Pakistan owed $2.07 billion to the IMF at the end of March 2003. This represents a sharp rise from $1.55 billion in June 2000. The power that the IMF exerts on our policy formulation as a result of this immense and increasing indebtedness cannot be underestimated. Almost everyday, newspapers report the pressure that the IMF is exerting on Pakistan to make policy decisions that have become a dogma with the IMF and are recommended to country after country regardless of its particular situation. Just in the month of May, the IMF has linked disbursal of loans in Pakistan to privatisation of a bank, submission of a fiscal responsibility law in parliament, and elimination of tax exemptions. IMF has also asked the Pakistan government to impose 15 per cent General Sales Tax in the 2003-04 budget on bricks, cement blocks, computer hardware, software, specific machinery etc.
Predictably, a recent World Bank and IMF Joint Staff Assessment (JSA) report cited by the Dawn identifies four risks to the implementation of reforms in Pakistan, including political opposition to reforms, lack of continuity, insufficient institutional capacity and exogenous shocks. No mention of the failure of these policies in countries all over the world from Latin America, to South East Asia. Argentina is a prime example of a country that followed the policy recommendations of the IMF to the letter and now that the country is economically, politically and socially a complete basket case, the IMF has, as in other cases, abdicated all responsibility. We can do no better than to learn from the experience of Argentina to temper our enthusiasm for the IMF and a blind obedience to its dictates.
When Argentina erupted on the international news scene in 2001 for committing the biggest default by a sovereign country on an international loan corporate media focused on fixing the blame on Argentina. In reality, Argentinaâ€™s case is a particularly good illustration of how a healthy, rich country was devastated under IMF tutelage. Conversely, Argentina today can also be an inspiring example of how ordinary citizens can organize themselves to rise above the problems created for them by local and international elites.
Argentinaâ€™s economic and political health was dealt a deathblow not because it did not follow the IMF dictates closely enough, but because it was indeed doing everything according to IMF agenda. All through the 1990s, opinion makers like the Financial Times hailed Argentina as the â€˜star pupilâ€™ of the IMF. The GDP rose by 60% over the decade, and foreign investment poured in. However, this glorious facade hid a crumbling edifice. The wealth flowing into Argentina during the 1990s was a combination of speculative finance and one-off sales: the phone company, the oil company, the post, rails, and airline. Between 1989 and 1999, national debt rose by $80bn and un-employment soared from 6.5% in 1989 to 20% in 2000. Today 57% of Argentinaâ€™s population lives below the poverty line.
Just before the default and right afterwards as well, mainstream economics machinery pounced on the country for plunging itself into international isolation, a sin beyond redemption according to the gods of globalisation. The real fear underlying this hysteria was that Argentina might set a bad example for other countries caught in the debt spiral. Other indebted countries could also default and use default on multilateral debt as a bargaining chip with creditors.
The fall of Argentina
Arguably the most developed country in Latin America, Argentina had an adult literacy rate of 91% in the 1960s. It has also been, historically, a highly politicised and unionised country. During World War II the country reaped huge gains from commerce with Allied and Axis powers. Peron, a left leaning politician became president soon afterwards. His politics was laden with nationalist and anti-imperialist demagogy, and although his achievements in office did not match up to the rhetoric, his rule did result in significant gains for the working and middle class in Argentina. Popular demands not completely satisfied, unrest in the country continued. Ultimately a military coup in 1976 led to a fierce clamp down. This was a period of immense brutality in which at least 30,000 activists, students, teachers and workers â€˜disappearedâ€™.
Argentinaâ€™s dictators, instead of being shunned by â€˜democraticâ€™ institutions like the IMF, in fact received massive doses of loans and advice on how to re-organize the economy. The generals were rewarded handsomely for their policies. In 1976 and 1977 Argentina received more than $2bn in foreign loans, more than the country had received in all of the preceding six years combined. After the disastrous war in Falklands, it became unsustainable for global finance to support a military dictatorship. The reins of power were handed over to a ruling clique that continued the implementation of IMF dictated policies. The countryâ€™s external debt had increased from $8 billion to $43 billion under the generals. Therefore, while they were no longer in power, their legacy ensured that the hold of international finance remained firm on Argentinean policy making. President Menem, a Peronist, where the insinuated affiliation to a popular regime in the past is just a cover, rather like Bhutto and his daughter in Pakistan, only implemented IMF policies with increased vehemence.
