[stop-imf] WPost: Weisbrot: Argentina's Crisis, IMF's Fingerprints

[Robert Weissman]

Great piece by our friend Mark Weisbrot:


Argentina's Crisis, IMF's Fingerprints
By Mark Weisbrot
Washington Post
Tuesday, December 25, 2001; Page A33


As Argentina's government was resigning in the face of full-scale riots and
protests from every sector of society, a BBC-TV reporter asked me whether
this economic and political meltdown would change the way people viewed the
International Monetary Fund. I wanted to say yes, but I had to tell him: "It
really depends on how the media reports these events."

So far it looks as if the IMF is getting off easy, once again. The Fund and
the World Bank -- the world's two most powerful financial institutions --
learned an important lesson from their brief spate of bad publicity during
the Asian economic crisis a few years ago. They have become masters of the
art of "spinning" the news.

Argentina's implosion has the IMF's fingerprints all over it. The first and
overwhelmingly most important cause of the country's economic troubles was
the government's decision to maintain its fixed rate of exchange: one peso
for one U.S. dollar. Adopted in 1991, this policy worked for awhile. But over
the past few years, the U.S. dollar has been overvalued. This made the
Argentine peso overvalued as well.

Contrary to popular belief, a "strong" currency is not like a strong
body. It
is very easy to have too much of a good thing. An overvalued currency
makes a
country's exports too expensive and its imports artificially cheap. Just look
at the United States, where our "strong" dollar has brought us a record $400
billion trade deficit.

But it gets catastrophically worse for a country that has committed
itself --
as Argentina has -- to a fixed exchange rate. When investors start to believe
that the peso is going to fall, they demand ever higher interest rates. These
exorbitant interest rates are crippling to the economy. This is the main
reason Argentina has not been able to recover from its 4-year-old recession.

To maintain an overvalued currency, a country needs large reserves of
dollars: The government has to guarantee that everyone who wants to exchange
a peso for a dollar can get one. The IMF's role here was crucial: It arranged
massive amounts of loans -- including $40 billion a year ago -- to support
the Argentine peso.

This was the IMF's second fatal error. To appreciate its severity, imagine
the United States borrowing $1.4 trillion -- 70 percent of our federal budget
-- just to prop up our overvalued dollar. It didn't take long for Argentina
to pile up a foreign debt that was literally impossible to pay back.

As if all that weren't enough, the Fund made its loans conditional on a
"zero-deficit" policy for the Argentine government. But it is neither
necessary nor desirable for a government to balance its budget during a
recession, when tax revenues typically fall and social spending rises.

The "zero-deficit" target may make little economic sense, but it has great
public relations value. By focusing on government spending, the IMF has
managed to convince most of the press that Argentina's "profligate" spending
habits are the source of its troubles. But Argentina has run only modest
budget deficits, much smaller than our own deficits during recessions.

The IMF now claims that it was against the fixed exchange rate, and the
massive loans to support it, all along. Fund officials say they went along
with these policies to please the Argentine government. So now Argentina
tells the U.S. government what to do! This is not a very credible story, but
of course verifying who made what decision is a little like tracking the
chain of command at al Qaeda. IMF board meetings, consultations with
government ministers and other deliberations are secret.

But they do have a track record. In 1998 the Fund supported overvalued
currencies in Russia and Brazil, with massive loans and sky-high interest
rates. In both cases the currencies collapsed anyway, and both countries were
better off for the devaluation: Russia's growth in 2000 was its highest in
two decades.

Argentina will undoubtedly recover too, after it devalues its currency and
defaults on its unpayable foreign debt. But the people will need a government
that is willing to break with the IMF and pursue policies that put their own
national interests first.

Washington has other ideas. "It's important for Argentina to continue to work
through the International Monetary Fund on sound policies," said White House
spokesman Ari Fleischer on Friday. For the IMF, failure is impossible.

The writer is co-director of the Center for Economic and Policy Research.



© 2001 The Washington Post Company