Saturday, May 05, 2007

Third World Financial Crises

Excerpts of my paper on the 2001 Argentine financial meltdown. Feel free to replace "Argentina" with "the Philippines." For a background on the crisis itself, click here.

The year 2001 was, in many ways, a turning point in Argentina’s history. It was the year when one of Latin America’s few success stories joined the ranks of tragedies and failed expectations. From the rapid growth of the early 90s, today Argentina is burdened with a total external debt of $169 billion, 300 percent more than in the height of the debt crisis of the 80s.

$106 billion of this debt is owed to the private sector from all around the globe (World Bank 2006). Today Argentina has the developing world’s highest debt per capita at $4,420 per Argentine (Escude 2002). From having been a ‘darling star pupil’ of the IMF for much of the decade before (Santiso 2003: 177), Argentina is a recent case of another ‘emerging market’ getting both economics and politics wrong.

There are many versions in the telling of how this has come to pass. In unravelling the Argentine crisis, much is revealed about the blurring of borders separating the national from international, the political from the economic. The idea of state accountability in the domestic context is also challenged by today’s globalising world, perhaps more so in the realm of international credit creation, where debtors are sovereign nations and creditors are private multinational entities and individuals.

The Argentine debt default in 2001 is as much a story of Argentina as it is the story of financial globalisation. This paper argues that the financial crisis was a symptom of the Argentine state’s continuing inability to carry out its function as an aggregator of interests more or less equitable to all within its domestic constituency. In the past half century, it has repeatedly financed government deficits with external credit. Due to its indebtedness, this dilemma is compounded by constraints and pressures by external actors such as international financial institutions and private creditors. The structure of the international monetary system since the 1970s allowed, even encouraged, debt-financed development which would continue on for four more decades despite limited results and repeated failures in many other debtor countries. The IMF’s early mandate of lender of last resort has changed significantly. It was politicised by the debt crisis of the 80s as it mediated between sovereign debtors and creditor banks. Because of the implicitly political nature of the IMF today, it is open to policy capture by strong creditor and certain national interests. The politicking within the IMF is difficult to monitor due to the nature of the institution itself. Its lack of transparency and accountability is highly disproportionate to the magnitude and reach of its policy-making.

Credit Addiction and the International Monetary System

The 90s saw an enormous expansion in credit-creating instruments. In the US alone the stock market business employed hundreds of thousands involved in investing $7 trillion annually (Sherden 85). The ratio of money exchange over trade has widened considerably from 10:1 in 1980 to 70:1 by 1995 (Eatwell 1997: 4). In recent years therefore, the exchange of real goods, commodities and services are clearly outpaced by the exchange of money instruments, forms of money that circle the globe facilitated by advances in computing technology.

Similar to the decade before, the IMF praised the benefits of capital freely crossing boundaries because laws of free market economics, in theory, predict that capital will go where it is needed the most. The World Bank coined the term “Emerging Markets,” i.e. developing country stock markets surveyed by its subsidiary office the International Finance Corporation. In the early 80s thirty-two countries were put in this list (Santiso 2003:1)

In Economic orthodoxy, the freedom of financial markets were supposed to effect a redistribution of capital world-wide. Capital was supposed to “flow from capital-rich developed countries to opportunity-rich emerging countries (Eatwell 1997: 11).” Not only that, markets were also expected to discipline governments for greater ‘efficiency.’

The IMF itself advocated deregulation of capital controls among members. Deputy Managing Director Stanley Fischer claimed capital account liberalisation would “outweigh the potential costs," hence the need to adapt “economic policies and institutions, particularly the financial system [to] operate in a world of liberalised capital markets (Singh 2003: 195).” Its sister institution, the World Bank also encouraged opening capital markets to foreign portfolio investment (Eatwell 1997: 7). Interestingly, China and India had not liberalised their capital account, but had nevertheless maintained economic growth for the last two decades (Singh 2003: 199). Argentina followed IMF advice to the letter. Scholars agree, perhaps more than any other country. But by the second half of the 90s, which saw financial crises erupt in these so-called ‘emerging markets,’ a similar crash in Argentina was not a matter of if but when it would happen. The country’s false sens of prosperity was about to come to an end.

Key Reforms in the IMF: Post-Washington Consensus?

