Monday, February 16, 2004

Argentina’s flouting the rule of law explains the poverty of nations. Adam Smith’s “Wealth of Nations” explained how a non-governmental “invisible hand” in free markets fuels national prosperity. In contrast, as the Argentine example corroborates, national penury is explained by the “black hands” of government leaders who torch the rule of law and private property rights for political benefit. A succession of Argentine presidents since 1999 have ruined the nation’s fortunes by making the laws and contractual promises akin to a restricted railroad ticket, good for this day and train only. Just last week, for instance, incumbent President Nestor Kirchner fatuously insisted that to pay government bondholders more than 10 cents on the dollar would be tantamount to genocide against the people.

National economies stagnate without legal predictability and scrupulous protection of private property. Without both, business risks climb, investment tumbles, capital flight gallops, unemployment escalates, and the best and brightest emigrate. As James Madison amplified in “Federalist 62”: “What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment when he can have no assurance that his preparatory labors will not render him victim to an inconstant government?”

Since 1999, Argentine Presidents Fernando de la Rua, Eduardo Duhalde and Mr. Kirchner have made economic rights more precarious than Russian roulette. In December 2001, Mr. de la Rua froze bank accounts when the peso and dollar were at parity. The following month on Jan. 6, 2002, Mr. Duhalde orchestrated the passage of the Law of Public Emergency and Reform of Exchange Rate Regime that crowned him with dictatorial economic powers. He converted the value of bank accounts held in U.S. dollars to that of a floating Argentine peso, which instantly plunged by 50 percent. Many depositors lost much of their life savings. Wealth was generally taken from creditors who were owed money in dollars and given to debtors who were permitted to repay dollar debts with depreciated pesos. Most contracts and loans were denominated in dollars when parity prevailed. But the government authorized small businesses and consumers to discharge their obligations with pesos worth only 28 cents. According to Guillermo Mondino, an economist at Latin Source, “Tenants can’t pay the rent, so landlords don’t pay the mortgage, so banks don’t make new loans. If you don’t have cash, you can’t buy anything, because there is no credit and all contracts have been effectively broken.”

Economics professor Steve H. Hanke thus testified before the U.S. Congress on March 5, 2002: “The [Duhalde] government’s program amounts to destruction of the rule of law, to the imperfect extent it existed in Argentina. The government has changed the terms of some contracts between private parties, suspended the validity of other contracts, and seized wealth from some members of the public to redistribute wealth to other members or to itself.”

On Jan. 26, 2004, Mr. Kirchner revoked a $500 million contract of French-owned Thales Spectrum to manage the airwaves used by mobile phone companies as well as radio and television stations. The Cabinet secretary, Alberto Fernandez, announced that the government would manage the spectrum: “This service can’t be conceded to the private sector. The results of privatization have not been positive.”

Mr. Kirchner has also canceled the contract of a local company to provide postal services and contemplates a government takeover of the enterprise. Argentina’s 25-month freeze on utility rates has crippled its electricity companies, water and gas suppliers, and telecommunications companies. A recent World Bank report deplored a plunging of private-sector investment in infrastructure from $5.2 billion annually in the 1990s, the heyday of dollar parity and privatization, to $200 million in 2002.

On March 5, 2003, the Argentine Supreme Court held unconstitutional the government’s seizure of private property through devaluation of the peso. But enforcing the decree remains problematic, and legal uncertainty continues to paralyze the economy.

The Argentine government has defaulted on $140 billion in public debt. Mr. Kirchner is adamant against repayment terms that would give creditors more than crumbs. Argentina’s access to private international lending markets has predictably withered.

Unemployment has spiraled past 20 percent. Capital flight persists. Poverty hovers over Buenos Aires. A study by Argentina’s University of Social and Enterprise Sciences revealed that a staggering one in five Argentines wishes to leave the country, which ranked among the richest a century ago when Adam Smith’s “invisible hand” was celebrated. Prospective emigrants are younger than 35 years old, unemployed, and sport high school or more advanced diplomas. Spain, Italy and the United States are prime beneficiaries of Argentina’s brain drain.

Mr. Kirchner like his immediate predecessors keenly relishes government lawlessness in economic affairs despite ruination of the country as a whole under their collective leaderships. And it succeeds in Argentine politics by duping the long suffering Argentine people into believing free enterprise is a conspiracy to impoverish workers and consumers.

Bruce Fein is an international consultant and former associate deputy attorney general during the Reagan administration.

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