Arthur MacEwan on Argentina

["Ian Murray" <seamus2001@xxxxxxxxx>]

Economic debacle in Argentina: IMF strikes again
By Arthur MacEwan
(With permission from Foreign Policy In Focus http://www.fpif.org)

[Editor's note: Since the time of writing, Argentina has yet another
new president, the Peronist Eduardo Duhalde. He has devalued the peso
by 29 percent, scrapping the decade-old peg to the US dollar, in an
attempt to ease the economic crisis.]

In the midst of their fourth year of recession, with the official
unemployment rate approaching 20 percent and with increasing cutbacks
of social programs, Argentinians took to the streets in the days
before Christmas. Sparked by the government's latest economic
policies, which restricted the amount of money people could withdraw
from their bank accounts, political demonstrations and the looting of
grocery stores spread across the country. First the government
declared a state of siege, but with the police often standing by
watching the looting "with their hands behind their backs", there was
little the government could do. Within a day after the demonstrations
began, the principal economic minister had resigned; a few days later
came the president's resignation.

A hastily assembled interim government immediately defaulted on $155
billion of Argentina's foreign debt, the largest debt default in
history. The new government then promised a public works jobs program
and announced it would issue a new currency, the argentino, that would
circulate as a "third currency" alongside the old pesos and US
dollars. Argentinians, however, seemed to have little hope for the new
currency, and, fearing a severe devaluation, they continued to line up
outside banks, hoping to get dollars from their accounts. As for the
new programs, they did little to confront the fact that per capita
income has already fallen by 14 percent in this recession. As economic
instability deepened, the new government proved unable to win the
popular support it needed, and it quickly dissolved.

At the opening of 2002, Argentina faced widespread political and econo
mic uncertainty. The main question seemed to be whether the short run
would bring more unemployment, severe inflation, or both. As to the
stability of Argentina's currency, virtually everyone expects a sharp
devaluation fairly soon.

Argentina's experience leading into the current debacle provides one
more lesson regarding the perils of free market ideology and of the
economic policies pushed on governments around the globe by the
International Monetary Fund (IMF). In Argentina and elsewhere, these
policies have been embraced by local elites, who see their fortunes
(both real and metaphoric) tied to the deregulation of commerce and
the reduction of social programs. Yet the claims that these free
market policies would bring economic growth and widespread well-being
have been thoroughly discredited. (In spite of the economic collapse
and political turmoil in Buenos Aires, the wealthy appear to have
protected themselves by having moved their money out of the country.)

>From good to bad to ugly

Not long ago, Argentina was the poster-child for the conservative
economic policies pushed by the IMF. The Buenos Aires government
privatized state enterprises, liberalized foreign trade and
investment, and tightened government fiscal and monetary policy.
During the 1990s the country's economy seemed to do well. The good
times of the mid-1990s, however, were built on weak foundations.
Economic growth in that period, while substantial, appears to have
been in large part the result of an increasing accumulation of
international debt, fortuitous expansion of foreign markets, and
short-term injections of government revenues from the sales of state
enterprises. Before the end of the decade, things began to fall apart.

Argentina's current problems are all the more severe because, in the
name of fighting inflation, in the early 1990s the government created
a "currency board" charged with regulating the country's currency so
that the Argentine peso would exchange one-to-one for the US dollar.
To assure this fixed exchange rate, the currency board maintained
dollar reserves, and could not expand the supply of pesos without an
equivalent increase in the dollars that it held. The currency board
system appeared attractive because of absurd rates of inflation in the
1980s, with price increases of up to 200 percent a month.

By the mid-1990s, inflation in Argentina had been virtually
eliminated - but flexibility in monetary policy had also been
eliminated. When the current recession began to develop, the
government could not expand the money supply as a means of stimulating
economic activity. Worse yet, as the economy continued downward, the
inflow of dollars slowed, restricting the country's money supply even
further (by the one-to-one rule). And still worse, in the late 1990s,
the US dollar appreciated against other currencies, which meant
(again, the one-to-one rule) that the peso also appreciated; the
result was a further weakening in world demand for Argentine exports.

During 2001 the Argentine recession grew rapidly deeper. Although the
IMF pumped in additional funds, it provided these funds on the
condition that the Argentine government would entirely eliminate its
budget deficit. With the economy in a nose-dive and tax revenues
plummeting, the only way to balance the budget was to drastically cut
government spending. Yet, in doing so, the government was both
eviscerating social programs and reducing overall demand. In
mid-December, the government announced that it would cut the salaries
of public employees by 20 percent and reduce pension payments. At the
same time, as the worsening crisis raised fears that the peso would be
devalued, the government moved to prevent people from trading their
pesos for dollars; it promulgated a regulation limiting bank
withdrawals. These steps were the final straws, and in the week before
Christmas, all hell broke loose.

