Posted on 01/08/2002 6:48:42 AM PST by William Wallace
While the world's attention has been focused on the Middle East, South America has been headed toward chaos and collapse. And worse, it is not merely an economic collapse, but a collapse into a disastrous intellectual confusion that threatens to make recovery impossible for many years.
A measure of this confusion is the fact that Argentina just swore in its fifth president in two weeks. The fourth president resigned his post the moment he got it, explaining that whoever takes office "has to have a serious program of government" -- a confession that he didn't have one, and didn't know how to come up with one.
But now, the new president, Eduardo Duhalde, has projected a strident certainty and a willingness to act vigorously. And that is Argentina's biggest problem. The only person who is certain of his views is a rabid anti-free-marketer, who is peddling, as an antidote to the nation's economic ills, the exact same poison that has already destroyed Argentina's economy.
Argentina is a lynchpin of South America. For the past decade, it has been a "model citizen," with a stable currency and a relatively strong economy, thanks to relatively pro-free-market policies. Now, those free-market ideas are being blamed for the nation's crisis, both by Duhalde and by some commentators in the United States.
To find out the real story behind the Argentine crisis, I talked to economist Richard Salsman, who first warned me of this impending disaster last April. The cause, he says, is not free-market policies, but Argentina's systematic repudiation of those policies.
The story begins back in 1991, when a crucial free-market reform -- the stabilization of the Argentine peso under a currency board with strictly limited powers -- tamed the country's runaway inflation, bringing it from a high of 3,000 percent down to a mere 2.2 percent, slightly less than in the United States.
A stable currency attracted more investment, which was good for the economy. But Argentina's government abused this advantage, launching a spending spree financed by massive borrowing. As the nation's debt mushroomed, private lenders grew nervous, fearing the government would default. That, says Salsman, is when the turning point came. In March of 2000, Argentina turned for help to the International Monetary Fund.
The IMF, Salsman explains, provides cheap loans, subsidized mostly by the U.S. government; in return, it dictates economic "advice" to the borrower. That advice is always the same. First, the IMF tells a country to increase its taxes in order to reduce budget deficits. The IMF always advocates higher taxes, never lower spending. Then the IMF suggests devaluing the nation's currency, a kind of one-shot hyperinflation that allegedly "stimulates" the economy and encourages exports.
Free-market policies? No, the IMF's prescriptions are as far from the free market as you can get: unchecked government spending, higher taxes and government-induced inflation.
The results in Argentina were predictable. Higher taxes sent the economy deeper into recession. Then, early last year, Domingo Cavallo, the architect of Argentina's stable currency system, made plans to demolish his work, proposing a thinly veiled devaluation that dropped the peso's value by 7 percent. Last fall, he began hinting that the peso was "overvalued" and needed to be brought down further.
Investors got the message: He was planning to make the peso worthless. They bailed out, everyone raised prices, and the economy went into a tailspin. The final result? The angry mobs of newly impoverished Argentines who rampaged in the streets in December. It's the same cycle we saw after the IMF gave advice in Russia and Southeast Asia. As Salsman quips, "Wherever the IMF goes, rubber bullets are sure to follow."
Against all reason, free markets are being blamed -- and the poison is being offered as medicine. Duhalde just announced the first component of his economic program: to devalue the peso by another 40 percent. Bear in mind that 80 percent of Argentina's private and government debt is denominated in dollars, so borrowers will now have to pay many more pesos for every dollar they owe. Under this scheme, any Argentine business that has not already gone bankrupt, will.
What advice is America offering? President Bush has offered to give Argentina financial assistance, if it can come up with a "credible" recovery plan. What counts as "credible"? The plan must be supported by the IMF.
The root of Argentina's economic crisis is not economic, nor is it limited to Argentina. It is the failure of the world's intellectuals, economists and politicians to understand and defend a genuine free market.
COPYRIGHT 2002 CREATORS SYNDICATE, INC.
Bad enough if the IMF and World Bank simply squandered hundreds of billions of our hard-earned wealth to subsidize failed economies around the world. Instead, they use our money to bankrupt other countries, creating a host of beggar nations dependent on the IMF and World Bank for their continued existence.
The sad part is the crushing debt and destruction of wealth caused by the IMF inevitably breeds massive resentment toward America in the recipients. Which is understandable, since the average Argentinian or Russian citizen doesn't see a penny from the IMF loans, but they suffer the consequences of the ruinous economic prescriptions dictated by the IMF. Meanwhile, we the people are bewildered and angered by the "ingratitude" shown by the recipients of our generosity. Which is also understandable, since we see the drain on our wealth but not the havoc wreaked on their economies. They hate us and we hate them and we are both poorer but no wiser.
