How egos and the IMF torpedoed Argentina

Commentary: It could happen again

By Michael Molinski, Investing Across Borders

April 2002

The International Monetary Fund is back in Argentina, waving the promise of more loans as if it were the country’s savior. How short our memory is. How desperate Argentina must be to accept help from the very organization responsible for its fiscal mess.

Sadly, Argentina has little choice but to accept the help. The economy is in ruin, society is dangerously close to anarchy, the government of newly appointed President Eduardo Duhalde is hanging on by a thread. A fast infusion of cash is needed to prevent complete loss of control of the peso and a return to the hyperinflation days of the 1980s.

But in accepting the help of the IMF, Argentina is once again beholding itself to an organization that is little different form a New York loan shark.

Argentina’s economy and government both fell in December, when the refusal of the IMF to release a line of credit prompted the collapse of the decade-old system of pegging the peso to the dollar. The government of President Fernando de la Rua was run out of office, and chaos ensued.

The media quickly followed by questioning whether the IMF did too little, or too much, to save Argentina. Did the promise of loans force Argentina to rely too much on the IMF as a lender of last resort? Or should Argentina have continued supporting the country to avoid a collapse of the monetary system?

Both questions miss the point. It wasn’t that the IMF did too much or too little, but rather that the IMF in granting the loans forced Argentina to adhere to economic, fiscal and monetary policies that were flat out wrong.

Stanley Fisher, then No. 2 at the IMF, flew back and forth between Buenos Aires and Washington throughout the emerging market crises of 1997, 1998, and 1999, and the dot-com bust and global recession of 2001, reiterating the same recipe of economic reforms that brought about the Asian crisis of 1997, patting Argentine officials on the back for their fiscal austerity measures, tightening fiscal budget, improved tax collection, adherence to a strict monetary policy.

While such policies were indeed good ones during the early 1990s, when Argentina was recovering from a lost decade and needed the stability that the IMF brought, they were ill-suited to a nation that was struggling to regain competitiveness and confronted with external shocks that it couldn’t endure.

In September 2000 – more than a year before Argentina eliminated the dollar peg and long after it should have – Johns Hopkins economist Steve Hanke wrote, "The economic plan, the brainchild of the IMF, was supposed to lower interest rates and produce a boom. How? By raising taxes, which was meant to reduce the government’s deficit. But added to other built-in problems in Argentina’s economic system, the ill-conceived plan has produced a mess. Its timing was awful: World interest rates were on the rise. So Argentina’s rates rose with the rest."

Still, Argentina and the IMF kept insisting the plan would work. Henke later called it "a deadly cocktail mixed by the IMF." For those who think that "loan shark" is too strong a reference, think again.

To be sure, it wasn’t all the IMF’s fault. The Argentine government – in particular former Finance Minister Domingo Cavallo – was so committed to the monetary system that Cavallo helped design that he couldn’t see that its time had passed. Big egos among other federal government officials contributed, as no one wanted to be responsible for killing stability. Provincial governors worsened the nightmare by fighting the federal government all the way, being more concerned with saving their reputations and their constituencies than with the health of the country.

There are those who say that Argentina should have completely dollarized the economy instead of letting the peso to float. But that was never an option to Argentina because it would have required the backing of the U.S. government, which wasn't going to come under either President Clinton or President Bush.

In late March, Argentina got a boost from the Inter-American Development Bank which, to its credit, loaned $694 million in a program designed to help the poorest people in the region and to encourage development. The IMF team is talking with Argentina this month and, if all goes well, it could lead to a renewed flow of loans as early as May. Provided the money is managed well, Argentina has every means to recover. It’s natural and human resources are unsurpassed.

Argentina’s Economy Vice Minister Jorge Todesca’s response to the IMF proposal is a sad commentary on the state of affairs there: "We need credibility, and that would largely be the result of an accord with the IMF."

True credibility will only come to Argentina when it learns to stand on its own feet, without the IMF. Take the IMF money. But don’t make the mistake of being taken by the IMF. The best that Argentina can do is to use the institution like it used Argentina for its own purposes, and those of its backers.

Once commercial banks start lending to the country again, and dollars start flowing back into the system, ignoring the IMF’s recipe for success is the best advice that Argentina can follow. And as history has shown, the IMF is much more willing to grant money to a bad pupil who succeeded than a willing disciple who failed.

Michael Molinski, author of "Investing in Latin America: Best Stocks, Best Funds," is president of Investing Across Borders.