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The IMF's fault, not Argentina's


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Giving Argentina the Cinderella Treatment

August 11, 2002


BRAZIL came away with a $30 billion bailout, and Uruguay
got a much-needed $1.5 billion. But when Treasury Secretary
Paul H. O'Neill arrived here this week to survey the
wreckage of Argentina's economy, all he had to offer was
the same advice Argentina has been getting since its crisis
began: tighten your belt even further and eventually a
recovery will come.

While a majority of economists might have endorsed that
approach six months ago, when the Argentine economy had
just imploded, it appears they no longer do. Upon further
reflection, a growing number of independent analysts now
maintain that many of Argentina's troubles stem from having
followed Washington's advice in the first place and that
the formula being insisted upon is only making matters

As Mr. O'Neill and the International Monetary Fund see it,
Argentina is a victim of its own profligacy and must cut
spending until no budget deficit remains. But Jeffrey D.
Sachs, an economics professor at Columbia University who
has advised several third world governments, compares that
prescription to the medieval medical procedure of bleeding
sick patients, noting that advanced economies like that of
the United States abandoned such practices long ago.

"They are telling Argentina to take a depression as a given
and, since tax revenues aren't being collected anymore, to
adjust their spending down to that level," Professor Sachs
said. "They are not thinking straight at all. That's
Herbert Hoover economics."

In fact, the last two times the United States confronted
recessions, the Republican administrations then in office
did exactly the opposite of what Mr. O'Neill is now telling
Argentina to do. When the elder George Bush faced a
downturn in 1992 far less severe than Argentina's, the
federal deficit rose to nearly 5 percent of gross domestic
product; under Ronald Reagan in 1983, deficit spending was
more than 5 percent of G.D.P.

At the moment, Argentina's provincial governments are being
chastised as especially prodigal. But the Center for
Economic and Policy Research in Washington has calculated
that the provincial deficits are relatively minor,
amounting to only 0.5 percent of G.D.P. in 2000 and 1
percent last year, and may be providing the only real
stimulus to the economy.

"In response to a depression, this is not a lot of
spending, especially since the central government is not
doing anything to alleviate poverty," said Mark Weisbrot, a
director of the center. Since the inflation and growth
rates in 2001 were negative, as they have been for several
years, "that money was a boost to the economy by

In reality, most of Argentina's deficit is simply the
result of arbitrary accounting procedures and not a
reflection of wastefulness. By privatizing the social
security system in 1994, much in the fashion the Bush
administration is now proposing in the United States, the
Argentine government could no longer count social security
payments as revenues and had to move them outside the

Had Argentina not privatized social security at the urging
of the I.M.F., it would actually have shown a budget
surplus in recent years. Indeed, according to another study
published by the Center for Economic and Policy Research
early this year, government spending in Argentina has
remained remarkably steady, at about 19 percent of G.D.P.
throughout the 1990's.

THE numbers were artificially distorted by the
privatization," said Joseph E. Stiglitz, the author of
"Globalization and its Discontents" and a winner of the
Nobel Prize in economic science. "They did make enormous
amounts of expenditure cuts in a real sense, and that is
one of the factors contributing to the downturn."

Josť Ignacio de Mendiguren, a former minister of production
and president of the Argentine Industrial Union, agrees.
Not only was "the reform of the social security system the
principal factor responsible for the fiscal imbalance," he
said in an interview here, but "the state ended up having
to turn to the private pension funds to finance the deficit
caused by the very creation of that system."

Unlike economists, the Bush administration remains
unwilling to adjust its initial analysis. Administration
officials like Otto J. Reich, the assistant secretary of
state for Western Hemisphere affairs, continue to argue
that the problem is Argentina itself, not the policies that
have been imposed on it.

"You shouldn't take Argentina as the failure of a
particular model," Mr. Reich said during a news conference
here last month. The real problem, in his view, is that "in
some countries those policies were implemented properly and
in others they were not." He offered, in contrast, El
Salvador, which is heavily dependent on remittances from
citizens living in the United States.

Even more than the Bush administration, the I.M.F. has much
at stake here, especially now that Brazil has been loaned
an additional $30 billion and the banking system in
neighboring Uruguay is teetering. But Dr. Stiglitz, who was
chief economist for the World Bank in the late 1990's, sees
few signs of flexibility or creativity in the I.M.F.'s
decision to send a team of four "wise men," all from
central banks, to advise Argentina.

"Central bankers would like to claim that inflation is the
most important thing for promoting economic growth," he
said. "But there is absolutely no evidence of that," and in
any case, Argentina is struggling with deflation, "which we
recognize as being every bit as bad as inflation and maybe
even worse."

So why does Washington continue to tell Argentina to make
even more budget cuts instead of unleashing the spending
and investment that could stimulate growth? Many here
believe that the arbiters of the global economy want to
punish Argentina so that other countries won't be tempted
to default on their debts, and George Soros, who made
billions of dollars playing the markets but is another with
second thoughts about what is happening here, seems to
agree. "Sovereign states do not provide any tangible
security," he wrote recently. "The only security the lender
has is the pain that the borrower will suffer if it
defaults. That is why the private sector has been so
strenuously opposed to any measure that would reduce the
pain" of the 37 million people here who continue to find
themselves held hostage to an experiment in economic