WHT: IMF fingerprints all over Argentine's implosion

Gorojovsky Gorojovsky at arnet.com.ar
Fri Dec 28 08:25:28 MST 2001


Copyright © 2001 The International Herald Tribune | www.iht.com

How the IMF Messed Up Argentina
Mark Weisbrot IHT
Wednesday, December 26, 2001

WASHINGTON Argentina's implosion has the fingerprints of the International
Monetary Fund 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 a while. But during the past few years the dollar has been overvalued,
which made the 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 exports too expensive and imports artificially cheap. Just look at the
United States, where a "strong" dollar has brought a record $400 billion
trade deficit.

But it gets catastrophically worse for a country that has committed itself
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. That is the main reason why
Argentina has not been able to recover from four years of 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 large loans, including $40 billion a year ago, to support the peso.
This was the IMF's second fatal error. To appreciate its severity, imagine
Washington borrowing $1.4 trillion - 70 percent of the federal budget - just
to prop up an overvalued dollar. It didn't take long for Argentina to pile
up a foreign debt that was impossible to pay back.

As if all that were not enough, the IMF made its loans conditional on a
"zero-deficit" policy in Buenos Aires. 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 U.S. deficits during recessions.

The IMF now claims that it was against the fixed exchange rate, and the
large loans to support it, all along. 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 Qaida's chain of command. IMF board
meetings, consultations with government ministers and other deliberations
are secret.

But they do have a track record. In 1998 the IMF supported overvalued
currencies in Russia and Brazil, with large 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 which
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. He
contributed this comment to The Washington Post.

 Copyright © 2001 The International Herald Tribune

Néstor Miguel Gorojovsky
gorojovsky at arnet.com.ar

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Compañeros del exercito de los Andes. 

...La guerra se la tenemos de hacer del modo que podamos: 
sino tenemos dinero, carne y un pedazo de tabaco no nos 
tiene de faltar: cuando se acaben los vestuarios, nos 
vestiremos con la bayetilla que nos trabajen nuestras mugeres, 
y sino andaremos en pelota como nuestros paisanos los indios: 
seamos libres, y lo demás no importa nada...

Jose de San Martín, 27 de julio de 1819.

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