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Symposium on Argentine Crisis explores causes, solutions

With the War on Terrorism and the turmoil in Iraq in the forefront of the world's focus, the economic crisis in Argentina can get lost in the shuffle.

Albright

But now is the time to concentrate on Argentina and the rest of Latin America, Madeleine Albright, Distinguished Scholar at the Business School's William Davidson Institute and former Secretary of State, said at the Oct. 22 Symposium on the Argentine Crisis at the Business School.

In her opening remarks, Albright said the Americas need to work together to keep the democratic tide rising. "Where there used to be dictatorships, there are now democracies save one red dot 90 miles off the coast of Florida," Albright said. She stressed the need to assist Latin American countries in defeating government corruption and dealing with the negative aspects of globalization so their strides toward democracy are not lost.

Panelists expressed their views about the economic crisis, and what can be done to remedy the situation.

Domingo Cavallo, former Minister of the Economy in Argentina, discussed the crisis in light of the Convertibility Law, which pegged the peso to the dollar at a one-to-one ratio.

Cavallo said the convertibility system was accompanied by a prohibition on issuing pesos without the backing of foreign reserve. Convertibility also included using foreign currency in local contracts, which means the dollar could be used to back local deals. Cavallo said the law allowed the economy to stabilize and investment to increase from 1991-98.

 
Domingo Cavallo, former Minister of the Economy in Argentina, and Katherine Terrell, professor of business and public policy and area director at the William Davidson Institute. (Photos by Marcia Ledford, U-M Photo Services)

Around mid-1998, however, crowding out of bank credit due to excessive spending and borrowing by the provinces, as well as currency appreciation due to devaluation of the Brazilian Real and depreciation of the Euro, caused major economic problems, Cavallo said. Banks froze assets, which caused distrust among investors who stopped putting their money in banks, and with foreign debt mounting, Argentina was thrust into a deep economic crisis, he said.

Cavallo said a floating peso is a viable solution. This means the currency will float within bands of dollars and Euros after dollar-Euro parity occurs. Through this, convertibilityin the sense of free choice of currencywould be preserved, he said.

Protesters at the symposium carried signs saying Cavallo is corrupt and "an international law violator." He responded that he cannot be blamed for everything that goes wrong in Argentina.

Michael Gavin, managing director of Emerging Markets Research at UBS Warburg, differed slightly in how he saw the crisis and its possible solutions. "The economic crisis happened at a time when the world economy was harsh toward Argentina," Gavin said.

He said fiscal problems such as inadequate policy response to the weakening economy and a failure to diagnose the economic problem caused the crisis, while a weak policy response to conditions made it worse. The crisis "undercut the country's capacity to govern itself," he said, and a solution could be found in constructive, ground-up political movements toward rejuvenation.

Panel member Ricardo Hausmann, former chief economist of the Inter-American Development Bank, said, "Unreliable capital flows, inability to borrow currency in their own country, and a defense of the old system of property rights that allows for an uneven distribution of wealth" have contributed to the crisis. Argentines need to establish new rules for coping with the economy, he said.

The forum concluded with Rolf Hoffman discussing the situation from the investor point of view. "Argentina has diverse industry and is well-positioned to be taken advantage of," said Hoffman, president of Eli Lilly Inter-America Inc. Argentina, however, needs to get rid of the corruption in its government and have free-flowing foreign investment, among other things, in order to be a country that is viable for investors, he said. "Investments will be driven by decisive intervention in the coming years," Hoffman said.

 

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