Address by the Governor of the Central Bank of Argentina, Federico Sturzenegger, at the 12th National Conference on the Public Sector organized by the Professional Council of Economic Sciences of the City of Buenos Aires

"Good afternoon and thank you for the invitation. I thought it would be useful to choose as topic for this conference the issue of “public administrations of the future. I believe it is highly valuable for us to tackle this issue head-on because we have yearned for a good management of the public goods for a long time already.

In fact, the previous Administration built a narrative consisting in justifying everything from the State without understanding the extraordinary responsibility of managing public spending, a responsibility that comes from a simple self-evident truth: each peso spent by the State means a peso that society cannot spend anywhere else. Therefore, the ideological umbrella that whatever the State does is right, by definition, ends up justifying inefficiency, squandering and corruption.

I always retell an example that is truly surprising for me. After accessing the European Union in 1985, Spain enjoyed a period of accelerated growth that 20 years later placed the country among the developed nations in the world in a process called “the second Spanish miracle.” Well, it happens that Argentina’s growth pace between 1990 and 2011 (unfortunately, it came to a halt when the currency clamp was adopted since it stifled opportunities for growth along the period it was in force) was higher than that of Spain during those 21 years. This is the truth: Argentina grew more during that period than a country that was experiencing an economic miracle. Why then do we speak about the “Spanish miracle” but we do not mention “the Argentine miracle” when in fact we had a higher growth rate during the same period? Precisely because of the issue this conference is dealing with, i.e. because the economic success was not accompanied by better infrastructure, better public goods or a better quality in social spending, that would have included all sectors and/or would have transformed this process into an economic development process. In other words, regardless of narratives, the real failure of Argentina in recent decades lay in the operation of the State. It is high time for us to change that.

From 1970 onwards, poverty levels worldwide have gone down from 60% to 10%, giving rise to the highest poverty reduction period in the history of mankind. Conversely, in our country, poverty levels have gone up from 5% to 30%, in a dramatic contrast that requires a change in the way we do things. The world has offered everything that was needed to pursue a process of economic growth with social inclusion, but if we do not improve the quality of the State, our opportunities for growth will continue to thwart. This is why I want to speak today about three ways whereby, in my opinion, we have to improve the management of public goods. They are not the only ones, of course, but they are three relevant dimensions I can illustrate with examples from our management at the Central Bank.

The first one has to do with a proper use of public resources. This means that money must bear fruit, that investment and government spending must be allocated correctly and that things should be done at the lowest possible cost. The second dimension is related to the regulatory framework applicable to the State. And in this respect, it is essential to define rules of the game that may ensure that freedom will not be limited where not required and that we will not bureaucratize, while we assure good levels of competition and transparency. Lastly, the third element

I want to mention is related to how to define the policies to be implemented: the “due diligence” to be performed in order to ensure the adoption of the most suitable policy. I would like to discuss today these three dimensions of potential improvements in the quality of our public spending, and illustrate how this improvement process has already started.

Taking care of our money

The previous Administration spent the same amount of money on road works in the Province of Santa Cruz (home of less than 1% of the population) than in the Province of Buenos Aires (home of 39% of the population). Even if we put a strong emphasis on the federalization of investment, it is implausible that those resources may have been allocated to the best possible use.

Investment in infrastructure is precisely one of the areas where there was more space for higher productivity gains from the resources allocated to this area. Not only because works were 50% more expensive in the previous Administration but also because today they are prioritized in terms of their economic performance rather than their political affinities.

Let us see some figures to understand the magnitude of the benefits derived from this change. Over the last ten years, capital expenditure in Argentina has averaged 2.5% of GDP on a yearly basis. A transparent management of such expenditure allows for the construction, with that same amount of money, of works that would have cost 3.75% of GDP in the past. This higher impact would come from the elimination of corruption in public works. In turn, prioritizing such projects on the basis of their social return would increase their economic performance even more. For example, if a better allocation doubled the productivity of such investment, the initial 2.5% of GDP, turned into 3.75%, would be equivalent then to 7.5% of GDP. In short, reducing corruption and doubling the rate of return of the projects would three-fold (i.e. an increase of 200%) the impact of infrastructure investment on the economy. Let me illustrate this potential productivity improvement in spending with an example you all know: the Metrobus (network of dedicated separated lanes and stations for normal buses). The Metrobus operating in La Matanza (in Greater Buenos Aires), for example, will allow 220,000 people to save 40 minutes a day. If we take into account business days only (i.e. we leave aside the benefits for car drivers, the reduced environmental and noise pollution, the lesser incidence of accidents, the reduced wear and tear of the public transportation fleet, etc.), this means saving over 2,900,000 hours a month for all these people. At an average value of ARS 77/hour1 , the annual savings of that Metrobus would amount, at least, to ARS 2.7 billion. This means that the investment cost of a work amounting to ARS 1.7 billion would be recovered in only 230 days of use. Assuming a ten-year horizon, the Internal Rate of Return (IRR) of the project would be 159% on a yearly basis. This is why, I am sure that the return of the initial 2.5% of capital expenditure under the previous example would increase significantly and, if we had projects with annual rates of return of 159%, I think that the point I want to emphasize is clear enough.

Now, an example closer to our task at the BCRA, related to the management of the cash held by the public. It is well known that the previous Administration refused to issue banknotes with a higher denomination because that would have meant admitting the inflation it was trying to conceal. Officials of the Central Bank who dared to suggest the issue of banknotes with a higher denomination were removed from their positions. Even though we could argue that higher-denomination banknotes facilitate informal economic activity2 , the truth is that the situation we inherited in terms of cash held by the public was not only inconvenient regarding the handling of money for society at large but also very expensive: the money in the ATMs was never enough, the cost of armored funds and securities carriers was increasingly more expensive and there were growing inefficiencies in all sectors. But there is also a more direct effect because issuing an ARS 1,000 banknote, for example, is ten times cheaper than issuing 10 banknotes of ARS 100. For the BCRA, the change of denomination meant that the provision of cash held by the public through banknotes of ARS 200, ARS 500 and ARS 1,000 this year resulted in savings in printing costs of around ARS 2.23 billion. In one year only! Estimates made by the Central Bank indicate that the inflation-concealment policy and the resulting outcome of preventing the optimization of the family of banknotes (assuming it was not an intentional policy implemented to issue more banknotes and increase the number of contracts to such effect) resulted in an additional printing cost for the country of 640 million dollars (around 11.2 billion Argentine Pesos at current prices) from 2008 to 2015. This is precisely not taking care of our money, because many things could be done with such resources.

Therefore, one of the greatest improvements in our country will be achieved when each peso of our taxes finds a use that is increasingly more efficient and fruitful for the society at large. This improvement will give rise to a State with an increasing presence, a State that gets things done better than ever before and at a lower cost for society as a whole.

A better regulatory framework

One of the most complex issues in the design of an effective regulatory framework lies in avoiding the temptation of overregulation –a natural compulsion of the State– and relying more on freedom, transparency and competition.

Our starting point at the BCRA was a situation where State regulation was already largely discouraging economic growth. The most accurate example of this was the currency clamp, which stifled our productive system so deeply that we could no longer grow after its implementation.

A positive –but not frequently mentioned– outcome of the elimination of the currency clamp was that one of the greatest beneficiaries was the bank depositor. Once depositors were released from the yoke that limited their freedom and forced them to keep their holdings in pesos frequently deposited in a bank account, it was observed, after the regularization of the exchange rate market in 2016, that financial institutions’ income from interest fell in terms of their assets by 0.2 percentage points while expenses for interest (i.e., the money with which the depositor is rewarded) went up 0.6 percentage points in terms of their assets. The freedom to do whatever they wanted with their savings empowered depositors to demand a better return. And this is what finally occurred.

My point here is that, with its regulations, the State not only gives rise to better or worse levels of efficiency but may also generate a redistribution of wealth. In this sense, the currency clamp was not only inefficient but it also redistributed people’s income towards the financial sector. Therefore, the lifting of the currency clamp resulted in a double benefit: it removed the hindrances that did not allow the country to grow and redistributed resources from the financial sector to the citizens. This is why it was critical to remove it.

