“Don’t cry for me Argentina” – so begins that beautiful song about a beautiful country. However shedding tears will not help the Argentine economic crisis that is in the news everywhere. But… there are some lessons to be learned.
Argentina is a young country that became significant in the last quarter of the 19th century as a major exporter of grains and beef. This was based on rich agricultural resources, foreign investment and massive immigration. In a 50-year period the country went from an “unknown” to one of the richest in the world. This was under conservative leadership; but toward the end of this high-growth period the reformist Radical Civic Union replaced the conservatives and then alternating periods of radical populism and conservative military dictatorships followed.
The most famous, and the subject of that beautiful song, were the two governments of Juan Peron. “Peronismo” featured trade unionism, inflexible labour laws, nationalized industries, restricted foreign investment, protective tariffs, and detailed business regulation…all paid for by fiscal deficits and a form of agricultural taxation. These were the means for income redistribution. Deficits lead to inflation, a de facto tax on wealth, and the latter at times fully expropriated profits in agriculture. Economic waste, hyper-inflation, private capital outflows and corruption created economic stagnation from 1970 to 1991.
In 1989 a reform government began the process of structural reform and the country accomplished much. For instance, the sale of government enterprises provided a significant inflow of revenues. The 1991 Convertibility Plan fixed the peso at par; the program achieved wide popular support; and economic growth reached 7.7 per cent in the period 1991-94.
However, the reform process was incomplete. The 1995 Mexican crisis led to a renewed Argentine crisis that Argentina has been unable to resolve. Despite its reform achievements government expenditures still exceeded revenues and the Central Bank exhausted its resources defending an unrealistic exchange rate.
Does any of this sound like the Bahamas? In some ways the answer is “Yes” because the Bahamas is fast moving toward achieving the Argentine model for economic crises.
Prior to 1968 the Bahamas, under colonial regulations, managed its finances on a balanced-budget basis. This meant freedom from public debt. This happy condition was achieved by a currency board that prevented discretionary spending by government beyond the monies in hand. Since 1973 and abandonment of the currency board, there has been steady erosion of the public finances as borrowing and expenditures have steadily increased. The change in monetary regimes and colonial regulations altered the macroeconomic landscape, permitting the government to run up a large public debt that will burden Bahamian taxpayers for years to come.
Back to Argentina: Well, you might ask “Why are you telling us about Argentina’s problems?” The culture is different from ours – different people, history and so forth. It can’t happen here.
In spite of differences there is one commonality. Both Argentinean and Bahamian householders understand that you cannot spend more than you earn for very long. There is a day of reckoning unless it is possible to either increase income or cut spending. If you rely on borrowing money – the circumstances are much the same – the added cost of interest on the borrowed money has also to be taken into account.
Although this is admittedly an oversimplification, the same rules apply to governments and it appears that in Argentina they have run out of both time and the money to pay their bills.
On the income side, we have been very fortunate in having an abundance of sun, sand and sea; and the expanding U.S. economy has resulted in growth in the Bahamian economy as well. We have seen the “fat” years and now that the “lean” years are upon us we might be wondering how we will make ends meet with a declining income.
The government spending spree and redistribution of income actions flout the rules the householder must obey. For example two loans for over 40 million, 100 million dollar loan guarantee for educating students abroad, and a host of handouts – including one for admitted government incompetence remind us of Dr. Milton Friedman’s classic comment:
“When business fails, it shuts down; when a government enterprise fails they pour more money into operations to expand”.
The labour bills have added significantly to the cost of business. Increased government spending means increased levels of taxation which translate into less capital resources available for expansion and new development in the wealth-creating private sector. As in Argentina, Bahamian government policies include wealth redistribution, inflexible labour laws, and high tariffs. The Bahamas is correctly described in the Economic Freedom of the World Study – 1997 as “an overly regulated centrally managed economy”. The same publication states “Argentina’s most serious current problem is a highly inflexible labour market. The rate of unemployment soared …………..”
Could we soon be asking – “Who will cry for the Bahamas?”