Failure under the direction of the IMF

Economic policies in Argentina during the past 15 years have had
substantial support among the country's business elite, especially
from those whose incomes derive from the financial sector and primary
product exports. These groups have gained substantially, and officials
in the Argentine government have been active in formulating and
executing the policies that have led to the current debacle.

At the same time, the country's economic policies during the 1990s
were developed under the direction of the IMF. From the late 1980s
onward, a series of loans gave the IMF the leverage to guide Argentine
policymakers as they increasingly adopted the IMF's conservative
economic agenda. As the country entered into the lasting downturn of
the current period, the IMF continued, unwavering, in its support. The
IMF provided Argentina with "small" loans, such as the $3 billion made
available in early 1998 when the country's economic difficulties began
to appear. As the Argentine crisis deepened, the IMF increased its
support, supplying a loan of $13.7 billion and arranging $26 billion
more from other sources at the end of 2000. As things worsened still
further in 2001, the IMF pledged another $8 billion.

The IMF coupled its largess with the condition that the Argentine
government maintain its severe monetary policy and continue to tighten
its fiscal policy. Deficit reduction - which according to the IMF is
the key to macroeconomic stability (which in turn is supposed to be
the key to economic growth) - was undertaken with a vengeance. In
early July 2001, on the eve of a major government bond offering,
Argentine officials announced budget cuts of $1.6 billion (about 3
percent of the federal budget), hoping that these cuts would reassure
investors and allow interest rates to fall. Apparently, however,
investors saw the cuts as another sign that the country's crisis was
worsening, and the bonds could only be sold at sharply higher interest
rates (14 percent as compared to the 9 percent that similar bonds had
commanded in mid-June). By December, the effort to balance the budget
required far more severe expenditure cuts, and the government
announced a drastic reduction of $9.2 billion in its spending, about
18 percent of its entire budget.

Argentina is now providing one more example of the failure of IMF
policies to establish the bases for long-term economic growth in
low-income countries. Numerous other countries demonstrate similar
sets of problems: much of sub-Saharan Africa; Mexico, and several
other countries in Latin America; Thailand, and other parts of East
Asia hit by the 1997 crisis; and Turkey, along with Argentina in 2001.
IMF policies do often succeed in curtailing inflation; sharp cuts in
government spending and restrictions of the money supply will usually
yield reduced price increases. Also, IMF programs can provide large
influxes of foreign loans - from the IMF itself and the World Bank,
from the US government and the governments of other high-income
countries, and, once the approval of the IMF has been attained, from
internationally operating banks. But nowhere has the IMF policy
package led to stable, sustained economic expansion. Also, as in
Argentina, it often generates growing inequality.

The IMF's mania for reductions of government spending in times of
crisis has been rationalized by the claim that balanced budgets are
the foundation of long-term economic stability and growth. The IMF
officially laments the fact that these policies have a severe negative
impact on low-income groups (because they both generate high rates of
unemployment and eviscerate social programs). Yet, IMF officials claim
these policies are necessary to assure long-term stability. Nonsense.
In recessions, moderate government deficits (like those of recent
years in Argentina) are a desirable counter-cyclical policy, and
balanced budgets only exacerbate down-turns. Also, curtailing social
spending - on education, health care, physical infrastructure
projects - cuts the legs out from under long-term economic progress.

Why does the IMF stick to failed policies?

Yet the IMF sticks to its policies, probably because those policies
serve important and powerful interests in the US and world economies.
The IMF, after all, is not an institution controlled by either the
people or the governments of low-income countries. It is not even like
UN agencies, in which governments have formally equal voice with one
another. Instead, the IMF is controlled by the governments of
high-income countries that provide the funds for its operations. The
US government has by far the greatest influence at the IMF. With over
18 percent of the voting shares in the Fund, the US government has de
facto control. Indeed, over the years, the IMF has operated largely as
a branch of the US foreign policy apparatus, attempting to create a
context that assures the well-being of US interests - which is to say
the interests of US-based internationally operating firms. (The same
context serves the interests of firms based in Europe, Japan, and
elsewhere; so the US generally has the support of its allied
governments in directing the IMF.)

