C.R. Experts: Argentina Must Accept Its Mistakes
By Christine Pratt
Tico Times Staff
cpratt@ticotimes.net

Lack of faith in politics and politicians, political parties that can never seem to agree on anything, a government that sinks deeper in debt by overspending its budget…

Four of Costa Rica’s top economists used phrases like these to describe some of the root causes of Argentina’s economic crash. But the quick exchange of glances taking place in their entrepreneur-filled audience this week left little room for doubt – the economists could have been describing Costa Rica.

Central Bank President Eduardo Lizano this week joined fellow economists Alberto Trejos, Thelmo Vargas and Jorge Guardia to gauge Argentina’s tortuous struggle back from virtual bankruptcy and civil chaos that, by Jan. 1, led it through five presidents in less than two weeks.

The experts, assembled by the Costa Rica Chamber of Commerce and the Costa Rican/American Chamber of Commerce (AmCham), were quick to note important differences between Costa Rica and Argentina that could prevent a similar crash here.

But the Costa Rican government’s continual overspending, with no apparent end in sight, is reminiscent of Argentina’s own fiscal irresponsibility that exacerbated the crash.

Costa Rica’s "internal debt," the obligations it accumulates when it sells bonds to its own public-sector institutions, such as the state-monopoly power and telecom company, ICE, to cover its spending deficit consumes some 40 percent of its budget.

"In Costa Rica, the internal debt is no longer the problem of a single administration, but rather of several," Lizano told the approving audience of a debt that can no longer be paid within the span of a four-year presidential term, but requires fiscal consensus and commitment that spans administrations.

Guardia added, to audience chuckles, "It’s just as (presidential candidate) Abel Pacheco says: ‘Debts have to be paid.’" Folksy Pacheco readily admits that his knowledge of economics is limited.

According to World Bank figures, the country’s foreign debt totaled $4.5 billion by late 2000 – slightly more than half of its export income that year of $7.7 billion. By comparison, Argentina’s debts to foreign lenders are some five times more than its total 2000 exports of $31 billion.

Many analysts consider internal debt easier to manage, because it’s money the country owes its own public institutions. Foreign lenders, such as the International Monetary Fund (IMF) are less flexible – and less forgiving.

Exports generate dollars needed to satisfy the productive sectors’ demands for credit, the experts explained. Argentina’s dollar deficit, driven by its lackluster export sector, was unable to supply demand for the credit in dollars among the country’s own exporters and small- to medium-sized businesses.

Argentina pegged its peso to the U.S. dollar in 1991. The December crisis obliged current President Eduardo Duhalde to allow the overvalued peso to float against the dollar.

Economists Guardia and Vargas worry that Argentina has yet to show serious resolve to control its central government and provincial deficit spending. Failure to do so could result in Argentines’ rapid loss of buying power as salaries fail to keep up with rising prices on consumer goods.

By comparison, the Costa Rican Central Bank daily devalues the colón to keep its value comparable with the dollar. And Lizano told the press last week that the Central Bank has already cautioned state banks about their growing portfolios in dollar loans, which in some cases total 70 percent of total credit.

An IMF report, released last week, warned Costa Rica about the dangers of its banks growing dollar credit portfolios at a time when the devaluation rate on the colón is slightly higher.

The experts are encouraged by current President Miguel Angel Rodríguez’ commitment to providing credit to smaller companies – a commitment shared by candidates Pacheco and Rolando Araya, who will face each other in a runoff election April 7.

Costa Rica’s fiscal deficit closed 2001 at about 2.3 percent of gross domestic product – less that the expected 3.3 percent. Analysts say its too early to tell if the government’s alleged increased tax collections caused the improvement.

After the crash, Argentina froze all dollar bank accounts, provoking the wrath of the middle class, which took to the streets in protest. The measure, known as the corralito (little fence), was designed to stop bank runs, but it also succeeded in slamming the brakes on consumer spending.

Part of Duhalde’s proposed economic plan would unfreeze dollar accounts, but oblige banks to release funds only in pesos, and at a highly disadvantageous rate of 1.4 pesos to the dollar. The measure may appease Argentina’s cash-poor consumers, but Costa Rica’s experts agreed that it won’t be enough if citizens there never get behind their government’s efforts to halt the economic slide and stop blaming outside sources, such as the IMF, for the country’s woes.

"Argentina’s problem was made in Argentina, and was not the result of what foreigners did to Argentina," insisted Trejos, of the country’s need to shore up its finances and take responsibility for its own mistakes.

Many analysts point to the IMF’s role in the Argentine debacle, saying that the institution loaned Argentina funding the country was unable to repay, and then imposed restrictions on the economy that the country was unable to endure (TT, Jan. 18).

All Costa Rica’s experts agreed on the need for Argentina to do whatever is necessary to forge a new agreement with the IMF to restore international confidence in the country’s economy.

"The country can expect no new financing or much foreign investment without it," Trejos said.

Lizano adamantly defended the need – and the ability – of Argentina to seek multi-party consensus to choose its own path.

"Argentina has excellent economists who know very well what needs to be done," he said. "They need to find an Argentine solution to their problems, something the people can support, and stop trying to only do what the U.S. or the IMF tells them to."

Duhalde’s Peronist Party doesn’t have a majority in Congress, so encouraging all feuding parties to agree on economic reforms that transcend party colors and terms of office may be the biggest challenge.

Given the four-party diversity of Costa Rica’s own recently elected Congress, which takes office May 1, the success or failure of its Argentine counterpart in passing needed legislation could serve as a model closer to home.