A Rich Country Goes Bust Again
Those who ruined Argentina
by Laurent Joffrin
Le Nouvel Observateur, Paris, France, January
You can look for any excuse you want for the International
Monetary Fund (IMF) or its free-market _ remedies. The least we
can I say, if we want to remain _ polite, is that the results
of its actions in Argentina are less than a complete success.
Here is a modern, deserving, and courageous country, one that
emerged from a bloody dictatorship, one that is re-establishing
democracy, respects individual freedoms, and has persistently
endeavored to follow the draconian prescriptions of the international
Now, for all its trouble, it finds itself ruined and handicapped
for at least a generation. To be fair, the Argentine people are
also paying the price for the ineptness of their own leaders.
Perhaps it was to get people to forget its propensity for corruption,
demagoguery, and tax evasion that the leadership suddenly converted
to the most orthodox canons of international finance.
Between Christmas and New Year's Day, the political leaders
were blown away one after another before finally bets were placed
on a horse marking a return to Peronism, Eduardo Duhalde, who
now has to save anything worth saving among the ruins.
Therefore, we can now leave behind the domain of tasteful
understatements and sum up the matter like this: The case of Argentina
is one of the most complete, spectacular, and revolting economic
and financial disasters we have seen since the Second World War.
The Argentine political earthquake should now make people
wake up. The market cannot provide z for everything, and what
is needed for a country like Argentina is not another dose of
laissez-faire economics, but a state worthy of the name. To put
it another way, what should now occupy the IMF and the international
community is a cultural revolution in the area of regulating globalization.
At the outset, however, contrary to what a certain militant
line asserted, the intervention of the IMF was necessary and helpful.
Succeeding a corrupt military regime, the administration of radical
leader Raul Alfonsin [president from 1983 to 1989] was unable
to bring the country's finances under control. Through deficits
and creating money, the Argentine government touched off a disastrous
wave of inflation that led to the virtual disappearance of the
currency In 1989, price increases had reached an annual rate of
5,000 percent. Prices were readjusted every day. Argentines were
getting rid of their currency like a hot potato.
The Peronists came back to power, led by the flamboyant and
shady Carlos Menem. Being short of resources, he turned to international
financiers to save a country devastated by hyperinflation. They
prescribed two crucial measures. Parity was fixed once and for
all by a constitutional law. In its most solemn charter, Argentina
declared that the peso, henceforth and for all eternity, would
be worth as much as the U.S. dollar. And to prevent the government,
once and for all, from resorting to printing more banknotes, it
was stipulated that the total currency in circulation in the country
would be strictly indexed to the number of dollars held by the
central bank. For having sinned by excess, Argentina was now abdicating
all monetary autonomy.
Actually, the measure was not completely unjustified. When
a currency sinks into hyperinflation, it cannot be saved without
dramatic gestures. The currency board, according to the technical
term designating the definitive linking of the peso to the dollar,
had the effect of restoring confidence. Knowing that their assets,
their savings, or their investments were convertible into dollars
at a preset exchange rate, Argentines and foreigners working in
the country began to use the national currency again without fear
of being fleeced.
The tight rein imposed on creating money was a guarantee against
thoughtless demagogic excesses by a political leadership known
for its irresponsibility. True, at the same time the ideologues
of the IMF and the international financial community imposed "structural
reforms," consisting of abruptly dismantling the Peronist
heritage of a state-directed economy and a social safety net.
Government officials were laid off, there was privatization on
a massive scale, and spending for education and health was cut.
Today we might doubt the need for these measures, especially
since the privatization program profited, through collusion and
corruption, the factions of the ruling elites linked to this or
that group in the political game, somewhat like in Yeltsin's Russia.
Still, this looked like the price that had to be paid to rescue
a country from the brink. Thrown into globalization like a novice
swimmer into cold water, Argentina whipped Up its energies and,
for four years straight, found itself with an average growth rate
of about 8 percent, a more than honorable performance. Inequalities
were on the increase, but people could hope that the average increase
in wealth would, in the end, benefit those most deprived, at least
Alas, the structural reforms had not put a stop to the unpatriotic
and dishonest behavior patterns of the Argentine bourgeoisie,
who lined their pockets with the complicity of politicians while
they took advantage of the financial liberalization to massively
invest their fortunes abroad.
But, above all, the currency board bore within itself the
seeds of its own destruction. The dollar went up in value and
oil prices rose while Argentina's main trading partners, particularly
Brazil, devalued their currency. Without any internal reason,
the peso saw its value rise with the dollar. The exchange rate,
in the opinion of the experts, was being propelled to a level
twice what was required for economic balance. Exports ceased abruptly,
choked off by the overvaluation of the currency. Recession set
in. The government was betrayed by the economic slowdown that
was drying up tax revenues.
A vicious circle was set in motion: The Argentine state had
to cut its expenditures to pay back its debt, but by reducing
its expenditures, it stalled the economy, which in turn made its
revenues dwindle, forcing it to cut its expenditures even more.
In the 1930s, using the same methods, Pierre Laval had led the
French economy to the brink of a similar precipice. Clinging to
its dogmas, in a state of ideological and psychological dependency
on high finance circles, the IMF failed to see the cycle that
was gearing up.
Yet many experts were predicting the catastrophe, both in
Argentina and in other countries. In France, the Observatoire
Francais des Conjonctures Economiques, the economics institute
headed by Jean-Paul Fitoussi, titled its October 2001 memorandum:
''No one can expect the impossible from Argentina."
But instead of organizing a gentle retreat from the currency
board, the IMF tightened its lending terms, demanding increasingly
draconian measures. That is, until the population rose up against
such insane austerity, bringing down both the government and the
clever schemes of the Talibans of orthodox finance.
Observing that their prescription had just about killed the
patient, the free-trade doctors recommended doubling the dose.
More "structural reform", less social protection, this
time an almost total dismantling of the Argentine welfare state,
and handing over all autonomy to international bankers: That
was the remedy prescribed.
The new government turned its back on this prescription. It
decided to devaluate and to come to the aid, to the extent possible,
of its poorest citizens. Argentina is entering upon a perilous
phase, running the risk of an economic relapse and political subversion
that would bring back an authoritarian regime to power. This tragic
fable has two morals. What Argentina lacked, in the first place,
was not so much a total immersion in the market economy Rather,
it was the draconian reform of a corrupt and ineffective state.
The free-marketers always forget, whether it be in Russia, in
Asia, or in Latin America, that the market is not born by spontaneous
generation. Without security for transactions, the impartiality
of the court system, sound infrastructures, competent government
officials, and government action to limit the effects of reform
on the poorest people, the economy will not function. It will
slide into corruption, casino financing, inequality, and tax evasion.
It is the state that institutes the market, and it does so
not by retreating or disappearing. Worshiping at the altar of
the market, the international experts recommended to emerging
countries that they should push back the state at any price and
by any means. We have seen the result.
The second lesson goes along the same lines. In intervening
to manage crises, the IMF can no longer confine itself to strict
financial criteria. Political and social considerations must also
be present in its line of reasoning, which, among other things,
includes lightening the burden of the debt. If not populations
will revolt with ever-growing violence against the prescriptions
of the world financial community.
Are we moving in that direction? No. The experts close to
George W. Bush have found a more radical way to shield the IMF
from criticism: They propose eliminating it. Financial crises
would then be entirely managed by the private sector. After one
kind of brutality had been called into question, it would be replaced
by an even greater kind of brutality. The Argentine people have
not yet finished suffering.