Dialogue: When you give up your currency

New Zealanders should be watching closely the economic and political crisis in once-prosperous Argentina, writes JANE KELSEY*.

Since 1998 the idea that New Zealand should abandon our national currency in favour of the Australian or American dollar has gained support.

While some talk of a common currency, Michael Cullen has described it more accurately as a non-hostile takeover of the Kiwi dollar. New Zealand would effectively transfer monetary authority, including the ability to influence the economy through interest and exchange rates, to the Australian Reserve Bank or United States Federal Reserve.

We would have to accept their monetary settings, whether or not they are appropriate or damaging to the New Zealand economy, and lose the ability to pay for Government spending by increasing the supply of money.

This is portrayed as yet another step in the inevitable process of globalisation. To date, the only discussion has focused on short-term economic consequences. There has been no serious examination of the broad economic, social and political ramifications and no attempt to learn from other countries that have adopted such a radical approach.

Hence the significance of the Argentine crisis, which is widely blamed on the rigid fixing of the peso to the US dollar (known as convertibility) and the damage caused by the strong greenback as Argentina faced a deepening recession, alongside other neo-liberal policies.

Like most other countries that adopted "convertibility", Argentina's Government pegged the value of the peso to the US dollar in 1991 as a solution for hyper-inflation.

Inflation quickly fell and the economy rapidly recovered, fuelled by huge foreign investment. Annual economic growth averaged more than 4 per cent until 1998. The budget deficit was eliminated and public debt was repaid, albeit through ill-considered privatisations.

In 1998, Argentina began a rapid economic decline. South America faced the contagion effects of the 1997 financial crisis, a slowing world economy and a strong US dollar.

Neighbouring Brazil eventually abandoned its peg to the greenback and floated its currency. A huge devaluation and lower costs, especially for labour, gave Brazil a competitive advantage over Argentina in a slowing international economy and within the Mercosur free trade area. Investors moved to Brazil, compounding Argentina's recession.

As Government revenue fell and public external debt grew, foreign lenders raised their interest rates. The debt burden mushroomed. Convertibility prevented the Argentine Government from funding its budget by expanding money supply or devaluing to provide relief to exporters.

Speculation that the Government might default on its debt and/or abandon convertibility raised the risk premium again. As Government revenue continued to decline, the share dedicated to debt repayments grew. The IMF provided bailouts, conditional on even greater fiscal austerity.

The burden fell directly on businesses and workers, with flow-on effects for families, communities and entire regions. When I visited Argentina in August unemployment was nearing 18 per cent, and worse in the regions.

Producers were abandoning their land, unable to meet growing debt payments from dwindling export returns. Factories had laid off staff, re-employing some under the table, below the minimum wage.

While the Government faced growing demands for social spending and income support, it promised the IMF it would limit spending to (falling) actual revenue. The Government cut wages and pensions for its workers by 13 per cent, which further worsened the recession and intensified popular unrest.

Militant unemployed, known as picketeres, blockaded the main arterial routes across the country. Pensioners, public servants, unions, left-wing parties and many others staged mass protests through the streets of Buenos Aires. Students occupied the universities. Middle-class families with no waged incomes struggled to survive. A growing number of the poor were starving.

Provincial governments responded to falling revenues by issuing their own local currencies. In Tucuman province, for example, its bonos had parity with the peso and US dollar but could not be used outside the province.

As pesos became scarcer and revenue kept falling, bonos were supplemented by tickets redeemable in specific stores. One teacher employed by the province told me she was now paid in a mixture of bonos, tickets and salary deferred for six months.

In August last year, Buenos Aires province issued its own version, the patacom. Privatised electricity and telephone companies announced they would accept patacoms as part payment. Even McDonald's announced a new meal - the patacombo, which could be bought with the new currency.

In December the crisis peaked. The Government limited weekly cash withdrawals by nationals to $US250 and imposed capital controls. Protests saw the President impose a state of emergency, then resign.

His interim successor faced ongoing rebellion, mainly from the middle classes, who were denied access to their bank accounts. He announced creation of a new domestic currency, the argentino, to run alongside the dollar and peso.

By the end of the year, the interim President had resigned, Argentina was in default on its debt, the economy was in ruin and the Government faced a deep crisis of legitimacy. People are now demanding an end to convertibility and neo-liberal economics and a new economic strategy that seeks to rebuild Argentina from within.

Those who promote the equivalent of convertibility for New Zealand portray it as inevitable and benign. Argentina's experience shows that surrendering monetary policy can have dramatic economic consequences, which in turn have dire social and political ramifications.

Another failed neo-liberal experiment is the last thing New Zealand needs.

* Professor Jane Kelsey, of the University of Auckland, visited Argentina as a guest of the University of Buenos Aires in August last year.