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From: wolda002@umn.edu
Date: Fri Nov 12 2010 - 23:19:39 EST
Kirchner's Legacy: Getting Argentina Out of Crisis by Defying the IMF and
"Free" Trade By Walden Bello, Foreign Policy in Focus
Posted on November 11, 2010, Printed on November 12, 2010
http://www.alternet.org/story/148813/
The unexpected death recently of Nestor Kirchner deprived not only Argentina
of a remarkable, albeit controversial leader. It also took away an exemplary
figure in the Global South when it came to dealing with international
financial institutions.
Kirchner defied the creditors. More importantly, he got away with it.
*The Collapse*
The full significance of Kirchner’s moves must be seen in the context of the
economy he inherited on his election as Argentine president in 2003. The
country was bankrupt, having defaulted on $100 billion of its debt. The
economy was in a depression, its gross domestic product having declined by
over 16 percent that year. Unemployment stood at 21.5 percent of the work
force, and 53 percent of Argentines had been pushed below the poverty line.
What was once the richest country in Latin America in terms of per capita
income plunged<http://econpapers.repec.org/article/meschalle/v_3a46_3ay_3a2003_3ai_3a5_3ap_3a37-58.htm>below
Peru and parts of Central America.
Argentina’s crisis stemmed from its faithful adherence to the neoliberal
model. The financial liberalization that served as the proximate cause of
the collapse was part and parcel of a broader program of radical economic
restructuring. Argentina had been the poster child of globalization,
Latin-style. It brought down its trade barriers faster than most other
countries in Latin America and liberalized its capital account more
radically. It followed a comprehensive privatization program involving the
sale of 400 state enterprises -- including airlines, oil companies, steel,
insurance companies, telecommunications, postal services, and petrochemicals
– a complex responsible for about seven percent of the nation’s annual
domestic product.
In the most touching gesture of neoliberal faith, Buenos Aires adopted a
currency board and thereby voluntarily gave up any meaningful control over
the domestic impact of a volatile global economy. This system tied the
quantity of pesos in circulation to the quantity of in-coming dollars. This
policy, as the *Washington Post* writer Paul Blustein
observed<http://pqasb.pqarchiver.com/washingtonpost/access/381224451.html?dids=381224451:381224451&FMT=ABS&FMTS=ABS:FT&type=current&date=Aug+08,+2003&author=&pub=The+Washington+Post&desc=What+Befell+Argentina&pqatl=google>,
handed over control of Argentina’s monetary policy to Alan Greenspan, the
U.S. Federal Reserve chief who was on top of the world’s supply of dollars.
This was, effectively, the *dollarization *of the country’s currency.
The U.S. Treasury Department and its surrogate, the International Monetary
Fund (IMF), either urged or approved of all of these measures. In fact, even
with financial liberalization called into question in the wake of the Asian
financial crisis of 1997-98, then-Secretary of the Treasury Larry Summers
extolled<http://focusweb.org/publications/1999/Power,%20Timidity,%20and%20Irresponsibility%20in%20Global%20Finance.htm>Argentina’s
selling off of its banking sector as a model for the developing
world: “Today, fully 50 percent of the banking sector, 70 percent of private
banks, in Argentina are foreign-controlled, up from 30 percent in 1994. The
result is a deeper, more efficient market, and external investors with a
greater stake in staying put.”
As the dollar rose in value, so did the peso, making Argentine goods
non-competitive both globally and locally. Raising tariff barriers against
imports was not an option owing to the technocrats’ commitment to the
neoliberal tenet of free trade. Instead, borrowing heavily to fund the
dangerously widening trade gap, Argentina spiraled into debt. The more it
borrowed, the higher the interest rates rose as international creditors grew
increasingly alarmed. Money began leaving the country. Foreign control of
the banking system facilitated the outflow of much-needed capital by banks
that became increasingly reluctant to lend, both to the government and to
local businesses.
Backed by the IMF, the neoliberal government nevertheless continued to keep
the country in the straitjacket that the peso-dollar currency board
arrangement had become. As George Soros
observed<http://books.google.com/books?id=gFyoVTQyegMC&pg=PA143&lpg=PA143&dq=%22sacrificed+practically+everything+on+the+altar+of+maintaining%22&source=bl&ots=oGgmq6Th6I&sig=6aJyUiiEi5n_SSWMuprW8Eipu2o&hl=en&ei=DH_RTKOXIoWClAewhbzRDA&sa=X&oi=book_result&ct=result&>,
Argentina “sacrificed practically everything on the altar of maintaining the
currency board and meeting international obligations.”
