Economic Debacle in Argentina

The IMF Strikes Again

by Arthur Macewan

Dollars and Sense magazine, March / April 2002

In the days just before Christmas, with increasing cutbacks in social programs and an official unemployment rate approaching 20%, Argentinians took to the streets ._ in protest. At the time, Argentina was in the midst of its fourth year of recession. The immediate spark for the unrest was the government's latest economic policies, which restricted the amount of money people could withdraw from their bank accounts. Political demonstrations and the looting of grocery stores quickly spread across the country.

The government declared a state of siege, but police often stood by and watched the looting "with their hands behind their backs." There was little the government could do. Within a day after the demonstrations began, principal economic minister Domingo Cavallo had resigned; a few days later, President Fernando de la Rua stepped down.

In the wake of the resignations, a hastily assembled interim government immediately defaulted on $155 billion of Argentina's foreign debt, the largest debt default in history. The new government also promised a public works jobs program and announced plans to issue a new currency, the argentino, that would circulate alongside the Argentine peso and the U.S. dollar. As economic instability deepened, however, the argentino plan was abandoned. And the new public works program did little to address the fact that per capita income had dropped by 14% since 1998. Unable to win the popular support it needed, the new government quickly dissolved. The current president, Eduardo Duhalde, was sworn in on January 1; he was the fifth president to serve in two weeks.

As of this writing (mid-February), Argentina still faces widespread political and economic uncertainty. In the short run, many anticipate more unemployment, severe inflation, or both. Also, Argentina's currency remains highly unstable. After experimenting with several different exchange rates, the Duhalde government is now permitting the peso to "float." The peso has already dropped from its previous value (one to the dollar) down to two to the dollar on the open market, and further devaluation is widely anticipated.

Argentina's experience leading into the current debacle provides one more lesson regarding the perils of "free market" ideology, and specifically the economic policies that the International Monetary Fund (IMF) pushes on governments around the globe. In Argentina, as in other places, these policies have been embraced by local elites, who see their fortunes (both real and metaphoric) as tied to the deregulation of commerce and the curtailment of social programs. Yet the claims that these policies bring economic growth and widespread well-being have been thoroughly discredited, as events in Argentina have shown.


Not long ago, Argentina was the poster child for the conservative economic policies of the IMF. From the late 1980s onward, a series of loans gave the IMF the leverage to guide Argentine policymakers in privatizing state enterprises, liberalizing foreign trade and investment, and tightening government fiscal and monetary policy. During the 1990s, the country's economy seemed to do well, with real per capita income growing at the very rapid annual rate of about 4.5%.

The rapid economic growth through most of the 1990s, however, was built on weak foundations. That growth, while substantial, appears to have resulted largely from an increasing accumulation of international obligations (debt to private banks, the IMF, and foreign governments, as well as direct foreign investment), fortuitous expansion of foreign markets for Argentine exports, and short-term injections of government revenues from the sale of state enterprises. Before the end of the decade, things began to fall apart.

Argentina's current problems are all the more severe because in the early 1990s, in the name of fighting inflation, the government created a "currency board." The board was charged with regulating the country's currency so that the Argentine peso would exchange one-to-one with the U.S. dollar. To assure this fixed exchange rate, the board kept a supply of dollars on reserve, and could not expand the supply of pesos without an equivalent increase in the dollars that it held. The currency board system appeared attractive because of absurd rates of inflation in the 1980s, with price increases of up to 200% a month. By restricting the growth of the money supply, the system brought inflation rates to heel.

Although the currency board system had virtually eliminated inflation in Argentina by the mid-1990s, it had also eliminated flexibility in monetary policy. When the current recession began to develop in the late 1990s, the government could not stimulate economic activity by expanding the money supply.

Worse yet, as the economy continued to spiral downward, the inflow of dollars slowed, forcing the currency board to restrict the country's money supply even further. And still worse, in the late 1990s, the U.S. dollar appreciated against other currencies, which meant (because of the one-to-one rule) that the peso also increased in value. As a result, the price of Argentine exports rose, further weakening world demand for Argentina's goods.

