< < <
Date Index > > > |
CEPR: Argentina Since Default by Pablo Rossell 13 September 2002 14:26 UTC |
< < <
Thread Index > > > |
This is an extremely important proposal. The question is: will President Duhalde do it, given his propensity to fall down on his knees to beg for the IMF's poisoned financial relief? PR > >The Center for Economic and Policy Research > (http://www.cepr.net) has > >released a new paper titled "Argentina Since Default: > The IMF and the > >Depression" by Alan Cibils, Mark Weisbrot, and > Debayani Kar. Please see > >the executive summary below. > > > >For the PDF version: > >http://www.cepr.net/Argentina.%20PDF.PDF > > > >For the HTML version: > >http://www.cepr.net/argentina_since_default.htm > > > >EXECUTIVE SUMMARY: > > > >It is now more than eight months since the economic > crisis led to > >demonstrations and riots that toppled the government > of President Fernando > >de la Rúa in Argentina, and the country defaulted on > its public debt. > >Argentina's economy has continued to decline, with > the recession now > >having lasted more than four years. At this moment it > is not yet clear > >when this downward spiral will end. > > > >This paper looks at Argentina's crisis since the > default in an attempt to > >find a way out of the depression. After more than > half a year of > >negotiations, there has been no loan agreement with > the IMF, nor is it > >clear when there may be one. Furthermore, it is not > clear if a loan > >agreement will provide new resources—as opposed to > simply providing money > >for multilateral debt payment. In addition, the costs > to the Argentine > >economy of conditions attached to IMF loans may > exceed the benefits. For > >these reasons, and others detailed below, it is > important to consider the > >prospects for reviving the economy, whether or not an > agreement with the > >IMF is reached. > > > >Background and Origins of the Crisis > > > >The IMF is still insisting that "failures in fiscal > policy constitute the > >root cause of the current crisis," and recommending > fiscal and monetary > >austerity as a means of reviving investor confidence > and thereby > >stimulating economic recovery. But this approach has > failed for more than > >four years, as the economy remains mired in a > depression, with a loss of > >more than 20 percent of GDP since the last business > cycle peak in 1998. > > > >Furthermore, the crisis was not caused by fiscal > profligacy: the worsening > >of the central government's fiscal balance from 1993 > to 2002 was not a > >result of increased government spending (other than > interest payments). > >Rather, there was a decline in government revenue due > to the recession, > >which began in the third quarter of 1998. More > importantly, Argentina got > >stuck in a debt spiral in which higher interest rates > increased the debt > >and the country's risk premium, which led to ever > higher interest rates > >and debt service until its default in December of > 2001. The interest rate > >shocks came from outside, starting with the US > Federal Reserve's decision > >to raise short-term rates in February of 1994, and on > through the Mexican, > >Asian, Russian, and Brazilian financial crises > (1995-1999). > > > >Argentina's currency board system contributed > significantly to the > >depression, because economic activity was directly > reduced by the large > >capital outflows during various episodes > international financial turbulence. > > > >It is also worth noting that the government's > decision to privatize its > >social security system in 1994 had a major impact on > the central > >government budget deficit: in fact, the lost revenue, > plus accumulated > >interest costs, amounted to nearly the entire > government budget deficit in > >2001. In spite of all these things, the central > government's deficit was > >never very large, peaking at 3.2 percent of GDP in > 2001 (all attributable > >to interest payments). Much has been made of > provincial spending, but the > >provincial deficits totaled 1.1 percent of GDP in > 2000 and peaked at 1.9 > >percent in 2001. All told, none of this deficit > spending is very large in > >the face of such a deep depression. > > > >This was a truly unviable system. It is difficult to > imagine any fiscal > >policy—assuming it were even politically possible to > cut enormous amounts > >of government spending—that could have avoided the > fate of December 2001, > >given the overvalued currency, the size and growth of > Argentina's debt > >(mostly denominated in foreign currency) relative to > export earnings, and > >the free mobility of capital. Deficit spending did > not cause the current > >crisis, and attempts to bring about an economic > recovery through continued > >fiscal and monetary austerity are not likely to be > more successful in the > >near future than they have been in the past. > > > >The Current Situation > > > >GDP has declined at a record 16.3 percent annual rate > in the first quarter > >of 2002. Unemployment stands at 21.5 percent of the > labor force, and real > >monthly wages have declined by 18 percent over the > course of the year. > >Official poverty and indigence rates have reached > record levels: 53% of > >Argentines now live below the official poverty line, > while 25% are > >indigent (basic needs unmet). Since October 2001, 5.2 > million Argentines > >have fallen below the poverty line, while seven out > of ten Argentine > >children are poor today. > > > >While this is the worst economic crisis in Argentine > history, there are a > >number of reasons to view the economy as poised for a > rapid recovery, and > >one that can take place without external financing. > Most importantly, > >Argentina is running a large current account and > trade surplus. Primarily > >a result of the devaluation, the export sector has > vastly expanded as a > >share of the economy (see below), and is considerably > more competitive > >internationally. > > > >The