Argentina's Aristotelian Crisis

Argentina is currently facing yet another economic crisis. Eduardo Levy Yeyati, Dean of the School of Government at Universidad Torcuato Di Tella in Buenos Aires, believes there are deep roots in Argentina that make the economic crisis Aristotelian in nature. There are both economic and political factors that have contributed to the current fiscal situation, which make it difficult to rectify when considering the impact of shorter election cycles on economic policy strategy. For Argentina to find its way out of this crisis, Eduardo places importance on finding consensus among stakeholders to improve existing policies. In this podcast, Growth Lab research fellow Carolina Pan and Eduardo as they discuss the contributing factors to this economic situation in Argentina and the means by which the country can prevent future crises.

Interview recorded on May 8, 2019.


Katya Gonzalez-Willette: Hello and welcome to the Growth Lab at Harvard University's weekly podcast. Argentina is currently facing yet another economic crisis. Eduardo Levy Yeyati, Dean of the School of Government at Universidad Torcuato Di Tella in Buenos Aires, believes there are deep roots in Argentina that make the economic crisis Aristotelian in nature. There are both economic and political factors that have contributed to the current fiscal situation, which make it difficult to rectify when considering the impact of shorter election cycles on economic policy strategy. For Argentina to find its way out of this crisis. Eduardo places importance on finding consensus among stakeholders to improve existing policies. In this podcast, Growth Lab Research fellow Carolina Pan and Eduardo discuss the contributing factors to this economic situation in Argentina and the means by which the country can prevent future crises.

Carolina Pan:  Eduardo so thank you very much for your talk at CID titled "Argentina's Aristotelian Crisis". And I thought that was a very interesting choice for the title. So maybe we can start with that. What makes this crisis Aristotelian?

Eduardo Levy Yeyati: What I would say all crisis are you know that Aristotle's used to say that men are happy in a single way and unhappy in very different ways because happiness for him was a definition of virtue. And you have to feeling different aspects of happiness, you know, to be happy. And if you don't have any of these aspects, then, you know, the picture was incomplete. And when you look at the crisis, particularly emerging market crises in particular in Argentina, in order to have that big a crisis, in order to have a systemic change, you need to have more than one factor. And my introductory point in the talk was that there is no single cause that actually can be attributed to be it's the origin of the crisis. The crisis there are a number of preconditions, and there maybe there is a trigger, there is a shock that maybe external or a political mistake that causes all this fragility, latent fragility to turn into a crisis. And then, of course, people will attribute the growth to this and that. And it would be a mistake and particularly policy mistake to seeing that change in that particular trigger would have avoided the crisis because a crisis with the condition was a precondition. And the crisis actually should illuminate the preconditions of the country here in the facility of the country in order for the policy to start addressing the real causes, the deep causes, rather than the triggers.

Carolina: Right. So it seems like people confuse the triggers with the causes in the case of Argentina. But it also seems that anything can trigger a crisis in Argentina. They're already the preexisting conditions are there all the time. Do you think this is the case? Do you think we are so unstable that anything could trigger or do you think now is a particular time because of particular factors?

Eduardo: I think Argentina has two big handicaps. On the one hand, it exports very little. And this means that we have a structural dollar shortage. In other words, if we want to grow at, say, 3, 4 percent, they would be at 2 percent per capita GDP growth, which is the minimum to sort of keep political stability over the long run. You would need to export, I think, twice as much. Or vise versa with these export ratios you can grow at 1 percent, that's not enough. So what happens is that you are forced to inflate growth temporarily for political reasons. And that's typically being done by issuing debt. And at some point that debt becomes ostensibly unsustainable, and then you have a run run, you know, from investors here, particularly international investors. And given that we have a second handicap, a very weak, feeble currency, that it's not a reserve value for investors. When you want to finance these inflated growth, you have to go to international capital markets and have the issuing dollars in foreign currency. And you create a currency as much currency imbalance, meaning that whenever you devalue, you are automatically bankrupt.

