“While boasting of our noble deeds, we are careful to control the ugly fact that by an iniquitous money system, we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.” – Horace Greeley
We bring this subject as a possible warning of what can happen to countries who relay on IMF and bailouts… Also, do you see any similarities with the current situation in Europe and the United States?
The following two articles were written over 10 years ago.
IMF Helped Sink Argentine Economy
If you want to know where the next riots will break out, follow the IMF “candy man” around the world. It’s happening in Argentina today. The economy is melting down; there have been deadly riots in the streets. President Bush insists that Argentina stay with the IMF program of fiscal austerity, the government has fallen and Peronist governor Adolfo Rodriguez Saa – sworn in as president a week earlier – resigned Sunday. Economic collapse in Argentina began with a failure of U.S. monetary policy that created worldwide dollar deflation and led to a global recession.
|Because Argentina’s peso is linked one-to-one to the dollar through its currency board, the government was forced to sit idly by since1997 while its currency appreciated 30 percent in tandem with the dollar against gold, other commodities and other currencies. The result was a dearth of peso liquidity resulting in falling prices and economic contraction.
Today wholesale prices are falling at an annual rate of 7 percent, and consumer prices are declining at a 1.5 percent annual rate. The money supply continues to shrink at double-digit rates. Ironically, the IMF, usually obsessed with the shibboleth of “overvalued” currencies, failed to recognize the effects of dollar deflation and instead mistook effect for cause and blamed Argentina’s economic woes on budget deficits and unmanageable debt. While it is true that the former government of Fernando De la Rua mismanaged the nation’s fiscal affairs and allowed spending to get out of hand, these mistakes were by no means the prime cause of Argentina’s meltdown. Argentina’s debt has become “unmanageable” because its economy hasn’t grown in three years. De la Rua’s biggest mistake was to succumb to the fatal attraction of bailout loans once the economic slide began and join in dangerous liaison with the IMF to increase taxes, impose salary reductions on public employees and slap on financial controls that threatened to seize up the financial system.
Think of Argentina’s one-to-one exchange rate between the dollar and the peso as an aircraft carrier (the United States) and a motorboat (Argentina) afloat on the high seas. If the motorboat economy floats freely, an economic squall can swamp and sink it, but if it tethers itself to the aircraft carrier, the resulting stability allows it to weather most storms. A currency anchor, however, won’t prevent the political crew of the motorboat economy from making policy mistakes like raising tax rates and increasing regulations, which can create an economic crisis. When that happens, the IMF typically comes around with cash in hand insisting on more tax hikes to reduce deficits and demanding that the small economic craft cut itself loose from its currency anchor in the hope that a free-floating currency has a better chance of righting itself. Bad advice. Small currencies invariably sink in high economic seas as speculators make runs on the currency, capital flees the country and wealth is destroyed. What happens, though, if the motorboat is shipshape but the aircraft carrier for some reason – say deflationary monetary policy – begins to take on water and ride lower in the sea? An aircraft-carrier economy may not be much affected by the additional monetary ballast of a heavier currency, perhaps experiencing little more than a slight slowdown in speed. But small changes to how high the motorboat’s anchor ship floats can have catastrophic consequences for the smaller vessel. If the anchor ship sinks low enough and the point at which the two vessels are tethered cannot be adjusted higher upon the hull of the anchor ship, it can drag the motorboat under.
Argentina’s economy will not recover as long as it lies prostrate between the hammer of dollar deflation and the anvil of IMF austerity. With 80 percent of Argentina’s debt in dollars and workers’ and businesses’ income in pesos, allowing the peso to float freely would impoverish the country and increase the debt burden. A new government cannot be established on the foundation of debt repudiation. The new government’s default on Argentina’s $155 billion debt must be followed up by debt rescheduling and a plan to reliquify the economy, cut tax rates and reduce regulations. One approach would be to allow the central bank to print sufficient pesos to buy up enough debt to reverse the currency’s unwarranted appreciation. Alternatively, the United States could alleviate the deflationary squeeze by having the Fed purchase sufficient new peso bonds to inject adequate dollar liquidity into the economy to relieve the deflation without breaching the currency board. Unless America lends a hand, socialists and the IMF will wreak more havoc in Argentina.
How the IMF Sank Argentina
by Mark Weisbrot 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 saw the International Monetary Fund. I wanted to say yes, but I had to tell him: “It really depends on how the media reports it.”
So far it looks as if the IMF is getting off easy, 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 the fixed rate of one peso for one U.S. dollar. Over the last 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. 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 did — 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 that Argentina has not been able to recover from its four-year 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 did not take long for Argentina to pile up a foreign debt that was literally impossible to pay back.
If all that weren’t enough, the Fund made its loans conditional on a “zero-deficit” policy for 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.
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 is telling 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-Qaida. IMF board meetings, consultations with government ministers, and other deliberations are secret.
But it does 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, now that it has devalued its currency and defaulted on its unpayable foreign debt. But the people will always need a government that is willing to break with the IMF and pursue policies that put their own national interests first.
Washington had 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 just before the collapse. For the IMF, failure was impossible.
Weisbrot, PhD., is an economist and co-director of the Center for Economic & Policy Research in Washington, D.C. His latest book is “Social Security: The Phony Crisis” (with Dean Baker), 1999, University of Chicago Press.
PS1 2013 Update
Argentina’s yellow card from IMF
By censuring Argentina, the IMF issued a more formal warning without sanctioning the country in any specific way. Argentina has been given until September to clean up its statistics or it will face some sanction. That sanction could be as light as losing its voting rights (which don’t matter much) to as heavy as compulsory withdrawal, which would trigger numerous economic problems.
The IMF is deliberately slow on this issue. They need financial indicators to be relatively honest, if not accurate. Blatant manipulation by governments and censorship of data that goes against the government storyline harms the whole financial system. Yet, acting too quickly against Argentina will allow the IMF to be attacked for Argentina’s economic problems, giving Kirchner yet another foreign adversary to blame for her own domestic troubles.
A lot can happen in nine months, but Kirchner doesn’t seem concerned about potential IMF sanctions. She embraces the conflict and the yellow card as a symbol of the country’s independence from the international economic gurus that so many in Argentina dislike.
PS2 About IMF
The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Bretton Woods Conference and formally created in 1945 by 29 member countries. The IMF’s stated goal was to assist in the reconstruction of the world’s international payment system post-World War II. Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily. Through this activity and others such as surveillance of its members’ economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries. The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” The organization’s stated objectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs. Its headquarters are in Washington, D.C., United States.
The IMF is mandated to oversee the international monetary and financial system and monitor the economic and financial policies of its 188 member countries. This activity is known as surveillance and facilitates international cooperation. IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources. The IMF does not require collateral from countries for loans but rather requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld. Conditionality is perhaps the most controversial aspect of IMF policies. Conditionality is associated with economic theory as well as an enforcement mechanism for repayment.
The IMF has the obstacle of being unfamiliar with local economic conditions, cultures, and environments in the countries they are requiring policy reform. The Fund knows very little about what public spending on programs like public health and education actually means, especially in African countries; they have no feel for the impact that their proposed national budget will have on people. The economic advice the IMF gives might not always take into consideration the difference between what spending means on paper and how it is felt by citizens.