The set of conditionalities attached to new loans were harmlessly termed ‘structural adjustment programs’ (SAPs). They embodied a ‘development orthodoxy’ by the ‘Washington Consensus,’ so called because of their origin (Davis 2006, Hoogvelt 1997). The policy framework enforced “fiscal and monetary austerity, elimination of government subsidies, moderate taxation, freeing of interest rates, lowering of exchange rates, liberalisation of foreign trade, privatisation, deregulation and encouragement of foreign direct investment. Free-market economics, with a strong US flavour, would take care of the problems of developing countries (Fine et al 2003: xiv).”

SAPs forced developing states to abandon developmental initiatives based on the early ISI framework. Pursuing liberalisation, privatisation and deregulation served to weaken the State as an agent of development. The laissez-faire approach and the infinite wisdom of the markets “led to weakened political parties and depressed participation – eerily echoing the apathy of the US electorate…developing countries have adopted a model of governance that resembles, in its most general outlines, the sort of capitalism that is practiced in the United States (Babb 2005:209).”

As a result of recent crises in many emerging markets the IMF has instituted new key reforms; “streamlined conditionality” and “program ownership.” The former meant lessening the number of structural benchmarks, outlining only the most crucial ones. ‘Owning’ the program meant governments must propose their own conditionalities (Arceneaux Pion-Berlin 2005: 51)

Today this ‘streamlined conditionality’ is also called ‘Good Governance.’ It has recently entered the canon of International Financial Institutions. Its “four pillars” are accountability, transparency, the rule of law, and participation (Kapur & Webb 2003).

Good governance, like democracy, certainly sounds like something any country would aspire for. But similar to the ‘Development’ blurb of the IFIs in the 80s, does ‘Good Governance’ pretend to champion debtors when it in fact looks after creditor interests? Critique of the good governance rhetoric include the excessive focus on public offices and institutions. The World Bank today is denouncing corruption and its ‘abuse of public power for private gain.’ However, the Bank defines power “as public office rather than the arbitrary exercise of power by any actor, public or private, but in the public domain. (Kapur & Webb 2003:12)."

Besides, twenty years of ‘rolling back’ the State through SAPs had already weakened the state as an economic (not to mention developmental) agent vis-à-vis markets (Strange 1988) and today it needs further discipline? In recent years, even the WTO has emerged as a major source of rules and conditions.

The last two decades has seen the following content of ongoing structural adjustment programs (Fine 2003: 10):
1. remove import quotas (57%)
2. improve export incentives (76%)
3. reform the fiscal system (70%)
4. improve financial performance of public enterprises (73%)
5. revise agricultural pricing (73%)
6. shift public investment (59%)
7. revise industrial incentives (68%)
8. increase public enterprise efficiency (57%)
9/ improve marketing and other support for agriculture (57%)

While conditionalities of the past were merely concerned with macroeconomic policies, today’s new conditionalities go beyond restructuring the economy. They have become increasingly tied with issues of domestic governance and democratisation (Fine 2003).

Lending by the Washington institutions has been marked by a creeping, even a galloping, extent of intervention within the economic arena to impose laissez-faire policies ...the new consensus can be understood as strengthening and extending the scope of permissible intervention in recipient countries...While the old consensus claimed that there was nothing wrong with its policies other than that they were not implemented, the new consensus is able to push for command over what the state does and how it should do it…What the new consensus does analytically is to strengthen and widen the scope for discretionary intervention under the guise of good governance and the imperative to moderate both market and non-market imperfections, and wrap it up in terms of local ownership (Fine 2003: 14-15).
‘Good governance’ has been accused of actually being ‘corporate governance’ instead because its supposed real aim was “to ensure investors (suppliers of finance, shareholders, or creditors) get a return on their money." The interests of these actors are then made into ‘common values’ to be safeguarded by emerging market countries and enforced through these new surveillance and policing institutions (Soederberg 2002).


For many developing countries, ‘development’ is a process that does not take place in a domestic vacuum. The State’s policy-making is pushed and pulled in all directions in response to different articulated interests. This puts increased pressure on national governments as they must contend with sub-national as well as supra-national actors, both public and private.

The 2001 Argentine crisis may be framed differently from all sorts of perspectives. It can be viewed as a series of ‘mismanagement’ by a short-sighted and under-informed global institution. It may also be viewed as a mere pawn of dominant transnational classes. What is beyond dispute, no matter which perspective we take is the IMF’s increasingly interventionist role in sovereign policy-making in the past twenty years. Its politicised role must be openly recognised so that it as an institution would itself be subject to its ‘four pillars’ of transparency, accountability, the rule of law and participation.

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