"abolish the i.m.f." - auerback article

  1. dub
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    International Perspective, by Marshall Auerback

    Abolish the IMF

    January 18, 2005


    When the Argentine economy collapsed in December 2001, predictions of financial Armageddon abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, as it had done repeatedly (and to little avail) in the past, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled. More importantly, the country would become an investment pariah, starved of any needed foreign capital to finance future growth.

    How different things appear today. Just three and a half years after Argentina declared a record debt default of more than $100 billion, the largest in history, the anticipated disaster has not played out. Instead, the economy has grown by 8 percent for two consecutive years, exports have soared, and the currency has even begun outperforming the dollar on the foreign exchange markets. Contrary to expectations, investors are gradually returning (the stock market has more than quadrupled from its Aug. 2001 lows) and unemployment has eased from record highs - all without a debt settlement or the requisite good housekeeping seal of approval from the IMF.

    Much ink has been spilled over the past few years suggesting the obsolescence of the United Nations or the World Bank, but somehow the IMF has escaped comparable scrutiny. Other than a few staunch golfing purists, most of us believe in the concept of taking a mulligan. And if the Argentina episode was an anomalous misstep in an otherwise stellar history, we wouldn’t be so hard on the IMF. But the singular lack of success of the Fund, especially over a series of emerging markets’ crises in the 1990s does call into question the organization’s long term viability as a positive reforming force in global finance. If anything, its record over the past decade has been one of expanding moral hazard and exacerbating underlying global financial fragility.

    Consider the emerging markets’ crisis of 1997/98. When the East Asian financial crisis hit in 1997–98, many of the commentators who had earlier attributed East Asia’s “miracle” to its free enterprise system suddenly disavowed the region’s “growth miracle”. They now alleged that the crisis was due to excessive government intervention in markets, especially financial markets where intervention was aimed at supporting investments by government “cronies.” They argued that the current crisis would mark the beginning of the end of the outmoded state-directed Asian system, and brought in the IMF to “reform” the various afflicted economies. Typical were the views proffered by the chairman of the U.S. Federal Reserve, Alan Greenspan:



    “The current crisis [in East Asia] is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment, in which finance played a key role in carrying out the state’s objectives. Such a system inevitably has led to the investment excesses and errors to which all similar endeavours seem prone.”




    In Mr. Greenspan’s view, the Asian crisis accelerated a worldwide move towards “the Western form of free market capitalism” and away from the competing Asian approach that only a few years ago looked like an attractive model for nations around the world: “What we have here is a very dramatic event towards a consensus of the type of market system which we have in this country.”



    Asia’s problems were described by then Deputy Managing Director of the IMF, Stanley Fischer, as “home-grown”, a very convenient, but self-serving description: an economy’s success is due to its integration into the world economy, but crisis is due to “home-grown causes”. Laying the blame on home-grown protected the current international financial regime and effectively legitimised the IMF’s role in the region. The Fund was playing an instrumental role in helping emerging Asia adopt the proper “western form of capitalism”, and eliminating the corrupt practices of the countries’ respective “crony capitalists”. And the home-grown causes explanation also legitimized the use of the imf to subject the governments, banks, and firms of developing countries to the kind of discipline demanded by private international capitalists (who saw themselves shut out by “cronyism”), but not to subject those capitalists or their G7 governments to the kind of discipline that might operate to the advantage of developing countries.



    Conveniently, such analyses by the Fund also legitimised the moral hazard implicit in historic IMF arrangements for international financial players, who were similarly hit (albeit not to the same degree) as the crisis-affected countries. For if no blame rests with international financial players or the international financial system, but does rest with irresponsible governments in the crisis-affected countries (who did not insist on full “transparency” in company accounts, for example), then the international private financiers are entitled to be protected from private losses just as they are entitled to keep the private profits.



    For a long time Argentina played the game the way they were supposed to (and for a time was actually known as the IMF’s “star pupil”). Under “guidance” from the international community, successive governments in the 1990s moved to dismantle the country’s Peronist state-driven, corporatist model, which was deemed to be economically unsustainable. Some forms of economic liberalisation were then introduced, culminating with the introduction a pegged peso regime, convertible at 1:1 with the dollar.



    Although ostensibly successful in the first instance, (thereby allowing the neo-liberal orthodoxy to become an end in its own right, rather than a mere impetus for further economic improvement), the currency peg ultimately led the country into an economic cul de sac: the dollar’s strength from 1995 onward led to an overvalued peso exchange rate, which in turn created a huge external imbalance in the Argentina’s current account. At one stage, its debt burden was equivalent to 450 per cent of net exports; yet to abolish the peg was to invite the collapse of the country’s economy, as the pegged rate regime was the basis of the country’s entire financial architecture (and supported, as such by the IMF itself). Argentina’s rapidly dwindling currency reserves, which were the basis of the pegged regime, were being frittered away quickly, a key reason being that the fall in reserves was due to the nation’s poor export performance, in itself the product of an overvalued exchange rate. In spite of this perverse circularity, the IMF continued to insist on its retention as a quid pro quo for Argentina to receive other IMF bailout packages (which ultimately had the effect of enabling the international banks to repatriate the bulk of their funds with no real sustained losses, rather than improving the underlying economic conditions creating the problems which led to the Fund’s appearance in the first place). In that regard, the IMF bore huge culpability for what later happened, since it helped to perpetuate a cycle of moral hazard which made the inevitable blow-up far worse when it came in the summer of 2001.



