[stop-imf] IMF Playing With Fire in Argentina

[Robert Weissman]

From: "weisbrot111" <weisbrot@cepr.net>

For more information on this subject, see CEPR's Briefing 
Paper, "What Happened to Argentina?", at www.cepr.net 

This was distributed to newspapers by Knight-Ridder/Tribune 
Information Services. If anyone wants to reprint it, please let me 
know.

IMF Playing With Fire in Argentina

	BUENOS AIRES -- "It's an explosive mix," said 
Ruben Cortina, a professor of law and economics at the 
University of Buenos Aires. "The middle classes are 
angry because their savings have been partly 
expropriated. The unemployed, at 22 percent and 
growing, have gotten nothing. And even those with jobs 
have had falling wages, and now face the prospect of 
even lower living standards due to inflation."

	The mix already exploded less than two months 
ago, when tens of thousands of people poured into the 
streets to defy then President Fernando de la Rua's 
declaration of a "state of siege." It was a collapse of state 
power -- a rare event that in other countries might have 
resulted in what is commonly called a revolution.

	Calm has returned to this sprawling city of 9 
million, with its wide boulevards and European 
architecture carrying reminders of the country's relatively 
prosperous past. But unless the new government of 
President Eduardo Duhalde can reverse Argentina's 
accelerating economic decline, the peace may not last 
long.

	Can this be done? Contrary to the theme of most 
business reporting and forecasts, Argentina could recover 
relatively quickly without suffering further economic 
contraction. The country is actually running a surplus in 
both its trade and government accounts -- if we don't 
count interest payments. In other words, Argentina 
doesn't really need foreign aid so much as it needs a 
moratorium on its debt service payments.

	In fact, the story of Argentina's debt is really the 
story of its current economic crisis. And if we look at the 
numbers, it is decisively not a case of a government 
trying to live beyond its means. From 1993 to 2000, 
government spending as a share of the economy -- again, 
excluding interest payments -- was basically unchanged. 

	So what happened? Most importantly, Argentina's 
interest payments increased. The trouble started in 
February of 1994, when the US Federal Reserve began a 
series of rate hikes that doubled US interest rates, from 3 
to 6 percent. Since Argentina's peso was fixed to the 
dollar, the shock hit especially hard. Investors began to 
fear that the country's higher interest payments would 
lead to devaluation and default. 

	These fears multiplied, and capital fled the 
country, when Mexico devalued the peso in December of 
1994. This caused a recession in Argentina. The economy 
recovered in 1996, but not for long: then came the Asian 
economic crisis (August 1997). Global financial markets 
spread the contagion to Russia and then Brazil. When 
Brazil's currency collapsed in 1998, Argentina's fate was 
sealed. The economy has been in recession -- which is 
now really a depression -- for nearly four years. In 
December, the inevitable currency devaluation and 
default on government debt finally happened.

	In other words, Argentina fell victim to the 
caprices of the global economy, as well as some bad 
policies -- most deadly was the fixed exchange rate that 
tied the peso to the dollar. These policies were supported 
and sponsored by the International Monetary Fund. All 
this would be just interesting history, if not for the fact 
that the IMF is at this very moment trying to force further 
budget cuts on Argentina's government. 

The Fund is still acting as though government 
spending is the problem. But the budget cuts will most 
likely worsen the depression: economists here are 
projecting another 8 percent drop in GDP for 2001, or 
worse.

It doesn't have to happen this way. The 
government of President Duhalde proposed a reasonable 
economic recovery program when he took office: one that 
would have made the banks absorb much of the cost of 
the devaluation, tax the oil companies (who will reap a 
windfall from the devaluation), revive domestic industry, 
and suspend interest payments on the foreign debt. 

But the IMF is a debt collector, and it insisting on 
more austerity and pain. Other governments -- most 
notably that of Malaysia during the Asian economic crisis 
-- have stood up to the IMF, and done better for it. But 
Duhalde's government has little backing among 
Argentines -- he was chosen by the Congress, not a 
popular vote. And people here are deeply cynical about 
their politicians and government.

So the Fund's officials have the upper hand. But 
they better be careful about how much debt service they 
try to squeeze out of this collapsed economy, and how 
many more people they push into poverty. They are 
playing with fire this time.

Mark Weisbrot is co-director of the Center for 
Economic and Policy Research (www.cepr.net), in 
Washington, DC.

Name: Mark Weisbrot 
E-mail: <weisbrot@cepr.net> 
Co-Director 
Center for Economic and Policy Research 
1015 18th Street NW, Suite 200 
Washington, DC 20036 
Phone (202) 293-5380 x228 
Fax (202) 822-1199 
(202) 333-6141 (home)
(202) 746-7264 (cell) 
www.cepr.net