1.    Performance of the CBAs in Argentina and Bulgaria

The objective of this analysis is to verify whether the similarity between the two countries’ monetary regimes produces similar macroeconomic indicators. A causal relationship under CBAs must be proven, and not assumed a priori.

The analysis is made on the basis of data from the recent annual World Bank reports, the IMF periodical for financial information and other publications of the IBRD, IMF, OECD, and the Bulgarian Central Statistical Office.

Table 1 presents the most important macroeconomic indicators for the Argentine economy:

Таble 1. Macroeconomic indicators for Argentina

Note: 2001 data refer only to the first quarter. The calculations are made by the author on the basis of information from the above-mentioned sources. Differences in some indicators in IBRD and IMF publications do not alter the overall picture.

What do the data from Table 1 and other sources tell us?

·        Economic growth is high over the first years of the CBA, but subsides later on and turns negative during the latter years. Average annual GDP growth between 1990 and 2000 is 4.3%. Adjusted for the average annual population growth (1.3%), the per capita GDP growth is 3%. This is not sufficient for a resource abundant country, such as Argentina. In the first five years of the CBA average annual growth of Argentina was higher than in Bulgaria.

·        The export/GDP ratio increased during the first half of the decade, and declined after 1996-1997. It deteriorated further in 2001. Argentina is still not properly integrated in the world trading system. Its exports increased during the decade by a factor of two, while its imports increased by a factor of six. The increase of the export/GDP ratio only by 3 percentage points for 10 years is not satisfactory. One of the main reasons is the deteriorating competitiveness of Argentine goods due to the long-term peg of the peso to an appreciating US dollar. The trading partners of Argentina (and particularly, the most important one – Brazil) have flexible exchange rate regimes and their currencies depreciated substantially compared to the US dollar, especially in the depreciations of the Brazilian real in 1999 and 2001. This attracted some of the multinationals, which moved their activities from Argentina to Brazil. Comparisons between the export/GDP (and import/GDP) ratios of Argentina and Bulgaria are irrelevant due to the large discrepancies in terms of population and even more of GDP. The Argentine GDP in 2000 in current prices was USD 285bln, and only USD 12bln in Bulgaria. The role of external consumption as a growth factor in the two countries is beyond comparison.

·        The import/GDP ratio exceeds the export/GDP ratio in most of the years, and doubled during the period. One of the main reasons was the prolonged peg of the national currency to the appreciating dollar, which boosted imports and suppressed exports. Bulgarian imports increased under the CBA, while exports declined. As in Argentina, the commodity composition of exports and imports is unfavourable – a high share of low value-added goods in exports. These are patterns typical for less-developed countries.

·        The investment rate, which was very low at the beginning of the decade, increased by several percentage points over the following years, but remained below 20%. It has fallen to 15% during the past years. The annual volume of investment kept declining too. The behavior of the savings rate is even more alarming. It was 14.7% in 1997, 15.1% in 1998, 13.7% in 1999, 12.8% in 2000, and is expected to approach 10-11% in 2001. Lending to the private sector also declined sharply. With such saving and investment rates major structural and technological modernisation in order to achieve sustained high growth is impossible. The savings and investment rates in Bulgaria were at the same level during the last five years. The inflexible and rigid CBA in both countries was one of the major contributing factors.

·        The fiscal balance was negative throughout the period. During the first half of the decade it was insignificant, and increased over the second half. A World Bank’s publication quotes a fiscal deficit of 2.5% in the crisis year 1990 (prior to introduction of the CBA), and 2.4% in 2000. As expected, the fiscal deficit is highly correlated with the current account deficit. The data from the table indicate that the fiscal deficit was not the major reason for the present crisis, as some observers stress. Many countries had even higher fiscal deficits during this decade, but did not end in such a crisis. A comparison with Brazil is revealing in this respect. The fiscal deficit of Argentina was 2.1% in 1998, 4.2% in 1999, 3.6% in 2000, and forecast at 3.2% in 2001. The fiscal deficit of Brazil for the same years was 7.9%, 10.0%, 4.6% and 3.5% respectively, but did not culminate in a crisis. On the contrary – the Brazilian economy is performing satisfactorily. The official Bulgarian fiscal deficit was lower during the last 4-5 years, but together with the quasi deficit is much higher.

·        The current account balance was negative during the entire period. The trend was a clear-cut deterioration, particularly after 1995-1996. The main reason was the prolonged rigid peg of the peso to the appreciating US dollar. There was no increase of total factor productivity to offset the accumulating appreciation of the exchange rate. Productivity was not increasing, because investment activity was low, as the CBA was not providing an appropriate economic environment. The chain was thus tightening. Other factors also contributed to this end. The current account deficit in Bulgaria after 1998 was higher than that in Argentina and is still rising. The growing negative trade balance – 9.8% in 2000 and expected 11-12% for 2001 is particularly threatening. The peg of the Bulgarian lev, though to a depreciating Euro, was one of the major contributors.

·        The official foreign exchange reserve of Argentina is at a reasonable level by international economic standards: 7-9 months of imports, with an increasing trend. It does not, however, match external indebtedness, and does not guarantee resistance to external shocks. The Bulgarian foreign exchange reserves during the recent years were at a level of 5.0 - 5.5 months of imports. The ratios to external debt and debt service are, however, more favourable.

