IMF "Rescue" Won't Help Latin America
Philadelphia Inquirer, August 13, 2001 Knight-Ridder/Tribune Media Services, July 12, 2001
When I was a child growing up in Chicago, we heard stories of lifeguards who saved panicked, drowning beach-goers by first knocking them out with a punch to the face, then hauling them to shore. This seemed like a risky strategy to me, and I never knew if it actually worked.
The International Monetary Fund has a similar "rescue" strategy for countries in financial trouble. Does it work? We are now seeing it tested yet again in Argentina and Brazil.
Fearing "contagion" of the type that spread financial panic from Asia to Russia to Brazil a few years ago, the IMF has offered a $15 billion credit to Brazil. In order to qualify, Brazil will have to cut another $2.5 billion from its budget, even as its economy is slowing and foreign investment is drying up. Argentina is also being forced to cut spending, despite being stuck in a recession for three years.
One problem with evaluating the Fund's policies is that most economies eventually resume growth, and so the architects of austerity, "shock therapy," or any other punishment can always claim success at some point. South Korea eventually recovered from the Asian economic crisis. Brazil grew at a respectable 4.0 percent in 2000, and Russia last year registered its highest growth (over 8 percent) in two decades.
But these growth spurts followed IMF policies that clearly failed to accomplish their objectives. The Fund's $41 billion loan to Brazil at the end of 1998 was to stabilize the Brazilian currency; that currency collapsed a few months later, losing 40 percent of its value. The same was true in Russia: the Fund loaned billions of dollars to prop up the ruble—but it was the ruble's collapse that allowed the Russian economy to recover.
In both of these cases, the IMF insisted that these over-valued currencies had to be supported, no matter what the cost to the economy. This meant high interest rates that cripple economic growth, budget austerity, and massive borrowing to support the exchange rate.
Their only economic argument was that if the currency were allowed to fall, the country would lapse into hyper-inflation (because of the increased cost of imports). But both the Brazilian and Russian currencies did collapse, and the hyper-inflation never came. Instead, there was growth.
Now Argentina is being put through the ringer to save its over-valued peso. Interest rates on government bonds have risen to 14 percent, and the government has borrowed $40 billion in a deal arranged by the IMF. For comparison, imagine our government borrowing $1.4 trillion (70 percent of our entire federal budget) in order to keep our own, overvalued dollar from falling.
It would never happen here, and it shouldn't be happening there either. Throughout Latin America, the expertise of the IMF's mad scientists—always standing by with more loans and unpleasant elixirs to swallow—is falling into increasing disrepute.
In fact, this is the great fear among the US foreign policy establishment right now: that Latin Americans will decide that Washington's cures are worse than any disease that they could catch on their own, and will go their own way. Their nightmare: First, a devaluation of the Argentine peso -- another failed showcase macro-economic experiment. Then Argentina defaults on, or has to renegotiate, its foreign debt.
Then Brazil elects a Workers' Party government in its national elections next year—something voters came within a hair of doing in 1990. There is enormous public sentiment in Brazil for defaulting on its massive international debt, and little that could be done to punish the country if it did. (Brazil's economy is still fairly closed, with exports amounting to only about 7 percent of the economy).
In short, the whole experiment in "neoliberalismo," as it is regularly denounced among Latin Americans, could go down the drain. And well it should. For 20 years now, Latin America has followed Washington's economic advice. They have slashed their tariffs, swallowed IMF austerity, and sold off tens of billions of dollars of state assets to foreigners.
It's been a lot of pain, and no gain. Over the last 20 years, income per person grew by a mere 7 percent in Latin America. This compares to 75 percent for the previous two decades (1960-1980), when national governments exercised much more control over their economic policies. And the gap between rich and poor has also grown.
Summing up the Russian experience, Putin's economic adviser Andrei Illarionov said recently "We didn't need IMF money before, and we don't need it now. It causes nothing but harm."
Most governments in Latin America could say the same, and they will. The only question is when.