So these two conditions combine the fact that you don't have enough dollars to grow at a reasonable pace, and that whenever you want to finance transitory this artificial growth, you have to incurring currency imbalance opens the door to crises that may be triggered by an increase in the interest rate in the US or by a decline in commodity prices. We are exporters of commodities, particularly soybeans, or because the political spectrum changes and that is a government that is more populous and is more linked to - we're not aware they made the law or complying with contracts. But the other trigger is a negative, as I say, because as long as you don't fix these two handicaps, you are in an environment that's inherently fragile. You know, any shock can actually turn this into a crisis and shocks happen all the time. So you have to prepare for that.

Carolina: So I think that some of these conditions are region specific. And so Latin America has a deep problem with exporting and the macroeconomic volatility. But still, some countries manage to grow even in that context. Do you think that Argentina has something more?

Eduardo: While no country is identical to another one. I think that having said that, in Latin America in general, the middle sized countries, the large countries, Latin America, Mexico, Brazil, more recently, Colombia has growth problems. Chile will have starting to have to experience those growth problems because originally those countries were catching up from very low levels of per capita income, but now that the rich, the middle income group, they are facing what's typically called the middle income trap. They cannot actually go the next step. So I think that the problem -.

Carolina: You're not very hopeful for what's going to happen in the region...

Eduardo: What I'm saying is their struggle to actually make the next step and it's going to take more than just continue to do the same thing they were doing before. It probably will take a different type of reforms and more focused development strategy. But going back to Argentina, I think maybe Argentina is a particular case because of the lack of currency of a reserve currency. So whenever you want to actually finance those cycles, you become extremely dependent on international and international capital is typically procyclical. They lend you and you're not only their money and they never lend you and you need their money. So whenever you are in there approaching a recession, you are facing typically a problem of market access. Nobody wants to refinance your debts and that adds to the pressure. So we have a real problem in terms of exports and our capacity to growth that is augmented by this dependence on external capital.

Carolina: Right. I also tend to think that external capital is also very influential in some ways. For instance, in the case of Argentina, I think that there's a very strong incidence of politics and economic performance. And then I believe this is also due to the fact that Argentina has a very expectations driven economy. And then whenever expectations change, that affects what happens with investors and in general state of the economy. Do you think this is actually a case? Do you think that politics actually dictates what happens in the economy? And do you think there could ever be economic stability when you have political instability?

Eduardo: I think the two levels of instability are intertwined because, first of all, we're in a democracy. So if you have changing views in the population, you will have almost by the finished changing views in the government, because the economy has to to some extent represent what the population is actually voting. One thing is important to bear in mind that when you talk about investment in investors, we need to invest more. Same in Latin America, in particular Argentina. We need to invest more. There are two types of investment and the real investment is one that's missing in Argentina. Investment actually increases your growth capacity and then you have a financial investment. The financial investment, particularly in the net mid-nineties, is characterized by herd behavior because after the introduction of the Brady Plan and the creation of emerging markets, particularly bond markets, you have an investor base that people actually lend to a country. The international investors have lent Argentina, for instance, that are extremely atomized and follow herd behavior, because these are mostly uninformed. So it's true that they are driven by expectations, sometimes are misled by expectations. And that makes them even more procyclical than they were before when those banks, rather than bondholders, the ones that the creditors, the ones that were finance in the country. So in the case of Argentina this dependence has been compounding with the emergence of this new type of investor that small investors essentially following the lead of large investors were behaving like a herd. Our expectations are much more successful in attracting financial investors than real investors because a real investor is actually more savvy, more informed investor and takes a long run view rather than the short run view that this illusion of liquidity is there, that you can actually sell the bond whenever things get, you know, start worsening, which is an illusion, because if everybody sells, then you're going to lose in terms of the price that you're selling at. But this liquidity illusion actually makes these financial investors much more moving, as you say, much more procyclical. The real investors, on the contrary, they need to see more credible signal that things will be better. Not tomorrow, not today, but in two years, three or four years time when he is starting to reap whatever investments put in right now. That contrast, I think, is one of the characteristics that explains what happened Argentina in 2016, because you saw a lot of positive expectations that were reflected, I would say an increase, a significant increase in capital inflows. But you never saw the corresponding dynamism in the real investors side. So we had a lot of finance and we could actually issue a lot of that, but we didn't grow. That's one of the reasons why we're facing now financial crisis.