The IMF and World Bank's policies should not be misconstrued as unintended consequences of well-meaning actions. These organizations lend hundreds of billions to dictatorships throughout the world. Often the money winds up in a dictator's Swiss bank accounts and his hapless victims are saddled with crushing debt. Sometimes the funds are used to finance monuments and unnecessary public works projects. All too often, the funds are primarily used to keep the dictator in power.
If the machinations of the IMF and World Bank were generally known and understood, its officers would be rounded up and hanged. The destruction caused by Osama bin Laden and his al Qaeda thugs pales in comparison to the misery inflicted around the globe by the IMF and World Bank.
Such a deal!
The banks then refinance loans to the countries to cover the private loans that have been taken out. Meanwhile, the individuals that got the private loans have taken the funds they can get away with wind up in some foreign secret bank account.
Money does not disappear, it just gets transferred, even in free markets. We as taxpayers have contributed billions to supply the IMF and World Bank for depleted reserves. When was the last, or for that matter, the first time any investigation by our government where the money in a particular country disappeared to?
The reason being that we don't want the public to know how much money reimbursed Citicorp or a number of other financial institutions. This is the biggest racket in the world. Foreign aid is involved, too.
Free-market policies? No, the IMF's prescriptions are as far from the free market as you can get: unchecked government spending, higher taxes and government-induced inflation.
No wonder they have a bad economy. However, as this article points out, the root of the problem is Argentina's Intelligentsia. They are protectionists, and the Argentinean Government is applying its power and national security resources to protect Argentina's position in what's supposed to be a free market. Argentineans' protectionism is partly to blame for the growing bad economy and the anti-free-market movement.
President George Bush recently proposed that the World Bank's International Development Association (IDA) begin extending performance-based grants to poor countries instead of loans that they have little chance of repaying. 1 A similar proposal was made by the congressionally appointed International Financial Institution Advisory Commission (the Meltzer Commission) in March 2000. 2
Rather than welcoming this proposal as a show of support for poor nations, some representatives of the World Bank have criticized it. Jeff Lamb of the World Bank, for example, claims the idea does not "resonate with conservative economics." 3 Beverly Warmington, spokeswoman for the British government's Department for International Development, also dismissed the proposal noting that "The World Bank is actually a bank and there are development agencies to give grants. It's important that the World Bank work alongside them instead of competing with them." 4
Yet the World Bank has shown little commitment to applying "conservative economics" to its lending policies. On the contrary, poor countries that receive World Bank loans are likely to remain poor despite repeated World Bank loans, and many are so burdened by the development loans that debt forgiveness has become a common topic at the Bank's regular meetings. Moreover, there is no shortage of projects that need funding, poor who need medicine, or children who need education; and the notion of organizations fighting for an opportunity to provide funding for these purposes would be welcomed by developing countries.
In truth, the President's proposal is about increasing the effectiveness and accountability of World Bank assistance to poor nations. The Administration will need leverage to overcome opposition to the plan at the World Bank. The means to do so is available: the appropriation of $803.4 million for the IDA in the Foreign Operations, Export Financing, and Related Programs Appropriations Act for 2002 (H.R. 2506), which the House passed on July 26. The Administration should work with Congress to ensure that future IDA appropriations are tied to that organization's adoption and implementation of the President's grant proposal.
Experienced little or no economic improvement. Of the 85 countries receiving IDA loans between 1980 and 1999, 33 experienced negative compound growth in inflation-adjusted per capita GDP (their people became poorer); 20 countries experienced between zero and 1.5 percent growth (their people experienced marginal increases in wealth); and 28 countries experienced growth greater than 1.5 percent. 7 The data clearly show that nearly two-thirds of IDA borrowers in the past 20 years derived little or no benefit in terms of per capita wealth. In fact, recipients are more likely to be worse off after the loans than they are to experience significant economic growth.
Diplomacy sucks!
The effects of the chaos going on in South America is very evident in South Florida already. Venezuelans fleeing Hugo Chavez are setting up shop in South Florida at an amazing speed. I expect a wave of wealthy Argentinians next.
The restaurants down here are getting better, and better!
You are one lucky SOB my friend.
L
I'm buying.
Noone knows their way around prime beef the way an Argentine chef does. I sure hope some of those soon to be refugees make it up around Chicago.
L
Great! Nothing better for the conservative cause then those who had first hand experience with off the cliff socialism.
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