Analysis: Argentina shows IMF needs reform
By Peter Roff
UPI Senior Political Analyst
Published 3/9/2004 3:59 PM
upi.com
WASHINGTON, March 9 (UPI) -- The last-minute agreement to prevent Argentina from defaulting on a $3.1 billion payment to the International Monetary Fund likely puts off any major discussion of U.S. foreign aid until after the November election.
U.S. financial aid to the perpetually developing world has a strong constituency among the political, financial and intellectual elites in both major political parties. They see it as a tool to promote international stability, to help in the improvement of emerging markets and to promote economic growth in the developing world.
Whether it comes in the form of direct assistance to other countries or through the underwriting of the activities of international groups such as the IMF and the World Bank, the average U.S. voter views the issue of foreign aid with more than a little skepticism. To many the issue smacks of taxing middle-class working Americans so that corrupt government officials somewhere overseas can enrich their personal bank accounts.
It is not as cut and dried as the voters might think. Nevertheless, critics frequently point to the IMF's lack of control over the spending of the funds it loans out and to the general lack of information about the activities of international lending institutions as reasons reform is desperately needed.
Had Argentina actually defaulted on its loan repayment, it would have led, experts say, to its isolation from the world financial markets, placing it in the same class as Liberia, Sudan and Somalia, all of which are dealing with the ongoing effects of years long rebellions and civil war.
The narrowly averted crisis has not gone unnoticed by IMF critics. Dan Mitchell, the McKenna senior fellow in political economy at the Heritage Foundation think tank said, "I almost wish they would default. It would finally show the IMF and other western lenders that subsidizing bad government policy in developing nations is misguided."
There are two typical complaints about the way the IMF and the other international lenders function. The first is that much of what the IMF and the other international lenders do is decided on in secret. The second is that loans they make are often conditioned on the implementation of policies that hurt local economies.
"The IMF generally says it wants countries to make dramatic cuts in social spending and to raise taxes in order to balance the budget and make the government more credit worthy, Rep. Mark Kirk, R-Ill., said. "Many times, especially on raising taxes, its strategy triggers a recession that then make the country less able to pay its debt."
Kirk is an expert on the issue of international lending institutions, having dealt with the issue while a congressional aide, at the U.S. State Department and as a staff member at the World Bank. Now, as a member of the House Appropriations Subcommittee on Foreign Operations, he is waging an effort in support of reform.
"It is not a policy option to allow Argentina to fail," Kirk said. "They had had a pro-growth agenda of low taxes, open markets and pegging the currency to the dollar" under the previous government but, thanks to domestic and international pressures coming at least in part from the IMF, the current government has been advocating policies that produce downturns in the economy rather than growth.
For now, Argentina continues in the driver's seat because it is, in the words of the old saw, "too big to fail." The IMF has continued to make loans to South America's second largest economy, which owes an estimated $100 billion to private creditors, so that it can maintain its payments on loans already outstanding. If it defaulted, the influx of cash from the IMF and other international institutions would end, forcing the government in Buenos Aires to suspend the repayment of loans already outstanding, creating an international financial crisis that might have forced U.S. politicians to talk seriously of IMF and World Bank reform. The deal reached Tuesday puts that off.
Any real reforms, Kirk said, will include a mandate for the IMF and World Bank meetings to be public. "There is an incorrect idea that fate of many countries is decided over at the state department," Kirk said, "but that reflects the world as it was in 1950 when the U.S. was the number one donor to every country."
Now, he said, the IMF and World Bank are the top providers of financial assistance to more than 60 countries, a fact that raises the stakes considerably.
"The debate inside the buildings is very stale and entirely conducted in private," Kirk said. "What is discussed in their board meetings should be open to the public. We ought to have a more open debate about the goals and policies of the bank and IMF programs," rather than allowing them to proceed without additional discussion and outside input.
The second, which Kirk and other critics acknowledge would be much harder to bring about, is a change in the policies the two organizations emphasize with their loan recipients.
Kirk wants the groups to begin advising countries to adopt pro-growth policies, "restricting spending without calling for a recession-triggering tax hike that weakens ability to pay."
"A focus on education," which experts of all stripes have identified as one of the single most important factors underlying long-term economic growth, would be a welcome change from current policy, he says, "as would a reduction in protectionism and more openness to the world markets."
For now, however, the prospects for reform are not encouraging. Absent a world crisis provoked by something like an Argentine default, it is unlikely that the U.S. electorate could be mobilized around an issue a relatively obscure as reform of global lending institutions. |
