April 19, 2001 | Backgrounder on Latin America
As U.S. Secretary of the Treasury Paul O'Neill explained to The Financial Times in February, the key factor underlying recent financial crises is not a failure of capitalism, but an "absence of capitalism." Argentina provides a cogent example; its lack of economic freedom--the necessary environment for capitalism to work effectively--resulted in continual economic decline and, ultimately, the financial crisis that erupted in November 2000.
economic policies and political instability contributed to
Argentina's decline from its noteworthy position as the world's
10th wealthiest nation in 1913 to the world's 36th wealthiest in
1998. Argentina is the only wealthy country to experience so great
a reversal in recent history, despite the involvement of the
International Monetary Fund (IMF). Indeed, the IMF's loans and
guidance have aggravated, not alleviated, Argentina's problems.
After more than nine bailouts and extensions of IMF loans since
1983, Argentina once again faces a financial crisis, with
prospects for stimulating effective economic growth in the future.
Instead of supporting a continuation of Argentina's policies that feed the current 33-month-long recession, the Bush Administration should encourage Argentina to adopt policies that will increase economic freedom and lead to long-term growth and stability. Specific policies that the Administration should encourage Argentina to implement include:
Argentina should not look on these reforms as options. Unless the country resumes strong economic growth soon, it will likely default on its debt and see its access to international capital markets crippled.
Restoring economic stability and promoting growth for Argentina will benefit the United States as well as the Argentine people. To help avert another crisis in Argentina, the Bush Administration should encourage Argentina to end its cyclical dependence on IMF loans and make the reforms necessary to stimulate growth. Economic growth would enable the government to service its debt and--if expenditures are also cut--end its reliance on IMF loans.
It is just as imperative, however, that the role played by international financial institutions in the global economy be restricted. The Bush Administration should seek to implement the recommendations of the congressionally mandated International Financial Institutions Advisory Commission, chaired by Allan H. Meltzer of Carnegie Mellon University, in order to establish a solid framework for reforming the IMF and World Bank. The reforms should maximize the organizations' effectiveness, increase accountability for their lending decisions, and limit their harmful influence in the global market.
Future crises will be less likely in an environment that promotes the efficiencies and benefits of open markets. Unless the Administration addresses the "absence of capitalism" that afflicts economies around the world by taking this approach, economic crises will become more frequent and more severe.
Ana I. Eiras is an Economic Policy Analyst for Latin America and Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at The Heritage Foundation.