As Argentina entered into the lasting downturn of the period since 1998, the IMF continued, unwavering, in its financial support. The IMF provided "small" loans, such as $3 billion in early 1998 when the country's economic difficulties began to appear. As the crisis deepened, the IMF increased its support, supplying a loan of $13.7 billion and arranging $26 billion more from other sources at the I end of 2000. As conditions worsened further in 2001, the IMF pledged another $8 billion.

However, the IMF coupled its largesse with the condition that the Argentine government maintain its severe monetary policy and continue to tighten its fiscal policy by eliminating its budget deficit. (The IMF considers deficit reduction to be the key to macroeconomic stability and, in turn, the key to economic growth.)

The Argentine government undertook deficit reduction with a vengeance. With the economy in a nosedive and tax revenues plummeting, the only way to balance the budget was to drastically cut government spending. In early July 2001, just before making a major government bond offering, Argentine officials announced budget cuts totaling $1.6 billion (about 3% of the federal budget), which they hoped would reassure investors and allow interest rates to fall. Apparently, however, investors saw the cuts as another sign of worsening crisis, and the bonds could only be sold at high interest rates (14%, as compared to 9% on similar bonds sold just a few weeks before the announcement of budget cuts). By December, the effort to balance the budget required cuts that were far more severe; the government announced a drastic reduction of $9.2 billion in spending, or about 18% of its entire budget.

With these cutbacks, the government both eviscerated social programs and reduced overall demand. In mid-December, the government announced that it would cut the salaries of public employees by 20% and reduce pension payments. At the same time, as the worsening crisis raised fears that Argentina would abandon the currency board system and devalue the peso, the government moved to prevent people from trading their pesos for dollars by limiting bank withdrawals. These steps were the final straws, and in the week before Christmas, all hell broke loose.


Argentina is just the latest example of how IMF policies have failed to establish the basis for long-term economic growth in low-income countries. IMF policies usually do succeed in curtailing inflation, as they did in Argentina in the mid-1990s, because sharp cuts in government spending and restrictions on the money supply tend to yield reduced price increases. Also, as the Argentine case illustrates, adopting IMF programs can open the door to large influxes of foreign loans-from the Fund itself, the World Bank, the governments of the United States and other high-income countries, and (with the IMF's approval) internationally operating banks. But nowhere, including Argentina, has the IMF policy package led to stable, sustained economic expansion.

What IMF policies do often lead to, though, is growing inequality. Officially, the IMF laments that its policies specifically reductions in government spending-have a severe negative impact on low-income groups (because they generate high rates of unemployment and lead to the gutting of social programs). Yet IMF officials rationalize their mania for spending cuts in times of crisis by claiming that balanced budgets are the foundation of long-term economic stability and growth.

Nonsense. In recessions, moderate government deficits, like those in Argentina in recent years, are a desirable policy because they boost spending, which counteracts the downturn; balanced budgets in such circumstances tend to exacerbate downturns. Also, curtailing social spending-on education, health care, infrastructure projects-cuts the legs out from under long-term economic progress.

Yet the IMF sticks to its policies, probably because those policies serve important and powerful interests in the U.S. and world economies. The IMF is controlled by the governments of the high-income countries that finance its operations. The U.S. government, with over 18% of the voting shares in the Fund, has by far the greatest influence. Indeed, over the years, the IMF has operated largely as a branch of the U.S. foreign policy apparatus, attempting to create a context that assures the well-being of U.S. interests-which is to say the interests of U.S.-based internationally operating firms. Since the same context serves the interests of firms based in Europe, Japan, and elsewhere, the U.S. government generally has the support of its allied governments in directing the IMF.

To serve those interests, the IMF tells governments that a key to economic growth lies in providing unrestricted access for imports and foreign investment. In fact, virtually all experience suggests the opposite. Britain, the United States, Japan, the countries of Western Europe, Taiwan, South Korea-all built the foundations for successful economic growth not on "free trade," but on government regulation of trade. The IMF gets around the inconvenient facts of history by conflating free trade with extensive engagement in the international economy. But the two are not the same. Yes, successful development has always been accompanied by extensive international engagement, but through regulated commerce, not free trade.

During the 1980s and 1990s, the IMF pushed governments in low-income countries to liberalize their capital markets, claiming that capital controls were anathema to development. Then came 1997, when the open capital markets of East Asian countries were instruments of disaster. In the aftermath of 1997, it seemed clear that the real winners from open capital markets were financial firms based in the United States and other high-income countries.