Menem brought in a former banker Cavallo to manage the finances of the country. Cavallo followed the directions of the IMF to the letter. Argentina privatized state enterprises (which are now facing bankruptcy), raised interest rates to ward off inflation, cut public sector salaries by 35 percent, and then fired 40 percent of its public employees. Under President Menemâ€™s rule, class discrepancy increased dramatically. Cavallo, with IMF approval, also imposed fixed parity between dollar and peso, which was to strangle exports. The country entered a recession in late 1990s. Tens of thousands of firms went bankrupt leading to mass unemployment. By the time a centre-left president, Fernando de la Rua, was elected in October 1999, democracy was a charade in this neoliberal show state, ruled by an extremely corrupt government.
In March 2001, the parliament gave Cavallo special powers and in July a zero deficit law was passed. Among other measures, civil service salaries and some pensions were further reduced by 13%; and the draft budget for 2002 proposed to cut spending by 18.6%, $9.2bn less than in 2001. With all these changes, the country was IMF’s prize disciple, with 90% of its banks and 40% of its industry in the hands of international capital.
By this time, Argentina’s external debt stood at $132bn in 2001 and the $40bn that the state collected from privatisation had â€˜disappearedâ€™. Unemployment had risen to 20%, the number of people in extreme poverty from 200,000 to 5 million, those in poverty from 1m to 14m, and illiteracy from 2% to 12%. Purchasing power had almost halved in the five years leading to 2001.
The straw that broke the back of the middle class
The final blow was the governmentâ€™s decision in December 2001 to limit all bank withdrawals to $250 per week in a country where most salaries are deposited and credit cards carry 30% interest rates. Under increasing international pressure to service the external debt, the governmentâ€™s move was supposedly intended “to stem the hemorrhage of capital”. The average Argentinean was not to take out more than $250 a week in cash, although more than $136bn had been taken out of the country by the big national and international speculators, the ruling elite.
This move hurt the newly impoverished middle class the most. Small and medium sized businesses could not access their accounts to meet business transactions. Millions among the salaried middle class struggled to buy basics of food. The strains of this hollowed out economy ultimately led not just the working class, but this increasingly impoverished middle class to turn out into the streets.
This so-called Argentinazo was a spontaneous outpouring of the people and not organized by any of the main political parties. People just left their homes to gather in the capital banging pots and pants, or to block highways refusing to go the government to negotiate, asking instead for the government to come to them. This started on Dec 19, 2001. Within the next 12 days, the country went through five presidents and defaulted on $95bn of its debt, the largest default in history.
IMFâ€™s Star Pupil
Anoop Singh, IMF Director of Special Operations, heading the delegation to Argentina declared in April 2002, â€œIn our view, failures in fiscal policy constitute the root cause of the current crisis.â€ However, a review of Argentinaâ€™s economic data shows that in fact the crisis could not have been caused by the fiscal policy. Inherent in IMFâ€™s declaration is the view that the government should not have increased public spending, which is exactly what Argentina had done. Not only had public spending not increased, it had actually been cut between 1993-2002. The only increase in government spending had been on interest payments on loans.
In reality, the crisis was rooted in many of the policies that the Argentinean government had followed on the recommendation of the IMF including pegging the peso to the US dollar, which made Argentinean exports un-competitive, and lifting barriers to capital flow. This meant that Argentina was extremely vulnerable to any interest rate increases in the US. The exogenous shocks of US Federal Reserveâ€™s decisions to raise short-term rates in February 1994 from 3% to 6%, and the Mexican, and Brazilian financial crisis from 1995-1999, all had a devastating impact on the economy of Argentina.
The IMF contends that policy decisions are made by the governments of client countries and are not its responsibility. This argument completely ignores the fact that the IMF actively pressurizes governments into policy directions through threats of loan recalls etc. We can see clearly in the pattern of negotiations between the IMF and Argentinaâ€™s government since 2002 that the IMF does and did refuse to allocate new loans, or even provide instalments of previously agreed loans, unless Argentina agreed to damaging new policies, which included re writing its laws to interpret the constitution.
The power that IMF exerts stems not just from the loans that it can dole out but also because of its close relationship with the US Treasury department and its role as the head of a creditors cartel than can deny any developing country, access to sources of credit. It is assumed that if the IMF is willing to invest in a country other private investors will also follow suit. Finally, the sister organization World Bank is the carrot attached to IMFâ€™s stick. The World Bank withheld previously approved $700 million in loans for social programs from Argentina until it agreed to IMFâ€™s new conditionalities after the default.
