Recent rescue packages for Uruguay and Brazil have raised a number of questions about the roles of the IMF. They apparently contradict previous fiery declarations of the US administration that it would oppose the big bailout approach favoured by its predecessor.
While some welcomed the bailouts as a sign that the US government was finally coming to its senses, some critics argued that the IMF was just trying to delay a major collapse for a few months so that US investors get bailed out before Brazil defaults. American banks have about $25.6 billion in outstanding loans to Brazilian borrowers. It is also significant that Uruguay quickly repaid a $1.5 billion US bridging loan, with $271,000 in interest, after its coffers were replenished with loans from the IMF, World Bank and Inter-American Development Bank.
In political terms the 30 billion dollar loan to Brazil in August is seen by some (including the New York Times) as a way to lock in “sound politics” no matter the result of the forthcoming elections, after concerns that left-wing candidates might reverse neoliberal economic policies. In order to secure the new IMF loan these candidates have had to commit to a continuation of current policies or else appear responsible for a potential massive withdrawal of volatile portfolio investments. A radical change in Brazil and/or a default on Brazil’s massive debts would give a signal to other countries in the region and jeopardize US plans for a wider free-trade area.
Meanwhile endless negotiations between Argentina and the IMF have driven Argentine authorities to distraction. Difficulties in getting key provincial governors on side have led President Duhalde to conclude that it is unlikely that an agreement would be reached before his successor takes power in May 2003.
Who “killed” Argentina?
The dispute about the division of responsibility between the IMF and the Argentinian government has heated up in recent weeks. Although most observers agree that the IMF made costly mistakes in Argentina, they sometimes disagree strongly on what these were. Some blame the IMF for being over-generous, some for being too tough and providing bad advice.
Michael Mussa, ex-IMF senior economic counsellor, says in a recent paper that the IMF is guilty of failing to use conditionality to press Argentina to adopt “a more responsible fiscal policy”. The second major mistake was to extend Fund support in the summer of 2001 after it had became clear that efforts to avoid default and to maintain the exchange rate peg had no reasonable chance of success. Mussa attributes Argentina’s collapse to its failure to implement the IMF approach “sufficiently vigorously”. He speculates that the IMF was concerned about its image after the Asian crisis and didn’t want to be “the skunk at the party”. Mussa’s main message is that the IMF should have been more of a “tough cop” and less of a “sympathetic social worker” with Argentina in the past few years.
Mussa also advocates better mechanisms of decision-making and accountability in the Fund, allowing the Board to be better informed and more able to perceive the biases in the work of the staff and/or management. He urges the IMF‘s Independent Evaluation Office to assess the Fund’s performance in Argentina as soon as possible.
Nancy Birdsall from the Center for Global Development blames the IMF for “bad parenting” with its “spoiled kid”. Argentina, says Birdsall, should have amassed fiscal surpluses during high growth years but did not due to excessive spending, especially by Argentina’s provinces. Birsdall also thinks the Fund should not have committed more resources “in a last ditch effort to discipline the spoiled child”. She says that the Argentinian crisis was not due to technical economic errors, but to bad luck combined with political chicanery and social injustice, and therefore that the main challenge lies in attacking those problems.
Mark Weisbrot and Dean Baker from the Center of Economic and Policy Research strongly disagree with the view of an overindulgent parent and a spoiled child. In a reply to Birdsall they argue that the myth of Argentina’s “profligacy” is being exploited to cover the IMF‘s failures and justify large pro-cyclical spending cuts that will worsen the depression. They say Argentina’s budget deficits between 1994 and 2000 were attributable to interest payments and argue that the IMF has raised the issue of provincial spending in an attempt to shift blame. But, they say, provincial borrowing was not guaranteed by the central government. The government recently forced provinces to sign a spending freeze agreement, in an attempt to trigger a resumption of IMF support.
Weisbrot and Baker also show that austerity measures were actually implemented in 2000 at the IMF‘s insistence, worsening the recession and its impacts on poor and working people. The CEPR paper urges the IMF, the World Bank and US Treasury to admit their responsibilities and contribute to addressing the problems that got Argentina into this mess: the complete opening-up to volatile portfolio investment combined with the deregulation of the banking system, and the Bank-backed privatisation of Argentina’s social security system.
“Much of the popular discontent with the Fund is that it is overzealous in its role as a tough cop rather than over indulgent in its role as a sympathetic social worker. In fact, the reverse is more often the case.”
Michael Mussa, ex-IMF Economic Counsellor and Research Director