These same financial firms have also been the winners of another component in the IMF policy package. "Fiscal responsibility," according to the IMF, means that governments must give the highest priority to repaying their international debts. However, experience does not support the contention that, when governments fail to pay foreign debts, they bring on financial disaster. Instead, experience suggests that, at times, defaulting on foreign debt can be an effective, positive policy option. It is the banks operating out of New York and other financial centers, not people in low-income countries, that gain from giving first priority to debt repayment.

The IMF's advocacy of privatization offers one more way to open the world economy more fully to U.S.-based firms. When state enterprises in low-income countries are sold, they are often bought by large internationally operating firms, able to move in quickly with their huge supply of capital. Of course, in Argentina and elsewhere, local business groups have often benefited directly from privatization, sometimes on their own and sometimes as junior partners of firms based abroad. Either way, this enlargement of the private sphere works in favor of private firms. The problem here is not that privatization is always inappropriate, but simply that, contrary to IMF nostrums, it is not always appropriate. Privatization is especially problematic when it only replaces an inefficient government monopoly with a private monopoly yielding huge profits for its owners. Moreover, the record from Mexico City to Moscow demonstrates that privatization is often a hugely corrupt process.


The recent political upheaval in Argentina lends new strength to the argument that IMF policies not only fail to bolster economic development but also lead to social and political disintegration. It also provides new opportunities to call for alternative strategies that support democratic, egalitarian forms of economic development. Such strategies would promote investment in social programs and other public services, the expansion of government revenues (raising taxes), and regulations to keep the private sector from being guided simply by private profits. These strategies, unlike those of the IMF, would establish a foundation for long-run economic expansion-and economic equality.

Could such strategies succeed in Argentina? The demonstrations that brought down the de la Rua government seem to have brought together unemployed people, workers, and large segments of the middle class, at least for a time. Sporadic rioting continues, and in Buenos Aires, scores of neighborhood-based assemblies, attracting thousands of participants, are calling for a more democratic political system as well as issuing demands for economic change.

Nonetheless, positive changes will be difficult to attain. Although the Argentine government did default on the debt (a key element in repudiating the policies of the IMF), it did so as an act of desperation, not in a controlled manner that might yield the greatest advantage. Also, while deputy economic minister Jorge Todesca has been harshly critical of the IMF, he is also trying to appease foreign investors, saying that the government is "not thinking of" nationalizing the banking system or establishing price controls.

Externally, there are substantial political barriers to an alternative model of economic growth. At the end of December, even as a new spate of rioting broke out in Buenos Aires, President Bush told the Argentine government to seek guidance from the IMF and "to work closely with" the Fund in developing its economic plans. In early February, the finance ministers of the G-7 (the world's seven wealthiest industrial nations) rejected Argentina's request for a $20 billion loan, saying that the IMF must be on board in order to bring about a "sustainable" plan. At this writing, Argentina's current economic minister, Jorge Remes Lenicov, is meeting with IMF officials in Washington, D.C.

And the IMF is unlikely to change its program in any significant way. Indeed, as Argentinians took to the streets in response to their long suffering under the aegis of the IMF, the IMF disclaimed all responsibility. "The economic program of Argentina was designed by the government of Argentina and the objective of eliminating the budget deficit was approved by the Congress of Argentina," declared the IMF's spokesperson on December 21. Continued pressure from the U.S. government, combined with the IMF's persistence in pursuing its discredited policies, will make progressive change difficult.

Also, powerful elites in Argentina will reinforce the barriers to change. In spite of the current difficulties, Argentina's economic policies of the past 15 years have delivered substantial benefits to the country's business elite, especially those whose incomes derive from the financial sector and primary product exports (grain and beef). Those policies have allowed the elite to strengthen their position in their own country and to secure their roles as junior partners with U.S.-based and other internationally operating firms. Changing policies will therefore require shifting the balance of power within Argentina, and that will be no easy task.


Arthur MacEwan is professor of economics and interim provost and vice chancellor for academic affairs at the University of Massachusetts, Boston. His most recent book is Neoliberalism or Democracy? Economic Strategy, Markets, and Alternatives for the 21st Century (Zed Books, 1999).

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