Re: Dornbusch: Argentina must surrender sovereignty on financial issues!!!!

[Alan Cibils <abcibils@xxxxxxxxx>]

I apparently sent only the first of three pages. Here are the other
two:



Argentineans must humbly acknowledge that
without massive external support and
intrusion they can't get out of the mess. What kind of external support?
It goes well
beyond funding. At the heart of Argentina?s problems is a crisis of trust
as a society and
confidence in the future of the economy. No one group is willing to
concede the power to
resolve the claims and fix the country to any other local group. Somebody
has to run the
country with a tight grip; dictatorship is neither likely nor desirable.
But since everybody
thinks ---often correctly --- that everybody else is selfish and corrupt,
there is no social
pact that can be reached. Without this social pact, day-to-day
cannibalization of social
and economic capital will continue. Ever more gruesome outcomes are on
the horizon.
Argentina now must give up much of its monetary, fiscal, regulatory and
asset
management sovereignty for an extended period, say five years. This is
not unheard of.
In the aftermath of World War II, Austria dramatized its needs to the
League of Nations
who recognized the fundamental problem of a dysfunctional society. It
resolved that
question, along with financial support, by having?with the consent of
parliament-- a
resident Commissioner General, appointed by and responsible to The League
of Nations.
The CG had to sign off on every spending bill, supervise the central bank
and monitor
reform. Here is the tough language of the League report.
?But the successful
accomplishment of the reform program, on which Austria?s prosperity and
the value of
her assets depend, would necessarily be a difficult and painful task. The
scheme therefore
included the appointment of a Commissioner General, whose duty was to
ensure, in
collaboration with the Austrian government, that the program of reforms
was carried out
and to supervise its execution. He would derive power from his control of
the disposal of
the loan.?
It worked! And here is what Argentina must accept to do. A board of
experienced
foreign central bankers should take control of Argentina?s monetary
policy. This solution
would have many of the reputation-virtues of a currency board, without
the costs of
having to adopt a monetary policy tailored to somebody else?s needs. The
new pesos
should not be printed in Argentina?s soil.
Another foreign agent is needed to verify fiscal performance and sign the
checks from the
nation to the provinces. Much of the fiscal problem has to do with fiscal
federalism in
designing and enforcing a sharing of responsibilities and resources in a
way that is
financially affordable.
Tax evasion and corruption?and the government?s acceptance of this state
of affairs--
has to be suppressed in the most radical fashion. Foreign micromanagement
is not
feasible but agreed incentive mechanisms and a sharing of experience are.
Argentina is
not the first country to experience tax collection issues, effective
answers are available
and must be imposed. Involvement of the provinces in the effort ? with a
lower basic co-participation
share to 30% or so, but steep incentives for local tax collection and
revenue
improvements are part of the answer. Proportional is not enough ? perhaps
go as high as
giving the provinces more than a peso for each extra peso of revenue
above certain
threshold. Also, because tax enforcement benefits from a simple tax
structure, there is no
space for a cumbersome tax code. It must be simplified to the bare basics
--- flat flat flat.

Argentina?s economy has been run down; it now needs an immediate
productivity boost,
pending a resumption of long neglected investment, and an eradication of
corruption as a
way of life. The incentive mechanism in the new tax-code should help
controlling
corruption at the province-level. Workers must become equity holders,
enter into profit
sharing agreements. Aside from the flexibility advantages of such system,
it adds an extra
layer of profit monitoring and of tax-evasion control to the 
system.
A massive privatization campaign of ports, customs, and other key
obstacles to
productivity must now take place. Deregulation of the wholesale and
distribution sectors
is essential. Another experienced foreign agent should control these
processes, as well as
make sure that the proceeds end up somewhere safe for all present and
future
Argentineans to share.
With the commitment to a clear and radical plan, Argentina would suddenly
offer a fresh
and encouraging new look. An awfully dark short run scenario would
suddenly have a
reasonable chance of a successful ending. As the foreign monetary board
is setup, move
quickly ---yesterday--- to a new temporary convertibility plan, say two
pesos on the
dollar just because it is the next simple number after one-on-one.
Release the ?corralito?
and let the IMF and other IFIs decide which banks to support and how? it
is their money
after all. Foreign capital is quick to change its mind; there can be hope
again. But to get
there, there is no escape from radical, intrusive reform.
It is well worth recording what the League said on the eve of the Austria
program: ?At the
best, the conditions of life in Austria must be worse next year, when she
is painfully
reestablishing her position, than last year when she was devoting loans
intended for that
purpose to current consumption. The alternative is not between continuing
the conditions
of life of last year or improving them. It is between enduring a period
of perhaps greater
hardship .. (but with the prospect of real improvement thereafter?the
happier
alternative) or collapsing into a chaos of destitution and starvation to
which there is no
modern analogy outside Russia. There is no hope for Austria unless she is
prepared to
endure and support an authority which must enforce reforms entailing
harder conditions
than those at present
prevailing?? Let there be no
doubt, this is the situation of
Argentina today; let there be no doubt, IMF money as usual would be a
dramatic error.