Failure to Embrace Free Markets Has Doomed Argentina

By Paul Gessing

Recently, bureaucrats from the International Monetary Fund have joined a chorus of ill-informed commentators in blaming Argentina's economic crisis on everything from the peso-dollar peg to free market reforms of the 1990s. Not only are these viewpoints inaccurate, but they also obscure the real culprits: the economically harmful laws and regulations written by Argentine politicians and the equally destructive remedies promoted by the IMF. In the end, Argentina's economy is another victim of high taxes and uncontrolled government spending.

Systemically, the poorly designed system of "Coparticipation" that governs the fiscal relationship between the provinces and federal government is the first major problem. With 56 percent of provincial expenditures directly funded by the federal government and with federally determined tax policies that rule out provincial tax competition, spending in the provinces is insatiable and determined by politics, not the promotion of economic growth.

A symptom of this problem is the philosophy of recently-installed President Duhalde who, as the governor of the largest and most populous Buenos Aires province during much of the 1990s, repeatedly overruled attempts to balance the provincial budget. His big-spending ways led to a $4.6 billion borrowing binge, more than doubling the provincial debt level during his eight years in office. He also increased spending by 22 percent in only two years in preparation for his failed 1999 presidential bid. These scenarios have been played out in provinces throughout Argentina during the last ten years and will continue until the provinces are forced to compete among themselves in a true federalist system.

Getting rid of the fiscally irresponsible "Coparticipation" system is only the beginning. Even after having privatized most of the nation's utilities, the telephone industry, and highways (among other items) Argentina's government simply spends too much. For starters, Argentine students pay no tuition at all to attend public universities. The costs of this system are extremely high as students choose to remain in school for years rather than test the difficult job market. Government employees account for 50 percent of workers in many provinces; their numbers must be reduced dramatically. Heavy taxes have played a large role in driving nearly 40 percent of Argentina's economy underground.

Contrary to advice from the IMF, the best way for Argentina to capture more tax revenue in the long term is by reducing taxes. By promoting economic growth and allowing much of the underground economy to surface, federal tax receipts will begin to rise. Among the most onerous taxes is the 21 percent Argentine equivalent of a sales tax. In addition, labor policies that promote corrupt and confrontational unions have contributed greatly to the staggering 18.3 percent unemployment level and continue to cause low productivity among the Argentine work force. These steps are just a start, but if taken together, the reforms would halt the inexorable decline of Argentina's economy.

Free market policies cannot be blamed for Argentina's collapse because nothing resembling the free market exists there. The reforms and privatizations of the early 1990s temporarily halted a decline that began in the 1940s, when Juan Peron nationalized much of the economy and restricted foreign capital and free trade. Instead of looking back themselves to the nationalist and socialist economic principles of Juan Peron, Argentines and their leaders must re-dedicate themselves to free markets and low taxes. Only sound economic policies can save Argentina and its people from becoming a third-world nation.

Paul J. Gessing is a Policy Associate at the National Taxpayers Union. Last year he studied the Argentine economy as a Research Fellow at Fundacion Libertad in Rosario, Argentina.