During a visit in 1976 to Buenos Aires, I discovered that taxis charged less than public buses. This was because of the confusion and economic turmoil the country was going through. Argentina was struggling with hyper -flation, deteriorating economic conditions and even riots.
With all this on his mind, when Carlos Menem became president, he appointed Domingo Cavalo Finance Minister. As a professional, a former official and economist with Argentina’s central bank, Mr. Cavalo began making his financial reforms.
Despite the opposition of many advisers, Mr. Cavalo decided to peg the peso to the dollar. This step was aimed at giving investors more confidence in the Argentine economy. In fact, Mr. Cavalo’s reforms did well and inflation decreased from 3000 percent in 1991 to 1.6 percent in 1996 while production increased by 230 percent.
Mr. Cavalo decided to resign, because he did not want to be associated with the political corruption around him. The Argentine economy that had prospered during the 90’s, then plunged into financial chaos. One of the main causes for this deterioration was the peg of a local weak currency to a strong one, in this case the dollar.
This remedy by itself isn’t effective because other economic elements remain subject to international forces.
It needs to be complemented with political and internal economic reform. As it was, foreign investments were not long-term and when they were withdrawn, the society collapsed, resulting in rioting.
When a government adopts protectionist measures in reaction to such a situation and blames businessmen for the problems, it will solve nothing. The successors to Mr. Cavalo failed to rectify Argentina’s core problem: debt. The prolonged crisis that followed allowed foreign banks and multinationals to take their assets and run, leaving the country to its fate and leading to the resignation of President De la Rua.
The freeze on the debt repayments as ordered by his successors is only a short term remedy.
A total political and economic reform is needed, one that will have the acceptance of the lenders.
Hence, managing an economy or tackling monetary issues isn’t as simple a matter as some of our columnists and writers seem to think.
The core issue with deteriorating economies is that domestic and international debts have to be repaid or the consequences will have to be faced. It is no secret that debts or loans in default have ruined even superpowers in the past. I therefore believe that by the middle of this century we shall see the strong USA at the mercy of its debts and debtors. As a result, the dominance of the US dollar will gradually lessen or even completely vanish.
In brief, clever economists and politicians see that a strong and pragmatic economic policy is a must for the welfare of a nation.
Rhetoric and slogans alone do not work as evidenced by the failure of the United Arab Republic.
This initiative by Egypt and Syria, which in itself was good, did not pay sufficient attention to basic economic issues.
Instead they should have listened to the small shop owners in both countries who had signs saying that they sold only for cash and would not give credit.