August 15, 2001 | Commentary on Latin America
They recently received a temporary reprieve when the IMF agreed to speed up a $1.2 billion payment of its existing loan, originally scheduled for September. The primary purpose of their agenda, however, was to lobby the IMF for a new loan package of at least $6 billion.
Approving yet another loan for Argentina would be a mistake. Past experience clearly shows that reform in Argentina is crisis-driven. Despite repeated loans and advice from the IMF, Argentina failed to adopt economic reform to address its problems in the 1980s.
Indeed, Argentina has failed to meet the conditions attached to each and every IMF loan it has received since 1983. The government's reluctance to adopt politically tough reforms sent the economy into a tailspin in the late 1980s, ending in hyperinflation. Only when it ran out of options did the Argentine government begin to address its problems by establishing a currency board and liberalizing its economy.
Argentina is repeating this pattern today. An IMF-led bailout of $39.7 billion last December failed to pull Argentina out of its three-year recession. At this stage, an additional $6 billion loan would prove just as ineffective, because the government still resists policies that would revive the economy. Repeated loans provide temporary relief, but at the cost of deeper long-term debt. In the end, Argentina's citizens will pay dearly for the government's inaction.
Argentina needs economic growth. This is even more critical now that global growth has slowed, which could deepen the current recession. To spur economic growth, Argentina must lower trade barriers, cut taxes and deregulate the labor market. This would make domestic industries more competitive, encourage job creation and hiring, attract foreign investment and benefit consumers.
Until recently, Argentine officials seemed to realize this. International financial markets had little confidence in Argentina's prospects and were reluctant to extend new loans. The Bush administration indicated that more IMF loans were unlikely and took a firm stance against bailouts in principle.
Treasury Secretary Paul O'Neill, Federal Reserve Chairman Alan Greenspan and Secretary of State Colin Powell all implied that Argentina's problems were of domestic origin and that new IMF loans were unnecessary.
National Security Adviser Condoleezza Rice summed up their comments during a July 13 White House press briefing: "The best course right now is for Argentina to be able to take the steps that it needs to be able to take at home to stabilize the financial situation."
As a result, Argentine authorities from all parties began discussing economic reform. The government enacted a zero-deficit budget policy, and debt restructuring was being explored by government officials and opposition party members. These reforms would have been a solid first step in resurrecting Argentina's economy.
Unfortunately, Argentine officials put these reforms on hold in the wake of a visit by John B. Taylor, undersecretary of treasury for international affairs. They took his visit to mean the Bush administration was reconsidering its position against a new IMF loan for Argentina.
International financial markets reacted positively to the prospect of an upcoming bailout. But in this instance, what is good for creditors is bad for Argentine citizens.
This is a critical moment to help Argentina to recover. After more than 36 months of recession, high unemployment and no reform plan in the horizon, Argentines are desperately looking for some stability.
This has left them all too receptive to populist messages that would magnify the country's problems by increasing the government's role in the economy, eliminating the currency board that has been the only successful solution to the country's historically high inflation, as well as raising barriers to trade and investment.
The best way the Bush administration can discourage these counterproductive proposals from the left and aid Argentina is to oppose new loans and force Argentina to renegotiate its debt and adopt economic reform.
Sooner or later, Argentina must bite the bullet and take these steps. The longer this process is delayed, the steeper the cost will be for ordinary Argentines, who ultimately will foot the bill for their government's inaction.
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