July 16, 2002
|Contact:||Michael Mussa||(202) 328-9000|
Washington, DCFormer IMF Chief Economist Michael Mussa argues in a new Institute study that the International Monetary Fund itself bears heavy responsibility for the tragic economic collapse of Argentina. Several crucial requirements emerge for the future management of the Fund:
Dr. Mussa's new study, Argentina and the Fund: From Triumph to Tragedy, traces the evolution of Argentina from being one of the Fund's greatest success stories through most of the 1990s to one of its most tragic failures. He emphasizes that Argentina, during the past decade, is a particularly important case for evaluating the role and performance of the IMF because unlike most other countries that have recently received large amounts of IMF financing, Argentina did not request support only as a crisis was under way or practically unavoidable but rather was under the scrutiny of IMF-supported programs throughout the period. Although the key decisions in the vital areas of fiscal, monetary, and exchange rate policy were undoubtedly those of the Argentine authorities and generally enjoyed broad popular support, the IMF supported and praised these policies and thus must bear significant responsibility for their final tragic failure.
The failure to run a sustainable fiscal policy (a long-standing problem of Argentina) was, Dr. Mussa argues, the most important policy mistakeas it led to sovereign default and undermined both Argentina's Convertibility Plan (exchange rate peg to the dollar) and its banking system. This failure was clearly avoidable, especially when Argentina's economy was performing well. From 1993 to 1998, when Argentine GDP advanced 26 percent and the government enjoyed substantial fiscal benefits from privatization and the Brady bond restructuring, the ratio of government debt to GDP nevertheless rose from 29 to 41 percent-demonstrating an addiction to fiscal laxity that would prove fatal in far less advantageous circumstances that prevailed after 1998. When times were good, however, the IMF failed to press Argentina to run a sustainable fiscal policy and thus it bears heavy responsibility for the critical failure in this vital area.
Argentina's Convertibility Plan, which linked the peso at parity with the dollar and tightly constrained monetary policy, also played a central role both in the initial success of Argentina's stabilization and reform efforts and in their ultimate collapse. Especially after the Brazilian crisis of early 1999, the Convertibility Plan severely limited Argentina's room for maneuver and contributed to the recession. But, Dr. Mussa maintains, the Convertibility Plan would probably have survived if not undermined by fiscal imprudence. In any case, the IMF needed to accept the Plan as the fundamental policy choice of the Argentine authorities (so long as it was not clearly unsustainable). Given this acceptance, however, the Fund had the obligation to press for all other policies essential to the survival of the Plan.
For more than a year after the Brazilian crisis, Argentina remained the darling of emerging-market finance and was able to continue floating large bond issues on private international credit markets. By late 2000, however, global markets came to question the sustainability of Argentina's finances and a potentially devastating crisis loomed. The IMF responded with a large international support package, conditioned on Argentina's commitment to rein in its fiscal deficit. Dr. Mussa concludes that this effort was reasonable to give Argentina a last chance to avoid disaster; despite clear risks that the effort might not succeed, those risks were not yet overwhelming.
However, during the first eight months of 2001, Argentina's efforts in the fiscal area continued to fall short. Global financial markets became progressively more disillusioned. Domestic runs on Argentine banks depleted reserves. There was no longer a realistic hope of avoiding a sovereign debt restructuring and probably a revocation or substantial modification of the Convertibility Plan. At this point, Dr. Mussa concludes, the IMF made another important mistake by disbursing another large chunk of support for an effort that was doomed to fail and by not insisting that the Argentine authorities needed to consider an alternative policy strategy before events compelled an even more catastrophic outcome.
That outcome was finally forced in early December 2001 by runs on Argentine banks and the government's decision to restrict bank withdrawals. Subsequently, the situation has continued to deteriorate. Despite the election by the Argentine Congress of a new President, Eduardo Duhalde, to fill out his predecessor's term, the Argentine government has not been able to put together a credible policy program to stabilize the economy and financial system and begin the process of recovery. The IMF has so far correctly withheld further support.
Dr. Mussa concludes his analysis by listing the requirements for a credible new Argentine economic program: reasonable economic assumptions, fiscal discipline that recognizes both Argentina's dire situation and the limits on available financing, a monetary policy that avoids hyperinflation, responsible efforts to resurrect the banking system, and fair treatment of external creditors and other claimants on defaulted contracts. He also suggests an appropriate scale of potential IMF support: a roll-over of payments already owed to the IMF plus, under stronger conditionality if it can be negotiated, additional money up to an annual limit of Argentina's IMF quota.
It is essential for the IMF itself to learn the right lessons from the failures in Argentina. Dr. Mussa argues that better mechanisms of responsibility and accountability are needed in the Fund. Internal discussion and dissent, including to countervail the tendency of many staff and management to give the benefit of the doubt to a country's authorities, needs to be encouraged, with more active involvement of the IMF's Executive Board. Critical evaluations of IMF programs need to be seriously undertaken by the newly created independent evaluation office, with particular emphasis on programs with high levels of Fund support. The case of Argentina should be at the top of this agenda.
More broadly, Dr. Mussa concludes that the case of Argentina has general implications for the use and usefulness of large IMF support packages. Argentina, in addition to Russia and several smaller cases, shows that the frequently raised concern of "moral hazard" arising from such support has surely been over emphasized. The Argentine case indeed has provided a clear message that private creditors cannot rely on protection from the official sector when it engages in imprudent lending. Rather, private creditors and, more importantly, the international community as a whole need to have an IMF that applies responsible discretion in determining those circumstances in which it is reasonable and desirableand those circumstances in which it is not reasonable or desirablefor the IMF to commit large-scale support.
About the Author
Michael Mussa, Senior Fellow, served as Economic Counselor and Director of the Department of Research at the International Monetary Fund from 1991-2001, where he was responsible for advising the management of the Fund and the Fund's Executive Board on broad issues of economic policy and for providing analysis of ongoing developments in the world economy. Dr. Mussa served as a member of the US Council of Economic Advisers from August 1986 to September 1988. He was a member of the faculty of the Graduate School of Business at the University of Chicago (1976-91) and was on the faculty of the Department of Economics at the University of Rochester (1971-76). During this period he also served as a visiting faculty member at the Graduate Center of the City University of New York, the London School of Economics, and the Graduate Institute of International Studies in Geneva, Switzerland. He has published widely on macroeconomics, monetary economics, international economics, and municipal finance in professional journals and research volumes.
About the Institute
The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regionsespecially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site. In 2001, it celebrated its twentieth anniversary and moved into its new headquarters at 1750 Massachusetts Avenue, NW. The Institute recently helped create the Center for Global Development, an independent but closely affiliated institution that will address poverty issues in the developing countries and policies toward them in the United States and other industrial nations.