|
|
|
|
Argentina 2002: A Case of Government Failure
By Allan H. Meltzer
Introduction
In the aftermath of the Argentine default and devaluation, the Argentine government did little or nothing to alleviate its deep crisis and much to make it worse. The unemployment rate exceeded 20 percent, more than a million people emigrated—a sure sign that they had given up hope of a return to stability—and 40 percent of those who remain are impoverished. Inflation soared following devaluation and rapid money creation. Although 40 percent of daily consumer purchases are cash transactions, the government restricted access to money, sharply limiting these transactions.
Joseph Stiglitz speculated that the International Monetary Fund punished Argentina because it defaulted. This is nonsense. The government did not make any of the reforms needed for recovery. The previous government wrecked the banking system. Devaluation strengthened the export sector, so the government increased export taxes reducing exports. The courts gave people who sued the right to withdraw their bank deposits, so the government threatened to replace the judges to prevent withdrawals. It wasted scarce foreign exchange managing its exchange rate instead of letting it fall to a market level.
The IMF showed remarkable calm compared with its past behavior. Aside from extending the term of some loans that Argentina could not pay, it did not offer any new money. The IMF sent a mission to negotiate a new loan agreement, and separately it sent four former central bankers (the wise men) to appraise conditions and to recommend a monetary framework for noninflationary growth. The wise men made an intriguing statement at the end of their report. They said that if Argentina had credible policies, it would not be in crisis. How true! The Duhalde government made negotiation unpromising.
Full Text (PDF, 3 pages, 26 KB)