Limits of technocratic policy making -- Lessons from Argentina

Limits of technocratic policy making -- Lessons from Argentina

Anis Chowdhury
Professor of Economics
University of Western Sydney
Australia
Senior Economist
United Nations Support Facility
for Indonesian Recovery (UNSFIR)
Jakarta

The culmination of three and half years (1998-2001) of
recession in the sudden collapse of the Argentine economy and the
ensuing political crisis last year was not surprising given
Argentina's history of economic crisis. During 1981-1990, the
Argentine economy contracted by -1.3 percent a year.
Hyperinflation ravaged the country in the 1970s and 1980s, and by
1989 the inflation rate reached nearly 5,000 percent. It needed
drastic measures to put the economy on track. The task was
entrusted to Domingo Cavallo (1991-1996).

Cavallo came to office with a deep commitment to change the
economic system, and he was given full authority to right the
economy. The president allowed Cavallo to become the most
influential person in the cabinet. All other parts of the
executive involved in economic affairs, which in other countries
tend to have cabinet ranking (e.g., energy, industry, finance,
trade), were formally subordinate to the Ministry of Economy.

The Ministry of Public Works was merged with that of
Economics. State-owned banks were governed by the Ministry of
Economy. The central bank was informally subordinate as well
(Cavallo chose the central bank president). All these created the
most powerful ministry of the economy ever assembled in
Argentina's democratic period, the peak of the state's
technocratic development.

Cavallo recruited a cadre of highly trained, like-minded
technical experts to fill bureaucratic positions. In his first
year in office, Cavallo introduced the largest number of economic
reform bills ever introduced in one year. The radical market-
oriented reform pursued by Cavallo produced dramatic results; the
economy grew by close to 7 percent a year between 1991 and 1995.
The Tequila crisis of 1995 which caused the economy to decline by
-2.8 percent was very short-lived compared to other Latin
American countries. It came out roaring from the Tequila crisis
within a year and managed to grow at about 6 percent between 1996
and 1998.

However, unemployment, poverty and inequality continued to
worsen even before the Tequila crisis. The unemployment rate
soared from 6.5 percent in 1991 to over 17 percent in 1995, the
number of people living in poverty increased from 22 percent in
1993 to over 27 percent in 1995, and the Gini coefficient (a
conventional measure of inequality) rose from 0.45 in 1992 to
0.47 in 1995. Cavallo himself left the Cabinet in 1996 in the
midst of brewing social discontent.

The new coalition government of De la Rua who came to power in
1999 appointed Jose Machinea as Finance Minister. Machinea's
appointment was greeted positively by international capital
markets and multi-lateral agencies as evidenced by flow of
foreign direct investment and new credit from the IMF.

However, domestic investors remained unimpressed, and the
economy continued to slide. By 2001 the number of people living
in poverty swelled to over 34 percent, despite near zero or
negative inflation rates, and the Gini coefficient approached
0.50. Investors were much more worried about worsening social
condition and its likely consequences.

However, some analysts blamed the pessimism of investors on
the lack of conviction of policy makers, or "political will", and
called for a more forceful leader. This brought back Domingo
Cavallo. He demanded and was granted special powers to fix the
economy by decree. All major policy requests were granted: Labor
market reforms, several tax increases, a special powers act in
April 2001 and a zero-deficit rule in the summer of 2001 that
involved the cutting of wages and pensions and making their
recipients junior to bondholders; budget bills were passed on
time.

But the investors reacted negatively; with the passing of
every decree, the market reacted with a sharp rise in country
risk. And at the end, destiny proved unavoidable -- the country
exploded in violence and political crisis, and the economy
declined by 11 percent.

What can we learn from the Argentine experiment with
technocratic policy making and rule by decrees? There are at
least four lessons. First, political will cannot be generated by
the appointment of strong economic ministers, or by-passing due
political processes. Second, the market players are much smarter
and understand the futility of such attempts. They know that rule
by decrees is not sustainable in a democracy and hence respond
negatively.

Furthermore, investors give more attention to other factors,
most importantly social cohesion, than purely economic variables
such as budget deficit, inflation or interest rates. Third,
people may not be willing to accept austere measures that lead to
a prolonged economic stagnation. Fourth, in a nascent democracy,
the issue of inequality and social justice (as manifested in mass
unemployment) cannot be ignored and made subservient to grow
first philosophy. The government has a stabilization role as
well, as it must provide public goods adequately.

The views expressed herein are entirely personal.