Bangkok Post, May 24, 2003
Knight-Ridder/Tribune Information Services - May 19, 2003
If ever there was an election that could be summed up by “It’s the economy, stupid” the Argentine election is it. In fact, the economic failure is so clear and the popular consensus so pronounced that last Sunday’s election was cancelled. In a highly unusual move for a candidate who won the first round of an election, Carlos Saul Menem withdrew from the race last week. His opponent and fellow Peronist party member Nestor Kirchner, who placed second in the first round, will become president of Argentina.
Over the last five years Argentina, which previously enjoyed the highest living standards in Latin America, has suffered through the worst economic decline in its history. The majority of the country now lives below the official poverty line, and unemployment is 22 percent.
Although Menem had other political liabilities – he is widely seen as corrupt – it is his role as designer of failed economic policies that did him in. A solid majority of the voters in the first round of the election voted for candidates – including Kirchner – who rejected these policies, and the polls showed Menem losing by more than a 2-1 margin in the run-off.
Menem was president from 1991-1999, and although he left office before things really fell apart, the electorate correctly held him responsible for the ensuing depression. Under Menem’s leadership, the country experimented with an extreme version of what Argentines call “neoliberalismo,” including an indiscriminate opening to foreign capital and trade, large-scale privatization, and a “currency board” system – much like a gold standard – that fixed Argentina’s peso at one per U.S. dollar.
The combination was deadly. Despite initial success in taming inflation and boosting economic growth, the regime was particularly vulnerable to external shocks from the global economy. These began in 1994 when the U.S. Federal Reserve started a series of interest rate hikes, followed by the Mexican peso crisis (1994-95), then the Asian (1997-98), Russian (1998), and Brazilian (1999) financial crises.
Each of these developments sent shock waves through the Argentine economy, which could not adjust so long as its currency was tied to the dollar. The result was a vicious spiral: private capital flight led to increasing interest rates and a shrinking economy, which led to more debt and even higher interest rates as investors feared a currency devaluation and then a debt default. The government finally did default on $95 billion of public debt at the end of 2000, and the currency collapsed.
But the past is anything but history, and the debate far from over. That is partly because there is another actor in the Argentine economic drama: the International Monetary Fund (IMF). Argentina under Menem was its poster child, and the Fund supported the government’s policies right up to the cliff and over the edge. Fund officials also prolonged and worsened the recession/depression by insisting on monetary and fiscal austerity at the wrong times. (Their warnings of hyperinflation following the devaluation proved unfounded: inflation so far this year is about 2.5 percent).
Like Menem, the IMF has admitted to no mistakes; unlike Menem, it is not accountable to any electorate. But the Fund was there in Buenos Aires, on the eve of the election. Their presence reminded the public that certain things are not necessarily decided by majority votes. (Menem had met previously with Fund officials; Kirchner declined, although he did send a representative).
After an entire year of tense negotiations and shifting demands from the Fund, the IMF and Argentina reached an agreement in January. The agreement – which expires in August --provided no net new resources for Argentina; the money will be used to pay official creditors such as the Fund itself and the World Bank.
Meanwhile, the Argentine economy began recovering on its own last year, in spite of the largest sovereign debt default in history, and with no help whatsoever from the Fund. All indications are that the IMF will be pressuring the new Argentine government to run large budget surpluses in order to make payments on its defaulted debt, as much and as soon as possible. This and other traditional IMF policy prescriptions could easily choke off the economy’s nascent economic recovery.
The new president will certainly have a mandate from the electorate to resist the Fund’s demands, and make economic recovery the country’s first priority. But will he use it?