February 17, 2002
Knight-Ridder/Tribune Information Services, February 17, 2002
BUENOS AIRES — “It’s an explosive mix,” said Ruben Cortina, a professor of law and economics at the University of Buenos Aires. “The middle classes are angry because their savings have been partly expropriated. The unemployed, at 22 percent and growing, have gotten nothing. And even those with jobs have had falling wages, and now face the prospect of even lower living standards due to inflation.”
The mix already exploded less than two months ago, when tens of thousands of people poured into the streets to defy then President Fernando de la Rua’s declaration of a “state of siege.” It was a collapse of state power — a rare event that in other countries might have resulted in what is commonly called a revolution.
Calm has returned to this sprawling city of 9 million, with its wide boulevards and European architecture carrying reminders of the country’s relatively prosperous past. But unless the new government of President Eduardo Duhalde can reverse Argentina’s accelerating economic decline, the peace may not last long.
Can this be done? Contrary to the theme of most business reporting and forecasts, Argentina could recover relatively quickly without suffering further economic contraction. The country is actually running a surplus in both its trade and government accounts — if we don’t count interest payments. In other words, Argentina doesn’t really need foreign aid so much as it needs a moratorium on its debt service payments.
In fact, the story of Argentina’s debt is really the story of its current economic crisis. And if we look at the numbers, it is decisively not a case of a government trying to live beyond its means. From 1993 to 2000, government spending as a share of the economy — again, excluding interest payments — was basically unchanged.
So what happened? Most importantly, Argentina’s interest payments increased. The trouble started in February of 1994, when the US Federal Reserve began a series of rate hikes that doubled US interest rates, from 3 to 6 percent. Since Argentina’s peso was fixed to the dollar, the shock hit especially hard. Investors began to fear that the country’s higher interest payments would lead to devaluation and default.
These fears multiplied, and capital fled the country, when Mexico devalued the peso in December of 1994. This caused a recession in Argentina. The economy recovered in 1996, but not for long: then came the Asian economic crisis (August 1997). Global financial markets spread the contagion to Russia and then Brazil. When Brazil’s currency collapsed in 1998, Argentina’s fate was sealed. The economy has been in recession — which is now really a depression — for nearly four years. In December, the inevitable currency devaluation and default on government debt finally happened.
In other words, Argentina fell victim to the caprices of the global economy, as well as some bad policies — most deadly was the fixed exchange rate that tied the peso to the dollar. These policies were supported and sponsored by the International Monetary Fund. All this would be just interesting history, if not for the fact that the IMF is at this very moment trying to force further budget cuts on Argentina’s government.
The Fund is still acting as though government spending is the problem. But the budget cuts will most likely worsen the depression: economists here are projecting another 8 percent drop in GDP for 2001, or worse.
It doesn’t have to happen this way. The government of President Duhalde proposed a reasonable economic recovery program when he took office: one that would have made the banks absorb much of the cost of the devaluation, tax the oil companies (who will reap a windfall from the devaluation), revive domestic industry, and suspend interest payments on the foreign debt.
But the IMF is a debt collector, and it insisting on more austerity and pain. Other governments — most notably that of Malaysia during the Asian economic crisis — have stood up to the IMF, and done better for it. But Duhalde’s government has little backing among Argentines — he was chosen by the Congress, not a popular vote. And people here are deeply cynical about their politicians and government.
So the Fund’s officials have the upper hand. But they better be careful about how much debt service they try to squeeze out of this collapsed economy, and how many more people they push into poverty. They are playing with fire this time.