[stop-imf] progressive economists on Argentina
Robert Weissman
rob@essential.org
Tue, 08 Jan 2002 17:54:18 -0800
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EXCERPTS FROM The Progressive Response 8 January 2002
Vol. 6, No. 1
Editor: Tom Barry
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I. Updates and Out-Takes [Excerpts only for stop-imf]
*** AFTER THE FALL: POSSIBLE REPERCUSSIONS OF ARGENTINE CRISIS ***
By David Felix
*** ECONOMIC DEBACLE IN ARGENTINA: THE IMF STRIKES AGAIN ***
By Arthur MacEwan
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I. Updates and Out-Takes
*** AFTER THE FALL: POSSIBLE REPERCUSSIONS OF ARGENTINE CRISIS ***
By David Felix
(Editor's Note: Protectionism and inward-looking economic policies have
returned with a vengeance, at least rhetorically, as Argentina gets its
fifth president in two weeks. Eduardo Duhalde, a senator with the
Peronist
party and unsuccessful presidential candidate two years ago, was
installed
as president January 1st. Nationalism not globalization, populism not
free
trade, Peronism not Thatcherism/Reaganism are the messages coming from
the
dominant political forces in Argentina. Whether such a retrenching in
the
type of economic policies that formerly characterized Latin America's
political economy will stabilize the country remains to be seen, but it
is
safe to say that Argentina's rejection of neoliberalism spells doom for
Washington's plans to build a Free Trade Area of the Americas. FPIF
offers
two news commentaries from noted progressive economists.)
(Editor's Note: Excerpted from a new FPIF Global Affairs Commentary,
posted
in its entirety at: http://www.fpif.org/commentary/0112argentine.html .)
The inevitable has now happened. The strategy of the government of
President de la Rua was to revive the sinking economy by re-attracting
IMF
credits and foreign capital. To appease the IMF and Wall Street, it
chose
to remain with a policy triad that had ceased to make sense. This was to
defend at all costs a severely overvalued peso exchange rate, keep up
full
servicing of the oppressively large dollar debt, and balance the fiscal
budget in the face of skyrocketing unemployment and falling production.
The frantic efforts of President de la Rua's economic policy czar,
Domingo
Cavallo, to implement the triad produced abject failure on all fronts:
debt
default, a run from the peso that's rapidly diminishing its value in the
exchange market, an expanding fiscal deficit, resounding nyets from the
IMF
to requests for more credits, as well as from Wall Street to requests to
finance the rollover of the existing foreign debt on viable terms, much
less to finance new debt. A violent popular uprising drove Cavallo and
President de la Rua from office, leaving the economy in shambles and the
polity in crisis.
Inevitable? The failure was foretold not merely by academic critics,
including this writer, but more importantly by bond investors, who, by
1998
having come to see Argentina as over-indebted and the peso as
overvalued,
began reducing lending to Argentina and upping the risk premia for
holding
Argentine paper. More difficult to foretell is what the failure may
bring.
But before offering prognoses, a brief review of what reduced Argentina
from poster child of the IMF and Wall Street during most of the 1990s to
pariah today may help lay out alternatives.
The Bush II administration and the IMF are comfortable with their tough
love rejection of Argentina's carnal embrace because they are persuaded
the
immediate global repercussions from Argentina's default will be minimal.
The reasoning is that in contrast to the Asian crisis, the default, so
long
in coming, has given creditors ample time to take protective measures.
However, this optimism may underestimate repercussions via slower
channels
of contagion.
One is that a sovereign bond default in each of the past three years,
with
the latest, Argentina's, being also by far the largest, plus the
hardening
of the IMF's bailout terms has been a red flag to the international
financial markets. The IMF reports that net bond flows to developing
countries, which had fallen to zero after 1998, turned negative after
mid-2001, and that syndicated bank loans, which are mainly directed to
large private firms of developing countries, have taken a similar
downward
path. Latin American and Asian countries burdened with large hard
currency
debts are facing hardening terms for rolling over or adding to their
debts.
And compared to the 1997 Asian crisis, promoting exports to offset the
higher debt service has been encountering tougher going. Their major
markets, the industrial countries, are all in recession, and the U.S.,
erstwhile global importer of last resort, is now turning again to
selective
protectionism. The terms of trade of exporters of primary materials and
low
technology industrial commodities have been deteriorating, and
increasing
export promotion will intensify the deterioration. Unless the industrial
countries recover soon and strongly from their recession, export-led
growth
promises to be impoverishing for most developing countries.
The direct trade effects of the Argentine peso devaluation will not be
important globally, but would be locally. Argentina is a large enough
trading partner with Brazil, Chile, and other neighboring countries for
a
large real devaluation of the peso to significantly impact their
economies.
The negative impact would be reinforced were the Peronist government to
follow Cavallo's lead in imposing higher tariffs on imports from its
Mercosur partners, notably from Brazil. Alternatively, the Peronists
might
try to build up regional import substitution as a partial substitute for
export-led growth by promoting the revival and further strengthening of
Mercosur. Success in that effort could have a positive regional impact,
but
a more contentious global one as well, since it would undercut the U.S.
drive for free trade and free capital movements.
A third contagion channel is political. If Argentina's new economic
strategy of debt default, expanded public expenditure and more
protectionist inward-oriented growth were to bring about a sustainable
economic recovery, the strategy would gain popular appeal in other
debt-ridden developing countries as a viable alternative to their
troubled
free market, export-led growth with its heavy dependence on volatile
foreign capital.
This presents the Bush II administration with a Hobson's choice. It
could
hang tough on no emergency loans to Argentina, re-enforced perhaps by a
hard line in the forthcoming debt renegotiations, in order to raise the
probability of failure for Argentina's breakaway from neoliberalism.
That
would also increase the risk that the resulting economic chaos could
produce political chaos and a return of the jackboots. It would also
increase opposition within the IMF directorate to U.S. dominance of IMF
policy toward the developing countries, which could further erode the
institution's usefulness to the U.S. as a key instrument for globalizing
neoliberalism.
The French, Italian, and Spanish governments are publicly demanding IMF
financial aid to Argentina. The alternative for the Bush II
administration
is to retreat from hardline unilateralism to softer Clintonism; i.e.,
help
Argentina financially in hopes of modifying its policy breakaway,
protecting Argentine democracy, and easing tensions within the IMF.
Which
will be the choice? At this date, quien sabe?
(David Felix <felix@wueconc.wustl.edu> is Professor Emeritus at
Washington
University.)
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*** ECONOMIC DEBACLE IN ARGENTINA: THE IMF STRIKES AGAIN ***
By Arthur MacEwan
(Editor's Note: Excerpted from a new FPIF Global Affairs Commentary,
posted
in its entirety at:
http://www.fpif.org/commentary/2002/0201argentina.html .)
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.)
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 Fund'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% 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% as compared to the 9% 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% 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 Fund
itself
and the World Bank, from the U.S. 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.
* Beyond Denunciation: Alternative Strategies
There is 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 U.S.-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, U.S. President 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 U.S. 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
re-enforce 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 <arthur.macewan@umb.edu> is professor of Economics and
interim provost and vice chancellor for Academic Affairs at the
University
of Massachusetts in Boston. His most recent book is Neoliberalism or
Democracy? Economic Strategy, Markets, and Alternatives for the 21st Century.)
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