The IMF Is Bleeding Argentina to Death

When Argentina's financial crisis first exploded, I pinned the primary responsibility on Argentina itself, rather than on international institutions such as the IMF. Now, half-a-year later, the balance of responsibility needs to be reconsidered. Even though Argentina is, in the last analysis, mainly responsible for its fate, the IMF is not helping. The problem is not only, or even mainly, the IMF's delay in providing money to Argentina. The bigger problem is the paucity of correct ideas coming from the IMF.

The IMF lacks a clear idea about what to do in Argentina. It continues to pound on one theme alone: that Argentina's economic crisis is the result of fiscal profligacy, the result of a government living beyond its means. So it emphasizes the need for Argentina to cut budget expenditures. As Argentina's crisis worsens, indeed with output possibly collapsing by 10 to 15% this year and with unemployment soaring, the IMF keeps asking for deeper cuts. This is something like the 18 th century medical practice in which doctors "treated" feverish patients by drawing blood from them, weakening the patients further and frequently hastening their deaths.

This IMF approach was abandoned in rich countries about seventy years ago during the Great Depression. When output crumbled due to a profound banking and financial crisis (linked to the collapse of the gold standard), tax revenues plummeted in the US and Europe, and conservative governments tried to cut budget spending to limit budget deficits. As they cut, output fell further and economic misery deepened. In 1936, John Maynard Keynes demonstrated the futility of trying to balance the budget in the midst of an economic depression.

The IMF is tragically ignoring this logic in Argentina. Argentina's widening budget deficit is mainly the result of its economic collapse since 1999, not the cause of it. The deficit was relatively mild until 1999, when the economy went into recession. Yes, budgetary waste exists, but it is not the cause of an extreme macroeconomic crisis. The recession was mainly caused not by budgetary spending, but rather by Brazil's sharp devaluation of its currency in February 1999, a step which made Argentina's own Peso uncompetitive and led investors (rightly, it turned out) to expect a similar devaluation in Argentina.