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Martin Guzman Interviewed by Veja Magazine (English Translation)

Foreign Policy Relations Between Brazil and Argentina Should Have More Weight

Martin Guzman

Backgrounder  109kb pdf

Foreign Policy Relations Between Brazil and Argentina Should Have More Weight: An Interview with Martin Guzman in Veja

March 13, 2024

(English translation from Portugese)

Veja: During the pandemic, when many countries were increasing their spending to deal with the health crisis, you led the renegotiation of Argentina's debt. Considering this context, what were the main obstacles faced and how did you overcome them?

Guzman: There is no international framework for sovereign debt restructuring, and obviously that lack is a major obstacle that creates unnecessary unpredictability and complexities. Political economy pressures add an element of complexity to debt restructuring processes.

Veja: Considering the persistent economic stagnation in Argentina since 2012 and the predominance of precarious and informal jobs, what is your view on the main structural barrier preventing the country from achieving sustainable and inclusive growth?

Guzman: The first main obstacle for inclusive, stable growth in Argentina has been inconsistent macroeconomic management. Added to that problem was the gambling behavior of borrowing immense amounts of foreign currency debt since 2016. Only two years later, that debt became unsustainable. Plus, there was a toxic record loan of USD 45 billion from the IMF in 2018 to bail out the holders of unsustainable foreign exchange and finance a capital flight.

Then there was the Covid-19 pandemic in 2020, and during the years that followed the pandemic the impossibility of achieving consensus within the then governing coalition concerning how to reduce the macroeconomic imbalances. Now the current government is taking a highly regressive approach to address the macroeconomic imbalances, and therefore creating further social imbalances.

However, the combination of human, physical, and natural capital of the country suggests that the economic potential is much higher than what the current reality tells—and that potential could be achieved under a reasonable set of policies.

Veja: In your opinion, how effective are the restrictive monetary policies adopted by the Argentine government in controlling inflation and reducing the fiscal deficit?

Guzman: The real reference interest rate is highly negative now – in the order of -10 percent in monthly terms, in an environment with capital controls. This is financial repression. The current approach is not meant to reduce inflation but to prepare the conditions for a dollarization of the economy, as the government has promised. This would not play well for the development of the country, and in fact I believe it would curtail development given the dramatic consequences that it would entail in a short period of time.

Veja: In light of the structural deficiencies of the Argentine economy that have hindered sustainable growth, what political and economic reforms do you consider urgent and viable to put the country on a path of growth?

Guzman: I have a proposal for ten policy guidelines, including reforms, for putting Argentina on a path of shared prosperity. These policy guidelines include: a progressive reduction of the fiscal deficit. It’s also important that there be a change in the composition of the public spending with lower current spending and higher public investments in digital and physical infrastructure as well as in knowledge.

There also has to be increased transparency and capacity to execute. Federal policy for provinces and municipalities’ debt management must be reformed. The government must enact a monetary policy that supports domestic capital market development and discourages the dollarization of the peso. These are just some of the crucial reforms that are needed.

Veja: How do you view the potential impact of the trade agreement between Mercosur and the European Union on the bloc's economies? And what are the main challenges to be faced in implementing this agreement?

Guzman: Blocs are getting increasingly important in the global economy. It would be in the best interest of Mercosur countries to act more as a bloc and relate to other block, like the EU, in such fashion. But before that can be achieved, there are some issues that have not received sufficient attention, and which need to be resolved.

First, the Mercosur should take a less defensive approach to integration, meaning its approach should be less based on protectionism and more based on the exploitation of economies of scale that are present but currently largely underexploited. To pursue such a strategy, infrastructure and knowledge are critical.

There are no physical reasons why Mercosur could not be an integrated market for electricity or gas. The reasons Mercosur is not: first, the lack of transnational transportation infrastructure as transmission lines or pipelines. And second, the lack of harmonized normative frameworks.

More integrated energy markets would mean a larger scale for a sector that features economies of scale, hence the production costs per unit would decrease, which in turn would make our industries more competitive, as energy is a critical input for the industrial sector. An increase in the scale of production of gas would also allow the growth of industries such as those for fertilizers and petrochemistry. This all means not just more competitiveness but more resilience to global shocks. Resilience is a matter of national security.

