QUERETARO, Mexico, Jan. 15 (UPI) -- Say it quietly. Argentina is doing a little better. It must be because it broke all the rules, letting its currency regime collapse and defaulting on debt.
The rule breaking raises questions about what is best for what is generally called nowadays an "emerging market." But it would have led only to disaster if President Eduardo Duhalde had not shown responsibility. That, too, was a surprise and a break with Duhalde's old habits as governor of the deficit-ridden province of Buenos Aires. The ironies pile up.
As president, Duhalde's priorities have not been those of Argentina's creditors. Against the International Monetary Fund, Duhalde appears "to have won a game of poker," says John Bowler, director for Latin America at The Economist Intelligence Unit in London.
The Fund has stalled for more than a year on reaching some sort of agreement with Argentina but this week one seems imminent. Having defaulted on payments to foreign private creditors at the end of 2001 and to the World Bank last year, Argentina has been stalling on payments to the IMF. If you don't give us a program, we won't pay, has been Duhalde's message.
That may seem an unfair message, but for a long time last year Argentina made every effort to satisfy the Fund's demands. It is the IMF that played hard to get, continually adding to its demands. Having long lent money to Argentina in large quantities and with unsuccessful results, the Fund has turned mean. And so did Duhalde. "The Fund's bluff has been called," Bowler says.
An agreement now seems imminent. Tuesday came the news that the Argentine government will make payments worth some $1.5 billion to the World Bank and Inter-American Development Bank in Washington. These payments appear intended to pave the way for an unusual transitional agreement with the IMF -- an agreement that would be likely to roll over the repayments that Argentina is due to make to the Fund this year and thereby prevent Argentina from defaulting to yet another creditor.
Last Wednesday, the Fund's directors grudgingly acknowledged in a report on Argentina that there has been "greater economic and financial stability" in the second half of 2002, and that "fiscal restraint has been a contributing factor to that stability. "Following the debt default and the floating of the currency -- now down to 3.26 pesos to the dollar having been held one-to-one with the dollar for a decade -- Duhalde has not allowed an inflationary crisis to develop. There has been no spending binge. A return to stability has been sought and, so far, obtained.
In the final three months of last year, the monthly inflation rate averaged no more than 0.3 percent. That was a remarkable achievement given that in the month of April alone, shortly after the collapse of the peso, prices rose by 10.4 percent. The peso, too, worth less than a third of its value little more than two years ago, has shown signs of stability. And with Argentina's annual inflation rate no worse than 41 percent, a huge real competitiveness gain has been achieved -- and it can be retained, provided inflation remains low.
In turn, renewed competitiveness is provoking some reactivation of the economy. This again begs questions. Why did the Fund go along with Argentina's fixed exchange rate? Why did U.S. academic experts and many on Wall Street support it? The mistakes were not only in Argentina.
Now exports are picking up a little and domestic production is substituting for imports. This slight pick up in the economy, an export tax -- perhaps unwise longer-term but useful as a stop gap -- and inflation, which tends to increase tax revenues and reduce government expenditure commitments in real terms, have helped government finances, even in the provinces, where the far-reaching reforms remain to be done.
"Argentina should focus on achieving a clear political consensus in favor of reforms," the IMF wrote last week. But this consensus in favor of profound reform -- an end to over-manning and corruption in the corridors of government -- is something that Argentina has sought in vain for decades, during which decades the IMF was often generous in its support of the country.
Politics again threatens now. Duhalde's interim term -- he stepped in and replaced the failing government of the Radical Party's Fernando De la Rua -- ends this year. Elections are scheduled for April. But in Argentina everything is malleable, yielding to the hands of the big political players. With the former president and Duhalde enemy, Carlos Menem, the man who helped install the disastrous fixed exchange rate and currency board, attempting a return to power, Duhalde is seeking to delay the election until later this year.
Argentina, then, still has much to do, and the politicians are engaged as usual in their battles for power. The unhappy truth is that chaos could return. With the Radical Party in disarray and other opposition parties weak, the ruling Peronists are likely, sometime this year, to provide the country's next president. Duhalde will seek to make that person one of his protégés. But whether the Peronists will ever tackle fiscal finances and corruption resolutely, particularly in the provinces, remains in doubt.
Yet Argentina's position now is not as bad as Wall Street predicted. The curse of the fixed and overvalued exchange rate has been removed. In a stronger world economy than we have now, Argentina would have some hope of growing its way out of at least some of its problems.
Meanwhile Argentina's defaults and deficits and the parlous position of domestic banks leave many problems to be tackled. But, as Duhalde seems to have realized, being cut off from international portfolio capital flows is less of a problem than it might have seemed.
All the years of borrowing, from U.S. investors mainly, and also from the IMF and other multilaterals, did not generate a growing economy. That raises an uncomfortable question. Did the raising of money on international markets ever do Argentina any good, or simply make further debt payments possible, and mask a fiscal deficit?
The borrowing once did Wall Street good, providing commissions for selling bonds, and then bonds to trade. But in Argentina it shored up bad policy, leaving the county vulnerable to an economic collapse that has made its population poorer than for decades. And, after the defaults, some of the investors, too, must regret their role in the international capital circus.
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