The year 2011, with its ongoing demonstrations of economic turmoil throughout the world, marks the 10-year anniversary of the outburst of one of the most epic economic, social and political crises in Argentina. A suffocating debt crisis led to a virtual collapse of the banking system and the subsequent brutal decline of the real GDP by nearly 12%. Then followed political mayhem of epic proportions that came close to a toppling the democratic regime and put governability to an extreme test. For many this was “the mother of all crises”, as it was often referred to, and the ultimate symbol of what could happen to a country living extensively on an “IMF-based diet”.
Argentina’s unexpected recovery and eventual pay-off of its debt to the international financial organization came as an exceptional phenomenon. It turned this southern-cone nation into a vivacious spokesperson that demands major reforms of the Bretton Woods institutions at every global forum it attends.
However natural this may appear today, it is definitely a momentous shift from the country’s foreign policy throughout the 1990s. Indeed, Argentina was once regarded as an exemplary case of macro-economic reform in line with the so-called “Washington Consensus”. Eventually the country’s economy - staggered and suffering from hyperinflation during the 1980’s - achieved a remarkable stabilization and a steady growth of its real GDP by more than 6 ½ percent per annum between 1991 and 1997.
These market-oriented reforms were framed under IMF-supported programs. “During the decade preceding the crisis, there were four successive financing arrangements for Argentina and its balance of outstanding credit to the IMF rose sharply after 2000 .The IMF also provided extensive technical assistance during the period, dispatching some 50 missions between 1991 and 2002, mainly in the fiscal, monetary and banking areas.”
Thus, how did the close relationship that bound Argentina and the IMF develop into outright animosity?
Crisis and default
Throughout the past ten years, Argentina’s debt crisis has been subject of a number of analyses. There is a consensus on the fact that the fixed exchange rate that Argentina implemented by law – known as the Convertibility Plan which pegged the national currency to the US dollar - restricted the means for coping with economic imbalances and stressed the country’s dependency on foreign credit, ultimately the source of all its problems. Like other countries relying on exchange-rate-based stabilization, Argentina faced a problem of real overvaluation, creating a current account deficit and dependence on foreign finance. Public debt as a share of the GDP rose from 28% in 1993 to 37% in 1998. Even if the level was not alarming, the trend was, given that it occurred in a period of rapid economic growth.
Consequently, what appears as matter of debate is the fact that the IMF continued to provide credit to a country that clearly showed signs of distress. Some critics have argued that the IMF's main fault laid in providing too much financing without requiring sufficient policy adjustments. Others have alleged that the policies recommended by the IMF actually contributed to the crisis.
Indeed, even as close to the outburst of the crisis as August 2001, the IMF allowed for an increase in the stand–by Agreement given that Argentine authorities had committed to strengthening fiscal adjustment and to ensuring that the fiscal adjustment were sustainable over the medium term. This was to be done through full implementation of the ‘zero-deficit’ law approved by the Argentine congress on July 29. A strengthening of tax administration by the authorities was expected as part of Argentina’s aggressive efforts to address fiscal imbalances. Other reforms under the government’s program included measures in the reform of the state and the strengthening of the public banks.
Strong reforms based on fiscal austerity and major cuts on social spending, the usual conditionality recipe on IMF programmes, proved to be not only inefficient but eventually lethal for the stagnated economy. This result created an environment of distrust. By November 2001, the country was experiencing a full-fledged bank run. Soon after, the government limited the withdrawals from bank accounts and banned investors from transferring funds abroad. The infamous “corralito” (“playpen”) was born and with it the beginning of the end of Argentina’s close and amicable relation with the IMF. On December 5, IMF management told the Executive Board that it could not recommend the completion of the latest review of Argentina’s IMF supported program. Completion of the review would have allowed Argentina to draw a further $1.3 billion from the IMF. Nevertheless, the IMF said it would remain in close contact with the Argentine authorities and wss committed to working with them to develop a sustainable economic program.
