Argentine crisis signalling end of Neo-liberal model?

Geneva, 21 December (Chakravarthi Raghavan) - - The crisis in Argentina, brewing in fact for the last five years - beginning as an economic and financial crisis, and then becoming a social crisis and now exploding as a political one - signals, even if the promoters refuse to recognise it, the end of the IMF-World Bank-WTO neo-liberal model of development, just as the 1994 peso crisis in Mexico signalled the unravelling of the Washington Consensus (promoted by the IMF and World Bank and Washington liberal think tanks and establishment).

On the finance and monetary front, the model has meant that countries going to full convertibility of currencies, without any restrictions on current transactions, as well as opening up the capital account - all on the basis that an appropriate climate would encourage foreign, foreign investment and funds and this would fill the gap - making it unnecessary to have any Balance-of-Payments restrictions.

The Argentine financial crisis, and its unsustainable currency board and exchange system that has been foretold for five years now, first exploded into a social crisis (high unemployment and ever-falling living standards and more and more middle classes slipping into poverty), and now into a first rate political crisis - driving an elected President out of office, and no government.

The crisis has not had any immediate effect on its neighbours (linked to Argentina in the Mercosur common market) and other emerging markets.

But while Mercosur partners seem to be holding up, repercussions of the political and social explosion in Argentina and its effects outside its borders cannot be ruled out.

With the United States Congress - in legislation in the House of Representatives for fast track authority to the administration for trade negotiations, and moves in the Senate - and various side letters and assurances suggest that several of the promises of the US underpinning the support of several countries, including the Cairns group of agricultural exporters of Latin America, are now unlikely to be fulfilled.

The agricultural markets of the US or Europe to exports of Argentina and Brazil and others from the region will not be so open.

The Argentine crisis also brings to the fore the lack of accountability at international levels.

The financial crisis in a country whose economic and financial policies have been so repeatedly acclaimed and backed by loans and funds from the IMF and mobilised by it, shows up the technical incompetence of the Fund, and its senior professional staff, in not having been able to anticipate the difficulties and emerging crises and their inability to make sound judgement on what remedies would work and what would not.

In every country, the country and the government of that country is ‘responsible’ for its problems - for the policies and measures it pursued or did not, whether it be on its own or at the behest of those who leant monies or invested.

And Argentina and its governments are not an exception to this.

With an elected president, driven out of office, by popular upsurge, not be leftists and extremists (the common characterisation of protest movements in the past), but by middle classes who everyday were sinking into poverty, there are no easy solutions for Argentina.

And the idea that ‘dollarisation’ of the national currency, a solution apparently favoured by former President Menem and some in his party, will be no solution now - given that the country’s dollar reserves are much less than peso money in circulation.

Earlier in December, when Cavallo made an unsuccessful trip to Washington tp persuade the IMF to release funds, the IMF refused to release the disbursement of $1.3 billion dollars.

And IMF spokesman Thomas Dawson, Director of the Funds’s External Relations Department, blamed the Argentine government for its failure to meet the agreed-on targets.

However, as late as 15 September, the same Dawson (in a letter to the Los Angeles Times, and posted on the IMF’s own website), praised the Argentine government and its policies, including the currency board system, as having popular support.

Dawson had been responding to the criticism of a writer, Mr. Weisbrot, ‘Helpers such as the IMF Make a junkie of Argentina’, who advocated that Argentina should instead declare a debt default and devalue the peso.

In the letter to the Los Angeles Times, Dawson praised the Argentine government and its reform recipes as ‘the right one’, decried critics of the IMF policy who called for debt default and devaluation. Dawson’s letter also claimed that Argentina’s currency board “enjoys widespread support in the country”, that Argentina has no option to a zero-deficit policy because of lack of access to financial markets, and that “the government is taking steps to protect the poor from the worst of the adjustment.”

