Thank you, Mr. Chairman. I am a senior fellow at the Institute for International Economics here in Washington, D.C. As you may know, for ten years before I joined the Institute last October, I worked on the staff of the International Monetary Fund, serving from September 1991 through June 2001 as its Economic Counsellor and Director of its Research Department.
It is a pleasure to be able to testify today on the important and timely subject of the economic tragedy now gripping Argentina--on how it got into this mess, and on how, with the assistance of the international community, it might get out of it.
The economic performance of Argentina during the past decade has encompassed a remarkable transition: from hyperinflation, financial chaos, and deep recession at the end of the 1980's, through a spectacularly successful period of stabilization, reform, and economic growth extending generally from 1991 through 1998, then into a deepening recession and deflation from 1999 through most of last year, and finally into a catastrophic financial and economic collapse that began with the effective closure of the Argentine banking last December and the subsequent sovereign default and termination of Argentina's Convertibility Plan linking the peso rigidly to the U.S. dollar.
What was responsible for the tragic collapse of Argentina's initially successful efforts at economic stabilization and reform. Clearly, a variety of important factors played significant roles; and I will not attempt to detail all of them and weigh their relative significance in these brief remarks. However, it is important to emphasize that the tragedy was due to primarily to Argentina's economic policies, either directly or in their failure to respond adequately to other adverse developments.
Argentina's key policy failure was the inability and unwillingness of government at all levels to run a sustainable fiscal policy. Even when the Argentine economy was turning in by far its best performance in many decades, as it was from 1991 to 1998, the ratio of total public debt to GDP was rising. In fact, after the Brady bond deal that help cut the debt ratio in early 1993 to 29 percent of GDP, total public debt rose to 41 percent of GDP by 1998. And, this was in a period when the Argentine government was receiving substantial non-recurring revenues from privatization. With the onset of recession and deflation in Argentina after the collapse of Brazil's exchange rate peg in early 1999, Argentina's fiscal difficulties became more pressing, and public debt rose to 50 percent of GDP by late 2000. When efforts to reign in the fiscal deficit during 2001 repeatedly proved inadequate, financial markets completely lost confidence and sovereign default became inevitable.
Argentina's Convertibility Plan, which rigidly linked the peso to the dollar and tightly constrained monetary policy, also played a critical role in the transformation from success to tragedy. Early in the 1990s, the Convertibility Plan helped enormously to bring financial stability and economic recovery after decades of financial chaos. However, it was a rigid framework that made in more difficult for the Argentine economy to adjust successfully to adverse shocks in the late 1990s; and this did not make the problems for fiscal policy any easier. However, in the end, I would say that fiscal imprudence killed the Convertibility Plan, rather than the other way around; and both together killed the Argentine economy.
What was the role of the International Monetary Fund in all of this? The Fund was deeply involved with Argentina throughout the past decade, as Argentina operated under the close scrutiny of a series of Fund-supported programs. And, the Fund generally praised most of Argentina's policies and pointed to them as a model for other emerging market economies. Thus, the Fund must take some responsibility for Argentina's tragedy. To be fair, however, it is important to emphasize that the policies that led to the tragedy were well and truly owned by the Argentine authorities; Argentina was not pushed into bad or inadequate policies by the Fund. Rather, the failures of the Fund were sins of omission, not sins of commission.
I would emphasize two such failures. First, when the Argentine economy was generally performing very well, the Fund did not press the Argentine authorities as hard as it could have or should have to run a more responsible fiscal policy. This was a serious failure of the Fund to do the job that it is expected to do for a program country like Argentina that had a long history of fiscal imprudence. Second, I believe that the Fund was right to organize a large international support package in December 2000 to help give Argentina one last chance to avoid disaster. However, by the middle of last year, it was clear that the Argentine authorities could not implement the policies required to take advantage of this one last chance. At that time, the Fund made another serious error in significantly augmenting its financial support for Argentina. Money that might be far more useful in aiding Argentina now was wasted in a futile effort to sustain the unsustainable. And, the Argentine authorities were not given a forceful message of the need to change fundamentally their policies at a time when the inevitable turmoil from such a change might have been better controlled than it has actually proved to be.
Looking to the future, no one should under estimate the immense difficulties faced by the present Argentine authorities in their efforts to stabilize a rapidly deteriorating situation and then to initiate a sustainable recovery. The Duhalde administration has taken several important steps--painful but necessary steps--in the right direction. However, my understanding is that they are still somewhat short of the consistent and comprehensive set of implementable policies that the Fund (and others) rightly insist are needed to provide assurance of a successful stabilization effort.
In the extremely difficult economic and political environment of today's Argentina, I think that one must recognize that the Duhalde administration may not be put together and implement as credible a program as we would all like to see. The effort may fail, and stabilization and recovery may only come after Argentina has gone through a more prolonged period of economic and financial chaos and political and social upheaval.
However, I believe that it would be unwise to surrender to this prospect because the policy program that might avoid it is somewhat less than fully credible. At some point, perhaps sooner rather than later, it makes sense to take some risk by extending international support to the best policy program the Argentine authorities are capable of proposing, even if this program has some significant weaknesses. For the Fund and the international community, the risk inherent in supporting such a program can be contained within reasonable limits: by insisting on a reasonable (but not perfect) set of policies that have some chance of successful implementation; by keeping the amount of net new financial support within reasonable limits (such as 100 percent of quota for additional annual support from the Fund); and by tranching the disbursement of this support in relatively small (monthly) packages so that if the program goes seriously off track remedies may be expeditiously sought.
The international community cannot simply abandon Argentina in its present desperate circumstances. While recognizing that success is not assured, it must seek a reasonable and realistic basis for aiding Argentina's efforts to end the present tragedy.
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