At the start of the year, the international economics establishment confidently agreed that Argentina was in recession because tying the peso to the dollar had made its exports uncompetitive. Those who actually enjoy cocktail parties of the International Monetary Fund told reporters that Argentina must renege on the decade-long pledge to swap one peso for one dollar and just let the peso “float” (sink).
Argentina bought the advice to appease the IMF. Argentine pesos are now worth about a quarter. But the government closed the banks, so people who put dollars into the banks cannot even take quarters out. In a country where 15 minutes of fame has meant being president or chief economist, this looks risky. The stock exchange was also closed, after losing more than half its value. The unemployment rate is near 25 percent — like the worst year of our Great Depression. Half the people are in poverty. Experimenting with bad economics can be as dangerous as tinkering with bombs.
Economists are an argumentative bunch, so we should have been wary when so many agreed that Argentina needed untrustworthy money. Consensus is too often a comforting substitute for common sense.
How could “uncompetitive” exports have caused Argentina’s recession when exports are only 9 percent of the economy, when Argentina’s exports rose 11 percent last year and when the trade surplus in 2001 was the largest in a decade?
What could be so terrible about being tied to the dollar, when the United States, China and Hong Kong are also tied to the dollar?
When has a weak currency ever resulted in a strong economy? Turkey, another overtaxed victim of more than a dozen IMF programs, has been an eager pupil of the devaluation school. It takes more than 1.3 million Turkish lira to buy one dollar. Yet the Turkish economy shrunk by more than 10 percent last year, like Argentina, and Turkey also had to cope with 65 percent inflation.
Those who habitually favor strong taxes and weak currencies cannot explain why Argentina experienced miraculous improvement after the peso was tied to the dollar in 1991 and the top income tax rate was slashed from 45 percent to 30 percent. The economy grew by 6 percent a year from 1991 to 1998. Inflation — which topped 3000 percent in 1989 — was zero for the past six years. Now, the IMF predicts 30 percent inflation, which is wildly optimistic.
Most emerging markets, including Argentina, suffered capital flight in 1998-99 because of traumatic devaluations in Asia, Russia and Brazil. But unlike Russia, which revived its economy with a 13 percent flat tax, Argentina bled its sick economy with more and more taxes. Taxing your economy to death is a mandatory courtship ritual when begging the IMF for money. Politicians love to spend money, and the IMF loves to lend money to politicians — but only after tax rates rise and the currency falls.
Argentina’s servile “letters of intent” to the IMF emphasized “fiscal consolidation” — meaning higher income and value-added taxes, new taxes on corporate assets and financial transactions, and higher tariffs. But the fiscal side of Argentina’s problem is spending, not deficits. Government spending rose from 9.4 percent of GDP in 1989 to 21 percent in 2000, but the budget deficit was only 2.5 percent of GDP. Trying to push the deficit to zero with higher taxes and tariffs shrunk Argentina’s economy and tax receipts, shoving more of the economy underground, and driving capital and talent out of the country. Yet the IMF always sees failure of its first cure-all (taxes) as an excuse for its second (devaluation).
The best analyses of the Argentina crisis are papers by Kurt Schuler and Steve Hanke at the Cato Institute website (www.cato.com). A history of the IMF’s role in such crises appeared in my own 1998 study in “Money and the Nation State,” edited by Kevin Dowd and Richard Timberlake. It was called, The IMF’s Destructive Recipe: Rising Tax Rates and Falling Currencies. The IMF is still peddling that recipe.
Those who recently demonstrated around the IMF building were there for all the wrong reasons. The serious issue is that IMF loans are tempting bait to politicians, but the strings attached to these loans end up wrapped around the borrowing country’s throat. The IMF washes its hands of responsibility, like Pontius Pilate. But their wrecking ball hangs over the whole globe, and you never know where it may come crashing down next. Let’s hope it isn’t poor Afghanistan.