Dawson said that the Argentine program, “as crafted by Argentina and not the IMF” will build on the country’s good record of economic transformation .” He also approvingly cited Cavallo as saying ‘recently that under a zero-deficit rule, Argentina “will be able to adjust more easily to external shocks without continuously having to shift the burden on to the productive and efficient private sector.”

Nevertheless, five years of the policy has resulted in a 20% unemployment, and in effect the once-affluent middle classes, constantly slipping below poverty, taking to the streets in rioting and looting shops for food.

Media reports over the last few days suggested that the IMF would in fact have wanted Cavallo and the Argentine government to take its own measures to declare a debt default and devalue.

However, such a step would not be easy, in the absence of an international chapter 11 bankruptcy provision, as advocated by the United Nations Conference on Trade and Development repeatedly over several years.

The Fund and Washington repeatedly rebuffed such a remedy.

Without such an international shield, any foreign bond-holder, and even more those who ‘buy’ cheap on the secondary markets, Argentinian debt, would be able to go to court anywhere, seize Argentine assets (like aircraft or ships or even bank accounts) for full repayment.

Only very recently, and belatedly, as it became clear that the tax-payers in the industrialized countries are not willing to pay the price for an endless, ever-burgeoning debt rescue packages, has the IMF (vice-President Mme Kruger in a speech in Washington in November) mooted the idea.

Even as the current wisdom is collapsing on the financial and monetary fronts, on the trade front, the neo-liberal wisdoms are being promoted and pursued recklessly, as if the financial, monetary and trade systems could exist independent of each other.

On the trade front, the neo-liberal model has meant the WTO version of ‘free trade’ and the benefits of ‘trade liberalisation’ (as if liberalisation is an end in itself) is being pursued and pushed on the basis of a new work programme agreed at the Doha ministerial conference.

Before Doha, and now, the merits of such liberalisation is being promoted by citing claims of benefits in projections in the CGE (computable general equilibrium) models, as in the widely cited (by the WTO secretariat in the runup to Doha and by US Trade officials) Michigan University study by Drusilla Brown, Alan Deardoff and Robert Stern about the 1.9 trillion dollar addition to the world economic product by trade liberalization.

And on the eve of Doha, not only were such models and predictions used widely, but a report of the secretariat was ironically debated this week at the WTO General Council, in a low key way.

The WTO provided no official briefings of the discussions, and it was not clear whether any one from the Latin American region made a reference to or took note of the Argentine crisis.

But the WTO Director-General Mike Moore in articles in the media, and the report of the secretariat, spoke of developing countries increasing their share of world trade over the last two decades, with the increase due to larger exports of manufactures and services.

In nominal dollar terms, between the 1970s and the 1990s, the share of developing countries in world trade has grown from about one-fourth to one-third, and there has been a rapid transformation in their exports - from commodities to manufactures.

However, says Mr. Yilmaz Akyuz, UNCTAD’s chief macroeconomist and the officer-in-charge of the Global Development Strategies division, the developing countries’ share in world output, and hence in world incomes has remained a constant around 20 percent.

The share of industrialized countries in world trade has been reduced, but their share in world output has increased over the same period, from about 72% to 77% and there has been an increasing North-South gap in incomes, rather than any convergence. This means that increased trade of developing countries and their closer integration into the world markets and economy has not made any significant positive contribution to their growth and per capita incomes.

“The South has been trading more without producing more. The North has been trading less but producing more, resulting in higher incomes,” says Akyuz.

Detailed data and analysis of this phenomenon, and the questions raised by them in terms of development strategies, are being dealt with by UNCTAD in its Trade and Development, 2002 expected to be published by end of March or early in April. – SUNS5036

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

[c] 2001, SUNS - All rights reserved. May not be reproduced, reprinted or posted to any system or service without specific permission from SUNS. This limitation includes incorporation into a database, distribution via Usenet News, bulletin board systems, mailing lists, print media or broadcast. For information about reproduction or multi-user subscriptions please contact: