We can't know yet how the markets will behave in Argentina after the announcements made by the economic team, except that the Blue dollar continues to rise. What is clear is that finally the government and its dreamers and/or its grim followers should openly acknowledge the problems that the country faces, at least in the economic area.

Regarding that, there are three central points to understand what is happening, event while not allowing one to clearly predict how everything will end up.

First Point

One common characteristic both in the economic ideology of the populist left and the pseudo-liberalism of the right in Latin America and Argentina in particular, is intellectual arrogance. In one way or another, we have seen the application of probably correct policies, but without consensus, by the right.

At the same time, and more often than not, we have seen the expression of an irrational ideological voluntarism without economic realism on the left. In both cases, one ends up with an economic collapse, trying to follow the principle that "if reality and ideology don't agree, reality is wrong." Perhaps it sounds ridiculous, but in an open or covered-up manner this has been the vision of the Kirchnerist authorities, which they explain in terms of their 'model'."

Second Point

In line with the above, the Argentine government believes that it has beat the economic laws of gravity. The economy goes forward, pushed on by the winds of the 2003-2005 recovery, with the improvement in prices on exports, and the impact of the default and the subsequent imposition of a unilateral, confiscatory and arbitrary solution on the external debt problem.

Eventually, the aerodynamic forces of these factors reversed: prices in descent, serious structural restrictions to achieve growth, and growing international isolation. The government, in the most favorable interpretation possible, showed an incredible ideological ingenuity, and couldn't believe that the economic law of gravity would make Argentina fall into the inevitable swamp created by its economic policies of recent years.

Third Point

Now, with a poor mood and improvisation, the authorities are taking some measures. They are band-aids used dozens of times in the past, adjusting the exchange rate, maintaining controls, but without reducing the causes of the debacle, which are failed macroeconomic policies, and without investment.

On the other hand, the authorities are trying to negotiate with the Paris Club, with arrogance regarding their sovereignty, without taking into account that the creditors are countries just as sovereign as Argentina, and in better economic conditions.

Argentina has no other option but to introduce an austerity plan.

With or without the IMF, Argentina has no other option but to introduce an austerity plan — or a classic model — with policies of reducing spending, raising taxes, eliminating crazy subsidies, and monetary control. Social protection will have to be done with systems conditioned from support, like the plans in Mexico and Brazil. An exchange rate and a trade policy without arbitrary restrictions will have to be accompanied by policies to support productive investment, reinforced with the resolution of the debt problems with the Paris Club and the holdouts.

This is the only practical solution for Argentina, if it wants to recover a minimum of effectiveness and credibility. Otherwise the law of gravity will bring a catastrophic collapse to the sand castle and in the air that the government and its followers believed they'd built and made impenetrable. Oh the cruelty of the laws of physics and economics!

About The Author Claudio Loser

Dr. Claudio Loser is President of Centennial Latin America, Advisor to the Emerging Markets Forum, and Senior Fellow at the Inter-American Dialogue. From 1994 to 2002 he was Director of Western Hemisphere Department at the International Monetary Fund.




www.centennial-group.com