WASHINGTON: It is a familiar refrain: Another Latin American republic,
this time Argentina, cannot get its act together. A profligate government and
its populist policies have brought the country to ruin. Americans can smugly
feel they are immune from such Latin ways.
Bewildered Latin Americans
see Argentina very differently. What happened, they ask, to this poster child of
neo-liberalism and the notion that free markets would ensure prosperity? This
was the country that did everything right. How could it have fallen so far?
There is some truth in both views, but ultimately, the one that has been
popularized in America is misguided. The crisis that had been brewing in
Argentina for several years finally burst out last December. As the official
unemployment rate approached 20 percent, workers had enough. Street
demonstrations overturned a democratically elected government.
Unable to
meet its debt payments, Argentina had to default, and the economic regime, with
the Argentine peso fixed in value to the dollar, crumbled. The economy has since
gone from bad to worse.
Argentina would be better off if there were less
corruption in political life and if it hadn't run deficits. But did those
factors cause the crisis?
Many American economists suggest the crisis
would have been averted had Argentina religiously followed the advice of the
IMF, especially by cutting expenditures more ruthlessly. Many Latin Americans,
however, think that would have led to an even worse crisis. The Latins are
right.
Like most economists outside the IMF, in an economic downturn,
cutting expenditures simply makes matters worse: Tax revenues, employment and
confidence in the economy also decline. Yet the IMF said make cuts, and
Argentina complied, trimming expenditures at the federal level (except interest)
by 10 per cent between 1999 and 2001.
Unsurprisingly, the cuts
exacerbated the downturn; had they been as ruthless as the IMF had wanted, the
economic collapse would have been even faster. Social unrest would have come
earlier. What is remarkable about Argentina is not that social and political
turmoil eventually broke out, but that it took so long.
A closer look at
its budget also shows how grossly unfair is the picture of Argentine profligacy
that has been so widely painted. The official numbers reveal a deficit of less
than three per cent of gross domestic product - not an outrageous number. Recall
that in 1992, when the United States was experiencing a far milder recession
than the current Argentine one, the US federal deficit was 4.9 percent of GDP.
An economy in recession normally runs a deficit, as tax revenues plummet
and safety net expenditures increase; and there should be a deficit, as
eliminating it simply plunges the economy into a deeper recession. But even that
three per cent figure is misleading, because of Argentina's decision to
privatize its social security system in the 1990s, encouraged by the IMF. With
that change, money that had been "inside the budget" moved "outside." In such
cases, even if nothing happens to the economy other than the privatization, the
apparent budgetary position greatly worsens because the pension plan surplus is
taken off the books.
If the US had a privatized Social Security system
in 1992, for example, its deficit that year would have been more than 8 percent
of GDP. Had Argentina not privatized, its 2001 budget would actually have shown
a surplus. The pension shift did not create a macroeconomic problem. Yet, the
IMF saw things as worse.
Even putting this aside, at the centre of
Argentina's budget deficits was not profligacy but an economic downturn, which
led to falling tax revenues.-Dawn/ LAT-WP News Service (c) The Washington Post.
Title: Message
Argentina
fell apart by listening to IMF
By Joseph E. Stiglitz
