FINANCE: Economists Divided on Cause of Argentina Crisis

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Nov 27 2002 (IPS) - A group of renowned economists here is divided over whether bad internal decisions or faulty advice from international financial institutions caused the economic crisis in Argentina and other Latin American nations.

In a survey by the Bretton Woods Committee, a public education group on global financial institutions like the World Bank and the International Monetary Fund (IMF), seven world-renowned economists disagreed on who is responsible for the economic instability in that part of the world.

Many Latin American countries, for long good disciples of the so-called ‘Washington Consensus’ – a set of 10 policy recommendations that Washington and Wall Street make to less developed nations – face their worst economic crisis in two decades.

Some of them – Argentina, Brazil, Ecuador, Uruguay, and Venezuela – are in outright financial crisis or teetering on one.

Latin American economies were flat in 2001 and, as a group, will contract by the end of this year, producing their worst two-year performance since 1982-83.

Even the region’s stronger economies, Chile and Mexico, are experiencing slow growth.

But the economists, who include Nobel Prize winner Joseph Stiglitiz, Augusto de la Torre, financial adviser for the World Bank and Sidney Weintraub of the Centre for Strategic and International Studies in Washington, were divided over what pushed Latin America into the economic mess.

Edwin Truman of the Washington-based Institute for International Economics (IIE), an economic think-tank, rebuffed claims that the Argentina crisis, the symbol of financial instability in Latin America, was triggered in any way by policy recommendations dictated by the IMF.

”Argentina is exhibit A in Latin America, but its problems were not caused by adherence to the Washington Consensus, unless one means a lip service to the Consensus that was falsely celebrated in Washington,” he wrote.

Truman argued that the origins of nations’ problems more often lie in diverse ”internal failings” rather than in bad advice. Such was the case of Argentina, he said.

The country got into economic difficulty because authorities there violated the ”commandments” in the Consensus, failing to cut spending, for instance, said Truman.

Stiglitz countered that it was Argentina’s devotion to IMF prescriptions that led the economy to flop.

”Many Latin Americans, however, think that the full IMF plan would have led to an even worse crisis – sooner. I think it is the Latins who are right,” Stiglitz wrote, referring to the austerity measures and expenditure cuts that the fund recommended.

In an economic downturn, argued Stiglitz, cutting expenditures simply makes matters worse, and tax revenues, employment and confidence in the economy also decline.

Yet the IMF demanded cuts, and Argentina complied, trimming expenditures at the federal level (except interest) by 10 percent between 1999 and 2001.

”Not surprisingly, the cuts exacerbated the downturn; had they been as ruthless as the IMF had wanted, the economic collapse would have been even faster,” the Nobel Prize winner wrote.

Another prominent economist, Adam Lerrick, adviser to the majority leader of the House of Representatives of the U.S. Congress, sides with Truman that ”internal reasons” are behind the Latin America crises, particularly in Argentina.

”Argentina is a political crisis, not an economic crisis,” he wrote. ”The Peronist party and philosophy dominate; social sentiment remains populist; the labour unions are strong; and the provincial governors who favour big spending wield veto power.”

Lerrick warned that the government’s failures could be used as a pretext to return to interventionist economic policies of the past.

”The Argentine default holds dangers far beyond the country’s borders,” he said. ”The failure of the regime to solve the nation’s underlying problems will be used to discredit the free market’s capacity to generate growth and to justify a return to what was clearly a flawed interventionist official agenda.”

Morris Goldstein, another IIE economist, echoed that it would be a mistake to blame the market for Argentina’s distress.

”Argentina got into trouble because it didn’t exercise sufficient fiscal discipline over an extended period, because it allowed its external debt to become too large, because it stuck too long with a currency regime that permitted its real exchange rate to become uncompetitive, and because it refused for too long to restructure its debt after it had ceased to be sustainable.”

But, Goldstein said, the IMF could be faulted for weak surveillance of fiscal and debt policies in Argentina and Brazil and for not insisting that ”realistic” exchange rates and sustainable debt positions be a condition of its lending.

No matter how some economists defend the Washington Consensus it still did not produce results for Latin America, said Riordan Roett of the School of Advanced International Studies at Johns Hopkins University.

”For all of the discussion about the ‘Washington Consensus’, it is clear it did not achieve a critical goal – to increase the competitiveness of Latin America,” he said.

Roett said it was ironic that Latin American leaders ignored the two Consensus recommendations that may have helped their people directly – investing in education and health and improving weak and poor judicial systems.

”When the leaders get their priorities right, Latin America may prosper. The hope for optimism is very low,” he wrote.

FINANCE: Economists Divided on Cause of Argentina Crisis

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Nov 27 2002 (IPS) - A group of renowned economists here is divided over whether bad internal decisions or faulty advice from international financial institutions caused the economic crisis in Argentina and other Latin American nations.
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