c o m m e n t a r
Economic Debacle In Argentina: The IMF Strikes Again
By Arthur MacEwan | January 2,
This commentary was commissioned and originally distributed
by the IRC’s Foreign Policy in Focus
(FPIF) project. It is reproduced here courtesy of FPIF. Foreign Policy
in Focus—A Think Tank Without Walls—can be accessed online at
In the midst of their fourth year of recession, with the official unemployment rate approaching 20%, and with increasing cutbacks of social programs, Argentinians took to the streets in the days before Christmas. Sparked by the government’s latest economic policies, which restricted the amount of money people could withdraw from their bank accounts, political demonstrations and the looting of grocery stores spread across the country. First the government declared a state of siege, but with the police often standing
by watching the looting "with their hands behind their backs,"
there was little the government could do. Within a day after the demonstrations
began, the principal economic minister had resigned; a few days later
came the president’s resignation.
A hastily assembled interim government immediately defaulted on $155
billion of Argentina’s foreign debt, the largest debt default in history.
The new government then promised a public works jobs program and announced
it would issue a new currency, the argentino, that would circulate as
a "third currency," along side the old pesos and U.S. dollars.
Argentinians, however, seemed to have little hope for the new currency,
and, fearing a severe devaluation, they continued to line up outside of
banks hoping to get dollars from their accounts. As for the new programs,
they did little to confront the fact that per capita income has already
fallen by 14% in this recession. As economic instability deepened, the
new government proved unable to win the popular support it needed, and
it quickly dissolved.
At the opening of 2002, Argentina faced widespread political and economic
uncertainty. The main question seemed to be whether the short run would
bring more unemployment, severe inflation, or both. As to the stability
of Argentina’s currency, virtually everyone expects a sharp devaluation
Argentina’s experience leading into the current debacle provides one
more lesson regarding the perils of free market ideology and of the economic
policies pushed on governments around the globe by the International Monetary
Fund (IMF). In Argentina and elsewhere, these policies have been embraced
by local elites, who see their fortunes (both real and metaphoric) tied
to the deregulation of commerce and the reduction of social programs.
Yet the claims that these free market policies would bring economic growth
and widespread well being have been thoroughly discredited. (In spite
of the economic collapse and political turmoil in Buenos Aires, the wealthy
appear to have protected themselves by having moved their money out of
From Good to Bad to Ugly
Not long ago, Argentina was the poster-child for the conservative economic
policies pushed by the IMF. The Buenos Aires government privatized state
enterprises, liberalized foreign trade and investment, and tightened government
fiscal and monetary policy. During the 1990s the country’s economy seemed
to do well. The good times of the mid-1990s, however, were built on weak
foundations. Economic growth in that period, while substantial, appears
to have been in large part the result of an increasing accumulation of
international debt, fortuitous expansion of foreign markets, and short-term
injections of government revenues from the sales of state enterprises.
Before the end of the decade, things began to fall apart.
Argentina’s current problems are all the more severe because, in the
name of fighting inflation, in the early 1990s the government created
a "currency board," charged with regulating the country’s currency
so that the Argentine peso would exchange one-to-one for the U.S. dollar.
To assure this fixed exchange rate, the currency board maintained dollar
reserves, and could not expand the supply of pesos without an equivalent
increase in the dollars that it held. The currency board system appeared
attractive because of absurd rates of inflation in the 1980s, with price
increases of up to 200% a month.
By the mid-1990s, inflation in Argentina had been virtually eliminatedbut
flexibility in monetary policy had also been eliminated. When the current
recession began to develop, the government could not expand the money
supply as a means of stimulating economic activity. Worse yet, as the
economy continued downward, the inflow of dollars slowed, restricting
the country’s money supply even further (by the one-to-one rule). And
still worse, in the late 1990s, the U.S. dollar appreciated against other
currencies, which meant (again, the one-to-one rule) that the peso also
appreciated; the result was a further weakening in world demand for Argentine
During 2001 the Argentine recession grew rapidly deeper. Although the
IMF pumped in additional funds, it provided these funds on the condition
that the Argentine government would entirely eliminate its budget deficit.
With the economy in a nose-dive and tax revenues plummeting, the only
way to balance the budget was to drastically cut government spending.
Yet, in doing so, the government was both eviscerating social programs
and reducing overall demand. In mid-December, the government announced
that it would cut the salaries of public employees by 20% and reduce pension
payments. At the same time, as the worsening crisis raised fears that
the peso would be devalued, the government moved to prevent people from
trading their pesos for dollars; it promulgated a regulation limiting
bank withdrawals. These steps were the final straws, and in the week before
Christmas, all hell broke loose.
