Weisbrot
When
I was a child growing up in Chicago, we heard stories of lifeguards who saved
panicked, drowning beach-goers by first knocking them out with a punch to the
face, then hauling them to shore. This seemed like a risky strategy to me, and I
never knew if it actually worked.
The
International Monetary Fund has a similar "rescue" strategy for countries in
financial trouble. Does it work? We are now seeing it tested yet again in
Argentina and Brazil.
Fearing "contagion" of the type that spread financial panic from Asia to Russia
to Brazil a few years ago, the IMF has offered a $15 billion credit to Brazil.
In order to qualify, Brazil will have to cut another $2.5 billion from its
budget, even as its economy is slowing and foreign investment is drying up.
Argentina is also being forced to cut spending, despite being stuck in a
recession for three years
One
problem with evaluating the Fund’s policies is that most economies eventually
resume growth, and so the architects of austerity, "shock therapy," or any other
punishment can always claim success at some point. South Korea eventually
recovered from the Asian economic crisis. Brazil grew at a respectable 4.0
percent in 2000, and Russia last year registered its highest growth (over 8
percent) in two decades.
But
these growth spurts followed IMF policies that clearly failed to accomplish
their objectives. The Fund’s $41 billion loan to Brazil at the end of 1998 was
to stabilize the Brazilian currency; that currency collapsed a few months later,
losing 40 percent of its value. The same was true in Russia: the Fund loaned
billions of dollars to prop up the ruble — but it was the ruble’s collapse that
allowed the Russian economy to recover.
In
both of these cases, the IMF insisted that these over-valued currencies had to
be supported, no matter what the cost to the economy. This meant high interest
rates that cripple economic growth, budget austerity, and massive borrowing to
support the exchange rate.
Their
only economic argument was that if the currency were allowed to fall, the
country would lapse into hyper-inflation (because of the increased cost of
imports). But both the Brazilian and Russian currencies did collapse, and the
hyper-inflation never came. Instead, there was growth.
Now
Argentina is being put through the ringer to save its over-valued peso. Interest
rates on government bonds have risen to 14 percent, and the government has
borrowed $40 billion in a deal arranged by the IMF. For comparison, imagine our
government borrowing $1.4 trillion (70 percent of our entire federal budget) in
order to keep our own, overvalued dollar from falling.
It
would never happen here, and it shouldn’t be happening there either. Throughout
Latin America, the expertise of the IMF’s mad scientists — always standing by
with more loans and unpleasant elixirs to swallow — is falling into increasing
disrepute.
In
fact, this is the great fear among the US foreign policy establishment right
now: that Latin Americans will decide that Washington’s cures are worse than any
disease that they could catch on their own, and will go their own way. Their
nightmare: First, a devaluation of the Argentine peso — another failed showcase
macro-economic experiment. Then Argentina defaults on, or has to renegotiate,
its foreign debt.
Then
Brazil elects a Workers’ Party government in its national elections next year —
something voters came within a hair of doing in 1990. There is enormous public
sentiment in Brazil for defaulting on its massive international debt, and little
that could be done to punish the country if it did. (Brazil’s economy is still
fairly closed, with exports amounting to only about 7 percent of the economy).
In
short, the whole experiment in "neoliberalismo," as it is regularly denounced
among Latin Americans, could go down the drain. And well it should. For 20 years
now, Latin America has followed Washington’s economic advice. They have slashed
their tariffs, swallowed IMF austerity, and sold off tens of billions of dollars
of state assets to foreigners.
It’s
been a lot of pain, and no gain. Over the last 20 years, income per person grew
by a mere 7 percent in Latin America. This compares to 75 percent for the
previous two decades (1960- 1980), when national governments exercised much more
control over their economic policies. And the gap between rich and poor has also
grown.
Summing up the Russian experience, Putin’s economic adviser Andrei Illarionov
said recently "We didn’t need IMF money before, and we don’t need it now. It
causes nothing but harm."
Most
governments in Latin America could say the same, and they will. The only
question is when.
Name: Mark Weisbrot E-mail: <[email protected]> Co-Director: Center for
Economic and Policy Research 1015 18th Street NW, Suite 200 Washington, DC
www.cepr.net