Economic debacle in Argentina: The IMF strikes again

Argentina’s economic policies during the 1990s were developed under the direction of the IMF. The following article analyses the fatal flaws in these policies.

Argentina’s experience leading into the current debacle provides one more lesson regarding the perils of free-market ideology and of the economic policies pushed on governments around the globe by the International Monetary Fund (IMF). In Argentina and elsewhere, these policies have been embraced by local elites, who see their fortunes (both real and metaphoric) tied to the deregulation of commerce and the reduction of social programmes. Yet the claims that these free-market policies would bring economic growth and widespread well-being have been thoroughly discredited. (In spite of the economic collapse and political turmoil in Buenos Aires, the wealthy appear to have protected themselves by having moved their money out of the country.)

From good to bad to ugly

Not long ago, Argentina was the poster-child for the conservative economic policies pushed by the IMF. The Buenos Aires government privatised state enterprises, liberalised foreign trade and investment, and tightened government fiscal and monetary policy. During the 1990s the country’s economy seemed to do well. The good times of the mid-1990s, however, were built on weak foundations. Economic growth in that period, while substantial, appears to have been in large part the result of an increasing accumulation of international debt, fortuitous expansion of foreign markets, and short-term injections of government revenues from the sales 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 name of fighting inflation, in the early 1990s the government created a ‘currency board,’ charged with regulating the country’s currency so that the Argentine peso would exchange one-to-one for the US dollar. To assure this fixed exchange rate, the currency board maintained dollar reserves, 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 the mid-1990s, inflation in Argentina had been virtually eliminated - but flexibility in monetary policy had also been eliminated. When the current recession began to develop, the government could not expand the money supply as a means of stimulating economic activity. Worse yet, as the economy continued downward, the inflow of dollars slowed, restricting the country’s money supply even further (by the one-to-one rule). And still worse, in the late 1990s, the US dollar appreciated against other currencies, which meant (again, the one-to-one rule) that the peso also appreciated; the result was a further weakening in world demand for Argentine exports.

During 2001 the Argentine recession grew rapidly deeper. Although the IMF pumped in additional funds, it provided these funds on the condition that the Argentine government would entirely eliminate its budget deficit. With the economy in a nose-dive and tax revenues plummeting, the only way to balance the budget was to drastically cut government spending. Yet, in doing so, the government was both eviscerating social programmes and reducing 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 the peso would be devalued, the government moved to prevent people from trading their pesos for dollars; it promulgated a regulation limiting bank withdrawals. These steps were the final straws, and in the week before Christmas, all hell broke loose.

Failure under the direction of the IMF

Economic policies in Argentina during the past 15 years have had substantial support among the country’s business elite, especially from those whose incomes derive from the financial sector and primary product exports. These groups have gained substantially, and officials in the Argentine government have been active in formulating and executing the policies that have led to the current debacle.

At the same time, the country’s economic policies during the 1990s were developed under the direction of the IMF. From the late 1980s onward, a series of loans gave the IMF the leverage to guide Argentine policymakers as they increasingly adopted the Fund’s conservative economic agenda. As the country entered into the lasting downturn of the current period, the IMF continued, unwavering, in its support.

The IMF provided Argentina with ‘small’ loans, such as the $3 billion made available in early 1998, when the country’s economic difficulties began to appear. As the Argentine crisis deepened, the IMF increased its support, supplying a loan of $13.7 billion and arranging $26 billion more from other sources at the end of 2000. As things worsened still further in 2001, the IMF pledged another $8 billion.

The IMF coupled its largess with the condition that the Argentine government maintain its severe monetary policy and continue to tighten its fiscal policy. Deficit reduction - which according to the IMF is the key to macroeconomic stability (which in turn is supposed to be the key to economic growth) - was undertaken with a vengeance. In early July 2001, on the eve of a major government bond offering, Argentine officials announced budget cuts of $1.6 billion (about 3% of the federal budget), hoping that these cuts would reassure investors and allow interest rates to fall. Apparently, however, investors saw the cuts as another sign that the country’s crisis was worsening, and the bonds could only be sold at sharply higher interest rates (14% as compared to the 9% that similar bonds had commanded in mid-June). By December, the effort to balance the budget required far more severe expenditure cuts, and the government announced a drastic reduction of $9.2 billion in its spending, about 18% of its entire budget.

Argentina is now providing one more example of the failure of IMF policies to establish the bases for long-term economic growth in low-income countries. Numerous other countries demonstrate similar sets of problems: much of sub-Saharan Africa; Mexico, and several other countries in Latin America; Thailand, and other parts of East Asia hit by the 1997 crisis; and Turkey, along with Argentina in 2001.

IMF policies do often succeed in curtailing inflation; sharp cuts in government spending and restrictions of the money supply will usually yield reduced price increases. Also, IMF programmes can provide large influxes of foreign loans - from the Fund itself and the World Bank, from the US government and the governments of other high-income countries, and, once the approval of the IMF has been attained, from internationally operating banks. But nowhere has the IMF policy package led to stable, sustained economic expansion. Also, as in Argentina, it often generates growing inequality.

