The Man Who Came In from the Crash

Domingo Cavallo’s policies led to the largest economic collapse in recent history. How did he end up teaching at Harvard?

Ask most Harvard professors if they think they are celebrities, and you’ll probably get a laugh. The life of a career academic is about research and teaching, far from glamorous pursuits. Former Harvard professors Jeffrey Sachs and Cornel West and their recognition outside the world of scholarship are exceptions.

Harvard, however, is not immune to the celebrity bug. The English Department, for example, hired popular authors Zadie Smith and James Wood (who have also written pieces for The New Republic) to teach courses on creative writing and literary consciousness, respectively, for this academic semester. The Kennedy School of Government often hires people who command extra-academic recognition; Samantha Power, who works at the Carr Center for Human Rights Policy, won a Pulitzer Prize in the non-fiction category for her book A Problem from Hell, a look at America’s relationship to genocide in the twentieth century. Signing up celebrities for research and teaching purposes is routine at Harvard.

But then there is the strange case of Domingo Cavallo, who complicates the practice of “celebrity” hiring practices at Harvard.

Cavallo, a Visiting Professor and Scholar at the Weatherhead Center for International Affairs, is not a popular novelist. He has not won Pulitzer Prizes. After receiving his Ph.D from Harvard in 1977, he directed the Argentinean Central Bank under the military government in Argentina in 1982. From 1991 to 1996, Cavallo was Minister of Finance of Argentina under President Carlos Menem. In 2001 he was reinstated as Minister of Economy under Menem’s successor Fernando De la Rua. On the basis of his real world credentials, Cavallo, a native of Argentina, is an established figure, the steward of a nation’s economy. The complication is that Cavallo presided over a spectacular economic collapse that destroyed the once promising prospects of Argentina.

According to The New York Times, in December 2001, after four years of recession, Argentina defaulted on a national $132 billion debt (in the form of reported interest on government bonds). Unemployment was also on the rise, as high as 18 percent, according to the Financial Times. In an attempt to save Argentina’s banking system, Cavallo instituted the corralito, a program which essentially froze personal accounts and prevented an old-fashioned “run” on the banks. By the time general access was granted, after Cavallo’s departure, accounts had plummeted in value and the financial security of the middle class was shattered.

Many claimed that the troubles began during Cavallo’s first tour of duty as Minister of Finance, when he created the “convertibility” plan that fixed the Argentinean peso to the value of the dollar at a one-to-one rate. Cavallo based his hopes on the theory that the Argentinean economy was strong enough to keep up with the American economy, or that the dollar would fall enough in value to reach the level of the peso. During this same period, he was also accused of corruption in his program to privatize government services. Cavallo, along with other members of De la Rua’s government, resigned amid riots across Argentina.

The analyses have ranged from defensive apologies to polemics. Professor Martin Feldstein, in the March/April 2002 issue of Foreign Affairs magazine, wrote: “If other emerging-market governments misinterpret Argentina’s experience, they too might move away from the promarket policies that hold the best promise of raising future living standards… If Menem and Cavallo’s strategy had succeeded, Argentina today would be enjoying strong growth, low inflation, and financial stability.” Longtime South American reporter Tim Frasca, on the other hand, in the May 6, 2002 issue of The Nation, called the corralito “grand larceny” and claimed that, “Implicit in the corralito was acknowledgment not only of the country’s bankruptcy but also of the huge falsehood that had underpinned the entire economy for a decade: that the Argentine peso was worth one U.S. dollar.” Cavallo’s theories were defended by free-market advocates, while his policies were decried by liberal economists. Cavallo himself, however, was left to twist in the wind politically, until he landed on his feet in academia.

The story, and the central question, comes full circle with Cavallo’s return to Harvard. Cavallo, who is currently teaching a class on the Latin American economy, does not represent the typical “celebrity” that Harvard employs for guest professorships. Even if one deeply dislikes Zadie Smith’s writing, it is hard to imagine someone vehemently protesting her presence at Harvard. This is not so for Cavallo, who while teaching at the Stern School of Business at New York University last year was the victim of escrache, a series of protests by students. He has not met with the same kind of reception here.

One is tempted to think of the story of Tom Paulin, the Irish poet invited last year to give the Morris Gray lecture. Paulin’s vicious anti-Semitic remarks caused the English Department to see-saw on whether or not they should invite or re-invite him, and the story initiated a great deal of controversy in academia and in the press. It is difficult to compare Paulin to Cavallo, however, because while Paulin’s words were violent and controversial, they were still simply words. Cavallo has been a man of action who, many would argue, made a good faith effort.

Professor John Coatsworth, the Director of the David Rockefeller Center for Latin American Studies, is of this opinion: “Domingo Cavallo tried to avert the economic crisis that, tragically, overtook his best efforts and drove him from office in December 2001. The crisis now looks unavoidable, but I think he had a fair chance at success when he agreed to reassume his old post as Minister of Economy,” said Coatsworth. “Had the dollar fallen a bit faster, had the US [sic] recession started later or interest rates fallen more quickly, had the new administration in Washington proved more sympathetic, had the Argentine president had been a more decisive and adroit politician…that is with a decent run of luck and better timing, Cavallo would now be celebrated as a great statesman.”

