Argentina's COVID Miracle
Although COVID-19 has been hard on everyone, it has not been an “equal opportunity” disease
The virus poses a greater threat to those who are already in poor health, many of whom are concentrated in poor countries with weak public-health systems. Moreover, not every country can spend one-quarter of its GDP to protect its economy, as the United States did. Developing and emerging economies have faced hard financial and fiscal constraints. And because of vaccine nationalism (hoarding by rich countries), they have had to scrounge for whatever doses they can get.
When countries suffer such acute pain, officeholders tend to receive more blame than they deserve. Often, the result is a more fractious politics that makes addressing real problems even harder. But even with the deck stacked against them, some countries have managed to deliver strong recoveries.
Consider Argentina, which was already in a recession when the pandemic hit, owing to a large extent to former President Mauricio Macri’s economic mismanagement. Everyone had seen this movie before. A right-wing, business-friendly government had won the confidence of international financial markets, which duly poured in money. But the administration’s policies turned out to be more ideological than pragmatic, serving the rich rather than ordinary citizens.
When those policies inevitably failed, Argentinians elected a center-left government that would spend most of its energy cleaning up the mess, rather than pursuing its own agenda. The resulting disappointment would then set the stage for the election of another right-wing government. Regrettably, a pattern repeated over and over.
But there are important differences in the current cycle. The Macri government, elected in 2015, inherited relatively little foreign debt, owing to the restructuring that had already occurred. International financial markets were thus was even more enthusiastic than usual, lending the government tens of billions of dollars despite the absence of a credible economic program.
Then, when things went awry – as many observers had anticipated – the International Monetary Fund stepped in with its largest-ever rescue package: a $57 billion program, of which $44 billion was quickly dispersed in what many saw as a naked attempt by the IMF, under pressure from US President Donald Trump’s administration, to sustain a right-wing government.
What followed is typical of such political loans (as I detailed in my 2002 book, Globalization and Its Discontents). Domestic and foreign financiers were given time to take their money out of the country, leaving Argentinian taxpayers holding the bag. Once again, the country was heavily indebted with nothing to show for it. And, once again, the IMF “program” failed, plunging the economy into a deep downturn, and a new government was elected.
Fortunately, the IMF now recognizes that its program failed to achieve its stated economic objectives. The Fund’s “Ex-Post Evaluation” places a significant portion of the blame on Macri’s government, whose “redlines on certain policies may have ruled out potentially critical measures for the program. Among those measures were a debt operation and use of capital flow management measures.”
The IMF’s usual apologists will attribute the program’s failure to a lack of communication or clumsy implementation. But better communication is no fix for poor program design. The market understood this, even if the US Treasury Department and some in the IMF did not.
Given the mess that Argentinian President Alberto Fernández’s government inherited in late 2019, it appears to have achieved an economic miracle. From the third quarter of 2020 to the third quarter of 2021, GDP growth reached 11.9%, and is now estimated to have been 10% for 2021 – almost twice the forecast for the US – while employment and investment have recovered to levels above those when Fernández took office. The country’s public finances have also improved, even with a countercyclical recovery policy, owing to the strong economic growth, higher and more progressive tax rates on wealth and corporate income, and the debt restructuring of 2020.
There also has been significant growth in exports – not just in terms of value but also in volume – following the implementation of development policies designed to foster growth in the tradable sector. These include reforms to credit policies; a reduction in export duties to zero in value-added sectors, coupled with higher rates on primary commodities; and investments in public infrastructure and research and development (the kinds of policies that Bruce Greenwald and I advocate in our book Creating a Learning Society).
Despite this significant progress in the real economy, the financial media has chosen to focus wholly on issues such as country risk and the exchange-rate gap. But those problems are hardly surprising. Financial markets are looking at the mountain of IMF-furnished debt coming due. Given the enormous size of the loan that needs to be refinanced, an agreement that merely extends the amortization timeline from 4.5 to ten years is hardly sufficient to alleviate Argentina’s debt worries.
Moreover, Argentina is still experiencing the effects of the speculative portfolio capital that poured in during Macri’s presidency. Much of this was trapped by that government’s capital controls, resulting in constant pressure on the parallel exchange rate.
Cleaning up the previous government’s financial mess will take years. The next big challenge is to reach an agreement with the IMF over the Macri-era debt. The Fernández government has signaled that it is open to any program that does not undermine economic recovery and increase poverty. Though everyone should know by now that austerity is counterproductive, some influential IMF member states may still push for it.
The irony is that the same countries that always insist on the need for “confidence” could undermine confidence in Argentina’s recovery. Will they be willing to go along with a program that does not entail austerity? In a world still battling COVID-19, no democratic government can or should accept such conditions.
Over the past few years, the IMF has gained new respect with its effective responses to global crises, from the pandemic and climate change to inequality and debt. Were it to reverse course with old-style austerity demands on Argentina, the consequences for the Fund itself would be severe, including other countries’ diminished willingness to engage with it. That, in turn, could threaten global financial and political stability. In the end, everyone would lose.