So I was reading this thread, where, at some point, Rufus Polson makes the following comment:
quote:
… the very specific usefulness of the Argentina example as a tool to whip right-wingers, because of Argentina's previous status as the IMF's poster child. It's just such a blatant, perfect example allowing us to point out to the right that their way isn't working even on their claimed terms
During my babble-sabbatical, I spent some time reading up on what happened in Argentina, and – perhaps unsurprisingly, there’s a wide range of opinions. Rufus’ quote summarises one end (BTW, I’m not trying to single out RP here – my point is that what he wrote is pretty representative of a certain opinion widely held on the left). On the other end, there’s the view best expressed (but not entirely shared) by Brad Delong:
quote:
… the neoliberal reform program that Argentina followed in the 1990s was nearly idiot-proof. But Argentinean politicians turned out to come from an unusually strong and unexpectedly ingenious class of idiots.
Unsurprisingly, I’ve ended up somewhere in between. The IMF and Argentina both made decisions that ended up badly, but these were invariably judgment calls that were made in a difficult time and under a great deal of uncertainty. I highly recommend reading the IMF’s Independent Evaluation Office’s report on the IMF and Argentina. It’s a 129-page pdf document, available here.
The immediate causes of the 2000-2 collapse are pretty clear: since the peso was tied to the USD, it ended up being overvalued for most of the 1990’s, especially after Brazil devalued in 1999. The convertibility regime effectively eliminated monetary policy as a macroeconomic stabilization instrument, so the only tool left at their disposal was fiscal policy. But when Argentina tried using fiscal policy to combat the 1998-9 recession, they hit the debt wall, and everything went to hell.
So was the convertibility regime the culprit? Would it have been better if it had never been implemented? The answers to those questions are ‘at least partly’, and ‘certainly not’.
Before 1991, Argentina was a basket case. The most recent crisis involved yet another round of hyperinflation, reaching 30% inflation per month - an annual rate of 2,200%. By 1990, per-capita GDP was 21% below what it had been in 1987, and it was 32% below its 1980 peak. By 1991, Argentina’s monetary policy makers had essentially no credibility left, so they decided to borrow Alan Greenspan’s. The convertibility regime law was passed in April 1991 – several months before they went to the IMF.
It seems clear that at first, the new regime was a success: inflation fell from 30% a month to 0.1% a year over the period 1991-1996, GDP increased by 60%, and GDP per capita had increased by 42% to regain its 1980 peak. The main worry was the current account deficit. Because the peso was tied to the USD, its value appreciated with the USD over the 1990s as well, and it – like the US – ended up with a large trade deficit.
Everyone knew that the only way that a ‘hard peg’ would work is if the govt were able to respond to recessions by increasing spending (it couldn’t devalue or lower interest rates), so part of the IMF package was a series of deficit targets. But when push came to shove in the aftermath of the 1998-99 shocks, it turned out that whatever Argentina had done – and it had done a lot – it wasn’t enough.
There are quite a few explanations for what went wrong. There’s some overlap.
1. Argentina’s politicians blew their chance to clean up their act
As noted earlier, GDP had increased by some 60% by 1996. That should have given Argentina enough breathing room to get their fiscal house in order. But even though they (barely) managed to keep their deficit within reach of their IMF-imposed targets, the debt-to-GDP ratio actually increased over this period. That is, the debt grew by more than 60%. One explanation for this is that Argentina made use of creative accounting: receipts from privatization were treated as current revenues (instead of a reduction in the debt), and there were any number of off-budget expenditures that didn’t show up as current expenditures, but which ended up inflating the debt figures. And it didn’t help that Menem spent much of his time in office trying to buy constitutional amendments that would permit him to spend more time as President.
But in Argentina’s defense, much (most? I don’t know) of that increase can be accounted by court-ordered assumptions of liabilities, most notably pensions.
2. The IMF permitted Argentina to repeatedly miss its deficit targets without any negative consequences.
There’s something to that. If GDP growth was lower than forecast, the IMF generally looks the other way when deficits are higher than their targets. But in Argentina’s case, deficit targets were missed even when GDP growth turned out to be higher than forecast – and the IMF still didn’t say anything.
The thing is, when you look at the data, you don’t see a classic example of out-of-control government finances. The deficit rarely went above 2% of GDP, and the debt-to-GDP ratio stayed in the 30-40% range for most of the 1990’s. That’s much less than what Canada had.
3. The IMF concentrated on deficits instead of debts
This seems to be the most serious error that the IMF made; their conditions were always expressed in terms of deficits, not debts. When Argentina missed a deficit target, they never had to make it up afterwards.
4. No-one knew where the ‘debt wall’ was.
For some reason, I’m reminded of the Darwin Awards story of the guy who was curious about the properties of propane gas. So he took some shots at a propane tank with his .22 rifle, waited a few minutes, and started walking towards it – with a lighted match in his hand...
Although the debt-GDP ratio was fairly low, relatively little thought seems to have been put into trying to figure out where exactly the debt wall, was. But since the IMF had been accustomed to dealing with countries with much higher debt ratios than Argentina’s, it’s perhaps understandable that they didn’t think it was worth worrying too much about at the time. But it turned out that – once again – Argentina was a special case: almost all its debt was external, and denominated in foreign currencies.
5. The convertibility regime should have been abandoned earlier.
In hindsight, 1996-7 would have been the moment to abandon the hard peg. There had been several years of exceptionally strong growth, and there was still a great of enthusiasm for ‘emerging markets’. It would not have been prudent to try to do so during the Asian crisis, and abandoning the peg during the 1998-99 recession would have smacked of desperation.
But here politics intervened: there was a Presidential election in 1995, and a Congressional election in 1997, and by that time, the Convertibility Law had gone from being a short-term stabilization instrument to being a political symbol for all the gains that had been made since 1991. During that particular electoral cycle, it was untouchable.
It’s hard to blame the IMF here. It knew full well the difficulties involved in managing a hard peg, but they were in no position to voice its objections publicly, or even privately: if the markets caught even of whiff of the notion that the IMF thought that the peg was unsustainable, all hell would break loose. The decision was Argentina’s to make, and since the peg was largely responsible for its newfound prosperity, it was understandably reluctant to risk abandoning it. After all, the crisis years of 1989-91 were still fresh in its memory.
And there was still a plausible hope that things would work out. The US also had a current account deficit, and it could reasonably be expected that the USD would eventually decline in value. If and when that happened, many of Argentina’s problems would be alleviated. This turned out to be the case – but unfortunately, the decline in the USD started a couple of years too late to be of any help to Argentina.
Oof. This is now well over 1000 words, so I’m going to stop now. The point I’m trying to make is that both Argentina and the IMF made decisions that turned out to have unforeseen consequences, but they decisions were defensible given the information that they had at the time. It is only in hindsight that we can call those decisions ‘mistakes.’
[ 16 January 2005: Message edited by: Oliver Cromwell ]
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posted 16 January 2005 11:41 PM
