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ARGENTINA AND THE IMF.

International Monetary Fund and its program to help Argentina's financial crises. First economic crisis of the 1990s, and second economic crisis of 2001. Criticizes the first IMF program and the Argentinean government's reforms. Brief overview of Argentina's history and root causes of economic problems. IMF's traditional neoliberal austerity response.

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The Case of Argentina and the IMF
Statement of Purpose
For many years, Argentina served as the “poster child” for
obedience to the International Monetary Fund (IMF) and its austerity program, a program designed by the IMF to assist heavily indebted and economically troubled nations regain their economic footing and achieve stability (Healy and Seman, p. A34). In the 1990s, Argentina experienced an end to years of hyperinflation and stagnation when the Argentine peso became stable after being pegged to the U.S. dollar and economic growth registered at a solid 8 percent annually (Healy and Seman, p. A34). Central to this stabilization was the “convertibility” factor, in which pesos and dollars became virtually interchangeable. However, over time, this (coupled with other fiscal, tax and

The cornerstone of his monetarist policy "adopted as a formof hyperinflation, was the guarantee that a peso was a dollar was a peso,now and forever" (Frasca, p. Argentina's Options for Economic Revival." Challenge, May 2 2, 45(3), pp. An agreement dating to 1853allows the central government to collect taxes and guarantees an automaticshare of revenues to the provinces. References to the convertibility process in which the Argentine pesowas pegged to the American dollar have been made in foregoing pages of thisreport. In 1991, external public debt wasU.S. Department of State (1,p. This trade imbalance made it all but impossible for the countryto earn the foreign exchange it required to pay the interest on its foreigndebt. What this meant in the 199 s inArgentina was that the provinces had no incentive to spend moreefficiently. "Argentina: A Decade of the Convertibility Regime." Challenge, July-August 2 2, 45(4), pp. 2. 1; 2, p. AfterPresident Menem came to power in 1989, he took a major step away from thePeronist vision. 1). 28-29+.Eiras, Ana I. Available at www.state.gov /documents/organization/8193.pdf.United States, Department of State. 3). Responding in part to IMF austeritydemands, Menem and others created a new monetary and fiscal policy for thenation. A34).Central to this stabilization was the "convertibility" factor, in whichpesos and dollars became virtually interchangeable. To make new payments, Argentina either needs anIMF loan or it needs to draw down its reserves. The Argentine trade balance also demonstrates that a financial crisishas developed in Argentina. "Austerity or Bust? 3. 1). 8) claims that anovervalued fixed exchange rate locked at one peso per dollar since 1991 andan excessive amount of foreign debts were the two proximate causes of theArgentine economic crisis. These data suggest thatthe Argentinean economic situation has worsened since 2 1. 2. The IMF also is said to have "encouraged policy measuresthat contributed to deepening the recession and pushing the economy furtherdown into a vicious cycle of sales and activity contractions that reducedtax collection and caused a further deterioration in the fiscal accounts"(Frenkel, p. IMFalso approved this move. This included an IMF-approved and highlytouted regime of convertibility, privatization, deep trade and financialopening, equal treatment of foreign and local capital, and local marketderegulation. Works CitedAnonymous. 3).Conclusions and Recommendations As been noted elsewhere in this report, the intervention of the IMF inthe Argentinean crisis appears to be contingent upon the ability ofArgentina to maintain a free-floating currency regime to providetransparency to the country's fiscal situation before any new aid flowsinto the country (United Press International, 3, p. 26), accept some share ofresponsibility for the current crisis. Feldstein (p. The IMF has also attached somepolitical terms to any bailout, including voting against Cuba at the UnitedNations (Frasca, p. 1 8114W5747.Barraclough, Colin. 