IMF and World Bank Killed Argentina

In Buenos Aires, the Paris of Latin America, police gunned down two dozen Argentines in December after they chose to face bullets rather than starvation. The nation's currency had crumbled and unemployment had shot up from a grim 16 percent to millions more than the collapsing government could measure. The economy had been murdered in cold blood.

Who done it? The killers left fingerprints all over the warm corpse.

A "Technical Memorandum of Understanding," dated September 5, 2000, was signed by Pedro Pou, president of Argentina's Central Bank for transmission to Horst Köhler, managing director of the International Monetary Fund. I received a complete copy of the inside report from . . . let's just say the envelope lacked a return address.

The "understanding" required Argentina to cut the government budget deficit from $5.3 billion in 2000 to $4.1 billion in 2001. Think about that. Eighteen months ago, when the "understanding" was drafted, Argentina was already on the cliff-edge of a depression. One in six workers were unemployed. Even the half-baked economists at the IMF should have known that holding back government spending in a contracting economy would be like turning off the engines of an airplane in stall.

The IMF is never wrong without being cruel as well. Under the boldface heading, "Improving the Conditions of the Poor," the agency directed Argentina to cut 20 percent from $200 monthly salaries paid under an emergency employment program. The "understanding" also promised a 12 to 15 percent cut in civil servant salaries and a pension "rationalization" (IMF-speak for a 13 percent cut in payments to the elderly).

Salted in the IMF plans for pensioners and the poor were economic forecasts bordering on the delusional. The report projected that, once Argentina snuffed consumer spending, somehow the nation's economic production would leap by 3.7 percent and unemployment would fall.

It didn't. The IMF plan kneecapped industrial production, which fell 25 percent in the first quarter of last year before keeling over completely to interest rates that by summer were running up to 90 percent on dollar-denominated earnings.

Another envelope that walked onto my desk contained the memorandum for Argentina's "Country Assistance Plan" for the next four years. The June 25 document, signed by World Bank President James Wolfensohn, included a warning that recipients must use it "only in the performance of their official duties."

My duty as a reporter is to tell you that the plan amounts to a breathtaking mix of cruelty and Titanic-sized self-deception. With the economy already in its death spiral, Wolfensohn claimed that "despite the setbacks, the goals set out in the last [year's] report remain valid and the strategy appropriate." The IMF plan, cooked up with the World Bank, would "greatly improve the outlook for the remainder of 2001 and for 2002, with growth expected to recover in the later half of 2001."

In this eyes-only document, the World Bank president expressed particular pride that Argentina's government had made "a $3 billion cut in primary expenditures accommodating the increase in interest obligations." In other words, the government gouged spending on domestic needs to pay interest to creditors, mostly foreign banks.

Crisis, indeed, has its bright side, as Wolfensohn crowed to his banker readers: "A major advance was made to eliminate outdated labor contracts." And "labor costs" had fallen due to "labor market flexibility induced by the de facto liberalization of the market via increased informality." Translation: Workers lost unionized jobs and turned to selling trinkets in the street.

What on Earth would lure Argentina into embracing this program? The bait was a $20 billion emergency loan package and "stand-by" credit from the IMF, the World Bank and their commercial bank partners. But there is less to this generosity than meets the eye. The "understanding" assumed Argentina would continue its "Convertibility Plan," a 1991 policy that pegged the peso, the nation's currency, to the Yankee dollar at an exchange rate of one-to-one. The currency peg hadn't come cheap: Foreign banks working with the IMF had demanded that Argentina pay a whopping 16 percent risk premium above U.S. Treasury lending rates for the dollars needed to back the scheme.

Now do the math. When Wolfensohn wrote his memo, Argentina owed $128 billion in debt. Normal interest plus the premium amounted to $27 billion a year. In other words, Argentina's people didn't net one penny from the $20 billion in "bailout" loans. The debt grew, but none of the money escaped New York, where it lingered to pay interest to U.S. creditors holding the bonds.

The creditors range from big fish, led by New York-based Citibank, to little biters such as Steve Hanke, president of Toronto Trust Argentina, an "emerging market" fund. Hanke's outfit loaded up 100 percent on Argentine bonds during a 1995 currency panic. Cry not for Steve, Argentina. His 79.25 percent profit that year put his fund at the top of the speculators' league. Players call it "vulture investing": betting on the failure of the IMF policies.



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In his day job as a Johns Hopkins University economics professor, Hanke freely offers a cure for Argentina's woes. The advice would put him out of business: "Abolish the IMF," he told me.

