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Tuesday, May 27, 2003

To Cry or Not to Cry for Argentina

I'm not sure whether this piece in the Economist is about Argentina or about the IMF. Either way I think they're a bit off target. The big IMF mistake was the $40 billion of Jan 2001, not the additional $8 billion in August. The major problem that comes out of the mess, is the difficulty of maintaining fixed-pegs, and this might be considered to have some implications for the eurozone, which is after all, not a single economy like the US, but a collective fixed-peg added on to a free trade area. However reflections on the disadvantages of fixed pegs for small economies are none too fashionable these days. The other topic is Argentine politics and the 'recovery'. Here I think the Economist is living in the proverbial cloud cuckoo land. The political system is still in deep crisis in Argentina, and while the political system remains in denial, it's difficult to see any kind of sustained economic recovery. If they carry on like this, Argentina could easily become another Cuba ten years down the road: ie out-of-date technology, and no money to buy the new stuff. Think Jarred Diamond, and the difficulties associated with cutting yourself off, especially in an ever more closely networked world.

Mr Kirchner has come to power after a period of unusual tension between Argentina and the IMF. Rarely have negotiations between the IMF and one of its borrowers been so strained and dragged on for so long. The economic crisis at the end of 2001 saw the abandonment of the one-for-one currency peg with the American dollar and the largest government debt default in history. It brought the economy to its knees. It also led to the collapse of the government and, for a time, the political order. A succession of presidents came and went before Eduardo Duhalde took office early in 2002. But he struggled to secure political backing for the reforms demanded by the IMF: there was enormous popular resentment as the economy contracted and unemployment and poverty rates shot up.

The very large devaluation of the peso was painful for those who watched the value of their savings shrink. But it did help kickstart the economy. After a recession that lasted four years, the economy is growing again and some semblance of financial stability is beginning to return. After the Duhalde government threatened to default on the country’s debts to the IMF late last year, a temporary deal was done with the Fund, whereby Argentina was able to roll over its obligations. But as the IMF made clear late last week, there are still outstanding issues to be resolved before a new programme of assistance can be put in place. That will be one of the first tasks for Mr Kirchner and is one reason why he chose to retain Roberto Lavagna, the economy minister in the outgoing Duhalde government.

The crisis in Argentina focused attention yet again on the quality of economic advice that the Fund provides. Within the IMF, the debate still rages about whether it was right to extend Argentina a loan of $8 billion in August 2001, just a few months before the currency peg was abandoned. Some economists, inside and outside the IMF, insist that the loan was tantamount to pouring money down a black hole. By then it was obvious to almost everybody except the government in Buenos Aires that the currency peg would have to go.

But the IMF often gets the blame both for the mistakes of the countries that borrow from it and those of its principal paymasters. America and the other big industrial economies have so many votes that they have a veto on IMF lending programmes, and are often able to dictate the timing and nature of emergency bail-outs. The Bush administration wanted to give Argentina a lifeline in August 2001, and wanted to do it through the Fund.
Source: The Economist

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