47-48.Anonymous. These shifts occurred in a period inwhich external public debt, according to the U.S. The United Press International (1, p. 2 2. From 1991, when the trade balance was 3.7percent, and 1993 when it was - 2.8 percent, it has increased to 4.7percent as of 2 1(U.S. Further, the IMF also informed Argentina, directly andindirectly that: 1) It requires a combined budget statement for federal andprovincial levels before any new aid will be provided; 2) The IMF no longerbelieves in the government's promises and has pressed to have Argentina'scombined federal and provincial economic numbers reviewed on a monthlybasis as part of any new agreement with Argentina (United PressInternational, 2, p. Rather thanprinting money as previous Argentine governments had done, the Menemadministration printed bonds to finance its fiscal deficit. The Case of Argentina and the IMFStatement of Purpose For many years, Argentina served as the "poster child" forobedience to the International Monetary Fund (IMF) and its austerityprogram, a program designed by the IMF to assist heavily indebted andeconomically troubled nations regain their economic footing and achievestability (Healy and Seman, p. The share ofpublic spending in GDP increased from 27 percent in 1995 to 3 percent in2 . 27), thePeronist regimes of the 194 s and 195 s capitalized upon the nation'spostwar largess and lulled the population into accepting politicalcorruption in return for fairly broad access to economic benefits. In 2 , unemployment rose to 15.4 percent and againrose in 2 1 to 16.4 percent. BetweenOctober and the end of 2 2, Argentina owed more than $US 1.9 billion tothose three organizations (United Press International, 1, p. Throughout the 199 s, because the exchange ratewas fixed at too high a level, Argentina exported too little and importedtoo much. By 1999,the Argentinean crisis was revealed in an external public debt of US $84.8billion. Other reforms (alsoeither approved, encouraged or requested by IMF) included granting ofautonomy to the central bank and the reorganization of the central bankwere implemented "as additional measures to consolidate the institutionalframework of the new macroeconomic setting" (Frenkel. 44-46), who believes that today neither the government's day-to-day operation, the external sector, nor the financial sector presentinsurmountable obstacles to Argentina's recovery. However, theIMF may also have been too tolerant for too long of Argentina's combinationof fixed exchange rates and fiscal laxity. Deregulation of the economy, via liberalization of the foreign investment code, along with removal of export taxes and import quotas to reduce the cost of doing business and spur investment.Against these successful reforms, Menem's government failed to completeothers reforms that are directly associated with the current crisis.Growing government expenditures as a percentage of GDP (9.4 percent in 1989to 21. "Argentina's Lopsided Recovery." The Economist, June 14, 1997, 343(8 21), pp. dollar and economic growthregistered at a solid 8 percent annually (Healy and Seman, p. 47) stated that after this occurred in 1991,foreign banks and investors looking for easy profits rapidly entered intothe Argentine economy. Fixing the peso throughthe currency board rules was instrumental in shaping monetary policy. These reforms include: floated currency, a moreaustere budget with reduced expenditures at both the federal and provinciallevels, tougher bankruptcy laws, temporary bans on any union-focused wageincreases, and reform of the central bank. 1), it is anticipated that realannual GDP in 2 2 will be -13.6 percent, corresponding to an inflationrate of 36.5 percent, an exchange rate (peso/US dollar) of 13.68 to 1, anda current account balance of $US 3,9 6 million. 41). 1). From IMF'sperspective, these investment flows were highly desirable. The IMF supported these initiatives, says Frenkel (p. In 1991, Argentina had asavings rate of 13.3 percent of gross domestic product - an amount thatcontinued to be registered through the mid-199 s. IMF teams went to Buenos Aries in March and April 2 2 to dictateterms for new loans to Argentina. At the same time, between1995 and 1997, the Argentine economy shrank by 4.4 percent. The transaction costs of this reform reached threepercent of GDP in 2 because the Argentine government still had to paypensioners, but no longer received contributions to pay the pensioners. 1 8267W653 .Anonymous. According to The Economist (2, p. "The Costs of Orthodoxy." The American Prospect, January 1, 2 2, 13(1), pp. 22).The Current Crisis Frenkel (p. 27). A34- A38.Rodrik, Dani. Argentina is now experiencing economic as well associal chaos, signs of which were observed in the spring of 2 2 (Epstein,p. billion. 