IMF mistakes at heart of Argentina's woes

Duncan Green, Guardian News Service, London

Not many nascent political parties use a toilet bowl as their logo, but the Giant Toilet Committee in Argentina's second city of Cordoba is both a witty protest movement and an apt metaphor for the dire state of the country.

The committee's barrio was nicknamed "the giant toilet" after the water table rose and sewage started flooding the houses and roads. For years, residents fruitlessly lobbied the local council for a sewage system. An outbreak of hepatitis in 2001 was the last straw. A protest committee formed, opting for irony rather than road blockades. They started off by parading outside the town hall with a 10 meter high toilet. On its lid, the word "promises" with an arrow pointing down into the bowl.

The Giant Toilet Committee is just one of thousands of self- help and protest groups confronting the worst crisis in Argentina's history. The end of 2001 saw mass demonstrations oust five governments in two weeks, and a chaotic devaluation. Last year, GDP fell by up to 15 percent, un- and under-employment rose to half the working population.

A quarter of Argentines do not earn enough to feed themselves or their families and cities are littered with boarded-up shops and factories.

The roots of the crisis lay in a disastrous combination of economic policies, bad advice from the IMF and World Bank, and external pressures beyond the government's control.

In 1991, the government ended inflation by pegging the peso to the dollar. This step, which effectively prevented devaluation, meant that the government could issue pesos only if they were backed by dollar reserves. In the event of a fiscal deficit, the government's only option was to borrow dollars to cover the gap, thereby adding to its debt.

And fiscal deficit there was, but the cause was not so much government profligacy or corruption, as pensions privatization. Urged on by the World Bank and IMF, Argentina moved rapidly from a "pay as you go" scheme in which the government used income from those at work to fund its pensions commitments, to a funded scheme, where individuals saved for their own retirement. The problem was the transition period, during which the government no longer received pensions contributions, but still had to pay out. In the Argentine case, decades of state patronage had led to a massive pensions bill, and the switch to funded schemes accounted for 70-80 percent of the deficit during the 1990s.

A number of other steps increased Argentina's vulnerability: bungled and corrupt privatizations led to a high cost economy, with tariffs for phones and electricity up to ten times international rates. This, plus an overvalued currency and trade liberalization, led to a surge of imports that destroyed Argentine industry and inflated the trade deficit. Financial deregulation, bank privatization and the liberalization of capital flows meant the government losing control over much of the economy.

The vulnerability of the economy was finally exposed by the slump in international capital flows after the Asia crisis of 1997-1998. The government staggered on, raising interest rates in a vain effort to pull in the dollars needed to service its escalating debt, but collapse was inevitable.

In all this, the IMF has to answer for its sins. During the 1990s, it held up Argentina as a model for the rest of the developing world, turning a blind eye to the looming crisis. When the crisis hit, the IMF made matters worse by applying its standard, and heavily criticized, recipe of trying to balance budgets during a recession by cutting spending.

There is one lesson they should learn. Capital account liberalization in developing countries usually ends in tears. Argentina demonstrates the risks involved in opening up to capital flows. If a country's politics, economic management or just about anything else, is weak, at some point it will frighten the horses and trigger a run on the currency. Millions of Argentines are now ruing their government's blind adherence to the 1990s siren songs of privatization and deregulation.

The writer is a policy analyst at Cafod, the British-based Roman Catholic aid agency.