By Peter Tase
The Republic of Argentina has been the focus of academic research and publications in Economic – Social Sciences of Professor Steve Hanke, throughout a number of international media outlets and newspapers.
On October 9th, 2019, Prof. Steve H. Hanke, Ph. D., Professor of Applied Economics at the Johns Hopkins University, was interviewed by BN Americas on Argentina’s current economic crisis and recession.
The following is an excerpt of Prof. Hanke’s thoughts on Argentina and the region; for many years he has been the proponent of dollarization in Argentina.
BNamericas notes: “Argentina has a large debt pile and an economy that is in recession. Add to this high inflation and interest rates and it is clear the next president will not enjoy a honeymoon period. Against this backdrop, BNamericas spoke with Steve Hanke, a professor of applied economics at Johns Hopkins University. A proponent of dollarization in Argentina, Hanke helped devise a currency board blueprint for Argentina before then-president Carlos Menem and his economy minister Domingo Cavallo implemented a non-orthodox regime dubbed the convertibility system in 1991.”
According to Prof. Hanke: “dollarization would keep government spending under control, tackle inflation and spur growth.”
The following is an abbreviated version of this interview:
“BNamericas: What are your initial thoughts on Argentina?
Hanke: I think whoever wins this election is really going to be staring into the abyss. It’s a terrible mess but one that they constantly deal with.
BNamericas: Why is this the case?
Hanke: One is that the system itself, the public financial system, is totally flawed because the institutions are very weak and there’s no hard budget constraint in the system. What that means, ultimately, is they always do the same thing: they go to the central bank and the central bank extends credit to finance the fiscal authorities. Once that happens all hell breaks out and the peso ultimately collapses and inflation goes up, and so forth. They can’t keep the money supply under control. Ultimately, the fiscal authorities, the political authorities will get into the central bank.
And what do you get? I think they have defaulted eight times, Argentina, in recent history.
BNamericas: What was your first reaction when you heard about the turmoil following the August primaries?
Hanke: The first thought was: here we go again. This is nothing new. It is standard fare in Argentina because the system is faulty; it does not have any kind of brake on the budgets. It doesn’t have really a hard budget constraint.
There’s only one way to solve any of this: they must dollarize the economy and get rid of the peso. They cannot have a monetary institution that can issue credit to the government. They just cannot have a central bank. You could reform all the political parties, all the financial and fiscal organizations and everything else but I am totally cynical about the possibility of [them] actually doing that.
There really is only one solution: dollarize officially – which is what all the Argentines do anyway; they have billions under the mattress. They know that is the only safe currency and the best place to keep isn’t even in a safety deposit box at a bank because the government can get in and take that; they’ve done it before.
BNamericas: What challenges does the next administration face?
Hanke: They only face one. There is only one thing to do – and that’s dollarize. If they don’t dollarize, the next administration will be staring into the abyss and they will fall into the abyss, like all of them.
The institutional set up is designed to collapse. There is no hard budget constraint that can be imposed on the fiscal authorities. Ultimately, they spend and rob, and who’s going to finance it? They go to the central bank – it happens every time.
Point two is that the political apparatus is totally corrupt. All the elites are involved in the thing; they have all been sucked into this honey trap.
Third, Argentines like to swagger but the technical incompetence is almost beyond belief. They really try to punch way above their weight.
BNamericas: What are the barriers to dollarization?
Hanke: It’s very hard to even get this conversation going in Argentina because, with the exception of a few, highly competent, technical people, most of the elites don’t want to discuss it because they are part of the system, part of the culture.
The average guy on the street has no problem with this. They do it themselves, they want greenbacks.
The real problem isn’t the average Argentine, it’s the elites. You’ve got the political class and then you have the technocratic economists, and they’re all wrapped up in the same ball of wax.
BNamericas: You rule out dollarization then?
Hanke: You never know. It would be a low probability but it could happen because someone looking down the abyss might say ‘I’m not going to go down that route’ and say I want to fix the thing.
Even if Macri did this today he would win the election. All he would have to do is say that we’re going to dollarize. This could be done easily, within 30 days.
BNamericas: What do you think will happen to the IMF deal if, for example, Fernández gets in?
Hanke: That one really is tough. I honestly don’t know. The IMF has not been able to control the thing, even with Macri. The IMF program never worked because they were never able to cut the money supply down.
The [IMF] program itself has been a failure and will fail. All the IMF programs fail in Argentina and they fail for exactly the same reason I gave you: they have no way to force a hard budget constraint in the system. As long as you have the peso, there is nothing the IMF can do except throw good money after bad.”
To read Prof. Hanke’s full interview, please click here.