The International Monetary Fund played Santa Claus over the holidays andorganized a rescue package for Argentina worth $40 billion, which wasofficially approved on Jan. 12. The deal allows Argentina to avoiddefaulting on its $124 billion in foreign debt. That's as good as the newsgets, however. A close look at the agreement shows that it has little chanceof solving Argentina's problems in the long term or putting its economy on arobust growth path in the near future.
Argentina's problems do not stem from the 1991 Convertibility Law thatlinked the peso at a fixed one-to-one rate with the dollar and made the pesoconvertible on demand, as critics of that reform claim. To the contrary,the problems stem from the government's seemingly insatiable thirst formoney. The currency board, which prevents the central bank of Argentinafrom printing more pesos than the dollar-denominated reserves that it holds,has made that thirst more apparent.
Government spending at state and federal levels has increased from 38.9percent of gross domestic product to 49.4 percent since 1997, an increase of10.5 percentage points. In that same period, public-sector external debt asa percentage of GDP has risen from 26 percent to 32.1 percent, an increaseof 6.1 percentage points. With tax revenues failing to keep up withspending and privatization proceeds drying up, the government is looking tooutside sources for financing. Unfortunately, the IMF is all too happy tooblige, acting like a bartender who keeps pouring drinks for an alcoholic.
Argentina joined the IMF in 1956. It has borrowed money from thatorganization in 34 of the last 45 years. In March of last year, the IMFloaned $7.4 billion to help Argentina launch a fiscal responsibility plan, acombination of tax increases and spending cuts aimed at bringing thepublic-sector deficit into balance by 2003. By September 2000, it wasapparent that the target date would be missed. Rather than suspend theloan, the IMF wants to provide a new loan, and push the target deficit dateto 2005. Yet tax-and-spend policies are not a good recipe for growth.
The Argentine economy has performed poorly since 1995, growing at an annualrate of 1 percent per capita on average. There are two reasons for thatpoor performance. First, Argentina has one of the most regulated labormarkets in the world. Those rules make it difficult and costly for employersto dismiss workers, so companies don't hire workers in the first place. Notsurprisingly, the rate of unemployment in Argentina has hovered around 15percent since 1995. The rate of underemployment (the percentage of thelabor force working less than 35 hours per week but wishing to work more) isalso around 15 percent.
In addition, tight regulation of the labor market makes it nearly impossiblefor Argentine companies to react rapidly to changing conditions and newopportunities in the world economy.
Second, taxes are prohibitively high. This kills investment and job creationand encourages tax evasion, which in turn worsens the government's financingwoes. In 1999 the Argentine congress passed, at the urging of the IMF, afiscal responsibility law. This law called for increases in personal incomeand wealth taxes, a broadening of the base of the value-added tax, andrenewed efforts to increase tax compliance. Not surprisingly, the responseof the productive sectors of the economy has been to avoid paying taxes evenmore than in the past and, when possible, to leave Argentina.
Argentina's problems--and the solutions to those problems--are homegrown.The IMF is responsible for giving money and bad advice to the Argentines.Unfortunately, that is unlikely to stop. For years the fund has toutedArgentina as its model client. To leave her now would deal a severe blow tothe fund's already tarnished reputation. Buenos Aires knows that andbehaves accordingly, failing to make the necessary reforms to get theeconomy on the path to sustained growth.
Knowing that the IMF will come to its rescue time and again, the Argentinegovernment has little incentive to reform. And thus the charade continues.