·        The external debt of Argentina was USD 62.2bln or 44.0% of GDP during the crisis-ridden 1990, and USD 146.4bln or 51.4% of GDP in 2000. At the end of 2001 it was USD145bln according to unofficial sources, much less than the Bulgarian level, compared to GDP. Such comparison however is not sufficient without taking the debt maturity structure and debt-servicing schedule into consideration. The external debt of Argentina is five times higher than annual export earnings. The ratio between external debt and foreign exchange reserves is similar. The large external debt, or its ratio to GDP, is not the major problem of Argentina. The burning issues are the unfavourable composition and volumes of exports and other foreign exchange earnings. Debt servicing amounted to 100.2% of exports in 1999 and 85% in 2000. The long-standing CBA is one of the major contributing factors. Once abandoned by the IMF in December 2001, Argentina had no choice but to temporarily cease external debt service. Bulgaria has a higher external debt/GDP ratio (86% at the end of 2000), but has a more favourable composition of debt and a better debt/foreign exchange reserves ratio, short-term debt/foreign exchange reserves ratio and debt service ratio.

·        Inflation in Argentina is minimal. After 1994-1995 it approached zero, and in recent years turned to disinflation. The Argentine crisis has proven once again, that financial stability alone (low inflation, low budget deficit, low interest rates and small spreads, stable exchange rate, etc.), although important, is not a sufficient prerequisite for successful economic development. No lasting financial stability, and even less so – sustained economic growth and better quality of life are attainable in the absence of solid microeconomic foundations. Financial stability as an end in itself under the CBA has contributed to the occurrence of the crisis. By all those parameters Bulgaria is in a very similar situation and is therefore faced with identical threats.

·        The unemployment level increased threefold from 1991 to 2001. There is a very high reverse correlation between GDP growth and unemployment. Poverty is also increasing. According to World Bank assessments 29% of the urban population (which comprises 90% of the total population) is under the poverty line. Other sources point to higher levels of poverty. Social polarisation is also growing. The officially reported unemployment level in Bulgaria since the installment of the CBA increased from 13.7% at the end of 1997 to 17.5% at the end of 2001. Independent experts confirm that it is above 30%. The Bulgarian picture on poverty and social polarisation is very similar to that in Argentina.

What are the conclusions?

First. The CBA contributes to achieving financial stability only during the initial years. Later, the positive effects fade away and the net negative effects prevail. Argentina has passed through the first constructive phase, entered deep into the destructive phase and ended in a devastating crisis. Bulgaria is at the end of the constructive phase of the CBA and is entering the destructive one (see charts in the Annex). It is still not too late to avert the crisis.

Second. Contrary to expectations the CBA did not contribute to more cautious management of public resources and external borrowing, to thriftiness, financial and economic discipline. A comparison of the most important macroeconomic indicators of the crisis-ridden 1990 prior to introduction of the CBA with the normal 2000 under a CBA proves that the new regime did not produce better results. The fiscal deficit in 2000 is lower only by 0.1 percentage points. The public debt/GDP ratio is higher by 7.4 percentage points. The saving rate is lower by 2.7 points, and the investment rate by 1.9 points. The exports to GDP ratio is higher by only 0.4 points, the volume of exports increased two-fold over the period, while imports increased six-fold. The current account deficit is deteriorating rapidly. The unemployment level increased three-fold; poverty and social polarization deepened. There are improvements only in two major indicators: a higher growth rate (only during the first half of the period) and a sharp fall of inflation (see Annex). A devastating economic and social price has been paid for modest results.

Third. There is no evidence that the benefits of the CBA surpass those of the standard monetary regimes in the neighboring countries economies of Latin America and the rest of the world. The opposite seems to be true. An economic mechanism, which does not provide an environment for efficient saving, investment, structural and technological modernisation, for deeper integration into the world economy, and thereby for sustained growth and better quality of life, has no future. Eleven years in Argentina were enough to test it, and the outcome is devastating.

Fourth. A fundamental question begs an answer: is it worth relying on such a mechanism, and if it rarely is – for how long? If the Argentine crisis, causing so much suffering to the people, can be useful, it is by providing undeniable empirical evidence for analysis of a large-scale socio-economic experiment – the application of a macroeconomic management mechanism, known as a Currency Board arrangement. The outcome of such a comprehensive analysis can be very instructive to other economies.

Two equally harmonious systems of logical arguments for or against a thesis can be contrasted without obvious means of proof. However, if irrefutable evidence is available it is easier to prove the truth. The impact of the CBA on the ultimate economic indicators should be isolated to the largest extent possible from the impact of other factors.

Fifth. The Argentine crisis is not a surprise to the impartial observers. The crisis has been in the making for 5-6 years. It would have been a surprise had the collapse not happened. Under a more favourable external environment, more stable balance of payments and external debt indicators the explosion could have been postponed, but hardly avoided. For the simple reason that the economy was suffering from an acute illness and the selected therapy was not the appropriate one, or was not properly implemented.