41) asserts that "Argentina embraced acomprehensive economic reform effort at the beginning of the 199 s." Inaddition to convertibility of pesos into dollars, this effort included amassive privatization of public utilities, deep trade and financialopening, equal treatment of local and foreign capital, and the deregulationof domestic markets. A drastic disinflation and fast economic growth seem toindicate that this set of strategies was working. A34). 3) contended that the country'stax system was inefficient throughout the 199 s and tax evasion was high.Whereas Brazil collects more than 3 percent of GDP in taxes, Argentinacollected just 21 percent of GDP in taxes. "Trade Rout - Reform in Argentina, Take Two." The New Republic, January 14, 2 2, pp. According to the Latin Focus (p. These IMF demands represent what Rodrik (p. 14) considers thetraditional neoliberal austerity response that the IMF has tended to offerin virtually all balance-of-payment crises. Business Week (p. With respect to theinvestment rate as a percentage of GDP, Argentina reported a 14.6 percentrate in 1991 and an 18. Argentina shouldconsider maintaining its unilateral debt moratorium. When it became clear that Argentina could nolonger borrow to rollover these debts and pay the interest owed, thegovernment was forced to default and to devalue the peso. Tax policy - or the lack of an adequate tax policy - is one of themajor causes of the current financial and economic debacle that isconfronting Argentina (The Economist, 2, p. Additionally, the banks are losing more than US $1 million a day in deposits, despite strict limits on withdrawals (BusinessWeek, p. In addition to seekingabolition of the provincial quasi-currencies, the IMF wants civil serviceranks reduced and bankers let off the hook. 22-23.Feldstein, M.S. dollar boded well for Argentina's future. When the peso was devalued in early 2 1, the forced conversion ofdollar loans and dollar deposits into pesos has cost the banks an estimatedUS $2 billion. Available at http://dosfan.lib.uic.edu/ERC/economics /trade_reports/1993/Argentina.html.Weller, Christian. "IMF to Argentina: Get Provinces in Line." United Press International, April 5, 2 2, p. Currently, this rate is set at 36.5 percent.Unemployment was 6.9 percent in 1991 and 1992, 9.9 percent in 1993, and at14.5 percent in 1999. 1. Investment and savings are additional indicators of how well aneconomy is performing (Epstein, pp. In the mid-199 s, accordingto The Economist (1, p. Feldstein (p. 26), is now "forcing Argentines topay the price of its decade long collusion with what it (IMF) now says wasa flawed performance all along." However, Frasca (p. "Argentina Economic Policy and Trade Practices." February 1994. Thecurrency board rules ensured that as individuals began to convert pesosinto dollars, the central bank would shrink the money supply and causeinterest rates to rise dramatically. "The Sacking of Argentina." The Nation, May 6, 2 2, 274(17), pp. 1 8 95W3394.Anonymous. 8).Frasca, Tim. Available www.latin-focus.com /countries/argentina/argeisum.htm.Anonymous. In December 2 1, the IMF cut off all aid to Argentina (Frasca, p.27). 44-58. 43). 42). Department of State 1, p. 8), most of which wasowned by the central and provincial governments, eventually reached 5 percent of GDP late in 2 1. 43). 26) suggests that IMFofficials are conveniently forgetting their former praise for Argentina'seconomic policies of the 199 s, which were created by former PresidentCarlos Menem. First, economic growth had not prevented a rise inunemployment as described above. Adding to the problem is the fact that exchange rate policies havenot had their anticipated impact. The response of the IMF, according tothe United Press International (2, p. "Argentina's Fall." Foreign Affairs, March-April 2 2, 81(2), p. 1 ) stated that "longbefore the central bank ran out of dollars, the interest rates on pesodeposits would get so high that people would be encouraged to keep theirfunds in pesos." This did not occur. It is therefore the purpose of this reportto examine the financial and economic crisis that occurred in Argentina andthe IMF austerity program initiated in response to that crisis and itseffects. This declined by 1993 to US $56. According to Frasca (p. 3). Had the initial IMFresponse to the original Argentinean financial crisis been somewhatdifferent, or had the reforms undertaken by the government in response tohat crisis and IMF assistance, the present fiscal crisis confronting thenation may not have occurred.The IMF and Argentina The IMF, according to Frasca (p. 1-3), a number of economic reforms instituted under Menem andrepresentative of both fiscal and monetary policy failed to achieve thegoal of long-term sustained growth. Feldstein (p. "Rotting from the Inside: Free Market Pains?" Latin Trade, April 2 2, 1 (4), pp. 31), investment by Argentineans continued toincrease while savings also increased slightly. 