerstone of his economic policy.
As a result, Fernández inherits a far worse economic situation than Macri confronted: Higher inflation, higher unemployment, and now, a debt beyond Argentina’s ability to service. Doubling down on a failed policy won’t work; nor will returning to what preceded it. That’s why it’s so important that Fernández has appointed a knowledgeable, brilliant economist who combines youthful energy with a wisdom well beyond his 37 years.
Given the mess that Macri has handed Fernández, there are no magic bullets. It is easier to say what not to do. As Fernández has put it, one doesn’t solve a problem of excessive debt by taking on more debt. Nor does one solve a problem of recession and unemployment by imposing more austerity, which in every recession always leads to more economic contraction. The reality is that there will be no substantial private-sector flows in the immediate future, no matter what policies the government enacts.
But Argentina must husband its limited resources, devoting them to reigniting the economy. One hopes that the multilateral development banks will provide countercyclical lending for investment projects that spur growth and poverty alleviation (under Macri, poverty has once again grown enormously, to more than 35 per cent of the population). There is enormous potential. Tourism, for example, boomed after the last major devaluation. Argentina has first-rate universities and large numbers of highly educated, entrepreneurial people.
Bondholders won’t necessarily be thinking, however, of Argentina’s people or of the country’s long-run potential. Many of them will be thinking only of the short-run gains from squeezing Argentina into more austerity. They will spin a story about a profligate country that lived beyond its means once again, even though they encouraged Macri in his misconceived policies and gave him the money that led Argentina into its current debt crisis. Presumably, they knew there was a risk: That’s why they demanded and received such high interest rates. Some may be more thoughtful and understand that restoring Argentina’s debt-service capacity depends on economic recovery.
In recent months, many other countries in the region have confronted political instability and economic turmoil. It is in no one’s interest that Argentina be added to that list. We should celebrate the orderly transfer of power, and the commitment on all sides to maintain and defend democracy. We should also celebrate the shared vision that any effective economic programme must involve not only shared sacrifice but also shared prosperity when the fruits of that programme are achieved.
Fernández, with Guzmán, appears to be formulating a programme of moderation, avoiding the extremes of the past. Unlike Macri’s agenda, the Fernández programme is not based on big gambles and wishful thinking. It is based on the hard realities of the situation that he has inherited. It represents Argentina’s best chance to achieve gradual restoration of growth. Obviously, the more assistance the international community can provide, the faster and more robust the recovery will be.
The writer is a Nobel laureate in economics, University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent © Project Syndicate, 2019
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