Failure under the Direction of the IMF
Economic policies in Argentina during the past 15 years have had substantial
support among the country’s business elite, especially from those whose
incomes derive from the financial sector and primary product exports.
These groups have gained substantially, and officials in the Argentine
government have been active in formulating and executing the policies
that have led to the current debacle.
At the same time, the country’s economic policies during the 1990s were
developed under the direction of the IMF. From the late 1980s onward,
a series of loans gave the IMF the leverage to guide Argentine policymakers
as they increasingly adopted the Fund’s conservative economic agenda.
As the country entered into the lasting downturn of the current period,
the IMF continued, unwavering, in its support. The IMF provided Argentina
with "small" loans, such as the $3 billion made available in
early 1998, when the country’s economic difficulties began to appear.
As the Argentine crisis deepened, the IMF increased its support, supplying
a loan of $13.7 billion and arranging $26 billion more from other sources
at the end of 2000. As things worsened still further in 2001, the IMF
pledged another $8 billion.
The IMF coupled its largess with the condition that the Argentine government
maintain its severe monetary policy and continue to tighten its fiscal
policy. Deficit reductionwhich according to the IMF is the key to macroeconomic
stability (which in turn is supposed to be the key to economic growth)was
undertaken with a vengeance. In early July 2001, on the eve of a major
government bond offering, Argentine officials announced budget cuts of
$1.6 billion (about 3% of the federal budget), hoping that these cuts
would reassure investors and allow interest rates to fall. Apparently,
however, investors saw the cuts as another sign that the country’s crisis
was worsening, and the bonds could only be sold at sharply higher interest
rates (14% as compared to the 9% that similar bonds had commanded in mid-June).
By December, the effort to balance the budget required far more severe
expenditure cuts, and the government announced a drastic reduction of
$9.2 billion in its spending, about 18% of its entire budget.
Argentina is now providing one more example of the failure of IMF policies
to establish the bases for long-term economic growth in low-income countries.
Numerous other countries demonstrate similar sets of problems: much of
sub-Saharan Africa; Mexico, and several other countries in Latin America;
Thailand, and other parts of East Asia hit by the 1997 crisis; and Turkey,
along with Argentina in 2001. IMF policies do often succeed in curtailing
inflation; sharp cuts in government spending and restrictions of the money
supply will usually yield reduced price increases. Also, IMF programs
can provide large influxes of foreign loansfrom the Fund itself and the
World Bank, from the U.S. government and the governments of other high-income
countries, and, once the approval of the IMF has been attained, from internationally
operating banks. But nowhere has the IMF policy package led to stable,
sustained economic expansion. Also, as in Argentina, it often generates
The IMF’s mania for reductions of government spending in times of crisis
has been rationalized by the claim that balanced budgets are the foundation
of long-term economic stability and growth. The IMF officially laments
the fact that these policies have a severe negative impact on low-income
groups (because they both generate high rates of unemployment and eviscerate
social programs). Yet, Fund officials claim these policies are necessary
to assure long-term stability. Nonsense. In recessions, moderate government
deficits (like those of recent years in Argentina) are a desirable counter-cyclical
policy, and balanced budgets only exacerbate down-turns. Also, curtailing
social spendingon education, health care, physical infrastructure projectscuts
the legs out from under long-term economic progress.
Why Does the IMF Stick to Failed Policies?
Yet the IMF sticks to its policies, probably because those policies
serve important and powerful interests in the U.S. and world economies.
The IMF, after all, is not an institution controlled by either the people
or the governments of low-income countries. It is not even like UN agencies,
where governments have formally equal voice with one another. Instead,
the IMF is controlled by the governments of high-income countries that
provide the funds for its operations. The U.S. government has by far the
greatest influence at the IMF. With over 18% of the voting shares in the
Fund, the U.S. government has de facto control. Indeed, over the years,
the IMF has operated largely as a branch of the U.S. foreign policy apparatus,
attempting to create a context that assures the well-being of U.S. interestswhich
is to say the interests of U.S.-based internationally operating firms.
(The same context serves the interests of firms based in Europe, Japan,
and elsewhere; so the U.S. generally has the support of its allied governments
in directing the IMF.)
Most important, the IMF tells governments that a key to economic growth
lies in providing unrestricted access for imports and foreign investment.