Carolina: So a lot of speculation, right, to with what happens with the currency in Argentina. And so people actually want to make money out of it. Right. They take advantage of the rates.

Eduardo: Now, I think that, you know, there is a they mentioned that you were mentioning before politics and the message that the politicians send to the markets and markets react to that. Our problem is that the economy, the real investors don't react to that. We need probably to change the message or to make it more credible in order for actual real investors to come to the country. Without real investment, the only thing we have is a transitory inflation of growth financed by debt that ends up typically in a financial crisis and an unwinding of these positions partially bailed out by IMF money. So we need to probably change the message. I think in Argentina, in many countries, governments tend to mistake the happiness in financial markets. They support the financial markets with the support of investors. The real investors are always trickier and you need to be much more convincing to attract them.

Carolina: And what would be the ideal scenario? What would a real investor need to come to Argentina happily and stay?

Eduardo: Well, investors need to make money. That's why they come. So you need to have profitability and you need to have sustainable profitability. Like in Argentina we have several sectors that we're artificially profitable because of subsidies. You need to have sectors that could be profitable even in the absence of subsidies. Those subsidies can work in the very short run stimulus. But at the end of the day, a country with a fiscal problem cannot subsidize everything that investors are investing in.

Carolina: I also think there's a role that the rules play in the sense that it seems like in Argentina rules are changing all the time. So, you know, what's the scenario today, you don't know what it's going to be in two months or even in a year. So it's hard to plan.

Eduardo: But that's tied to the sustainability concept. If you are engaging in a stimulus or development plan that's based on unsustainable subsidies, some related of subsidies will be cut down or something else will appear because you cannot simply sustain this over time. So the message should be credible in the specific sense of being sustainable over the long run. That's one thing. And then, of course, profitability is associated not only with their productivity in saying within the firm, within the company, but also outside the company. And that's where the rationalization and I would say reduction at this optimization of fiscal spending comes into play because you would like to see the tax burden come down a little bit. But you cannot do that without reducing expenditure and you cannot reduce expenditure at the expense of, say, social spending. So you see there is less of a Catch-22 there. In order for a promise to reduce the tax burden to be sustainable and have an effect on investors, then you should show the way in which you will achieve that lower tax burden and without facing a fiscal crisis, which is exactly what happened right now in 2016. Reduce export taxes, reduce you, cut some taxes and promises further cuts in tax burden. But at the same time, you didn't fix the fiscal deficit and now you're actually arranged reducing the taxes that you cut in 2016. So the conviction of this promise is entirely related to the sustainability of your plans. It is not attainable. Investors simply will not react.

Carolina: So in this context of Argentina today, do you think there is any hope now?

Eduardo: There's always hope. If there weren't any hope, then we wouldn't be talking about this. And what we're doing, we'll be doing something else. I think the hope, the only hope, the only upside of a very unnecessary and socially costly crisis is that it makes you face the urgency for some reforms, some changes. And out of that urgency, you can get the courage or the altruism or political altruism to actually prioritize what's best for the country. So there is hope in that this crisis open up that possibility. And new consensus. And I'm hoping that this will get a more constructive view next year at a minimum cost, because it goes actually it can always deteriorate to a full blown crisis like 2001. So I'm hoping that that's not necessary, that's not the case. But there is always hope we know with we need to do. The problem is, how do you do that? How do you coordinate the different interest groups, how you negotiate the distribution of costs? Because by there, every form has winners and losers. And we need to find a way to put everybody all the actors are participants, the shareholders on the table and negotiate. Who pays what? Who gives what? This is something very difficult for Argentina. This is my view of a consensus: distribution of costs, not the distribution of gains. And that's something that crisis can actually trigger.

