Latin American economies should follow a simple rule of thumb to handle unwieldy debt burdens, Roberto Lavagna, Argentina's economy minister, says: 'Restructure and pay. That's what we've done.'
Lavagna pointed out in an interview with Emerging Markets last night that in the three years since defaulting on a record $100 billion in debt, Argentina has not only restructured that sum but also repaid $13.8 billion to multilateral institutions the IMF, World Bank and Inter-American Development Bank.
He also called for the Bretton Woods institutions to expand their horizons beyond fiscal and monetary policy, and to focus more clearly on wealth distribution. 'It is fundamental to include in the toolbox an income policy,' he said. Latin America suffers the most unequal distribution of income among the world's regions.
Lavagna argued that there are clear limits on how much debt a country can handle. 'We think the maximum [level of] debt for an emerging country is 30% of GDP,' he said. At such levels, countries are better able to withstand external shocks. 'If a country is far off the 30% [level], when a shock comes it causes recession with terrible social effects.' Argentine net debt now stands at 52% of GDP.
Still, Lavagna downplayed fears that the commodity prices boom driving growth in much of Latin America also poses risks to the region when prices drop, as many economists fear. Prices for Argentina's export basket, dominated by agro and agri-business products, are 9% below their peak in 1996. Lavagna called for successful negotiations at the Doha round to reduce subsidies and open markets for the agricultural sector.
He pointed out that governments also 'have a role to play' in stimulating a 'virtuous circle' of investment, employment and productivity including prices and salaries.