Argentina turns to the IMF In the 1990s, Argentina was the darling of the newly liberalised economies of Latin America. Under the Peronist government of President Carlos Menem, and his Economic Minister, Domingo Cavallo, the country adopted the reforms recommended by the international financial institutions in order to insert itself in the globalised world economy. These measures included pegging the peso to the US dollar and privatising utilities and industrial holdings, and the country bloomed. However, when President Fernando De la Rua of the Radical Party, was elected in 2000, he inherited an economy on the decline; and he has had no political honeymoon. Argentina has become the most expensive country in Latin America; unemployment stands at 16 per cent; and since March of this year approximately US$8.2 billion, or 10 per cent of bank deposits, have been lost to capital flight. Politics have played a significant role in the country's economic woes. From the beginning De la Rua has been perceived as a weak President (his government rules in a coalition with the socialist Frepaso Party), despite the fact that he has managed to cut government spending by US$3 billion in his first year. To make matters worse, De la Rua has not been able to count on the support of his Radical Party's president, Raul Alfonsin - the former President of Argentina who led the country into hyperinflation in the 1980s. President Alfonsin has made public statements against President De la Rua's budget cuts and the handling of the economy, and dissension in the ruling party has served to further weaken the President. De la Rua's popularity rating now stands at a low of 20 per cent. In May, President De la Rua called on Domingo Cavallo to once again take the reins as Economic Minister. Unfortunately, his appointment alone was not able to work miracles. In July the Argentinean stock market fell drastically and panic ensued. To his credit, by mid-July President De la Rua managed to secure the support of the Congress and provincial Governors to put through a "zero deficit plan" with the aim of extricating the country from recession. The main tenets of the plan are 13 per cent wage cuts for public employees and pensioners, maintaining a constant level of debt, and improved tax collection. Unions and civic groups have been protesting against this austerity plan, and the unrest has been making investors even more jittery. Unfortunately, the plan alone was not enough. In order to avoid defaulting on its US$128 billion external debt and to shore up its banking system, Argentina had to turn to the International Monetary Fund (IMF) seeking US$9 billion - a tall order as the IMF granted Argentina a US$39.7 billion package just last December. After 10 days of difficult negotiations, the IMF offered Argentina a US$8 billion package, and they are prepared to offer another US$3 billion if Argentina decides to negotiate a restructuring of its massive external debt. The Argentinean government has also agreed to pass laws to tighten the controls on spending by its provinces, and to strengthen the banking system. Some analysts believe that the currency convertibility regime is at the root of Argentina's problems, because it gives the government no flexibility: it cannot change monetary policy nor devalue. Minister Cavallo, however, continues to defend the convertibility law, and has dismissed suggestions to devalue the peso, as this would lead to massive capital flight and a total collapse of the economy. Minister Cavallo has also reminded the US Government and the international financial institutions that Argentina was the favourite of lending agencies over the past 10 years, precisely because it followed their advice on deregulation and liberalisation of the economy. He also warned that "it would be tragic, not only for Argentina but for the global economy, if it were concluded that Argentina's experience was useless and did not work for the Argentines." Minister Cavallo is right; it would be tragic. If large countries like Argentina follow all the rules of the globalised economy, only to fail, what is to become of small countries like ours that are still struggling to try to adhere to the rules?! Argentina's fate fell into the hands of the IMF, and luckily, the IMF had a vested interest to help it in order to avoid 'contagion' of its neighbours with sizeable economies such as Brazil and Chile. Needless to say, the IMF would not have such a great incentive to save Jamaica were we in the same situation as Argentina. Throughout history, the world economy has swung on a pendulum between protectionism and free trade. Could it be that the pendulum is now swinging back toward protectionism as more countries realise that in this 'survival of the fittest' globalised economy only the already powerful nations appear to be the real beneficiaries? Time will tell; but it is indeed a shame that Argentina has had to learn that sometimes, 'those who play by the rules get shafted'. Lisa McGregor is a regular contributor who writes on Inter-American issues.
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