Argentina to be sacrificed on free-market altar?

10 September 2001

In August, Argentinian teachers, doctors and public workers went on strike and unemployed workers and students blocked roads to protest against rising unemployment and cuts in pensions and salaries. These were measures agreed by the government in order to secure a further $8bn loan from the IMF. But the new cash will only offer temporary help to shore up reserves. Since June foreign investors and wealthy Argentinians have taken out $9bn from the country, which was formerly billed as a structural adjustment success story.

Coordinator of Dialogue 2000, a coalition of Argentinian NGOs, Beverly Keene said: “This new agreement with the IMF will only make things worse since these loans are conditional on implementing more of the policies that have impaired the economy and taken an enormous human toll.” The pressure is on the Argentinian government not just to save its economy but to save the reputation of neo-liberal economics. “If Argentina collapses, we’re not talking about just an economic contagion in emerging markets, but a political one,” Daniel Artana, chief economist at FIEL, a Buenos Aires-based research organisation told the Washington Post (6/8/01). “The real danger is that restless left wingers will point to Argentina, a country that went full thrust with the free market, and say it is evidence that capitalist reforms simply don’t work.” In a letter to the Financial Times (17/8/01), former US Treasury Secretary, Nicholas Brady, remarked, “The decisions made now are crucial for the global economy. If Argentina rises to the occasion and fulfils the principles that would free the IMF to act, we could continue along the path of progress. Then the goal of achieving free and open markets would not have to be abandoned by Argentina or any other country.”

Argentinian Finance Minister Domingo Carvallo insists that the government will continue to tighten its budget to meet IMF and private investors’ expectations of a “zero deficit”. This year, Argentina is scheduled to pay $30 billion in interest and foreign debt service, more than half the national budget. To reach the zero deficit target will require cutting government salaries and pensions by at least 13 per cent.

US Treasury Secretary Paul O’Neill wants to demonstrate a tougher line against using multilateral and bilateral funds to bailout countries in financial crisis. In his view, countries should make significant efforts to restructure their economies before funds are provided. He is confident that national economic policies are at the main cause of crises and that contagion is now less likely than before. However, the US administration has already strayed from its hard line adopted when in opposition – that it would not support more money to Argentina.

While attention has focussed on debt restructuring and budget tightening, the IMF has supported the government’s desire to maintain its over-valued currency arrangement, causing exports to become increasingly uncompetitive. The government has resisted devaluation on the basis that it would cause a collapse in the economy as investors rushed for the exits and hedge funds move to make a quick killing. In the meantime, the Bush administration has criticised Argentina for failing to support regional trade liberalisation. US Trade Representative Robert Zoellick announced that as part of the administration’s support for the new IMF loans, he will meet the trade ministers from Argentina, Brazil, Paraguay and Uruguay “to pursue our common interest in free trade as an engine of economic growth”.

Earlier in the month Brazil secured a further $15bn from the IMF to help deal with problems caused by Argentina’s crisis. Since February the value of Brazil’s currency, the Real, has fallen by nearly 25 per cent against the US dollar. With the country heading into a presidential election year, any new cuts in government spending and investment would probably strengthen the appeal of the left-leaning opposition, some parts of which are opposed to dealings with the IMF and support a moratorium on repayment of Brazil’s foreign debt.

Global Macroeconomic and Financial Policy site, Stern Business School