Many economists have argued that Argentina had a good chance of stabilizing its economy without assistance from the IMF. The country had in 2002, a sizeable balance of credit due to massive shrinkage in imports. The devaluation of peso had made their exports more competitive and the country could invest its surplus in public works to reduce unemployment. Once the economy has started to recover, foreign investment will flow in since investors no longer need to fear a break down. In fact, this is precisely what the US government itself has undertaken in recent recessionary times.
However, to make this a reality, the government would need to stem the flow of capital outflow, which would mean some kind of currency control. This is in direct conflict with the IMFâ€™s dogma, which places financial deregulation at a high priority. This means in fact, that the so-called assistance from IMF, given its terms and conditions, is likely to slow or even negate the recovery that Argentina is capable of.
Life After the Default:
More significant than Argentinaâ€™s decision to repudiate the IMF, to whose fold its hapless politicians are moving again, and its ability to get some debt written off, are the changes going on in the society that are likely to have a much longer lasting influence.
As middle class Argentineans lost their purchasing power and their illusions about growth in an economy at the mercy of international capital, the search for alternatives intensified. Argentineans have started re-organizing from the smallest scale. “Asambleas barriales” or neighbourhood meetings take place as frequently as every two days or every week, not just in working class areas but also in the middle class localities. These meetings discuss anything from how to run the collective kitchen, to what the effect of years of de-politicisation has been. Most significantly a generation of young activists has been politicised almost by necessity. A vibrant underground barter economy is also flourishing in neighbourhood markets where people are allocated credits for goods and services they can provide. The paucity of resources available to these millions in poverty is alleviated by their creativity and spirit of solidarity.
The movement of the unemployed workers called â€œpiquesterosâ€ is gaining momentum. Workers have taken over several businesses that went bankrupt during the current crisis and are managing them themselves. Often the items produced are bartered for other goods or services. They are finding larger and larger networks to barter with. In 2002, around 150 factories have been taken over by their workers and turned into cooperatives or collectives. These include tractor plants, supermarkets, printing houses, aluminium factories and pizza parlours. Decisions about company policy are made in open assemblies, and profits are split equally among the workers. In recent months, the “fabricas tomadas” (“taken factories”) have begun to network among themselves and are beginning to plan an informal “solidarity economy”. For instance, garment workers from an occupied factory, sew sheets for an occupied health clinic; a supermarket in Rosario, turned into a workers’ cooperative, sells pasta from an occupied pasta factory.
Most neighbourhood assemblies and the various small-scale political groups decided not to participate in the elections that concluded on May 18, 2003 with the appointment of Nestor Kirchner, a relatively unknown governor with links to previous regime, as President. It is important to realize that unless the Asambleas barriales and the piquesteros do not form a cohesive front at the political level their potential for radical change will remain limited. The government has increased the violent crushing of the piquesteros recently.
The relevance of Argentinaâ€™s experience
Argentinean (or Pakistani) citizens are not unique in having military/civilian dictatorships imposed upon them, which are then sustained by massive doses of international loans. Around the world, this recursive relationship between dictators and global capital serves the purpose of enslaving people through increased indebtedness while forcing them to open up their markets for increasing the profits of large multinationals through threats of loan recalls etc. The insecurity of dictators and their need to silence all opposition is a well-calculated advantage in this relationship to international capital. An added advantage is that once the dictators have been deposed, the people of that country remain indebted as the loans were taken in their name, regardless of the fact that beyond lining the pockets of the ruling junta these loans served little developmental purpose.
As the IMF imposes devastating demands for privatisation of public resources that will increase social polarization, our government only responds with pleas for patience. The IMF pushes through sale of Habib Bank Limited, and the only resistance the Pakistani government can offer is that the process cannot be completed within the deadline specified by IMF, June 30. At the same time we are told that the government is set to increase the budget for â€˜law and orderâ€™.
The increased violence in our society is a direct result of the incredible polarisation that has gone on as schools, hospitals, two square meals and the prospect of employment have moved out of the reach of an increasing number of Pakistanis. The service that our public hospitals and schools provide in spite of a pitiful budget allocation, barely 5% for health and education combined, is remarkable (51% of our budget is used to service loans). We can only imagine how much better the system could be with adequate funding. Throwing more people in jails, and more policemen on the streets is likely to only increase the magnitude of the problem. As Delia Garcilazo de RÃos, whose son was killed by prison guards, claims, “Police repression and low salary are forms of having social control. When the people ask for things in a blockade or in a march and there’s a kid who breaks a window, we are violent. But I ask what’s more violent, a youth dying of starvation, a kid being shot from behind, or if we break a window? A window is a material thing, you can fix it, life you can’t ever get back.”