[A-List] Argentina: indicting the IMF

["Michael Keaney" <michael.keaney@xxxxxx>]

Néstor writes:

As an a-list exclusive, I dare to inform the members
that within a few weeks, the results of the Argentinean elections
might well shake the world.

-----

I hope so -- and please keep us informed. Here's something from today's
Guardian which tells little new but does give a flavour of the extent of
social mobilisation.


IMF's Argentinian incontinence

Duncan Green
Monday February 10, 2003
The Guardian

Not many nascent political parties use a toilet bowl as their logo, but the
Giant Toilet Committee in Argentina's second city of Cordoba is both a witty
protest movement and an apt metaphor for the dire state of the country.

The committee's barrio was nicknamed "the giant toilet" after the water
table rose and sewage started flooding the houses and roads. For years,
residents fruitlessly lobbied the local council for a sewage system. An
outbreak of hepatitis in 2001 was the last straw. A protest committee
formed, opting for irony rather than road blockades. They started off by
parading outside the town hall with a 10 metre high toilet. On its lid, the
word "promises" with an arrow pointing down into the bowl.

The Giant Toilet Committee is just one of thousands of self-help and protest
groups confronting the worst crisis in Argentina's history. The end of 2001
saw mass demonstrations oust five governments in two weeks, and a chaotic
devaluation. Last year, GDP fell by up to 15%, un- and under-employment rose
to half the working population.

A quarter of Argentinians do not earn enough to feed themselves or their
families and cities are littered with boarded-up shops and factories.

The roots of the crisis lay in a disastrous combination of economic
policies, bad advice from the IMF and World Bank, and external pressures
beyond the government's control.

In 1991, the government ended inflation by pegging the peso to the dollar.
This step, which effectively prevented devaluation, meant that the
government could issue pesos only if they were backed by dollar reserves. In
the event of a fiscal deficit, the government's only option was to borrow
dollars to cover the gap, thereby adding to its debt.

And fiscal deficit there was, but the cause was not so much government
profligacy or corruption, as pensions privatisation. Urged on by the World
Bank and IMF, Argentina moved rapidly from a "pay as you go" scheme in which
the government used income from those at work to fund its pensions
commitments, to a funded scheme, where individuals saved for their own
retirement. The problem was the transition period, during which the
government no longer received pensions contributions, but still had to pay
out. In the case of Argentina, decades of state patronage had led to a
massive pensions bill, and the switch to funded schemes accounted for 70-80%
of the deficit during the 1990s.

A number of other steps increased Argentina's vulnerability: bungled and
corrupt privatisations led to a high cost economy, with tariffs for phones
and electricity up to 10 times international rates. This, plus an overvalued
currency and trade liberalisation, led to a surge of imports that destroyed
the country's industry and inflated the trade deficit. Financial
deregulation, bank privatisation and the liberalisation of capital flows
meant the government losing control over much of the economy.

The vulnerability of the economy was finally exposed by the slump in
international capital flows after the Asia crisis of 1997-98. The government
staggered on, raising interest rates in a vain effort to pull in the dollars
needed to service its escalating debt, but collapse was inevitable.

In all this, the IMF has to answer for its sins. During the 1990s, it held
up Argentina as a model for the rest of the developing world, turning a
blind eye to the looming crisis. When the crisis hit, the IMF made matters
worse by applying its standard, and heavily criticised, recipe of trying to
balance budgets during a recession by cutting spending.

There is one lesson they should learn. Capital account liberalisation in
developing countries usually ends in tears. Argentina demonstrates the risks
involved in opening up to capital flows. If a country's politics, economic
management, or just about anything else, is weak, at some point it will
frighten the horses and trigger a run on the currency. Millions of
Argentinians are now ruing their government's blind adherence to the 1990s
siren songs of privatisation and deregulation.

ˇ Duncan Green is a policy analyst at Cafod, the Catholic aid agency