Washington Post, December 25, 2001
International Herald Tribune, December 26, 2001
As Argentina's government was resigning in the face of full-scale riots and protests from every sector of society, a BBC-TV reporter asked me whether this economic and political meltdown would change the way people viewed the International Monetary Fund. I wanted to say yes, but I had to tell him: "It really depends on how the media reports these events."
So far it looks as if the IMF is getting off easy, once again. The Fund and the World Bank -- the world's two most powerful financial institutions -- learned an important lesson from their brief spate of bad publicity during the Asian economic crisis a few years ago. They have become masters of the art of "spinning" the news.
Argentina's implosion has the IMF's fingerprints all over it. The first and overwhelmingly most important cause of the country's economic troubles was the government's decision to maintain its fixed rate of exchange: one peso for one U.S. dollar. Adopted in 1991, this policy worked for awhile. But over the past few years, the U.S. dollar has been overvalued. This made the Argentine peso overvalued as well.
Contrary to popular belief, a "strong" currency is not like a strong body. It is very easy to have too much of a good thing. An overvalued currency makes a country's exports too expensive and its imports artificially cheap. Just look at the United States, where our "strong" dollar has brought us a record $400 billion trade deficit.
But it gets catastrophically worse for a country that has committed itself -- as Argentina has -- to a fixed exchange rate. When investors start to believe that the peso is going to fall, they demand ever higher interest rates. These exorbitant interest rates are crippling to the economy. This is the main reason Argentina has not been able to recover from its 4-year-old recession.
To maintain an overvalued currency, a country needs large reserves of dollars: The government has to guarantee that everyone who wants to exchange a peso for a dollar can get one. The IMF's role here was crucial: It arranged massive amounts of loans -- including $40 billion a year ago -- to support the Argentine peso.
This was the IMF's second fatal error. To appreciate its severity, imagine the United States borrowing $1.4 trillion -- 70 percent of our federal budget -- just to prop up our overvalued dollar. It didn't take long for Argentina to pile up a foreign debt that was literally impossible to pay back.
As if all that weren't enough, the Fund made its loans conditional on a "zero-deficit" policy for the Argentine government. But it is neither necessary nor desirable for a government to balance its budget during a recession, when tax revenues typically fall and social spending rises.
The "zero-deficit" target may make little economic sense, but it has great public relations value. By focusing on government spending, the IMF has managed to convince most of the press that Argentina's "profligate" spending habits are the source of its troubles. But Argentina has run only modest budget deficits, much smaller than our own deficits during recessions.
The IMF now claims that it was against the fixed exchange rate, and the massive loans to support it, all along. Fund officials say they went along with these policies to please the Argentine government. So now Argentina tells the U.S. government what to do! This is not a very credible story, but of course verifying who made what decision is a little like tracking the chain of command at al Qaeda. IMF board meetings, consultations with government ministers and other deliberations are secret.
But they do have a track record. In 1998 the Fund supported overvalued currencies in Russia and Brazil, with massive loans and sky-high interest rates. In both cases the currencies collapsed anyway, and both countries were better off for the devaluation: Russia's growth in 2000 was its highest in two decades.
Argentina will undoubtedly recover too, after it devalues its currency and defaults on its unpayable foreign debt. But the people will need a government that is willing to break with the IMF and pursue policies that put their own national interests first.
Washington has other ideas. "It's important for Argentina to continue to work through the International Monetary Fund on sound policies," said White House spokesman Ari Fleischer on Friday. For the IMF, failure is impossible.