Final Analysis
==Conclusion
Argentina must take immediate action to increase its level of economic freedom. Liberalizing its economy would reassure international investors and set Argentina on the path toward long-term growth and stability. Specifically, Argentina should:
Adopt the U.S. dollar as its official currency. Speculation about the sustainability of the currency board has helped to increase interest rate premiums on Argentine debt beyond the normal spread between peso and dollar debt. In these circumstances, the best way to address the interest rate premium resulting from currency risk would be for Argentina to adopt the U.S. dollar as its own currency. This would eliminate the risk stemming from the peso-dollar exchange rate and lead to lower interest rates on the country's debt, which is what happened in El Salvador 56 and Panama after they adopted the dollar. 57
Reduce spending and taxes. To spur economic growth, Argentina needs to bolster productive behavior by lowering taxes to increase the incentive to work, save, and invest. 58 To lower taxes without creating an economic disaster, it also needs to slash government expenditures. Cavallo's plan includes a cut in expenditures; but instead of lowering taxes, it would shift the tax burden from businesses to international investors, imposing new costs without allowing the beneficial stimulus associated with an overall reduction in taxes. Restoring economic growth will require much deeper reductions in government expenditures and more extensive tax cuts.
Foster further deregulation. President de la Rúa succeeded in getting a labor reform bill passed by the Senate and the lower house. Argentina should build on this progress by scaling back regulations governing, for example, the ability of employers to lay off employees. The government also needs to scale back the wages and numbers of public-sector employees, since high public-sector wage rates make it difficult to adjust private wage rates. This is particularly true in the provinces, where many public sector workers do not contribute to production and are merely a drain on public resources.
Encourage free trade. Argentina should expand its export markets and diversify its export base by signing agreements with other nations that are receptive to unrestricted trade. Considering the linking of the peso and the dollar, a free trade agreement between the United States and Argentina would be particularly beneficial by providing greater stability to Argentine exporters. The United States is Argentina's second largest trading partner, and reducing trade barriers would enhance that relationship to the benefit of both countries. Argentina will need to open its market in order to facilitate trade talks with the United States. If necessary, it should withdraw from Mercosur as an exclusive trade area; if it wishes to remain a political ally of Mercosur as Chile has done, it could do so.
Strengthen the rule of law. The vulnerability of the judiciary to bribery and political influence has undermined public confidence to the extent that ordinary Argentines do not use the legal system and businesses restrain their investments. The Argentine government must punish corruption more aggressively, insulate the judiciary from political pressure through whistle-blower protections, and increase standards for those employed in law enforcement.
Argentina should not look on these reforms as options. Unless the country resumes strong economic growth soon, it will likely default on its debt and see its access to international capital
markets crippled.
Introduction | Dictatorship | Raúl Alfonsín | Carlos Menem | Fernando de la Rúa
