- The Washington Times - Sunday, November 17, 2002

With Argentina sinking deeper into the financial abyss, international financial institutions are debating whether to lend Argentina an additional $9 billion in the weeks ahead. With little to show for the $48 billion already lent to Argentina in the past 20 months, decisionmakers in Washington and the international community urgently need to understand the core causes of Argentina's problems and the obstacles they pose to any meaningful recovery.
First, Argentina's woes are fundamentally political, not economic. Postmortem debates over Argentina's experiments with currency boards and fixed exchange rates obscure the fact that lenders have been treating the symptom rather than cause of Argentina's fiscal malaise. The IMF has correctly singled out Argentina's profligate revenue-sharing system, which transfers more than half of all federal tax receipts to provincial governments.
But the fiscally ruinous system persists because Argentina has one of the world's most disproportionate legislatures: provinces that account for 20 percent of the population and 30 percent of GDP control 75 percent of the lower house. Politicians with a vested interest in maintaining the reckless transfer scheme have a permanent veto over any effort to rationalize government spending. To put the arrangement in context, imagine the impact in the U.S. if Mississippi and Arkansas had more congressional representation than California and Texas.
Second, whatever path the international community settles on, lenders should recognize that Argentina's Congress will not be part of the solution. When lenders approved an emergency $8 billion package for Argentina in August 2001, congressional leaders announced that the crisis was over and declared a recess despite a backlog of 900 bills. Since Congress reconvened last January, half of all sessions have ended without a quorum. Small wonder that only 11 percent of the public professes to have even "some" or "a little" confidence in Congress.
Third, the current antiglobalization rhetoric sidesteps the fact that most of Argentina's woes are self-inflicted. A 2001 Pricewaterhouse-Coopers survey estimates that corruption and opaque regulations cost Argentina $14 billion in forgone foreign investment annually. The World Competitiveness Report ranks Argentina on par with Bulgaria and Botswana for transparency, and Transparency International ranks it just below Ethiopia in terms of good governance.
Argentina's cumbersome pension and tax systems are typical examples. Tax evasion costs the government $17 billion annually, an amount equal to 40 percent of the federal budget and more than enough to service the $11.7 billion Argentina owes the international community next year. Pension fraud costs the federal coffers $800 million annually, 3 times what Buenos Aires spends on the Ministry of Justice or of Education. Curiously absent is any political will to clean up the system. Since 1999, Argentina's Anticorruption Office has opened criminal investigations against 1,784 public employees, but has not secured a single conviction. In Argentina, corruption is not a blight on the system; it is the system.
Argentina's prospects are especially bleak because the political crisis there will get worse before it gets better. Leading candidates for the March 2003 presidential elections include Rodolfo Rodriguez Saa, a provincial governor who used his one-week stint as interim president last year to default on Argentina's foreign debt; Elisa Carrio, a populist who blames the U.S. Treasury Department for her country's woes; and former President Carlos Menem, only recently released from house arrest for arms trafficking. With such front-runners, it is not surprising that 27 percent of potential voters say they will cast an intentionally spoiled or invalid ballot on Election Day, according to a recent Gallup poll.
What the United States does or doesn't do in Argentina will have a disproportionate impact throughout the region. For better or worse, Latin America's political elite view Argentine as a showcase for U.S.-backed reforms. Argentina has been under some form of IMF program for 18 of the last 21 years, and during the 1990s Argentina closely tied itself to Washington, backing the U.S. in 95 percent of all U.N. votes and sending peacekeepers to a dozen international hot spots.
Populists regionwide are eager to use Argentina's debacle as evidence that Latin America should scrap market reforms. Brazil's next president, for example, eagerly blames "the Washington Consensus" for Argentina's woes, while populists in Bolivia, Peru, Uruguay and Venezuela are claiming market reforms will lead their country to Argentine-style ruin.
Where, then, does Argentina's crisis leave the United States? The short answer is that Washington is left in the worst of both worlds: unable to remedy Argentina's fundamental ailments, but squarely in the line of fire for all that goes wrong.
Failure to devote more resources to Argentina will trigger claims of U.S. neglect and isolationism, but additional aid will bring charges that Washington is foisting austerity on an already suffering people.
Even then, more aid may make Argentina more nettlesome, not less. Under fire at home for allegedly selling out the motherland, President Eduardo Duhalde has begun playing to his domestic left to demonstrate his nationalist credentials, launching rhetorical broadsides against U.S. policy toward Iraq and bemoaning "U.S. ignorance and neglect." There is no question Argentina needs help. The question for Washington is whether Argentina deserves it.

William Prillaman is a federal executive fellow at the Brookings Institution. The views expressed in this article do not necessarily represent those of the U.S. government.


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