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How the IMF Messed Up
Argentina
by Mark Weisbrot, co-director of the Center for
Economic and Policy
Research.
Reprinted from the 'International Herald
Tribune,' December 26, 2001
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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 (c) 2001 The International Herald Tribune | www.iht.com
Posted for Fair Use Only
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Footnotes and Further Reading:
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1) It is amazing that, although the IMF has had the same effect on every
economy it has 'helped' for more than a decade (that is, the economies
have been severely hurt) nevertheless these guys are still in business. If
they were doctors, they would have been jailed for deliberately injuring
their patients.
Doesn't this suggest that the giant U.S. and European financial interests
behind the IMF want to destroy these economies?
1) To find out more about the International Monetary Fund, see the award
winning article,' The International Monetary Fund and The Yugoslav
Elections,' by Michel Chossudovsky and Jared Israel. It explains how IMF
policies destroy national economies, including discussion of Yugoslavia,
Russia, Ukraine, Bulgaria and Peru. Can be read at
http://emperors-clothes.com/analysis/1.htm
2) IMF policies destroy because they are calculated to destroy. This
emerges clearly from the sharp debate between Chossudovsky and Israel, on
the one hand, and Prof. Kjell Magnusson from Sweden. Prof. Magnusson
sharply criticized the article, The International Monetary Fund And The
Yugoslav Elections,' after it was published by the leading Swedish
newspaper.
* 'Chossudovsky and Israel are Inaccurate and Misleading' By Kjell
Magnusson, Balkan expert, Uppsala University. Can be read at
http://emperors-clothes.com/debates/magnus.htm
* 'Everything We Wrote Comes from Official Sources' by Michel Chossudovsky
and Jared Israel Can be read at
http://emperors-clothes.com/debates/data.htm
3) "Give Us Milosevic or We Won't Destroy Your Country!" is a statement by
the SPS, which is now apparently the leading party in Serbia (it came in
first in recent district elections.) The statement rejects the notion that
the IMF and associated institutions aim to help poorer countries.
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