- How the IMF Messed Up Argentina
- by Mark Weisbrot, co-director of the Center
for Economic and Policy Research. Reprinted from the 'International
Herald Tribune,' December 26, 2001 [Posted 31 December 2001]
- original article http://emperorsclothes.com//analysis/1htm
[NOTE FROM EMPEROR'S CLOTHES: Our gratitude to Néstor
Miguel Gorojovsky in Argentina who found this article by Mark
Weisbrot. It explains in easily understandable language why pegging
the Argentinean peso to the U.S. dollar has wrecked Argentina's
Check out Further Reading (at the end) for other articles documenting
the nation-destroying policies of the International Monetary
We hope to post an analysis of the Argentinean rebellion against
the New World Order. - Emperor's Clothes.]
Argentina's implosion has the fingerprints of the International
Monetary Fund 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 a while. But during the past
few years the dollar has been overvalued, which made the 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 exports too expensive
and imports artificially cheap. Just look at the United States,
where a "strong" dollar has brought a record $400 billion
But it gets catastrophically worse for a country that has committed
itself 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.
That is the main reason why Argentina has not been able to recover
from four years of 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 large loans, including $40
billion a year ago, to support the peso. This was the IMF's second
fatal error. To appreciate its severity, imagine Washington borrowing
$1.4 trillion - 70 percent of the federal budget - just to prop
up an overvalued dollar. It didn't take long for Argentina to
pile up a foreign debt that was impossible to pay back.
As if all that were not enough, the IMF made its loans conditional
on a "zero-deficit" policy in Buenos Aires. 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 U.S. deficits
The IMF now claims that it was against the fixed exchange rate,
and the large loans to support it, all along. 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 Qaida's chain of
command. IMF board meetings, consultations with government ministers
and other deliberations are secret.
But they do have a track record. In 1998 the IMF supported overvalued
currencies in Russia and Brazil, with large 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 which put their own national interests
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.
The writer is co-director of the Center for Economic and Policy
Research. He contributed this comment to The Washington Post.
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