The crisis unfolded with frightening speed in late 2001, forcing Argentina
to go to the IMF for money to service its mounting debt. After earlier
providing loans, the IMF refused its pupil this time, leading to the
government’s $100 billion debt default. Businesses collapsed, people lost
jobs, capital left the country, and riots and other forms citizen unrest
toppled one government after another.
*Kirchner’s Gamble*
When Kirchner won the elections for the presidency in 2003, he inherited a
devastated country. He saw the choice as debt or resurrection, putting the
interests of the creditors first or prioritizing economic recovery. Kirchner
offered to settle Argentina’s debts but at a steep discount. He would write
off 70-75 percent, repaying only 25-30 cents to the dollar. The bondholders
screamed and demanded that the IMF discipline Kirchner. Kirchner repeated
his offer and warned the bondholders that this was a one-time offer that
they had to accept or lose the rights to any repayment. He told the
creditors that he would not tax poverty-ridden Argentines to pay off the
debt and invited them to visit his country’s slums to “experience poverty
first hand.” Faced with his determination, the IMF stood by helplessly and a
majority of the bondholders angrily accepted his terms.
Indeed, Kirchner played hardball not only with the creditors but with the
IMF. He told the Fund in early 2004 that Argentina would not repay a $3.3
billion installment due the IMF unless it approved a similar amount of
lending to Buenos Aires. The IMF blinked and came up with the money. In
December 2005, Kirchner paid off the country’s debt to the IMF in full and
booted the Fund out of Argentina.
For over two decades, since the Third World debt crisis in the early 1980s,
developing country governments had considered defying the creditors. There
had been a few quiet defaults on payments, but Kirchner was the first to
publicly threaten the lenders with a unilateral haircut and make good on
that promise. Stratfor, the political risk analysis firm, pointed
out<http://www.stratfor.com/memberships/83558/global_market_brief_argentina_avoids_debt_repayment>the
implications of his high-wire act: “If Argentina walks away from its
private and multilateral debts successfully -- meaning it doesn’t collapse
economically when it is shut out of international markets after repudiating
its debt -- then other countries might soon take the same path. This could
finish what little institutional and geopolitical relevance the IMF has
left.”
And indeed, Kirchner’s act contributed to the erosion of the credibility and
power of the Fund in the middle of this decade.
*Recovery *
Argentina did not collapse. Instead, it grew by a remarkable 10 percent per
year over the next four years. This was no mystery. A central cause of the
high rate of growth was the financial resources that the government
reinvested in the economy instead of sending outside as debt service.
Kirchner’s historic debt initiative was accompanied by other moves to throw
off the shackles of neoliberalism: the adoption of a managed float for the
Argentine peso, domestic price controls, export taxes, sharply increased
public spending, and caps on utility rates.
Kirchner did not confine his reforms to the domestic sphere. He undertook
high-profile initiatives with other progressive leaders in Latin America,
such as the sinking of the Washington-sponsored Free Trade of the Americas
and efforts to bring about greater economic and political cooperation.
Emblematic of this alliance was Venezuela’s $2.4 billion purchase of
Argentine bonds, which enabled Argentina to pay off all of the country’s
debt to the IMF.
Along with Hugo Chavez of Venezuela, Lula of Brazil, Evo Morales of Bolivia,
and Rafael Correa of Ecuador, Kirchner was one of several remarkable leaders
that the crisis of neoliberalism produced in Latin America. Mark Weisbrot,
who captured his continental significance,
writes<http://mrzine.monthlyreview.org/2010/weisbrot271010.html>that
Kirchner’s moves “have not generally won him much favor in Washington
and in international business circles, but history will record him not only
as a great president but also as an independence hero of Latin America.”
* Walden Bello is a member of the House of Representatives of the
Philippines, a senior analyst of Focus on the Global South, and a columnist
for Foreign Policy In Focus. *
© 2010 Foreign Policy in Focus All rights reserved.
View this story online at: http://www.alternet.org/story/148813/