Fund-razing in Argentina

Enemigos: Argentina y el FMI (Enemies: Argentina and the IMF)
By Ernesto Tenembaum
344 pages, Buenos Aires: Grupo Editorial Norma, 2004 (in Spanish)

Un País en Deuda (A Country in Debt)
By Marcelo Bonelli
368 pages, Buenos Aires: Planeta, 2004 (in Spanish)

More than three years have passed since Argentina defaulted on $81 billion of its debt and devalued its currency, triggering a crisis that brought the country to the brink of political and economic collapse. For creditors, the default was painful enough. But for Argentines, the meltdown and its social aftermath was traumatic.

Recovery, underlined in February by the government’s achievement of a controversial but successful debt exchange, has come faster than many expected, but the crash of 2001 and the events of the decade leading up to it are still the subject of constant, almost obsessive, interest in Argentina. The episode has prompted a national identity crisis. Why has Argentina — a country so European in its habits and mentality — been so incapable of producing the kind of stable, open, and European-style society to which its citizens seem to aspire? Why has prosperity, last seen before the First World War but glimpsed again in the early 1990s, proved so elusive? Above all, why did everything go so wrong and who — if anyone — was responsible?

All of these concerns have created an audience for books about the debt crisis, including several bestsellers. In Un País en Deuda (A Country in Debt), Marcelo Bonelli, an astute journalist well known locally for his compelling columns in Clarín, Argentina’s most popular newspaper, has written a detailed history of the debt crisis from its origins in the mid-1970s to the collapse of 2001 and its messy aftermath. And Ernesto Tenembaum, a journalist and broadcaster, converted an extended e-mail interview with Claudio Loser, the former head of the International Monetary Fund’s (IMF) Western Hemisphere department, into a book. A Country in Debt is already in its second edition. Tenembaum’s Enemigos: Argentina y el FMI (Enemies: Argentina and the IMF) has performed even better and has been among the most read nonfiction for more than three months.

Bonelli’s account starts in 1976, when the military intervened to end the chaos and industrial strife associated with the return of Gen. Juan Domingo Perón, the father of Argentine populism, to the country in 1973. The early 1970s had seen Argentina’s economic model of import substitution and state intervention in crisis, with inflation running out of control and society beginning to break down. The military and its economy minister, José Alfredo Martínez de Hoz, sought to solve these problems by imposing a liberal economic model, with stability underpinned — as it had been at the turn of the century — by a strong currency.

The central argument of A Country in Debt is that liberal economic policies led to the debt crisis. In other words, Joe — as Argentines called the economy minister — started the rot, and not one of the 13 governments and 30 economy ministers of the last 30 years have made much of a difference. Matters went from bad to worse at the beginning of the 1990s, when President Carlos Menem turned the Peronist movement upside down by embracing liberalism, rejecting his populist party’s statist traditions and introducing the most rigid exchange rate system of all — convertibility, in which a dollar was held in reserves for every peso in circulation.

Bonelli has an eye for detail and his recreation of key moments in the drama are compelling. So colorful is the history that it is as if, as one local reviewer puts it, the events spring from Latin America’s tradition of magical realism. But somehow the analytical framework isn’t convincing. One of the reasons Argentines adopted fixed exchange rates was that they found it so difficult to control inflation in any other way. Certainly, in the aftermath of the debt default, many Argentines have blamed their problems on the economic model imposed upon them by the markets and the IMF. But for much of the 1990s, public opinion was enthusiastic about the convertibility system and the salvation from hyperinflation that it seemed to represent at the time.

The respective merits of liberalism and the possibilities of an alternative — implicit in Bonelli’s account — are at the core of the debate of Enemies. Tenembaum, like Bonelli, is deeply critical of Argentina’s experience in the 1990s. Not surprising, he faults the IMF and the larger international financial community, as well as the government of the United States, which championed Argentina as a poster child of market reform only to abandon its citizens to their fate when the country defaulted.

Tenembaum talks about the "religious character" of the neoliberal crusade of the 1990s and argues that international bankers and fund officials such as his interviewee were "priests of the new religion." Policies such as privatization and flexible labor markets were the "route to salvation," and those "who were opposed were automatically discredited, as if they were incapable of recognizing the light of divine truth." In a series of e-mail exchanges conducted last year, Tenembaum puts all this to Loser, the fund official who ran the fund’s Western Hemisphere department for eight years and lost his job, at least in part, because of Argentina’s collapse.

Loser is loyal to his colleagues, but he admits that the fund made mistakes. He concedes that the IMF technocrats underestimated the complexity of local politics. The sell-off of state companies took place at a breakneck pace and was encouraged by the IMF even though the fund made little preparation to regulate new private industries. Officials were blind to the need for regulation, and they underestimated the negative social impact of many of the reforms. "Nobody worried about the social [ramifications]," Loser says in one particularly compelling passage. "[Fifteen] years ago we were all convinced. If you could do things again we would discuss these concepts."

More serious still, with capital in plentiful supply on international markets and bankers eager to do business with Menem, Argentina’s debt continued to grow. The government — having sold its most marketable assets — failed to adjust spending. Loser and his fellow technocrats became worried, but Menem’s international reputation continued to insulate him from pressure.

"It was difficult to set limits on Argentina’s leadership when it had such good and powerful friends," says Loser. After Argentina ran out of state companies to sell in the late 1990s, its fiscal problems became "unsustainable."

But, says Loser, the fund can hardly be blamed for the whole mess. If the imposition of neoliberalism really was the main cause of Argentina’s debt crisis, why was the Argentine experience so much worse than those of Chile, Brazil, or Mexico? After all, to a greater or lesser degree, the governments of all these countries also embraced the free-market combination of fiscal conservatism and privatization.

How was Chile able to sustain economic expansion through the 1990s and make inroads into reducing the scale of social problems, halving the rate of poverty between 1990 and 2000? Why was Brazil, which has a sizable debt itself, able to avoid default and ride through the downturn of 2001 and 2002 without the consequent economic disruption? And how did Mexico survive its 1994 default and successfully rebuild its shattered financial system?

These comparisons lead Loser to suggest that Argentina’s problems lie in Argentina itself, rather than in its relationships with lenders and investors. Loser says that the Argentines he dealt with were far less skilled in achieving their goals than their counterparts in Brazil, Chile, Mexico, or almost anywhere else. Argentina’s virulent political divisions were particularly dysfunctional. "There is so much irrationality, conflict and recrimination and very little common sense," he argues. "The climate has been so self-destructive that I think [Argentina] would be unable to take advantage of any international context, however favorable."

Ideology runs deep, and in the end — even after four months of illuminating exchanges — Tenembaum and Loser haven’t changed each other’s minds. Tenembaum still thinks that the international system is flawed. Loser argues that the greater fault lies with Argentina and the failure of its politicians to accept the fact that orthodox economic principles "are like the law of gravity." The tone of the debate is positive, though, and the discussion is intelligent, civil, and refreshingly good-humored. That at least is a positive sign for Argentina. With its debt restructuring now more or less out of the way, the hope must be that the spirit of the debate in Enemies begins to influence the country’s relationship with the international financial community.