    The collapse of this experiment in August 2001 caused a complete rethink on the part of Argentina’s monetary and financial authorities. The country’s recovery under the Kirchner regime has been undeniable, and it has been achieved at least in part by ignoring and even defying economic and political orthodoxy. Rather than moving to immediately satisfy bondholders, private banks and the IMF, as other developing countries have done in less severe crises, the Peronist-led government chose to stimulate internal consumption first and told creditors to get in line with everyone else. For the first time in years, international bankers were actually being forced to deal with the consequences of their own irresponsible lending policies, and they weren’t happy about it.

    "This is a remarkable historical event, one that challenges 25 years of failed policies," said Mark Weisbrot, an economist at the Center for Economic and Policy Research, a liberal research group in Washington. "While other countries are just limping along, Argentina is experiencing very healthy growth with no sign that it is unsustainable, and they've done it without having to make any concessions to get foreign capital inflows."

    As for the threat that Argentina would become a pariah for foreign investment, it is true that its traditional sources of funding have largely dried up. But this has been replaced by inflows from Asian countries, notably China and South Korea. China in particular views Argentina as a valuable potential source of resource supply. Its president, Hu Jintao, recently announced that his country plans to invest $20 billion in Argentina over the next decade. But the bulk of the new investment comes from Argentines who are beginning to spend their money at home, either bringing their savings back from abroad or from under their mattresses. For the first time in three years, more money is coming into the country than is leaving it. These flows are far more stable than the short term speculative portfolio flows which tended to predominate in the 1990s.

    Ultimately, as the New York Times recently reported, the consequences Argentina’s decision to forgo IMF orthodoxy can be seen in government statistics and in stores, where consumers once again were spending robustly before Christmas. More than two million jobs had been created since the depths of the crisis early in 2002, and according to official figures, inflation-adjusted income has also bounced back, returning almost to the level of the late 1990's. That is when the crisis emerged, as Argentina sought to tighten its belt according to I.M.F. prescriptions, only to collapse into the worst depression in its history, which also set off a political crisis.

    The Times article concedes that some of the new jobs are from a low-paying government make-work program, but nearly half are in the private sector. As a result, unemployment has declined from more than 20 percent to about 13 percent, and the number of Argentines living below the poverty line has fallen by nearly 10 points from the record high of 53.4 percent early in 2002.

    The IMF has sought to defend its historic role in the country, contending that the current government’s success largely stems from implementing traditional IMF type remedies. It claims that the Kirchner administration has limited spending and moved to increase revenues, and built up a surplus twice the size of what the fund had asked before negotiations were put on hold several months ago.

    This defense, however, is somewhat disingenuous because this fiscal retrenchment, and balance of payments surplus, were only able to occur in the context of a growing economy, something that would have never occurred had the IMF’s traditional remedies been employed. Historically, the IMF has sought to reduce current account deficits, keep inflation in check and keep domestic demand restrained. But it is one thing to undertake such reforms where real interest rates are very low and indebtedness not high (as in the United States in the late 1980s), and another to undertake them where both real interest rates and indebtedness are high. In these conditions such restructuring leads to closures and layoffs, with deflationary knock-on effects and more investor pullout. In Argentina, the Fund’s initial insistence on fiscal contraction, cuts in aggregate demand, and large-scale institutional reform accelerated debt deflation, which raised the real cost of the country’s debts and made things far worse. Had the burden been spread around equally, the Fund’s actions might have been somewhat more morally defensible, but they were made far worse by the fact that they imposed vast social costs on the country as a quid pro quo for Argentina receiving continued economic assistance, yet comparatively limited “haircuts” were incurred by Wall Street’s investment and commercial banking interests. It is this imbalance which the Kirchner government is seeking to rectify today with its hard-line stance against the international banking community.

    As the Economics Minister, Roberto Lavagna, noted: “It’s very simple. Nobody can collect from a country that is not growing.” Economic reform can only flow from growth, not the other way around. Reforms of the sort demanded by the Fund when Argentina was experiencing the throes of economic crisis, simply exacerbated extreme deflationary pressures.

    In fact, there is a much more favorable precedent for other countries which find themselves in an Argentina-style predicament: that of Chile in the 1980s, which favored limited and gradual financial integration. Foreign exchange market regulations and capital account intervention were historically used to limit the secondary effects of financial integration and to deter interest-rate arbitrage, destabilizing speculation, credit bubbles, and the overshooting behavior of asset prices (including the real exchange rate). Chile placed particular emphasis on neutralizing disturbances to the current account and domestic prices caused by sharp increases in speculative capital inflows.

    The IMF is so imbued with the ideology that fully deregulated and liberalized markets are the optimal way to organize economies, developed or developing, that it is inconceivable that they would advocate that sort of a Chilean-style policy mix. Which does lead one to question what the IMF’s true role is today? The prevailing neo-liberal development paradigm—enshrined as the Washington Consensus of the World Trade Organization, the World Bank, and the International Monetary Fund and echoed in the counsels of the Federal Reserve and US Treasury—is for the most part useless in dealing with the types of crises that afflicted Argentina and other emerging market economies over the past 20 years. The IMF, however, does enable these same failed development strategies to be perpetuated under the guise of a “neutral multilateral” institution. Because it continues to do Uncle Sam’s dirty work for it, it will likely be allowed to continue in its present form, inflicting more misery on the developing world unless more nations begin to have the courage to follow Argentina’s precedent.


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    bye.dub

 
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