Charles Nailen/The Hoya Former Argentinian Economic Minister Domingo Cavallo speaks in ICC Auditorium Monday afternoon.

Domingo Cavallo, former Economy Minister of Argentina, delivered a speech entitled “Argentina 2002: When the Attempt to Set `Right Prices’ Destroyed Property Rights” in ICC Auditorium Monday afternoon.

Cavallo, the Economy Minister for former President Carlos enem’s government until 1996, joined former President Fernando De la Rua’s government as Economy Minister in 2001, only to quit with De la Rua in Dec. amid the serious economic crisis. In April, he was arrested as a suspect in an arms-smuggling case that took place in 1990s.

Cavallo criticized the way that the new government, led by President Eduardo Duhalde, has handled the current economic crisis. He said that the measures taken by the government “implied termination of convertibility and demolition of the institutional base of Argentinean economy.”

Cavallo advocated the Convertibility Law as a solution to the problems created by devaluation and “destroyed property rights,” maintaining that these were more important than the problems created by overvalued currency, such as the discouragement of growth and export.

The Convertibility Law brought about the pegging of the peso for the dollar, the prohibition of issuing pesos without the backing of foreign resources and the legalization of the use of foreign currencies in local contracts. According to Cavallo, the law stabilized the Argentinean economy, which had been suffering from inflation for 45 years.

The law also encouraged investment, as “financial intermediation in dollars prevented emigration of savings.” Cavallo said. Showing the GDP growth, export growth and investment figures of 80s and 90s, Cavallo pointed out the positive effect of the law over the Argentinean economy between 1990-98.

According to Cavallo, there were two explanations for the recession that struck Argentina’s economy in 1998. First, he said, provinces were spending excessively and borrowing from private banks, which resulted in the crowding out of the bank credit that was supposed to finance the private sector. Second, the recession occurred because of the appreciation of the peso when the Brazilian real was devaluated and the Euro was depreciated after January 1999.

Cavallo claimed the recession could have been avoided if politicians had taken necessary measures – restricting the over-expenditure and borrowing by the provinces, which the politicians failed to do.

“When you have elections approaching, you don’t think long term,” he said.

However, Cavallo thought the pessimistic forecast could change. He listed a number of conditions that would bring change, such as a Supreme Court reinstatement of the Rule of Law by unfreezing deposits and revoking pesification, the conversion of foreign currency debt to pesos.

“We should prove [that] the quality of Argentinean law is not lower than foreign law,” he said. He said the court should be the protector of savings and property rights. “The contracts that are made in dollars are changed to pesos in lower rates,” he said.

Cavallo emphasized the new government’s need to provide “credible commitment to recreate the conditions for investment and productivity.” Inefficiency, corruption and political favoritism should be eradicated from social policies, he said.

Cavallo said the changes in the U.S. and the IMF administrations were unfortunate for Argentina. “The administration was not the best one to help Argentina. They don’t know how to deal with crisis in emerging economies,” he said. He said that Turkey was rescued from a similar economic crisis because of its strategic location near Iraq. “I hope they [IMF] give a different response to Brazil,” he said. “If Brazil is `helped’ as Argentina was `helped’ last year, poor South America, poor global economy . a crisis in Brazil would create a bigger impact.”

Cavallo also informed the students about the past decade of the Argentinean economy, starting with the economic growth of the 1990s that preceded the recession.

Growth could have began in 2002 if the government had continued its use of taxes and maintained the process of deregulation to reduce prices, according to Cavallo. He said the government could also reduce government spending through debt restructuring in order to eliminate the fiscal deficit.

In order to combat the economic crisis, the new government decided to freeze deposits in the banks. The government also decided to transform dollars into pesos at a below market rate and to start floating the peso without eliminating exchange controls.

Cavallo said the large devaluation of the peso deepened the recession, reducing domestic demand. As a result of devaluation, the real income of families fell, causing a collapse in consumption. On the other hand, he claimed that exports react slowly to the devaluation and existing domestic production is not able to substitute imports.

“Export growth and import substitution will take a long period of time to compensate for the collapse of the domestic market,” he said.

Cavallo talked about the political discussions and solution proposals that arose during his tenure as Economy Minister in 2001. According to Cavallo, some politicians proposed lower payroll taxes and more efficient social spending to overcome unemployment and reduce poverty, while others wanted to “change the economic system of 90s”.

Cavallo disagreed with popular political and media sentiment, proposing formal default of debt and abandonment of the peso-dollar peg. “We decided to adjust relative prices through non-monetary instruments and work on debt restructuring [reduce interests and postpone debt] without formal default; we tried to preserve convertibility,” he said.

Cavallo said the indebted private sector saw an opportunity to solve its debt problem through pesification.

“Pesification and floating the currency would mean a default of the just recently restructured domestic debt,” he said. “Such a policy would demolish domestic financial intermediation,” he said.

The Latin American Student Association and Latin American Graduate Organization sponsored the lecture.

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