In the 1990's, recession and unemployment had grown to unmanageable levels, mostly as a result of corruption and ill-conceived privatization at the hands of then-president Carlos Menem. Menem incidentally is scheduled to be brought back to Argentina (now in Chile) to be tried for charges of embezzlement and gunrunning. Security will be at incredible levels for Menem should he come back as numerous Argentines want his body in the ground, many with valid reasons.
The IMF began to run economic policy in Argentina to a large extent in the late 1990īs. The IMF's solution-which is consistent with it's strategy in much of the developing world-was foreign influx of capital. Of course, who in their right minds would want to invest in Argentina? This was a country that was rife with corruption, had huge unemployment (>30%) and was on the verge of a social crisis. By promising exorbitant returns in government securities, of course.
This is the panacea for success for the IMF, that leads to the debate on it's legitimacy. Whether this is corruption (giving opportunity to Wall Street fund manager A for a piece of the pie in return for kickbacks to IMF director B) or simple bad policy, whatever the reason, it almost never works.
So what does the government of Argentina do under the direction of the IMF? It needs to do all the things possible to guarantee the foreign influx of capital. What are these things?
First was to maintain a stable currency. They kept the peg to Dollar at all costs to guarantee return, despite knowing that the Peso was not near the value of the Dollar. Also, maintain minimal inflation.
Second they reduced govt spending to show investors that paying investors is priority and that they could manage the budget aggressively. They also needed to reduce spending out of necessity to pay off the huge returns in the govt bonds (15-20% in some cases). Reduction in union and government jobs showed the foreign investors that they were serious about a capitalistic structure and corporate profits-at the expense of quality jobs.
What were the results of these policies? Decrease in government spending in social welfare and works programs caused a huge amount of additional poverty. Poverty in Argentina increased 7 million people in year 2002 alone to around 60% of the overall population.
How much sense does it make to reduce spending in a recession?? What does the US do time and time again, when the economy is stalled and it is on the verge of a downturn? That's right, they INCREASE government spending to stimulate the economy. Not the opposite. The opposite produces horrific results.
Not spending on new job creation and increasing production killed the engine of an already stalling economy.
Further exacerbating the problem was the collapse of the Brazilian Real in 1999. The government of Argentina held the Peso to the US Dollar as the cheap Real caused a huge spike in exports from Brazil, and an inversely proportional decrease in exports from it's competitor Argentina with the now-expensive Peso. Huge amount of farm and industrial revenue were lost during this time.
When the government finally woke up and decided to release the peg to the Dollar it was too late. The economy was on the verge of collapse, and the markets reacted to this. The Peso value started to drop dramatically. With a run on the banks, the banks did what they had to do, which was temporarily freeze assets. They couldn't let all the depositors have their money because 1) the economy would collapse into hyperinflation and B) they didn't have the money anyway.
So what did they do, as the Peso continued to drop and middle-class families watched their life savings deteriorate? They paid off Wall Street, Citibank, Bank Santander (Spain) and Vivendi (France). Many small depositors only were able to get their money when the Peso had dropped to 1/6th of it's original value, if they got it at all. This is why Argentines took to the streets in 2001 and smashed the windows in the banks. They were pissed. They continue to be pissed. 3 times a week, a group of people walk to the banks in protest and pound on the banks with controlled anger (police always monitor the proceedings). Many of the protesters are older folks that lost it all in the fiasco. It is really sad to watch.
Even more disgusting is after the country started to default on all these loans, predators came in and bought up the now-cheap debt for half the price. Many of the debt is owned by rich Argentines who took advantage of the situation and suffering of their own people. Even worse, many rich oligarchs celebrated as the peso dropped, since their bank accounts were in Dollars in Miami and Euros in Switzerland, and were now much richer than they had ever been before. Also, with the drop in the peso, these landowners were set to make a fortune on exports. Ironic, that the land that overflows with food has so many starving. Much of the revenue of the country was going to pay the investors as the people starved.
The current president, Kirchner, does not want to pay most of the debt (or deuda), and wants to feed his starving people first. Given the fact that many of the debt is owned by predatory financiers, I would have to agree with him. It's not that simple that they can just default on their debt in the face of the IMF, of course. The consequences could be embargoes and inability to sell their valuable exports to other countries (e.g. US). It's a real conundrum, but Kircher seems to be making the right choice. The next couple of years should be interesting to watch.