This article first appeared in Forbes Magazine on March 4, 2002.
The mess in Buenos Aires is nothing short of criminal. Citizens are rioting. The government is blocking depositors from tapping their bank accounts. Commercial banks have been forced to turn over dollars to the central bank. People are trying to sneak greenbacks out of the country.
When President Eduardo Duhalde ended the decade-old currency system, in which the peso and dollar both legally circulated at a 1-to-1 exchange rate, the peso was devalued. Okay, devaluations are one of life’s risks. But this one was far more than a typical devaluation. It was legalized theft.
French economist Frédéric Bastiat (1801-50) defined “legal plunder” as the passing of a law that takes someone’s belongings and gives them to another. Before Duhalde, the central bank’s foreign reserves guaranteed a peso holder’s legal right to freely convert a peso into a dollar. This strong convertibility feature distinguished Argentina’s setup from the typical fiat money system. Its demise also is distinctive, perversely so.
As part of Duhalde’s Jan. 6 repeal of convertibility, he confiscated $17.8 billion of foreign reserves. Until his action, that was the property of peso holders.
Convertibility’s detractors have a way of blaming Argentina’s problems not on the breakdown of the rule of law but on the strong dollar, which supposedly led to an overvalued peso. This is said to have rendered Argentina uncompetitive, causing the economy to slump and forcing Argentina to default on its debt.
Argentina uncompetitive? Nonsense. If an overvalued currency causes uncompetitiveness, you see declining exports. But Argentina’s exports rose every year in the past decade except 1999, when Brazil, its largest trading partner and a nation without dollar convertibility, suffered its own currency crisis. (Note: The crisis was not that the Brazilian real was too strong.)
Argentinean exports during the first 11 months of 2001 were 3.2% ahead of the same period in 2000. Considering that the real growth in world trade was only an estimated 0.9% last year, Argentina’s export performance was rather strong. Indeed, the export sector has been one of the few bright spots in the Argentinean economy. If the rest of the economy had been growing as fast as the exports during the last two years, Argentina would not be in a recession and the government would not be bankrupt.
Hell-bent on proving that the peso has been overvalued, convertibility’s critics also point to purportedly high prices in Buenos Aires. More nonsense. A recent Union Bank of Switzerland survey of prices in 58 of the world’s largest cities found that, for a basket of 111 goods and services, Buenos Aires ranked 22nd. That’s about midway between the most expensive city, Tokyo, and the least, Bombay.
The biggest lie of all is that the peso devaluation will get the economy going again. Let’s go through the arithmetic. To stimulate Argentina’s exports by 1%, the real value of the peso (adjusted for inflation) would have to depreciate by 10%. Argentinean exports only accounted for one-tenth of gross domestic product last year. This implies that if the current devaluation of 50% doesn’t pass through to any domestic inflation—in short, if the nominal devaluation is a real devaluation—exports will increase by around 5%. Even under these unrealistic assumptions, a 50% devaluation would only add a paltry 0.5% to a collapsed post-devaluation GDP.
Any way you cut this, there was no moral or factual justification for Argentina’s devaluation and nullification of contracts. The Bush Administration should refuse to offer any direct aid and should veto any proposal for the International Monetary Fund, the World Bank or the Inter-American Development Bank to lend money to Argentina. There is a legal basis for refusing a bailout. Title 22, Section 2370 of the U.S. Code provides for suspending U.S. assistance to any country that seizes property owned by U.S. citizens or corporations or nullifies contracts with them. Americans with property in Argentina have been victimized just as much as Argentineans.
If that isn’t enough, listen to President George Bush’s first State of the Union address. “We have no intention of imposing our culture,” Bush said. “But America will always stand firm for the nonnegotiable demands of human dignity: the rule of law; limits on the power of the state; respect for women; private property; free speech; equal justice; and religious tolerance.”
The U.S. should not tolerate the plundering. It should pressure Argentina’s rulers to restore people’s property and the rule of law.
Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore, Maryland; chairman of the Friedberg Mercantile Group of New York; and a senior fellow at the Cato Institute.