La Argentina que merecemos by Roberto Lavagna
Roberto Lavagna, Argentina’s economy and production minister from 2002–2005, steered his country through one of the most tumultuous periods in Argentina’s recent economic history. Taking office in the depth of the economic recession, his restructuring of the financial system helped create the conditions for recovery while also making foes along the way. In La Argentina que merecemos (The Argentina We Deserve) he reflects on policies implemented during the recession, while also looking ahead to how Argentina can achieve long-term and inclusive growth.
A well-known critic of the free market—he offered defaulted bond-holders harsh terms as part of the 2005 debt restructuring—Lavagna starts his book with a phrase slightly different than a standard development book would use: “I believe that the same dream unites all Argentines: to make Argentina that country of opportunities that we [once] knew to have…” Usually policymakers from emerging economies start their books with something along the lines of: “I believe all citizens of [insert country name] share the same dream… To make this a place where every member of society has the capacity to fulfill his or her dreams...”
But Argentina is not like any other emerging economy. In the early twentieth century, Argentina was one of the richest countries in the world, with per capita income reaching 80 percent of U.S. levels, a figure that now stands at 30 percent. An almost complete lack of economic policy cohesion and a perennial incapacity “to stay the course” and constrain ideological swings have steadily reduced Argentina’s wealth and global standing.
Lavagna recognizes that policy volatility has generated this terrible social outcome. His solution to the long-standing constraints on Argentine development comprises three very straightforward policies: consolidate the economic base to ensure lasting economic growth; focus public and private policies on recovering Argentine social mobility through ensuring effective income redistribution and equality of opportunities; and transform the relationship of public institutions with civil society.
These all make sense, but they appear less cohesive when Lavagna describes them in greater detail. For example, he believes that consolidating the economic base can be achieved by implementing shock policies aimed at ensuring a competitive real exchange rate, while protecting and encouraging domestic and foreign investments and boosting total factor productivity. At the same time, Lavagna argues that the government needs to boost domestic demand by increasing salaries and pensions and that tax policy should focus mostly on taxing dividends and capital gains.
All of this is easier said than done. Virtually all economic development evidence shows that it is very difficult to lure foreign direct investment to a country that taxes capital gains and dividends heavily. This is especially true if a country lacks other investment attractions such as an extremely competitive infrastructure base, a very educated labor force or, at the other extreme, an extremely cheap labor force. Argentina does not score high on any of those fundamental benchmarks.
My critique is not ideological. It simply reflects a fact of globalization: capital carries no patriotism. Capital will go to the countries that welcome capitalists, not to countries that place adverse conditions on the modus operandi of capitalists, which is to make a large profit in return for taking risk. The experience of Ireland and Chile demonstrates that low taxes for capital holders is a key component of any capital deepening process. The same criticism is applicable to the concept of boosting domestic demand by increasing salaries and pensions. Decreeing higher salaries (by an executive or legislative decision) is inconsistent with a country being able to achieve higher levels of total factor productivity.
The author also fails to elaborate on other Argentine inefficiencies, which in my view explain the under-performance of its economy since the turn of the last century. For example, the World Bank’s Doing Business 2010 report ranks Argentina as 138th among 183 countries in terms of ease of doing business. In Argentina, it takes 2.8 years to close a business, and the average recovery rate of invested capital stands at 29.8 percent. These challenges need to be addressed.
The book devotes considerable attention to the Nestor Kirchner Administration’s [2003–2007] destructive and ultimately regressive energy policies. Here, he is right on target. Lavagna criticizes the government for its management of electricity energy price controls after the currency devaluation. The lack of new investment in the energy industry is blamed on the decision to impose a price freeze on public utilities at 2001 dollar equivalent levels, which implied at that time, a reduction of more than 60 percent in the real value of the price ceiling.
The large social inefficiencies caused by the energy pricing system represent another challenge. For example, the price of natural gas for industries—delivered via pipelines—continues to benefit from a massive subsidy, while the poor who use gas in canisters for cooking and heating receive no subsidy. The net result: the poor subsidize business and the rich.
La Argentina que merecemos does not leave the development discussion solely to economics. It also focuses on other social, political and economic concerns, such as addressing the cost and quality of education, boosting investment in science and technology, accelerating infrastructure investment, and improving health care.
Lavagna believes that the 2001 crisis was a wake-up call for the country. He writes that Argentina must now use the current positive environment to take a qualified step toward development. But it must do so in a way that finds alternatives to the usual patterns of economic development, which for the most part continue to be based on the concept of trickle-down economics with a “social component”—namely the redistribution of income via targeted social policies.
The former economy minister, though, does leave out one key factor: the link between foreign capital investment and economic growth. Unless this is addressed, Argentina will miss another development opportunity. Still, this book is a good read. It will help readers understand why Argentina’s ruling class, unlike Chile’s, seems to be stuck in a perennial search for a nonconventional developmental “golden goose” versus “tried and true” economic principles.