Most importantly, the IMF tells governments that a key to economic
growth lies in providing unrestricted access for imports and foreign
investment. Virtually all experience, however, suggests the opposite -
that extensive regulation of foreign commerce by a country's
government has been an essential foundation for successful economic
growth. Britain, the US, Japan, countries of Western Europe, Taiwan,
South Korea - all built the foundations for development not on "free
trade" but on government regulation of trade. The IMF gets around the
inconvenient facts of history by conflating free trade with extensive
engagement in the international economy. But the two are not the same.
Yes, successful development has always been accompanied by extensive
international engagement, but through regulated commerce and not free
trade.

The dramatic experience with financial capital demonstrates a similar
disconnect between IMF proclamations and reality. Through the period
of its increasing influence in the 1980s and 1990s, the IMF pushed
governments in low-income countries to liberalize their capital
markets. Capital controls were, claimed the IMF, anathema to
development. Then came 1997, when the open capital markets of East
Asian countries were instruments of disaster. In the aftermath of
1997, it seemed clear that the real winners from open capital markets
were financial firms based in the US and other high-income countries.

These same financial firms are also the winners from another component
in the IMF policy package. Fiscal responsibility, according to the
IMF, means that governments must give the highest priority to
repayment of their international debts. In fact, the immediate
justification of new IMF loans is often that this influx of capital is
necessary to assure prompt payments of past loans. While there is no
doubt that banks operating out of New York and other financial centers
gain from this policy, experience does not support the contention that
when governments fail to pay foreign debts they bring on financial
disaster. Instead, experience suggests that, at times, defaulting on
foreign debt can be an effective, positive policy option. (Also, as
has been frequently noted, as long as the IMF provides the funds to
assure payment of loans made by the internationally operating banks,
those banks will have no incentive to assure that they are making
sound loans.)

IMF advocacy of privatization is one more example of its effort to
open the world economy more fully for US-based firms. When state
enterprises in low-income countries are sold, large internationally
operating firms are often the buyers, able to move in quickly with
their huge supply of capital. Of course, in Argentina and elsewhere,
local business groups have often been the direct beneficiaries of
privatization, sometimes on their own and sometimes as junior partners
of firms based abroad. Either way, whether the buyers of state
enterprises are national or foreign, this enlargement of the private
sphere of operation works to the benefit of the private firms. The
problem here is not that privatization is always inappropriate, but
simply that, contrary to IMF nostrums, it is not always appropriate.

Privatization is especially problematic when it only replaces an
inefficient government monopoly with a private monopoly yielding huge
profits for its owners. Moreover, the record from Mexico City to
Moscow demonstrates that privatization is often a hugely corrupt
process.

A growing popular opposition

The policies of the IMF and those of the World Bank have generated a
great deal of popular opposition in low-income countries as well as in
the US and Europe. During recent years, that opposition has become
increasingly strident, staging major demonstrations at meetings of the
IMF and the World Bank, as well as at other gatherings of the
government officials guiding globalization. This opposition has been
dubbed the "anti-globalization movement". The title is misleading
because most of the activists are not opposed to the growing
international economic and cultural connections among peoples, but are
opposed to the way those connections are being structured, benefiting
large firms while creating hardship and instability for many, many
people. Policies like those of the IMF in Argentina typify the
problem. Also, the recent political upheaval in Argentina lends new
strength to the argument of the opposition movement that the IMF
adjustment policies not only fail to bolster economic development but
also lead to social and political disintegration.

Pressure from this movement has had some impacts. The IMF's
contribution to the Asian financial crisis in 1997 unleashed a torrent
of criticism that the movement both built upon and contributed to.
While no major policy changes have ensued, the IMF has responded
rhetorically, renaming its "Enhanced Structural Adjustment Facility"
as the "Poverty Reduction and Growth Facility". Over a longer period,
the World Bank has also adjusted at least the appearance of its
policies, focusing more attention on the issue of poverty and starting
to examine the role of gender in economic development. The World Bank,
in addition, has backed off from some of its large-scale water control
projects in low-income countries as a result of pressure from local
organizations and international environmental groups. These changes
have not basically altered the programs of the international financial
institutions, and the IMF has been especially resistant to change. Yet
these adjustments do suggest that opposition has begun to have an
impact.

The lesson is that the movement for change should increase its
pressure on these institutions that are playing such central roles in
shaping globalization. While the movement has emerged largely in
response to the hardships and inequality that have grown - even while
IMF-type policies generated some economic growth - this opposition
will gain greater legitimacy as growth is replaced by crisis, as in
Argentina. The appeal of alternative policies will be even greater as
the IMF and local elites can no longer claim that economic growth will
eventually solve all problems.