The IMF’s mania for reductions of government spending in times of crisis has been rationalised by the claim that balanced budgets are the foundation of long-term economic stability and growth. The IMF officially laments the fact that these policies have a severe negative impact on low-income groups (because they both generate high rates of unemployment and eviscerate social programmes). Yet, Fund officials claim these policies are necessary to assure long-term stability. Nonsense. In recessions, moderate government deficits (like those of recent years in Argentina) are a desirable counter-cyclical policy, and balanced budgets only exacerbate down-turns. Also, curtailing social spending - on education, health care, physical infrastructure projects - cuts the legs out from under long-term economic progress.

Why does the IMF stick to failed policies?

Yet the IMF sticks to its policies, probably because those policies serve important and powerful interests in the US and world economies. The IMF, after all, is not an institution controlled by either the people or the governments of low-income countries. It is not even like UN agencies, where governments have formally equal voice with one another. Instead, the IMF is controlled by the governments of high-income countries that provide the funds for its operations.

The US government has by far the greatest influence at the IMF. With over 18% of the voting shares in the Fund, the US government has de facto control. Indeed, over the years, the IMF has operated largely as a branch of the US foreign policy apparatus, attempting to create a context that assures the well-being of US interests - which is to say the interests of US-based internationally operating firms. (The same context serves the interests of firms based in Europe, Japan, and elsewhere; so the US generally has the support of its allied governments in directing the IMF.)

Most important, the IMF tells governments that a key to economic growth lies in providing unrestricted access for imports and foreign investment. Virtually all experience, however, suggests the opposite - that extensive regulation of foreign commerce by a country’s government has been an essential foundation for successful economic growth. Britain, the US, Japan, countries of Western Europe, Taiwan and South Korea all built the foundations for development 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 and not free trade.

The dramatic experience with financial capital demonstrates a similar disconnect between IMF proclamations and reality. Through the period of its increasing influence in the 1980s and 1990s, the IMF pushed governments in low-income countries to liberalise their capital markets. Capital controls were, claimed the IMF, 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 US and other high-income countries.

These same financial firms are also the winners from another component in the IMF policy package. Fiscal responsibility, according to the IMF, means that governments must give the highest priority to repayment of their international debts. In fact, the immediate justification of new IMF loans is often that this influx of capital is necessary to assure prompt payments of past loans. While there is no doubt that banks operating out of New York and other financial centres gain from this policy, 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. (Also, as has been frequently noted, as long as the IMF provides the funds to assure payment of loans made by the internationally operating banks, those banks will have no incentive to assure that they are making sound loans.)

IMF advocacy of privatisation is one more example of its effort to open the world economy more fully for US-based firms. When state enterprises in low-income countries are sold, large internationally operating firms are often the buyers, able to move in quickly with their huge supply of capital. Of course, in Argentina and elsewhere, local business groups have often been the direct beneficiaries of privatisation, sometimes on their own and sometimes as junior partners of firms based abroad. Either way, whether the buyers of state enterprises are national or foreign, this enlargement of the private sphere of operation works to the benefit of the private firms. The problem here is not that privatisation is always inappropriate, but simply that, contrary to IMF nostrums, it is not always appropriate.

Privatisation 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 privatisation is often a hugely corrupt process.

Growing popular opposition

The policies of the IMF and those of the World Bank have generated a great deal of popular opposition in low-income countries as well as in the US and Europe. During recent years, that opposition has become increasingly strident, staging major demonstrations at meetings of the IMF and the Bank, as well as at other gatherings of the government officials guiding globalisation. This opposition has been dubbed the ‘anti-globalisation movement’. The title is misleading because most of the activists are not opposed to the growing international economic and cultural connections among peoples, but are opposed to the way those connections are being structured, benefiting large firms while creating hardship and instability for many, many people. Policies like those of the IMF in Argentina typify the problem. Also, the recent political upheaval in Argentina lends new strength to the argument of the opposition movement that the IMF adjustment policies not only fail to bolster economic development but also lead to social and political disintegration.

Pressure from this movement has had some impacts. The IMF’s contribution to the Asian financial crisis in 1997 unleashed a torrent of criticism that the movement both built upon and contributed to. While no major policy changes have ensued, the Fund has responded rhetorically, renaming its ‘Enhanced Structural Adjustment Facility’ as the ‘Poverty Reduction and Growth Facility’. Over a longer period, the World Bank has also adjusted at least the appearance of its policies, focusing more attention on the issue of poverty and starting to examine the role of gender in economic development.

The World Bank, in addition, has backed off from some of its large-scale water control projects in low-income countries as a result of pressure from local organisations and international environmental groups. These changes have not basically altered the programmes of the international financial institutions, and the IMF has been especially resistant to change. Yet these adjustments do suggest that opposition has begun to have an impact.

The lesson is that the movement for change should increase its pressure on these institutions that are playing such central roles in shaping globalisation. While the movement has emerged largely in response to the hardships and inequality that have grown - even while IMF-type policies generated some economic growth - this opposition will gain greater legitimacy as growth is replaced by crisis, as in Argentina. The appeal of alternative policies will be even greater as the IMF and local elites can no longer claim that economic growth will eventually solve all problems.

Arthur MacEwan is Professor of Economics and interim provost and vice chancellor for academic affairs at the University of Massachusetts in Boston. His most recent book is Neoliberalism or Democracy? Economic Strategy, Markets and Alternatives for the 21st Century.

The above article is excerpted from a Global Affairs Commentary produced by Foreign Policy in Focus<>, a joint project of the Interhemispheric Resource Center and the Institute for Policy Studies.