Virtually all experience, however, suggests the oppositethat extensive
regulation of foreign commerce by a country’s government has been an essential
foundation for successful economic growth. Britain, the U.S., Japan, countries
of Western Europe, Taiwan, South Koreaall built the foundations for development
not on "free trade" but on government regulation of trade. The
IMF gets around the inconvenient facts of history by conflating free trade
with extensive engagement in the international economy. But the two are
not the same. Yes, successful development has always been accompanied
by extensive international engagement, but through regulated commerce
and not free trade.
The dramatic experience with financial capital demonstrates a similar
disconnect between IMF proclamations and reality. Through the period of
its increasing influence in the 1980s and 1990s, the IMF pushed governments
in low-income countries to liberalize their capital markets. Capital controls
were, claimed the IMF, anathema to development. Then came 1997, when the
open capital markets of East Asian countries were instruments of disaster.
In the aftermath of 1997, it seemed clear that the real winners from open
capital markets were financial firms based in the U.S. and other high-income
These same financial firms are also the winners from another component
in the IMF policy package. Fiscal responsibility, according to the IMF,
means that governments must give the highest priority to repayment of
their international debts. In fact, the immediate justification of new
IMF loans is often that this influx of capital is necessary to assure
prompt payments of past loans. While there is no doubt that banks operating
out of New York and other financial centers gain from this policy, experience
does not support the contention that when governments fail to pay foreign
debts they bring on financial disaster. Instead, experience suggests that,
at times, defaulting on foreign debt can be an effective, positive policy
option. (Also, as has been frequently noted, as long as the IMF provides
the funds to assure payment of loans made by the internationally operating
banks, those banks will have no incentive to assure that they are making
IMF advocacy of privatization is one more example of its effort to open
the world economy more fully for U.S.-based firms. When state enterprises
in low-income countries are sold, large internationally operating firms
are often the buyers, able to move in quickly with their huge supply of
capital. Of course, in Argentina and elsewhere, local business groups
have often been the direct beneficiaries of privatization, sometimes on
their own and sometimes as junior partners of firms based abroad. Either
way, whether the buyers of state enterprises are national or foreign,
this enlargement of the private sphere of operation works to the benefit
of the private firms. The problem here is not that privatization is always
inappropriate, but simply that, contrary to IMF nostrums, it is not always
Privatization is especially problematic when it only replaces an inefficient
government monopoly with a private monopoly yielding huge profits for
its owners. Moreover, the record from Mexico City to Moscow demonstrates
that privatization is often a hugely corrupt process.
A Growing Popular Opposition
The policies of the IMF and those of the World Bank have generated a
great deal of popular opposition in low-income countries as well as in
the U.S. and Europe. During recent years, that opposition has become increasingly
strident, staging major demonstrations at meetings of the IMF and the
Bank, as well as at other gatherings of the government officials guiding
globalization. This opposition has been dubbed the "anti-globalization
movement." The title is misleading because most of the activists
are not opposed to the growing international economic and cultural connections
among peoples, but are opposed to the way those connections are being
structured, benefiting large firms, while creating hardship and instability
for many, many people. Policies like those of the IMF in Argentina typify
the problem. Also, the recent political upheaval in Argentina lends new
strength to the argument of the opposition movement that the IMF adjustment
policies not only fail to bolster economic development but also lead to
social and political disintegration.
Pressure from this movement has had some impacts. The IMF’s contribution
to the Asian financial crisis in 1997 unleashed a torrent of criticism
that the movement both built upon and contributed to. While no major policy
changes have ensued, the Fund has responded rhetorically, renaming its
"Enhanced Structural Adjustment Facility" as the "Poverty
Reduction and Growth Facility." Over a longer period, the World Bank
has also adjusted at least the appearance of its policies, focusing more
attention on the issue of poverty and starting to examine the role of
gender in economic development. The World Bank, in addition, has backed
off from some of its large-scale water control projects in low-income
countries as a result of pressure from local organizations and international
environmental groups. These changes have not basically altered the programs
of the international financial institutions, and the IMF has been especially
resistant to change. Yet these adjustments do suggest that opposition
has begun to have an impact.
The lesson is that the movement for change should increase its pressure
on these institutions that are playing such central roles in shaping globalization.
While the movement has emerged largely in response to the hardships and
inequality that have growneven while IMF-type policies generated some
economic growththis opposition will gain greater legitimacy as growth
is replaced by crisis, as in Argentina. The appeal of alternative policies
will be even greater as the IMF and local elites can no longer claim that
economic growth will eventually solve all problems.
