Did anyone catch an editorial in yesterday's WSJ? It seemed very anti IMF (rightly so, though I suspect for different reasons than many on this list would propose). Is this a normal WSJ stance? Since when?
For those that haven't seen it, I have enclosed it below. Alan Wall Street Journal January 8, 2002 Editorial Who Lost Argentina? With Argentina devaluing its peso over the weekend, the conventional economic wisdom finally got its way. We hope that Argentines now watching their life savings dissipate feel as gratified. Someone should also pause, amid the conventional backslapping, to ask why, if the dollar-peso peg was such a terrible idea, it managed to last for a decade? The answer is that the peg did enormous good in Argentina as long as its discipline was followed. Keep in mind that the decision to anchor the peso to the dollar was made in 1991 as a last policy resort. Amid labor strikes and fears of a military coup, then-President Carlos Menem revoked the central bank's power to print local currency except when it had the dollar reserves to back it up. The result was almost immediate success. The peg restored credibility to the peso, broke the Argentine scourge of hyperinflation and brought the first economic stability to that country in our lifetimes. Argentine GDP grew by about 10% in each of the next two years and nearly 6% in the two after that. The peg even helped Argentina to ride out any contagion from Mexico's peso devaluation of 1994; growth fell in 1995 but the country's refusal to take conventional advice and follow with its own devaluation helped growth rebound through 1998. Of course, the challenge with any hard-money policy is that its benefits require that policy discipline be maintained. And over time that is something Argentina's politicians proved incapable of doing. In particular, its political system provided no control over the free-spending of state governors. The country's rigid labor laws were never eased and new private monopolies, such as in telecom, hurt its competitiveness. The peso-peg's intellectual Achilles' heel, however, was probably Mercosur, the country's customs union with neighboring Brazil. A free-trade area like Mercosur can be useful, but it is inevitably unstable when one of the countries is linked to the dollar and the other isn't. So when Brazil devalued its real in January 1999, Argentina got whacked. Devaluations of this type used to be called beggar-thy-neighbor policies for a reason. In this case it gave Brazilian products an exporting advantage and made Argentina bear the pain of adjustment. Argentine exports fell in 1999 for the only time that decade. Mercosur's common external tariffs trapped Argentina into this arrangement and blocked its industries from the discipline of global competition. In response Argentina began fiddling with its dollar-peso link, adding the euro to the mix in another sign of weakening discipline. This is where both the Clinton Treasury and the International Monetary Fund failed Argentina. At worst then-Treasury Secretary Robert Rubin encouraged Brazil to devalue, at best he did nothing to stop it. And devaluations are of course the IMF's household remedy for any economic ailment. Worse, when Argentina's economy suffered as a result, the IMF then recommended its other patent medicine -- austerity and higher taxes to close its "budget deficit." While there certainly was a budget problem, austerity to solve recession is self-defeating, not to say idiotic. Rather than devalue, Argentina would be better off now to go all the way to complete dollarization while breaking free of Mercosur. This would restore credibility to the peso, which is essential to attracting new investment. And it would limit the devastation to the living standards of the country's middle class. If there is a silver lining to this debacle, it is that Argentina's international creditors won't be bailed out. This is in contrast to what happened after the Mexican and Asian crises of the 1990s, and goes a ways toward removing moral hazard from the global monetary system. The Bush Treasury deserves credit so far for holding the line here. We can hope that in the future markets will start to pinch credit to troubled countries sooner, before any downward spiral and while there is still time for less painful remedies. It would be even better for world economic growth and stability if the IMF is one of the creditors that isn't repaid. Its bad advice has contributed to Argentina's troubles, but its bureaucrats will pay no heed until their own pretensions are pricked. They will continue to live comfortably in Washington with their own assets in dollars, immune from the damage that devaluation does to peso-holding Argentines. More hopefully, an Argentina free of the IMF could finally address its own problems more realistically. Things may now get worse before they get better, but Russia faced similar turmoil after its last economic crisis in 1998. The Russians threw off the IMF yoke, stabilized the ruble and cut taxes, and the result has been a burst of prosperity. There's no reason Argentina can't do the same. _________________________________________________________ Do You Yahoo!? Get your free @yahoo.com address at http://mail.yahoo.com
