Who´s to Blame for Argentina?
Debate over Role of International Monetary Fund
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BUENOS AIRES, JAN. 19, 2002 (Zenit.org).- "Do cry for Argentina," announced a recent headline. And with good reason. The last month and a half has seen a string of bad economic news, street riots and a rapid succession of presidents.
On Dec. 1, then Economy Minister Domingo Cavallo introduced a limit on bank withdrawals to $1,000 monthly. From there on, the situation rapidly deteriorated. Popular unrest led first to the resignation of all government Ministers, and then on Dec. 20 to the departure of President Fernando De la Rúa. His successor, Adolfo Rodríguez Saá, governor of the state of San Luis, lasted only a few days. Other interim presidents also failed to restore calm. Finally, Peronist Senator Eduardo Duhalde was installed in power on Jan. 2.
The new administration broke the parity of the peso to the dollar and announced the suspension of debt payments. The link between the two currencies was considered crucial in ending the hyperinflation that afflicted Argentina in the past, but experts now agreed that the fixed rate was no longer economically viable.
This week saw the first days of free trading in the peso, and, as the New York Times reported Jan. 17, the Argentine currency has rapidly lost value. On Wednesday it closed today at 1.85 to the dollar, with some trades at 2.2 to the dollar reported before the central bank´s intervention.
On Tuesday the central bank sold $8.8 million of its dwindling foreign reserves when the peso slipped below the psychologically important level of 2 to 1, reported the New York Times.
The International Monetary Fund announced that it would grant Argentina a reprieve of one year on repayment of a $933 million loan. IMF managing director Horst Köhler said the action represented the IMF´s "desire to help Argentina overcome its difficult economic and social situation," the Guardian newspaper of Britain reported Jan. 17.
The crisis has prompted questioning of the free-market reforms introduced in recent years in Argentina and other Latin American countries. But in an address to the Organization of American States on Wednesday, President George W. Bush said that "Argentina -- and nationals throughout our hemisphere -- need to strengthen our commitment to market-based reform, not weaken it," reported the New York Times.
Relations tense with IMF
Wednesday´s decision to postpone the loan repayment notwithstanding, the IMF has avoided bailing out Argentina. Anne O. Krueger, the IMF´s deputy managing director, said that until the new government agreed on "a fairly coherent program that gives promise in the medium run" of putting the economy on a sound path, "there is no point in our talking about a fund support program for them," reported the Washington Post on Jan. 12.
On Dec. 21 the Wall Street Journal reported that many in Latin America characterize the IMF in the following terms: "It lends you money, but with plenty of strings. When you get into trouble, it squeezes you for your last peso and forces a currency devaluation, leaving you poorer."
The Journal, a long-standing critic of the IMF, stated: "The devastation that the IMF has left in its wake is so impressive that even the fund itself cannot ignore the results." To be fair, the Journal also considers that the tax increases of De la Rúa and the refusal to "downsize the state" also played a part in the current crisis.
On Dec. 22 the New York Times noted that criticisms of the IMF come from all parts of the political spectrum, and are sometimes contradictory. Some opine the fund was wrong to deny aid to Argentina in December, while the country´s economic program (designed with IMF approval) was forcing painful austerity measures on its citizens. Others say the opposite, arguing that the fund erred in repeatedly offering loans to Argentina, despite indications that the country´s policies were no longer functioning.
Not all blame the IMF. Nobel prize winner Paul Samuelson argues that the causes of Argentina´s problems lie within the country itself. In an interview published Dec. 22 by the Italian paper Il Messaggero, Samuelson said that since 1998 the IMF had been warning Argentina of the need to change its economic policies.
The cost of corruption
The American economist considers that the government should have broken the peso´s parity with the dollar a long time ago, given the stronger position of the greenback in recent years. That this decision was not taken is due to a lack of political courage, affirmed Samuelson.
Brink Lindsey, senior fellow at the Cato Institute, also pointed the finger at internal problems. Writing in the Wall Street Journal on Jan. 9, Lindsey said one of the causes of the crisis "is the dilapidated state of its political and legal institutions." Corruption, lack of judicial independence, and poor functioning of the political and legal systems are hurting Argentina, Lindsey said.
"A healthy market economy requires not just the absence of statist controls; it requires the presence of sound institutions," the article concluded. "And although the reforms of the Menem era made strides toward meeting the former requirement, they ignored the latter altogether."
One longtime critic of the IMF, Harvard University economist Jeffrey Sachs, says the IMF helped Argentina emerge from its hyperinflation of the 1980s and only ran up against its limits this year, according to a Bloomberg report Jan. 4. "The fund can be criticized for backing a program that had a weak chance of success, but this is a lesser sin" than imposing draconian spending cuts, Sachs said. And those spending reductions were ordered by the government, not the IMF, he observed.
However, Joseph Stiglitz, the 2001 winner of the Nobel Memorial Prize in Economic Sciences, was more critical of the IMF. Writing in the Spanish paper El País on Jan. 10, he said the fund committed the error of encouraging a contractionary fiscal policy, the same mistake it had made in East Asia. A contractionary policy only leads to a slowdown, thus ensuring that budget targets would not be met.
Stiglitz outlined a number of lessons to be learned from Argentina´s problems. Among these he says that in a world of volatile exchange rates, pegging a currency to the U.S. dollar is highly risky. He also warned against a single-minded focus on fighting inflation. Following policies that leave large numbers unemployed -- Argentina had a jobless rate of 18% in December -- is very risky, Stiglitz says.
Stiglitz concluded by arguing that the situation in Argentina highlights the urgent need to reform the international financial system, starting with a reform of the IMF.
According to Susan George, this reform should lead to the IMF being a mechanism that helps countries avoid temporary problems with their balance of payments. George is associate director of the Transnational Institute in Amsterdam and vice president of ATTAC France (Association for Taxation of Financial Transaction to Aid Citizens). Writing in the Spanish paper El Mundo on Jan. 10, she argued that the IMF would be better off advising nations how to avoid contracting new debts. She also argued that that the IMF must dedicate itself to supervising a plan for the cancellation of the foreign debts of poor countries.
Back in Argentina, meanwhile, in a press conference last Tuesday President Duhalde was critical of Argentina´s recent agreements with the IMF, which he said had aggravated recession. Yet, Duhalde signaled his decision to work with international institutions to help the economy, the Financial Times noted Jan. 16. "The policy we have followed with the IMF has been part of the problem and is now going to be part of the solution," he said. After a good cry, Argentina is ready for real relief.