Beyond denunciation: Alternative strategies

There is, however, a need and an opportunity for the opposition
movement to go beyond denunciation of the IMF's conservative policies
and to articulate alternative strategies, strategies that would
support a democratic, egalitarian form of economic development. Such
strategies would promote structural adjustment in low-income
countries, but a very different and more fundamental structural
adjustment than has been advocated by the IMF. A democratic
development strategy could begin with a focus on the expansion of
social programs, a greater investment in schooling, health care, and
other public services that would establish a social foundation for
long-run economic expansion.

A democratic strategy would not ignore macroeconomic stability, but
instead of seeking that stability in government cutbacks, it would
pursue expanding the government revenues (raising taxes) as a means to
provide fiscal balance. Also, a democratic strategy could not ignore
the private sector, but it would recognize the problems of allowing
the private sector to be guided simply by private profits in an
unregulated market. It would, for example, push the private sector
toward high-technology activity instead of production based on low
wages, and it would seek to provide support for local farmers to
maintain their livelihoods and community stability.

The first problem in implementing an alternative development program
in Argentina and elsewhere is to overcome the power of elite groups
that have directed the existing system. In spite of the current
difficulties, the policies that the Argentine government has followed
in recent years, and the similar policies pursued by the governments
of many low-income countries, have delivered substantial benefits to
local elites. Those policies have allowed them to strengthen their
positions in their own economies and secure their roles as junior
partners with US-based and other internationally operating firms.
Changing policies will therefore require changing the balance of
power. Shifting the balance of power in a country is never easy, but
the emergence of an international movement for change and the growing
economic crisis present some substantial opportunities.

If people in low-income countries are to move in an alternative
direction, they must find ways to deal with the oppressive burden of
foreign debt. Not only is the debt itself a problem, creating a
growing drain on countries' resources, but also the need to
continually seek new debt in order to repay old debt forces
governments to accept the IMF conditions that perpetuate the problem.

Here, those forces that want change can take a lesson from the
high-income countries. As the governments of high-income countries
work together in pursuing their economic relations with the low-income
countries, low-income debtor countries have a common set of interests
that could provide the foundation for common action. Working as a
bloc, they would have a greater chance of gaining better terms,
greater leeway in the conditions that come with foreign finance, and
the freedom to pursue the meaningful structural adjustment of a
democratic strategy.

Ultimately, the power of such a bloc would depend on the willingness
of member countries to repudiate their foreign debts. Such repudiation
would have legitimacy because of the coercive practices that have
given rise to this debt, and repudiation would have wide popular
support.

But would debt repudiation invite economic disaster? In Argentina,
quite to the contrary, it was a refusal to repudiate the debt that led
into the December debacle. The new government has now defaulted, but
not in a controlled manner that might yield the greatest advantage,
but as an act of desperation. Also, debt defaults in the past have
generally not generated disaster, certainly nothing worse than the
current Argentine situation. In any case, if forces in debtor
countries could make the threat real, actual repudiation would
probably not be necessary. The power that the high-income countries
have in the threat to cut off new loans would be matched by the power
that low-income countries would have from their threat to cut off the
flow of repayments.

There are substantial political barriers to the emergence of
democratic development strategies in low-income countries and to joint
action by debtor countries. At the end of December, as a new spate of
rioting broke out in Buenos Aires, US President George Bush told the
Argentine government to seek guidance from the IMF and "to work
closely with" the IMF to develop its economic plans. And the policies
of the IMF are unlikely to change in any significant way. Indeed, as
Argentinians went to the streets in response to their long suffering
under the aegis of the IMF, the IMF disclaimed all responsibility.
"The economic program of Argentina was designed by the government of
Argentina and the objective of eliminating the budget deficit was
approved by the Congress of Argentina," declared the IMF's
spokesperson on December 21.

This continued pressure from the US government and the persistence of
the IMF in pursuing its discredited policies make progressive change
difficult. Also, powerful elites in Argentina and other low-income
countries reinforce the barriers to change. Yet the economic case for
change is overwhelming, and one way or another a political route to
this change needs to be found.

Arthur MacEwan is Professor of Economics and interim provost and Vice
Chancellor for Academic Affairs at the University of Massachusetts in
Boston, United States. His most recent book is Neoliberalism or
Democracy? Economic Strategy, Markets, and Alternatives for the 21st
Century.