And, Hanke advised, abolish the one-for-one exchange rate. The currency peg forced Argentina to beg and borrow a steady supply of dollars to back each peso, and this became the rationale for the IMF and World Bank to let loose in the pampas their Four Horsemen of neoliberal policy: liberalized financial markets, reduced government, privatization and free trade.

The "liberalizing" means allowing capital to flow freely across national borders. Capital has indeed flowed freely. Last year, Argentina's elite dumped its pesos for dollars and sent the hard loot to investment havens abroad, bleeding as much as $750 million a day from the country.

Once upon a time, government-owned national and provincial banks supported their nation's debts. But in the mid-1990s, President Carlos Saúl Menem's government sold these off to foreign operators such as Citibank and Boston-based Fleet Bank. Former World Bank advisor Charles Calomiris told me these bank privatizations were a "really wonderful story." Wonderful for whom? With the foreign-owned banks unwilling to repay Argentine depositors, the government froze savings accounts December 3, effectively seizing money from the middle class to pay off the foreign creditors.

To keep the foreign creditors smiling, the IMF "understanding" also required "reform of the revenue sharing system." This is the kinder, gentler way of stating that the U.S. banks would be paid by siphoning off tax receipts that the provinces had earmarked for education and other public services. The "understanding" also found cash in "reforming" (cutting from) the nation's health insurance system.

And when cuts aren't enough to pay creditors, one can always sell "grandma's jewels," as Argentines describe the privatizations. The government sold much of the nation's water system in 1995 to Vivendi Universal. The French conglomerate promptly cut staff and raised prices, including 400 percent hikes in some areas. In his confidential memo, the World Bank's Wolfensohn sighs, "Almost all major utilities have been privatized," so now there's really nothing left to sell.

The coup de grâce, spelled out in the "understanding," was the imposition of "an open trade policy." This pushed Argentina's exporters (with their products priced in U.S. dollars, via the peg) into a pathetic, losing competition against Brazilian goods priced in that nation's devalued currency.

Have the World Bank and IMF learned from their errors? They learn the way a pig learns to sing: It can't, it won't and, if it tries, the resulting noise is unbearable. On January 9, with the Argentine capital in flames, IMF Deputy Managing Director Anne Krueger ordered the country's new president, Eduardo Duhalde, to cut still deeper into government expenditures. Interestingly, President George W. Bush backed the IMF budget-cutting advice-the same week he demanded that the U.S. Congress adopt a $50 billion scheme to spend the United States out of recession.

Wolfensohn's memo summed up the program: All Argentina needed to do was "reduce the cost of production," a step that required only a "flexible workforce." Translation: further cuts in pensions and wages or, better yet, no wages at all. To the dismay of Argentina's elite, however, the worker bees proved inflexibly obstinate in agreeing to their impoverishment.

One such worker, Anibal Verón, a 37-year-old father of five, lost his job as a bus driver from a company that owed him nine months' pay. Verón joined unemployed Argentines, known as "piqueteros," who block roads. In November 2000, while clearing a blockade, the military police killed him with a bullet to the head.

Yet globalization boosters portray resistance to the New World Order as a lark of pampered, naïve, western youths curing their ennui by "indulging in protest," as British Prime Minister Tony Blair put it. The U.S. and European media play to this theme, focusing on protests in Seattle and Genoa, while burying news of general strikes honored by millions of Argentine workers. The July 20 killing of Genoa protester Carlo Giuliani made front pages across the United States and Europe. But these newspapers ignored Verón's death and the June 17 killings of Argentine protesters Carlos Santillán, 27, and Oscar Barrios, 17, gunned down by police in a churchyard in General Mosconi, a northern town. Only in December, when Argentina failed to make an interest payment on foreign-held debt, did the Euro-American press report a "crisis."

To implement their "reforms," the IMF and World Bank work with locals such as Domingo Cavallo, who resigned as economy minister in December after mass protests. Argentines remember him as head of the nation's Central Bank during the 1976-1983 military dictatorship.

Mindful of that era, the Buenos Aires-based Peace and Justice Service (SERPAJ) is documenting cases in which police tortured northern protesters. SERPAJ leader Adolfo Pérez Esquivel, who won the Nobel Peace Prize in 1980, told me his group has filed a formal complaint charging police with recruiting children as young as age 5 as informers for paramilitary squads. He compared the operation to the Hitler Youth, the organization that trained German boys in Nazi principles. Pérez Esquivel, who last year led protests against the proposed Free Trade Agreement of the Americas, says economic "liberalization" and political repression go hand in hand.

Greg Palast is author of the book, The Best Democracy Money Can Buy, out in April. He is an investigative reporter for London's Sunday paper, The Observer, and BBC TV's Newsnight. Read his columns at He will be appearing in Chicago April 5-6; check his website for details.