[stop-imf] Krugman: Jitters on Washington Consensus and a dose of humility

[Robert Weissman]

The Lost Continent 
By Paul Krugman 
New York Times |Opinion 

Friday, 9 August, 2002 

On Wednesday the Bush administration, which says that
it is for free trade and against bailouts, once again
put its money where its mouth isn't. Less than two
weeks ago Treasury Secretary Paul O'Neill created a
diplomatic incident and sent Brazil's currency into
free fall with his remark about assistance ending up
in "Swiss bank accounts." Now the International
Monetary Fund, with Mr. O'Neill's blessing, has agreed
to lend Brazil an unprecedented $30 billion. 

I guess it's good news that our leadership finally
woke up to two uncomfortable facts: A major threat to
U.S. interests is developing in this hemisphere, and
doing the opposite of what Bill Clinton did isn't
always a wise policy. Indeed, if Brazil hadn't gotten
a loan the South American financial crisis, already
comparable to the one that struck Asia in 1997, might
quickly have turned into something much bigger. 

And yet I have a bad feeling about this. Let me make
the case for the I.M.F. loan, then explain my
misgivings. 

The good news is that Brazil's current leadership is
highly responsible. In the past, I.M.F. loans went to
governments that didn't collect taxes (Russia) or were
committed to an unsustainable exchange rate
(Argentina). By comparison, Brazil is a model of
upright behavior. 

So why is there a crisis? With an election due in
October, President Fernando Henrique Cardoso's chosen
successor is running far behind two left-of-center
candidates. Investors are nervous, and the result has
been one of those downward spirals all too familiar
from the history of currency crises. Fears that the
government will default on its debt have caused the
currency to plunge and interest rates to soar; since
most of the debt is indexed either to the dollar or to
short-term interest rates, this makes default seem
even more likely. 

Mr. O'Neill's remark was unforgivable because it
reinforced this death spiral; the I.M.F. loan is an
attempt to turn that spiral around. The end result of
Mr. O'Neill's flub was probably to get Brazil an extra
$10 billion. 

So why am I feeling queasy? One reason is that there
is some question about who, exactly, is being bailed
out. Paul Erdman writes on cbsmarketwatch.com -- in a
column praising the administration! -- that "The fact
that the Brazilian bailout also gave a big boost to
Citigroup and FleetBoston, which combined had close to
$20 billion at risk in Brazil, will hardly go
unnoticed when it comes time to raise campaign funds
among the Wall Street elite." 

More important, if you look beyond the question of
short-term financial stabilization you have to wonder
where all this is supposed to be leading. Asian
economies were doing very well before their crisis,
and you could think of bailouts as a way to get them
back on track. But there is a reason the left is
having a resurgence in Brazil and elsewhere in the
region: We promised them a rose garden, but even
before this latest crisis too many people got nothing
but thorns. 

A decade ago Washington confidently assured Latin
American nations that if they opened themselves to
foreign goods and capital and privatized their state
enterprises they would experience a great surge of
economic growth. But it hasn't happened. Argentina is
a catastrophe. Both Mexico and Brazil were, a few
months ago, regarded as success stories, but in both
countries per capita income today is only slightly
higher than it was in 1980. And because inequality has
increased sharply, most people are probably worse off
than they were 20 years ago. Is it any wonder that the
public is weary of yet more calls for austerity and
market discipline? 

Why hasn't reform worked as promised? That's a
difficult and disturbing question. I, too, bought into
much though not all of the Washington consensus; but
now it's time, as Berkeley's Brad DeLong puts it, to
mark my beliefs to market. And my confidence that
we've been giving good advice is way down. One has to
sympathize with Latin political leaders who want to
temper enthusiasm for free markets with more efforts
to protect workers and the poor. 

What that suggests to me is that the United States
should be very cautious about what it expects for its
money. Pulling Brazil back from the brink doesn't mean
that we are once again in a position to demand that
Latin Americans do things our way. The truth is that
we've lost a lot of credibility with our southern
neighbors. If we overplay our hand, we'll lose
whatever is left.