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.
FROM GOOD TO BAD TO UGLY
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
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
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.
WHO BENEFITS FROM IMF POLICIES?
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
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
FORGING AN ARGENTINE ALTERNATIVE?
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
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,
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
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).
Monetary Fund (IMF) & World Bank