Just two weeks later, Argentina’s president resigned amid violent demonstrations that resulted in the death of 20 people. Soon after, president-for-a-week Adolfo Rodriguez Saá declared the country in default. Argentina was making history with the largest ever sovereign debt default of more than $80 billion.
Almost a year after, on November 2002 an Argentine economic mission went to Washington with the aim of cementing a deal with the IMF for the renewal of the country’s credit line. Talks broke down, however, as the international lending agency advanced new demands on the crisis-stricken country and objected to limited measures taken by congress-elected Duhalde government in an attempt to revive the failing economy. So much for support for the poster child.
Life after crisis
In a context that predicted more chaos and depression, surrounded by the pressure of international creditors and with no support from financial institutions, Argentina seemed destined for failure. Yet, the country undertook bold measures that contradicted the usual neoliberal instructions, emphasizing jobs creation rather than market-oriented reforms. The government’s stimulus package has been far-reaching and comprehensive, comprised of monetary and financial policies, a fiscal stimulus package, and labor market and social protection measures. On the fiscal side, it has included both major structural policies, such as the renationalization of the pension system and a large public works program, as well as temporary measures aimed at providing relief to specific industries, maintaining employment and protecting vulnerable people.
After a major devaluation of the national currency, which increased the cost of living, recovery appeared plausible. Agricultural exports hit a record high thanks to a cheaper peso and the growing demand of Asian markets, and the country attracted more investments. From 2003 to 2007 real GDP grew 8.8 per cent on average. Additionally, the open urban unemployment rate, which reached 19.7 per cent in 2002, had dipped below 8 per cent by the end of 2007.
The new administration lead by Nestor Kirchner, who assumed office in 2003, made it clear that no conditionality-type of measures were to be taken. Kirchner emerged as a regional leader that claimed independence from international financial institutions and prioritized national development. "The International Monetary Fund has acted toward our country as a promoter of, and vehicle for, policies which provoked poverty and pain among the Argentine people, at the hand of governments that were lauded as exemplary students of permanent adjustment. Our people can corroborate that (…) this international agency first backed real political failures—the currency board policies of the 1990s—and then wouldn't give one penny of aid to [help us] overcome the crisis or to restructure the debt”, he declared back in 2005. It was also at this time that Argentina joined major global player Brazil in a bold pay off of its debt in advance, saving $ 1 billion in interest.
Since then, Argentina’s leaders have been claiming for reforms of the IMF structure and policies. While true that the objectives of the multilateral institutions, such as the IMF, include shortening the duration and lessening the imbalance of payments of member countries, instilling confidence by giving them opportunities for readjustment, and not taking measures that undermine national or international prosperity, it is also necessary to redesign those multilateral institutions. Redesigning multilateral lending agencies should include changing the model so that the success or failure of economic policies is measured in terms of success or failure in the fight for development, equitable distribution, the fight against poverty and maintaining adequate levels of employment.
There is a demand for change that goes beyond formal regulations and more into a conceptual shift based on the notion of shared responsibility. Debtors and creditors are not separate entities; rather they are entailed in a sort of “symbiotic” relations. As President Kirchner stated back in 2003 “It goes without saying that when debt grows to such an extent, not only the debtor but also the creditor bears responsibility.” One quick look at the current financial crisis might indicate that this lesson – learned with much suffering by the Argentine people - is still one that the developed countries should take notice of.
A new beginning?
Ten years after declaring its default, Argentina has emerged as a growing economy. It is a member of the G-20 that can cope with global financial stirs without compromising – so far at least - its development. Its experience with the IMF has proved to be a defining one in terms of placing the country in a position to defy standard rules of international relations. Yet, Argentina has to prove the sustainability and robustness of its recovery as well as it relations with the global scenario. A recent statement made by the IMF claimed the country has committed to work with the IMF staff in improving data reporting into compliance with the obligations under the Articles of Agreement of the Fund. It is quiet approach compared to the “complimentary” notes from the past; however, it is a significant one that may indicate that, despite all the criticism, Argentina is ready to play again the IMF’s game. Although this time Argentina may do so, after committing to play by its own rules.