But this in turns raises questions of reliance and international relations. It was fairly common knowledge in the international community that Argentina, beyond the mathematics of finance, was happily, even slavishly, catering to U.S. international desires. At one point during the 1990s, Foreign Minister Guido di Tella claimed that there were “carnal relations” between Argentina and the U.S. If di Tella had been asked to identify the dominant partner in the relationship, he might even in his exuberance have regretted using the metaphor. The U.S. economy is the largest in the world and undoubtedly exerts the most direct and indirect influence, but the “carnal relations” when it came to economics might have been too intricate. There seems to be something amiss when a nation’s productive capabilities are so connected to the capabilities of another that a retrenchment in one causes the collapse of another. It is disturbing when the echo is louder than the original sound.

Argentina is not the only nation that has been struggling with neoliberal economic doctrine. The IMF and its promotion of free markets, retrenchment of government involvement in the economy, and foreign investment has also run into major snags in Asia, most notably in Malaysia, where government officials have fought the IMF and attempted to assert government control. The difficulty of IMF program implementation does not seem to be lost in translation. While Cavallo might be viewed as another victim of flawed policy, he also was a willing participant in programs that, on the whole, have a very spotty track record.

Coatsworth creates a long string of “ifs” in his theorizing that bad luck painted Cavallo into a corner. The result seems somewhat strained. The term “recession” is also a murky one and can be misleading. Many people still believe that we are still in an economic recession or, more generally, that the economy is stagnant. But according to the Bureau of Economic Analysis, real gross domestic product (GDP) of the U.S. rose by 8.2 percent in the third quarter of this year: for comparison’s sake, in 1999, a year still tagged with the “boom” label and just when Argentina’s own recession began, the GDP rose by 7.1 percent and only dipped twice over the past four years, in the first two quarters of 2001, and even then by markedly smaller percentages. Productivity, arguably the single key factor for many economists when considering long-term economic growth and tied to GDP figures, actually grew in both 2001 and 2002 by 2.0 and 5.3 percent, respectively. In the third quarter of this year, productivity jumped by 8.1 percent. National unemployment figures get the headlines, but productivity is arguably more important.

The point, of course, is that while the U.S. economic downturn earlier in this decade surely had massive ripple effects, the picture is complex, and it is hard to paint the Argentinean portrait with a broad statistical brush. What precise part of a postponed recession would have “saved” Cavallo? Predictions along this line sound like predictions a few years ago concerning Argentina, when everyone assumed that the IMF would continue to keep Argentina afloat while it waited for foreign investment, among other things. Theory, after all, can still fail retroactively as well as proactively when it is applied to forecasts about what might have been.

Finally, to call the De la Rua administration indecisive is about the most complimentary thing anybody can say about any government with which Cavallo has worked. When Cavallo controlled the Argentinean bank in 1982, he was working for a notorious third-world military dictatorship that initiated the Falklands War. The first democratic president he served under was Carlos Menem, who today is widely recognized as one of the most corrupt government officials in recent global history: the Argentinean government under his leadership was rife with graft and wink-wink deals. The conjunction of a corrupt government and apparent economic success must always be viewed with suspicion. It is important to stress that there is not any kind of substantial evidence linking Cavallo personally to the sleaze that was so prevalent. He was, to his credit, following his own orders and believed in the validity of his plans. But he isn’t likely to score pity points for the company he kept.

President of Harvard University Lawrence H. Summers, who is listed on the faculty of the economics department, chose to emphasize Cavallo’s credentials as a theorist when discussing the matter: “Wholly apart from his work as a policymaker, he is an economist of some distinction and one of the leading thinkers on macroeconomic policy in a developing country context.” Summers added that, “I…had no role at all in Domingo Cavallo’s appointment as a visitor in the economics department and indeed until I saw him on the street a week ago did not know he was visiting Harvard.”

Others take a utilitarian view of Cavallo as an academic on a college campus. “Even the best economists give advice and [make] decisions that sometimes lead to fatal outcomes,” said Professor Jagdish Bhagwati, a prominent economist at Columbia University and one of the advisors to the GATT trade agreement enacted under President Clinton. “It is important to have them come to universities and be interrogated on why they made the mistakes so that we may prevent them in the future.”

Bhagwati’s choice of words is interesting. The word “interrogated” does not conjure up the most pleasant images – one tends to think of terrorists, not economists, being interrogated. The general feeling in the world of economic theory is that Cavallo is a true believer in neoliberal market theories, and that he is not a hypocrite, much less some kind of criminal. Still, the failure of his policies, according to Bhagwati, can be viewed as a sort of commodity to be extracted and subjected to scrutiny in future international economic planning.

When considering if Cavallo’s personal credibility as an economist has been damaged, Bhagwati said, “Yes, it has been. But economists, like Jesus Christ, can rise again. Jeffrey Sachs, now my colleague, was badly damaged by the failure of shock therapy in Russia. But he has now redeemed himself through his work on medicines in Africa. There can be redemption and rehabilitation.”

To say that Cavallo should be blacklisted from the academic community is a harsh, overly simplified charge. He has done a great deal of respected, groundbreaking work in the field. But to pooh-pooh the concerns of those who look on Cavallo with fear or resentment is likewise an unfair tactic. Students, especially at elite universities, must recognize and harbor concern for who is instructing them in the classroom. When one listens to a Shakespearean soliloquy on stage, the character’s actions in history must be taken into account. Otherwise, Iago of Othello might come off as an honest, even avuncular advisor. Cavallo is no Iago. But his policies in the real world resulted in disaster for Argentina. If a Harvard student chooses to ignore or dismiss this, the student has failed as well.

Andrew Ujifusa ’04 ( has his doubts about Harvard and its role in the revolving door—look out, Wall Street.