2. Deposits poured into Argentina and with PresidentMenem rapidly liberalizing the economy, banks felt that they could operatetheir businesses without fear of government meddling. 1) put the inflation rate at .3 percent in 1997and at -1.8 percent in 1999. The IMF, backed bythe Bush administration, is insisting that Argentina enact structuralreforms before either the IMF or the United States will put their fullweight behind any aid. The IMF austerity proposal and privatization are less likely toresult in needed improvements than has been suggested. The current accountdeficit in terms of GDP percent was -4.2 percent in 1999 and decreased to-2.5 percent in 2 1 (U.S. 1-4.Anonymous. 53). Some Argentineans believe, according to (The Economist, 2, p. A brief overview of Argentina's history can illustrate the rootcauses of the country's current problems. 41-6 .Healy, M.A. "Foreign Banks May Head for the Exit." Business Week, April 15, 2 2, 3778, pp. Investors continued lending to the government. 1) increased substantially. "Argentina looks for economic direction." United Press International, April 24, 2 2, p. P. Deposits surged fromfour percent of GDP in 1989 to 37 percent of GDP in 1999. "Argentina: Economic Indicators Summary, 1997- 2 2." Latin Focus, 2 2. Further, The Economist (2, p. 13-15+.United States, Department of State. Included in these terms were newspending cuts to further reduce internal demand. Second, the government had embarked on anambitious pension reform from a state pay-as-you-go system to individualprivate accounts. 26-3 +.Frenkel, Roberto. Department of State, 1, p. 1). "Analysis: Argentina's Heated IMF Debate." United Press International, September 24, 2 2, p. IMFnegotiators told President Duhalde's economic team that it must gaincontrol of provincial governments and their runaway spending if any new aidis to be provided. Currency and economic reserves are an important source of economicstability. In fact, IMF funded many of the economic policies undertakenin the 199 s and must, says Frasca (p. According to Eiras andSchaefer (pp. Such an examination is important in that it permits a student orother researcher to compare the effects of a particular set of economicpolicies to the outcomes of those policies over time. 4),that the IMF (via a previous imposition of neoliberal policies of opennessand privatization) created the situation which now exists. percent in 2 1. The new policy caused the country's economy to grow at a real rate ofmore than seven percent a year from 199 to 1994. Also, Argentina is currently blocked from obtaining privateinternational credit and its primary creditors refuse to extend furtherloans until the country comes to terms with the IMF. 1), was almost instantaneous. It should engage indiscussion with its lenders over debt forgiveness and use the savings topromote policies that will help to increase domestic investment andconsumption (Weller, p. Raising taxes - and placing an unsustainableburden on the middle and working classes - was countered by increasedunemployment and the need to extend already stressed social welfareprogramming to the unemployed (Eiras and Schaefer, p. "A Decline without Parallel - Argentina's Collapse." The Economist, March 2, 2 2, 348, pp. The Heritage Foundation. Under Menem, Argentina embraced a comprehensive reform effort in theearly 199 s (Frenkel, p. billion. The situation isincreasingly critical. 9)maintains that Argentina retained its fixed exchange rate for over a decadewas due to the fact that such a peg cured hyperinflation and created adecade of price stability and a framework for strong economic growth. Under the Convertibility Law, the government's liabilities could not be financed by printing money, which did serve to arrest the hyperinflation problem immediately, but which also led to bond issues that could not be repaid; . "Argentina: Key Economic Indicators. 