Road Ahead > > > >Even if the IMF eventually proves willing to reach a > new loan agreement > >with the government of Argentina, it is still an open > question whether the > >country would be better off with an economic recovery > program of its own. > >While there are risks to both paths, it seems that > Argentina would be > >better off declaring a moratorium on its debt and > using its available > >resources to put the economy on a sustainable growth > path. > > > >One risk of going the IMF route is that the policy > conditions imposed by > >the Fund would themselves prolong and/or worsen the > depression. As noted > >above, the recommended fiscal and monetary policies > would almost certainly > >have that effect. Even assuming that the economy > recovers, an IMF > >agreement might well put Argentina into a type of > receivership in which > >slow growth, permanently high interest rates, and a > continued > >unsustainable debt burden cause the country to limp > along from one crisis > >to the next. > > > >What is the alternative to an IMF agreement? Most > importantly, the > >government would have to begin to revive economic > activity directly, > >instead of waiting for foreign or even domestic > investment to resume on > >its own. Once the economy begins to recover, and > investors no longer fear > >a worsening breakdown, private investment would > return. (This is not so > >unusual as it may seem from looking at IMF packages > in these situations: > >in the United States, the most recent (mild) > recession and continued > >economic weakness has been countered by a shift from > a Federal budget > >surplus of about 2 percent of GDP to a deficit of 1.5 > percent, or about > >$350 billion dollars. Business investment has yet to > recover). > > > >Demand could be stimulated through public works > programs, along with > >income support for the families of the unemployed and > the poor. A subsidy > >for unemployed workers or at the very least a food > stamp program of some > >sort would be particularly important, due to the lack > of access that many > >poor families now have to adequate food. > > > >The export sector can potentially play an even bigger > role in > >jump-starting a recovery. First, the export sector > has gone from a > >relatively small to a sizeable part of the Argentine > economy. Before the > >devaluation, exports of goods and services were only > 11.5 percent of GDP. > >Now they are about 37 percent of GDP. This is not > only because of the > >contraction of GDP, but mostly because the > devaluation makes each dollar > >of export earnings worth (currently) about 3.6 pesos. > Of course the > >devaluation also makes Argentine exports much more > competitive. > > > >The government could work directly with private banks > in major export > >markets (e.g. Brazil) to arrange for letters of > credit and allow exports > >to expand more rapidly. > > > >One of the great advantages that Argentina has over > other countries in > >such situations, in terms of recovering on its own, > is that the country is > >running large surpluses on both its trade and current > accounts. For the > >first quarter of 2002, the current account surplus > was $1.5 billion, or > >7.1 percent of GDP on an annual basis. The > merchandise trade surplus is > >3.75 billion dollars, or 17.8 percent of GDP on an > annual basis. The > >current account surplus is not a result of debt > default: net foreign > >interest payments in the first quarter of 2002 > actually exceeded those of > >a year ago. > > > >What has happened is that imports have collapsed -- > for the first quarter > >of 2002, imports of goods and services are down 60 > percent from a year > >ago, and even more from their level during the 1998 > business cycle peak. > >The importance of this change cannot be > over-emphasized. It means that the > >Argentine economy has already gone through an > enormous "structural > >adjustment," as a result of the depression. In other > words, as a result of > >a steep and painful shrinking of the economy (which > automatically reduces > >imports), Argentina has already accomplished the > adjustment that is > >necessary to set the stage for sustainable and even > rapid growth. > >Furthermore, the current account surplus is not > likely to disappear any > >time soon, since the full effect of the > devaluation—in terms of increasing > >exports and reducing imports—has not yet been felt. > > > >The country is therefore capable of paying for the > imports that it needs, > >for the foreseeable future, without any need for > foreign financing. This > >means that the Argentine economy is ready to recover > without new loans > >from the IMF or other international institutions. > > > >The details of an economic recovery program remain to > be worked out, but > >it is certainly feasible. Aside from meeting the most > basic needs of the > >poor, the most important thing is to come up with a > plan that revives > >production and consumer demand, and allows exports to > grow without > >unnecessary constraints. Even if an IMF agreement is > reached it cannot be > >assured that such an agreement will provide net new > resources to the > >economy, or lead to increased private investment. > Moreover, any new > >credits will almost certainly be disbursed in > tranches (installments), > >with conditions that might hinder or even abort an > economic recovery. > >Therefore, regardless of when IMF and US Treasury > officials decide that > >they are ready to sign an agreement, Argentina must > have a viable economic > >recovery plan of its own. The alternative is to leave > the economy at the > >mercy of the IMF/US Treasury and the forces of > economic contraction. > __________________________________________________ Do you Yahoo!? Yahoo! News - Today's headlines http://news.yahoo.com
< < <
Date Index > > > |
World Systems Network List Archives at CSF | Subscribe to World Systems Network |
< < <
Thread Index > > > |