Analysis: IMF entrenched in Latin America

By BRADLEY BROOKS, UPI Business Correspondent  |  Feb. 19, 2003 at 2:04 PM
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RIO DE JANEIRO, Feb. 19 (UPI) -- Riots over a new tax lead to the resignation of a presidential cabinet in Bolivia. Uruguay quietly totters on the brink of default. Brazil looks vulnerable to a war in the Mideast, and Argentina remains ... Argentina.

Is there a common thread running through these situations?

If so, it might be the International Monetary Fund, alternately vilified and lauded for its huge stakes in many of Latin America's stagnant economies.

The Bolivian situation is an apt example.

President Gonzalo Sanchez de Lozada's cabinet resigned en masse Tuesday after protests that left 29 people dead.

The disturbances started late last week after several thousand police walked off the job, protesting plans for a new income tax. Army troops clashed with the police, resulting in the deaths. And Sanchez de Lozada has since called off the tax hike.

That new tax was to be part of a wider effort to cut the budget deficit, which must be pared by some $250 million if Bolivia wants new IMF loans.

Critics from all levels of society claim that if protests were sparked by part of an IMF-mandated austerity package, there must be blood on the hands of fund officials in Washington.

"It isn't that suddenly all the governments in Latin America became incapable, their leaders untested, but rather there is a root cause," Argentine President Eduardo Duhalde said earlier this week after the unrest in Bolivia.

Duhalde -- who just went through more than a year of grueling negotiations with the IMF to reach a debt rollover agreement -- has more experience dealing with the fund than any other leader in the region.

Alluding to the confluence of the IMF, rich nations and their agricultural protectionism, and an economic model that doesn't suit Latin America, Duhalde summed it up by saying that "this is a design of globalization that has harmed us."

But economic thinkers -- even those not particularly interested in defending the IMF -- point out that the region's problems go deeper, that they have much more to do with internal problems than Duhalde will admit.

"Bolivia, economically, has been in decline for roughly 900 years," said Richard Feinberg, former president of the Inter-American Dialogue and now director of the APEC study center at the University of California, San Diego.

"That's generated constant political instability and discontent. Back in the 1100s, they blamed it on the Incas. People can point their finger at all sorts of external factors, but fundamentally the problems lie in the nature of the domestic economy."

Not that criticism of the IMF and other multilateral lenders isn't needed, Feinberg said.

"Sometimes the IMF can have a political tin ear and they do make mistakes. But, for instance, the problems that occurred in Argentina weren't because of the IMF," he said.

"Did the fund aggravate the situation in Argentina? I would say yes. And here I would particularly blame the Bushites: the former secretary of the treasury (Paul O'Neill) and Anne Krueger at the fund."

For Feinberg, there are those at the IMF -- such as Krueger, who is first deputy managing director -- who are "ideologically fundamentalists" and unable to adjust to on-the-ground situations in Bolivia, Argentina or elsewhere in the region.

"They want to 'leave it to the market,'" he said. "Leaving it to the market is fine if you're talking about a private firm, which you can just let go bankrupt. But you can't just let a country go bankrupt."

But that's the situation several Latin American nations -- including the region's largest economy, Brazil -- find themselves realistically facing without new funds from the IMF and other multi-lateral lenders.

One of the most pressing problems for Latin American countries -- and the reason they're reliant on IMF loans -- is the complete dearth of private international credit.

Because governments have few other options for raising capital, they're forced to accede to IMF demands, which naturally include economic and political reforms as a condition for loans. But if done clumsily, as in the case of Argentina, these reforms can have unintended consequences. They can spark social unrest while simultaneously giving local politicians political cover by making the IMF into a scapegoat.

Duhalde, for one, has made an art of delivering glancing blows to the IMF -- often at political rallies and the like.

But Feinberg and other economists note that when used adroitly, the IMF's power at nudging Latin American economies towards modernity can be useful.

A promising case is that of Brazil.

"I don't need to tell you how critical the Brazilian economy is to the IMF," Feinberg said. "They've got a $30 billion credit line outstanding, and that is by far the most important IMF program active in Latin America."

So far, the IMF and Brazil's new leftist President Luiz Inacio Lula da Silva -- who in the past has railed against IMF policies in Latin America and the "Washington Consensus" economic model of the 1990s -- have been busy patting one another on the back.

Meanwhile, Brazil's government, to the surprise of many, is surpassing many IMF demands on austerity, such as increasing its primary budget surplus target. And it hasn't signaled that a reversal of privatizations is afoot, as many feared.

In the opinion of many economists -- both Brazilian and foreign -- the IMF learned important lessons during its battle with Argentina and has been far more supportive in both cash and political capital with Brazil.

The same goes for Uruguay, which is likely to see renewed loan disbursements from the fund soon. The loan package has been cut off since October, awaiting economic reforms that were structured in a way that made them easier for Uruguay's leaders to implement.

These are both examples of a smarter IMF paying more attention to the political climate in the region. That's also helped reduce its role as a scapegoat, along with the United States and Europe.

The result has been to shift Latin Americans' focus inward, where so many of the region's problems actually lie.

"I subscribe to the view that the U.S. should not be seen as the source of all evil, diminishing the responsibility of our incompetent elites," said Gustavo Reis, a Brazilian-born economist with the Rio de Janeiro-based investment bank Pactual.

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