1. "Argentina's Economic Crisis: An Absence of Capitalism." April 19, 2 1. In the case of Argentina, reserves have stabilized as ofSeptember 2 2 at US $9.48 billion, which is down from US $19.5 billion atthe beginning of 2 2. According to Colin Barraclough (p. 3), Argentina's governmentactivities in the 199 s consisted of loose fiscal policy that underminedthe economy. 1). and Seman, Ernesto. These reforms included: . Latin Focus (1, p. Argentina's foreign debt, says Feldstein (p. $57.2 billion. DespiteDecember 2 1's default on the national public debt in Argentina, theseobligations have been met. 1) reported in late September2 2 that "a split is developing within Argentina between those who believethat the International Monetary Fund's policies pave the road to salvationand those who believe there must be an alternative." The debate iscentered on debt payments, many of which are coming due this year to theIMF, the World Bank, and the Inter-American Development Bank. Much Argentine government spending was inefficient and involvedcorruption. The IMF is said to have beensuspicious of the currency board created under President Menem, though thissuspicion has been expressed only recently (The Economist, 2, p. 3 ). 31-33.Anonymous. In the expansionary phase of 1991 to 1994,average real incomes of employed individuals in Argentina rose. 41-42) contends that inflation and unemployment tend to reactin synergy with one another. percent rate in 1993. 47). 1). Aggressive privatization of state enterprises (i.e., gas and oil, coal mines, petrochemicals, passenger and cargo railways, airlines, water and sewage systems, the telecommunications industry, and the postal service); . Beginning in2 1, however, Argentina once again began to exhibit signs of economicdistress, re-entering an era in which growth slowed, the people lostconfidence in the banks, and debt payments have been put on hold (UnitedPress International, 1, p. Debt servicepayments have gone from 5.2 percent of government revenues in 1991 to 3.3percent in 1993, and up again to 5. 22-23). Apart from rising debt payments, two variables accounted for most ofthe increase. The period of sustained growth came to an abrupt end as the 199 swound down. As of 2 1, this figure was US $84. Another important economic indicator is inflation and unemployment.Frankel (pp. In the 199 s, Argentina experiencedan end to years of hyperinflation and stagnation when the Argentine pesobecame stable after being pegged to the U.S. Since the current crisis became more and more apparent after EduardoDuhalde (a Peronist) became president in early 2 2, Argentina defaulted onits $US 155 billion public debt - the largest default by any country inhistory (The Economist, 2, p. percent in 2 ), combined with reduced tax revenues and slowerthan anticipated GDP (with negative GDP growth since 1998) also negativelyimpacted upon the economy. Establishment of a currency board via the Convertibility Law, making the peso fully convertible with the dollar at a fixed rate of one-to-one, and decreasing savings as well as backing the domestic monetary base by the foreign exchange reserves of the central bank; . 43), "withfinancial resources by giving its seal of approval to unsustainableprograms and by providing arguments in defense of the currency board" thatMenem's government created as part of the convertibility (i.e., pesos todollars) regime. "That Sinking Feeling." Newsweek International, August 19, 2 2, pp. Both the authorities and the IMF "disregarded sensibleanalyses, international experiences, and the overwhelming evidence on thepersistent worsening of the country's economic and social situation"(Frenkel, p. 1). Argentina needs to pay US $329 million to the IMF,the World Bank, and the Inter-American Development Bank (IADB). While privatizing many sectors of the economy, Menem also dismantledtrade barriers and freed financial flows - especially those going out ofthe country. However,as the 199 s ended, a rising unemployment rate led to lower per capitaincome and a return to higher levels of poverty such as those observedprior to the 199 s. This is a view shared byWeller (pp. However, over time,this (coupled with other fiscal, tax and monetary policy inadequacies)would return Argentina to a state of economic crisis. 28), a decade of economicstability underpinned by steady foreign investment and a currency fixed atpar with the U.S. 1. Available at www.heritage.org /Research/LatinAmerica/BG1432.cfm.Epstein, Jack. and Schaefer, Brett D.

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