Beyond Denunciation: Alternative Strategies
There is, however, a need and an opportunity for the opposition movement
to go beyond denunciation of the IMF’s conservative policies and to articulate
alternative strategies, strategies that would support a democratic, egalitarian
form of economic development. Such strategies would promote structural
adjustment in low-income countries, but a very different and more fundamental
structural adjustment than has been advocated by the IMF. A democratic
development strategy could begin with a focus on the expansion of social
programs, a greater investment in schooling, health care, and other public
services that would establish a social foundation for long-run economic
A democratic strategy would not ignore macroeconomic stability, but instead
of seeking that stability in government cutbacks, it would pursue expanding
the government revenues (raising taxes) as a means to provide fiscal balance.
Also, a democratic strategy could not ignore the private sector, but it
would recognize the problems of allowing the private sector to be guided
simply by private profits in an unregulated market. It would, for example,
push the private sector toward high-technology activity instead of production
based on low wages, and it would seek to provide support for local farmers
to maintain their livelihoods and community stability.
The first problem in implementing an alternative development program
in Argentina and elsewhere is to overcome the power of elite groups that
have directed the existing system. In spite of the current difficulties,
the policies that the Argentine government has followed in recent years,
and the similar policies pursued by the governments of many low-income
countries, have delivered substantial benefits to local elites. Those
policies have allowed them to strengthen their positions in their own
economies and secure their roles as junior partners with U.S.-based and
other internationally operating firms. Changing policies will therefore
require changing the balance of power. Shifting the balance of power in
a country is never easy, but the emergence of an international movement
for change and the growing economic crisis present some substantial opportunities.
If people in low-income countries are to move in an alternative direction,
they must find ways to deal with the oppressive burden of foreign debt.
Not only is the debt itself a problem, creating a growing drain on countries’
resources, but also the need to continually seek new debt in order to
repay old debt forces governments to accept the IMF conditions that perpetuate
Here, those forces that want change can take a lesson from the high-income
countries. As the governments of high-income countries work together in
pursuing their economic relations with the low-income countries, low-income
debtor countries have a common set of interests that could provide the
foundation for common action. Working as a bloc, they would have a greater
chance of gaining better terms, greater leeway in the conditions that
come with foreign finance, and the freedom to pursue the meaningful structural
adjustment of a democratic strategy.
Ultimately, the power of such a bloc would depend on the willingness
of member countries to repudiate their foreign debts. Such repudiation
would have legitimacy because of the coercive practices that have given
rise to this debt, and repudiation would have wide popular support.
But would debt repudiation invite economic disaster? In Argentina, quite
to the contrary, it was a refusal to repudiate the debt that led into
the December debacle. The new government has now defaulted, but not in
a controlled manner that might yield the greatest advantage, but as an
act of desperation. Also, debt defaults in the past have generally not
generated disaster, certainly nothing worse than the current Argentine
situation. In any case, if forces in debtor countries could make the threat
real, actual repudiation would probably not be necessary. The power that
the high-income countries have in the threat to cut off new loans would
be matched by the power that low-income countries would have from their
threat to cut off the flow of repayments.
There are substantial political barriers to the emergence of democratic
development strategies in low-income countries and to joint action by
debtor countries. At the end of December, as a new spate of rioting broke
out in Buenos Aires, U.S. President Bush told the Argentine government
to seek guidance from the IMF and "to work closely with" the
IMF to develop its economic plans. And the policies of the IMF are unlikely
to change in any significant way. Indeed, as Argentinians went to the
streets in response to their long suffering under the aegis of the IMF,
the IMF disclaimed all responsibility. "The economic program of Argentina
was designed by the government of Argentina and the objective of eliminating
the budget deficit was approved by the Congress of Argentina," declared
the IMF’s spokesperson on December 21.
This continued pressure from the U.S. government and the persistence
of the IMF in pursuing its discredited policies make progressive change
difficult. Also, powerful elites in Argentina and other low-income countries
re-enforce the barriers to change. Yet the economic case for change is
overwhelming, and one way or another a political route to this change
needs to be found.
(Arthur MacEwan < firstname.lastname@example.org >
is professor of Economics and interim provost and vice chancellor for
Academic Affairs at the University of Massachusetts in Boston. His most
recent book is Neoliberalism or Democracy? Economic Strategy, Markets,
and Alternatives for the 21st Century.)
This commentary is a product of the Interhemispheric
Resource Center’s Global Affairs
and Americas Programs .
All rights reserved.
Recommended citation: “Economic
Debacle In Argentina: The IMF Strikes Again,” Americas Program Commentary,
(Silver City, NM: Interhemispheric Resource Center, January 2, 2002).
Web location: http://www.americaspolicy.org/commentary/2002/0201argentina.html