Carolina: Right. Very interesting. So do you think that we agree in what our main economic problems are and we just disagree on what policies we need to implement, even taking that political aspect aside? Right. Do you think, like every party agrees where the main issues are?

Eduardo: No, no. There is no formal agreement. There are some partial agreements. For instance, we know that we need to do something with the Social Security reform Social Security scheme in order to prevent the deficit from widening and offsetting, I would say, more than offsetting whatever fiscal consolidation we are getting this year. I mean, it's very costly to do this with no consolation to live, it's an adjustment and we're going to lose it in five years if we don't do anything with the Social Security system. Now, what Social Security scheme we want that we don't know. In fact, I'd prefer one that's more distribution is a la New Zealand. I'm pretty sure that most people in Argentina prefer is more of a contributive system as the one that we have now. The problem is not that we differ on the scheme. At the end of the day, they will have different preferences. Point is that you need to sit everybody in the table and agree with one scheme and at least get 51 percent of the vote. You know, we need to have a minimum consensus to pass a reform and reform that will incorporate this diversity of views. But at the end of the day will favor one view over the other. The problem is when you are at a standstill and no view can actually can be push forward because you have any consensus and then there is no reform. I would be happy to have a Social Security reform that is sustainable even if it's not as distribution as I thought you would like. I am unhappy in economic terms. You said if no reform and we face another problem with the fiscal deficit in three years. So it's not common view that we are asking for is just a place where we can trade views and negotiate something that can be actually implemented.

Carolina: Right. Right. So it's getting something done, having policies that favor the economy rather than the elections being more radical in how we implement our policies. And really, we're all not in full agreement knowing that we should take some direction somewhere.

Eduardo: Yes. I think the standstill that we're in right now is worse than choosing any of the options that are on the table. Had been on the table for a while. And I think we tend to agree on the priorities. Nobody would oppose prioritizing in budgetary terms, say, education, particularly public education, given that you have this degree of poverty, only very low social mobility. The question that we have to negotiate is where the money is coming from. So as I say, there's no negotiating who gets what. That's actually who doesn't. In a sense, economic is like that is the allocation of scarce resources. So we have to decide who's not going to get something now he's getting or wherever to get the resources. That negotiation is a positive sum game. So at the end of the day, you will probably grow more, we'll have more to distribute. But the first time in the beginning you have to be aware of at some point you have to take something from someone. And if you don't state the negotiation, this forum, then you are fooling the voter or fooling the stakeholders. So you need to be very clear about that. You know who pays for what? What every one of these actors is actually giving and putting on the table, has never been done in Argentina. And that's probably, in my view, is probably the deeper political pending assignments so to speak.

Carolina: And finally, and to wrap up, going back to the beginning, going back to the title you were talking about these deep roots that make the crisis actually very Aristotelian. And I think those roots are very embedded in our institutions and in our culture. Do you think those could be changed or that we just have to deal with that? That's what we are. And then we have to make all necessary adjustments to just be behave normally.

Eduardo: Let me put it in this way. And the most likely scenario is that we are not going to change. But that's also the case in many other countries because it's very difficult to impose cultural change. Nobody can do that from the top. Now, faced with this scenario in which we are going to essentially repeat ourselves - eternal Groundhog Day in which we have crises, we wrote very little. We're always complaining. We are always missing a mythical time in which we were rich like Australia, which never happened. But nonetheless, it's something that's always in our minds. I think that looking at that scenario in the face can actually trigger a reaction. And the reaction would be to do something some things differently, to understand that some of our beliefs were myths. We have no illusions. And to start from scratch, I think there is a choice and there is a hope. But it's not going to happen naturally. There should be a discussion, a political discussion that leads to a changing way. People think some of these topics. And for that, you need a leader, a leading party, but particularly a strong leader that is willing to lose an election, is willing to lose some support in order to impose what he thinks is the direction of the next step. We're still missing that. But, you know, everybody can change.

Carolina: Thank you very much, Eduardo this was a very interesting talk.

Katya:Thank you. If you want to learn more about the Growth Labs latest research and events, please visit See you next week.