Let me give you some other examples related to how to foster competition and transparency, since this is another way whereby the State may contribute to improving the general situation of the economic and social system. The BCRA has encouraged the development of the Fintech, i.e. companies providing financing without receiving bank deposits. It is important to point out that the Central Bank’s regulation is mainly intended to take care of depositors, but if a company lends money out of its own capital, then the arguments that may justify regulation by the monetary authority lose ground. As a result, several Fintech companies have been successfully launched to the market. In this respect, Mercado Libre is a perfect example since it uses, of course, the knowledge of thousands of companies operating in its platform on a daily basis, in addition to its capital, exceeding 10 billion dollars, to create lending solutions for their own clients. In this case, the crucial point is to avoid the temptation to get involved and regulate a business when there are no sufficient grounds to do so.

In this same line, we have also eliminated the prohibition to pay interest on checking account deposits, encouraging institutions to compete for funds taking in this segment where companies and wholesale investors are the main operating agents. Believe it or not, the BCRA did not allow banks to pay interest to their clients on their checking account balances. Can you believe it? Which was the interest behind this prohibition? A good State regulates with a view to improving competition and transparency; a good State does not pass laws or regulations to favor a particular interest.

In terms of transparency, the topic of commission fees should be especially underlined. One of the first measures we adopted was to allow banks to determine once again the commission fees they were going to charge but requiring them simultaneously to publish the prices offered by other institutions of the system. And I ask you to pay special attention to this issue since, even though it may seem to be curious, it is one of the most evident paradoxes proving that sometimes excessive regulations are counterproductive. The period when commission fees were regulated was precisely the period when they were higher as a percentage of the financial institutions’ assets. With greater freedom to determine their value, and simultaneously ensuring a correct performance in terms of competition and transparency within this sector, commission fees fell 0.7 percentage points since then, as a percentage of both the assets of the institutions and total credits and deposits of the system. In other words, competition and transparency led to lower commission fees than when the State presumably regulated the system to protect the bank client. In fact, when the banks realized that we were going to publish their prices in our web site, they immediately started to lower their prices.

Lastly, lending in foreign currency is another example of the positive effects of a less invasive but more efficient regulation. After the exchange rate unification and the tax amnesty, deposits in foreign currency increased 160% and, at the beginning of 2017, there were still 7.5 billion dollars to spare in the Argentine financial system; therefore, the challenge was to use them for productive purposes. Let us think that when somebody takes a credit at a 4% rate, for example, this means that production will generate a return higher than 4%. If those dollars are not used, then the wealth they could have created is lost. Therefore, those spare resources were an issue to be solved for the benefit of all of us.

For this reason, the potential uses of the available lending capacity were expanded, being always aware of avoiding currency mismatches in the balance sheets. For example, we allowed the suppliers of exporting companies and also those who produced tradeable goods without exporting them directly (a farming producer, for instance) to have access to such funds. We also established that a portion of such funds may be devoted to loans related to beef-cattle raising and energy projects, two clearly tradeable goods. By the end of April, we offered the possibility of providing funds to Argentine importers of goods and services, under a mechanism by which local banks may become a source of funding for foreign clients of Argentine exporting companies, thus playing a role similar to that of development banks in other countries. For the first time in many years, Argentine companies may go out to the world to offer not only their products but also the financing for them.

As a result of these measures, interest rates in dollars went down from 5%-6% annually by late 2015 to 2%-3% annually today, and lending in foreign currency went up 379% since then, from a stock of U$S 2.9 billion to 14 billion dollars today.

Consequently, spare funds in the domestic system were redirected towards productive activities; the strong increase of lending meant that the amount of spare dollars went down from U$S 7.5 billion in early 2017 to around U$S 1.5 billion today. This huge amount of resources allocated to our real economy translates into competitiveness gains for our companies, represented by a better access to funding and under better conditions.

This set of initiatives, which gave rise to a more flexible and less stifling regulatory framework, even though stringent enough to ensure the correct competitive performance of the sector, is one of the reasons behind the strong increase in lending, which is currently growing at a 46% year-on-year rate, which in real terms accounts for a 20% increase.

How to design good public policies

The assessment of the impact of public policies is an area under study that is gaining more and more relevance among economists and social sciences at large. Today, best practices require making “pilot tests” before public policies are launched, so that they serve as guide for them to be more effective when they are implemented. At international level, it is now a common practice to measure the effectiveness of a public policy to solve the problem to be tackled3 by means of social experiments. The objective is to avoid initiatives launched out of mere intuition or ideology. If you are interested in an in-depth explanation of this methodology, I recommend you a TED Talk presentation in 2010 by Esther Duflo4 , professor of the Massachusetts Institute of Technology (MIT).

