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CEPR: Argentina Since Default
by Pablo Rossell
13 September 2002 14:26 UTC
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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?


> >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
> >
> >
> >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.

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