[stop-imf] Weisbrot: Argentina's Cancelled Election and the IMF

[Robert Weissman]

This was distributed to newspapers by Knight-Ridder/Tribune
Information Services. If anyone wants to reprint it, please contact Mark
Weisbrot <weisbrot@cepr.net>.
_________________________________________

Argentina's Cancelled Election: It's the Economy, and
the Electorate Has Decided
  But What About the IMF?

         If ever there was an election that could be
summed up by "It's the economy, stupid" the Argentine
election is it. In fact, the economic failure is so clear and
the popular consensus so pronounced that last Sunday's
election was cancelled. In a highly unusual move for a
candidate who won the first round of an election, Carlos
Saul Menem withdrew from the race last week. His
opponent and fellow Peronist party member Nestor
Kirchner, who placed second in the first round, will
become president of Argentina.

         Over the last five years Argentina, which
previously enjoyed the highest living standards in Latin
America, has suffered through the worst economic
decline in its history. The majority of the country now
lives below the official poverty line, and unemployment
is 22 percent.

         Although Menem had other political liabilities
he is widely seen as corrupt  it is his role as designer of
failed economic policies that did him in. A solid majority
of the voters in the first round of the election voted for
candidates  including Kirchner  who rejected these
policies, and the polls showed Menem losing by more
than a 2-1 margin in the run-off.

Menem was president from 1991-1999, and
although he left office before things really fell apart, the
electorate correctly held him responsible for the ensuing
depression. Under Menem's leadership, the country
experimented with an extreme version of what Argentines
call "neoliberalismo," including an indiscriminate
opening to foreign capital and trade, large-scale
privatization, and a "currency board" system  much like
a gold standard  that fixed Argentina's peso at one per
U.S. dollar.

The combination was deadly. Despite initial
success in taming inflation and boosting economic
growth, the regime was particularly vulnerable to external
shocks from the global economy. These began in 1994
when the U.S. Federal Reserve started a series of interest
rate hikes, followed by the Mexican peso crisis (1994-
95), then the Asian (1997-98), Russian (1998), and
Brazilian (1999) financial crises.

Each of these developments sent shock waves
through the Argentine economy, which could not adjust
so long as its currency was tied to the dollar. The result
was a vicious spiral: private capital flight led to
increasing interest rates and a shrinking economy, which
led to more debt and even higher interest rates as
investors feared a currency devaluation and then a debt
default. The government finally did default on $95 billion
of public debt at the end of 2000, and the currency
collapsed.

But the past is anything but history, and the
debate far from over. That is partly because there is
another actor in the Argentine economic drama: the
International Monetary Fund (IMF). Argentina under
Menem was its poster child, and the Fund supported the
government's policies right up to the cliff and over the
edge. Fund officials also prolonged and worsened the
recession/depression by insisting on monetary and fiscal
austerity at the wrong times. (Their warnings of
hyperinflation following the devaluation proved
unfounded: inflation so far this year is about 2.5 percent).

Like Menem, the IMF has admitted to no
mistakes; unlike Menem, it is not accountable to any
electorate. But the Fund was there in Buenos Aires, on
the eve of the election. Their presence reminded the
public that certain things are not necessarily decided by
majority votes. (Menem had met previously with Fund
officials; Kirchner declined, although he did send a
representative).

After an entire year of tense negotiations and
shifting demands from the Fund, the IMF and Argentina
reached an agreement in January. The agreement  which
expires in August --provided no net new resources for
Argentina; the money will be used to pay official
creditors such as the Fund itself and the World Bank.

Meanwhile, the Argentine economy began
recovering on its own last year, in spite of the largest
sovereign debt default in history, and with no help
whatsoever from the Fund. All indications are that the
IMF will be pressuring the new Argentine government to
run large budget surpluses in order to make payments on
its defaulted debt, as much and as soon as possible. This
and other traditional IMF policy prescriptions could
easily choke off the economy's nascent economic
recovery.

The new president will certainly have a mandate
from the electorate to resist the Fund's demands, and
make economic recovery the country's first priority. But
will he use it?

Mark Weisbrot is Co-Director of the Center for
Economic and Policy Research, in Washington D.C.
(www.cepr.net)