If a social policy may be subject to an experiment to assess its efficacy, this is the path to be followed before a mass implementation of such policy so as to avoid mistakes and optimize its design. For example, the government is seeking to promote saving among children by potentially generating saving mechanisms specifically targeted to school-age children. It is an ambitious but absolutely critical project and it needs to be successful.

This is the framework within which the BCRA has been applying this type of methodologies to assess the efficacy of different financial educational programs devoted to the young; we have studied their impact at a small scale first before adopting measures at national level and committing a higher volume of resources to such actions.

After authorizing accounts in UVAs and UVIs for the underaged since mid-2016, the BCRA sought to make an analysis of the effectiveness of such potential initiatives to stimulate an increased use of banking resources by that segment of the population.

To this effect, the Central Bank, together with Banco Nación, the Ministry of Education and the General Board of Schools of the Province of Mendoza, implemented a series of actions in 2016 in such province to assess the impact of various educational proposals. First, we randomly divided the schools surveyed into three groups. One of these groups received a relatively short training course to explain the concept of savings accounts and UVA and UVI accounts for the underaged. The second group attended a more comprehensive training workshop where issues related to the importance of saving and the use of banking resources were also tackled, while the third group was what is usually called “control group” in the technical jargon, i.e. no information workshop was held in this case. This is done to make a comparison against what would have happened in such population in the counterfactual scenario where no additional workshop is provided.

In April and May 2017, a follow-up was made of the 2016 participants and it was found that, among those who had received the most comprehensive training, a bank account for the underaged had been opened by 4 times and a half more participants; and out of the attendees of the short training course, three times more participants had opened the account compared to the group that did not take any educational workshop. This kind of information is essential to effectively design the policies to be implemented. This exercise has taught us that an information workshop serves to dramatically increase the effectiveness of the policy, and it must therefore be a core component of the measures to be put into practice.

It is indispensable to make these exercises to distribute our energy better and allocate public resources more efficiently.

There was also a survey among the participating schools in the province of Mendoza, and the results were amazing. The survey was made to the children and, in some cases, to their parents. A first interesting result is that 78% of the young respondents state that they would like to save at a bank, and something curious is that we received more affirmative answers to this question among children from places with the lowest financial infrastructure available. The survey proved that the willingness to save was greater in rural than in urban areas, that the children’s main saving objectives were the purchase of a house or better possibilities for education, and that the willingness to save was higher in young people than in their parents.

I wanted to mention this experiment and the survey we performed as an example of the previous work to be made by the State in order to design good public policies, since they must be efficient enough to achieve the results being sought for so that State resources may truly translate into welfare for the entire population. To sum up, safeguarding a responsible use of State resources, implementing an intelligent regulatory framework that ensures freedom, transparency and competition, and assessing the effectiveness of public policies before they are put into practice are three unavoidable tasks we must carry out to improve the quality of our public spending. They are not the only ones, of course. But I assure you that if we give this step forward, it will quickly impact positively on our daily lives thanks to a better State. And the endless debate about whether the State should be big or small will be settled as soon as it is perceived that the resources are devoted to a better quality of life for all of us. I invite you to a discussion focused on an efficient vs. an inefficient State, and how to turn the latter into the former. I am sure what side most Argentinians will choose to be.

Thank you very much".


1 Calculated on the basis of the average income from the main activity provided by the Permanent Household Survey (EPH) corresponding to the first quarter of 2017, for all urban agglomerations.

2 Proposed, for example, in an article by Federico Sturzenegger published by La Nación newspaper: “¿Un billete de 500 pesos? No, todo lo contrario: suprimamos el de 100” (An ARS 500 banknote? No, just the opposite, let us eliminate the ARS 100 banknote), on April 7, 2015.

3Several examples of these studies and assessments of public policies may be found in Chapter 11 of the book by Federico Sturzenegger (2013): Yo no me quiero ir, Editorial Planeta.

4 Talk called “Social Experiments to Fight Poverty” (2010). Available at: https://www.ted.com/talks/esther_duflo_social_experiments_to_fight_poverty?language=es.

August 31, 2017

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