Friday 9 September 2011

The post-IMF Argentine economic recovery

If the European debt crisis continues to escalate
Spain may have to look to her former colony Argentina
for an escape strategy.
The European debt crisis had caused a number of economists to consider the future of the single European currency.

A couple of years ago, had anyone stated that Greece should bail out of the European single currency in order to save their economy they would have been derided by mainstream commentators. However the view that Greece could jump ship has become increasingly popular.

Anyone that tries to claim that European monetary union is not dysfunctional in the light of 27% interest on Greek government debt, 45% youth unemployment in Spain, an €85 billion (€13,700 per citizen) bailout to Ireland and hundreds of billions of Euros worth of repossessed and stockpiled Spanish, Greek & Irish property assets on the balance sheets of European banks is clearly in denial.

Opinions range from those that claim that the only way to save the Euro is through rapid monetary union with the United Kingdom to others who imply that it is only a matter of time before countries start unilaterally withdrawing from the Euro.

The fact that people are beginning to openly discuss the potential withdrawal of smaller European nations may be quite alarming for the citizens of Greece and Spain but there is a positive case to be made for withdrawal. Argentina is the best recent economic case study for the smaller European nations and lessons should be learned from their catastrophic economic collapse (1999-2002) and their phoenix like recovery over the last decade (2002-2011) despite the post credit crunch chaos in the wider global economy and the extremely high cost of Argentine government borrowing.

The Argentine debt crisis was caused by strict adherence to hardline neoliberal dogma, lack of monetary autonomy (de facto monetary union between the Argentine Peso and the US$) and the massive scale of capital flight.

The crisis was resolved by tearing up the small-state, free-market, IMF textbook of neoliberal pseudo-economic dogma, boosting the economy by restoring monetary autonomy (breaking the monetary union with the US Dollar), direct government investment (in infrastructure, housebuilding, social security, industry) and cooling capital flight through targeted taxation (to fund the investment projects).

Throughout the 1990s Carlos "innombrable" Menem's Argentine regime were considered IMF poster boys because of the enthusiastic manner in which they implemented hardline neoliberal economic reforms such as deregulation of the financial sector (creating a fertile environment for massive corruption and tax evasion), privatisation of almost everything (into ownership of foreign multinationals, speculators and asset strippers), lack of monetary autonomy, low taxes for the rich and low government spending on infrastructure and services for everyone else. After a decade of this zealous neoliberal experiment the Argentine economy imploded spectacularly with four consecutive years of economic contraction between 1999 and 2002 with painful bouts of hyperinflation eventually resulting in the biggest national debt default in economic history.

The IMF revisionist story is that Argentina's neoliberal reforms were not undertaken properly, but at the time the IMF and World Bank had no complains about the technical implementation of the reforms.
"On the second semester of 1998 Argentina was considered in Washington the most successful economy among the ones that had restructurated its debt within the Brady's Plan framework. None of the Washington Consensus' sponsors were interested in pointing out that the Argentine economic reforms had differences with its 10 recommendations. On the contrary, Argentina was considered the best pupil of the IMF, the World Bank and the USA government."
Domingo Cavallo, former Argentine Minister of Economy (1991–1996).
The IMF approved neoliberal agenda delivered four years of painful economic contraction, hyperinflation and the accumulation of vast government debts. The IMF opposed recovery strategy that Argentina eventually embarked upon created economic growth of 9% a year for nearly a decade, and resulted in the dramatic reduction of government debt despite the extremely poor economic performance of the wider global economy and  the extremely high cost of government borrowing.

Another IMF post hoc cop out is their revisionist criticism of the Peso-Dollar fixed exchange rate, in which they described as "idiosyncratic" "increasingly uncompetitive" and "a constraint on fiscal policy control". However at the actual time, the neoliberal technocrats at the IMF were too busy patting the Argentine regime on the back for their militant neoliberal reforms to bother voicing any concern over monetary autonomy. 

Even now the IMF are utterly unwilling to use the same pejorative terminology to describe the European Single Currency, despite the fact that it is based on the exactly the same convertability principle. The only difference being that actual coins and notes of the Eurozone nations are the same, (save for the slightly differing designs depending on the country of origin), rather than taking the form of monetary union based on the retention of two (or many) distinct currencies with identical values.

Another IMF "arse covering" strategy is to try and imply that Argentina's spectacular recovery has nothing to do with them having torn up the IMF textbook of neoliberal dogma, paid off their IMF debts as soon as possible and expelled the IMF from the country. The IMF would have anyone that is stupid enough to take their explanation at face value believe that Argentina recovered solely on the back of  "a fortuitous boom in prices of primary commodities, leaving open issues of longer-term sustainability".

I'm fairly sure that had Argentina stuck with the IMF approved formula since 2002, their economy would have continued to stagnate, as rampant corruption and a lack of targeted taxation would have allowed the vast majority of this "boom" in primary commodities wealth to have simply evaporated away into the profits of foreign multinationals and into the Swiss bank accounts of the big landowners, rather than being used to lower Argentine government debt (and interest repayments), improve infrastructure and provide the poor with half-decent houses and jobs instead of unsanitary slums and unemployment.

The late Argentine President Néstor Kirchner -
no fan of the IMF approved economic dogma
Exactly the same causal factors that created the Argentine crisis can be seen in Spain and Greece (IMF approved neoliberal economic dogma, lack of monetary autonomy and capital flight) but instead of taking a radical course of action to restructure their economies in order to restore economic growth (a step that has been proven successful in the short and medium term by Argentina), the Spanish & Greek governments are being pressurised by the European Central Bank and the IMF to intensify the neoliberal privatisation agenda and maintain the Euro. Strategies that remove their monetary autonomy, limit their fiscal autonomy and hinder any effort to prevent capital flight.

Spain and Greece are learning the lesson that Argentina learned a decade ago, that globalised neoliberalism is a bankrupt ideology. The astonishing thing is that these smaller European nations choose to ignore the lessons of the past, choose to remain in the Euro, choose to follow outdated IMF dogma and choose to let their citizens suffer the terrible economic consequences. How long before they decide to cut their losses and jump ship?

Whatever they decide to do, it would be wise for European leaders to heed the words of the late Argentine President Néstor Kirchner: "The IMF has transformed itself from being a lender for development to a creditor demanding privileges".

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Margaret Thatcher is dead

What is ... neoliberalism?
  The Great Neoliberal Lie
The JP Morgan vision for Europe
Mixed Economy vs Neoliberalism
MoneyWeek and their "End of Britain" debt fearmongering campaign
  The "unpatriotic left" fallacy
Common Sense and neoliberal pseudo-economics