The same is true with knowledge. We don’t do enough to take advantage of potential positive externalities—the term economists use for external benefits. For instance, a transnational cooperation between higher education institutions in the Mercosur could create phenomenal benefits. Why don’t we have our own Erasmus at the Mercosur? By the way, one of the most valuable experiences for my professional development was attending summer school on Mathematics at the Instituto de Matematica Pura e

Aplicada (IMPA), in Rio de Janeiro, when I was a grad student. An amazing place, world-class, that allowed me to create long-term bonds with Brazil.

Let me also note that when it comes to the discussion on the Mercosur-EU agreement, we should note that today’s world is different than the one that prevailed when the deal was being negotiated. Advanced economies are adopting large subsidies for industrial policies on key segments of the global value chains, as semiconductors and electromobility.

Ultimately, with a better integrated and more competitive bloc, intra-regional agreements would be negotiated from a different position and with different goals and could bring greater benefits to the region.

Veja: State intervention in key sectors of the economy, along with rigid regulations, has been an obstacle to the growth of the private sector and international competitiveness. Can the neoliberal stance of the new government change this?

Guzman: The new Argentine government correctly points out that there are privileges— including an excess of regulations, some of which are meant to benefit vested interests— that negatively affect the performance of the market economy. However, the approach that is being adopted will not lead to a more competitive and better performing economy. Monopolies need to be regulated. President Milei, however, argues that the regulation of monopolies is inefficient. This is not even a neoliberal stance. His approach will lead to more concentration, market power abuse, and inequality.

Veja: Considering the statements of the Minister of Economy of Javier Milei's government, Luis Caputo, regarding relying on Brazil to help Argentina overcome its current economic crisis, how do you see Brazil's role in the context of Argentina's economic recovery?

Guzman: There are two issues that need to be separated here. On the one hand, Argentina has its own problems to address, and those need to be resolved by Argentina. On the other hand, it is in the best interest of both countries that their relations be based on more stable state policies, rather than government policies. The kind of regional infrastructure development that would help both countries to become more competitive and resilient entails horizons – for planning and operations – that transcend governments.

Veja: What opportunities and challenges do you identify for economic cooperation between the two countries?

Brazil should be the most important country for Argentina in terms of foreign policy. Brazil is the most relevant country on the potential for infrastructure investments for integration that increase the competitiveness of the region. It’s also the country with which a common foreign policy agenda for enhancing regional financing for infrastructure and knowledge would bring the largest benefits.

It would be good to see a long-term regional planning agenda between the states of Argentina and Brazil. We don’t see this today. We don’t even see partnerships between think tanks of both countries for thinking about these issues. I push hard for changing this in my country.

Veja: How can Latin American countries improve their infrastructure deficit without succumbing to corruption and inefficient outcomes?

Guzman: Institutions are key. The state should have legislative and normative frameworks that prevent corruption and that at the same time make execution efficient. In Argentina, the architecture of the state needs reform. I’m pushing for an improved law for public financial management.

Corruption damages not only the legitimacy of the state, but also democracy and sovereignty, and should not be tolerated.

Veja: Could the advancement of industrial policies in the US and Europe hinder the competitiveness for industrialization in emerging economies?

Guzman: If we do not react appropriately, yes. The US is basically violating the WTO rules under the argument that subsidies are implemented for national security reasons. It’s a power abuse. This does not mean that the US should not adopt industrial policies, but international trade rules should be redefined to avoid abuses of power and make the field for industrial policies more leveled.

The Mercosur would benefit from negotiating trade and investment agreements that make its countries eligible for the subsidies that advanced economies provide for industrial policies, such as those under the CHIPS and Science Act and the Inflation Reduction Act in the US. That’s not been part of the frameworks of recent negotiations, but it should be.

We should also pay closer attention to what happens with the patterns of trade between Latin America and China. Our countries export commodities and import medium- and high-tech manufactures from China, replicating colonial patterns. A deeper integration with China based on the current patterns is not the solution to our development problems. This does not mean that the relations should not be well established, not at all, as they are important and do bring certain benefits, but we must be aware that trade with China has limitations for the region.

On the other hand, a well-designed green trade and investment agreement between the Mercosur and the US could bring large benefits to the region.


Publication Information

Type Backgrounder
Program Sovereign Debt Restructuring
Download 109kb pdf