FOR a decade Argentina, like Enron, has been a darling of the West’s financial community. And like the energy trading giant, this Latin American country was also presented as a role model of free market system and showered with praises in the financial press.

In their own ways, both the company and the country were experiments in neoliberalism — the new ideology of the Bretton Woods institutions under the ‘Washington Consensus’. If Enron was an experiment in doing away with regulatory activism, Argentina was in doing away with monetary activism — there was less and less government intervention, tariffs were slashed, state enterprises were privatized, multinationals were welcomed and the peso was pegged to the dollar. Wall Street cheered and money poured in. For a while, free market economics seemed doing wonders and its advocates felt proud in claiming credit.

Then came the crunch. Enron crashed in the first half of December. Argentina collapsed in the second half of December.

Argentina is the latest instance of how a Third World county’s economy is mismanaged into a crisis by the US-trained economists on the advice of the IMF. This is not the first time that the IMF has burdened a country with huge debt in order to prop up an overvalued currency. In 1998, it did the same to Brazil and Russia. In both cases the currency collapsed quickly in spite of the loans. And, it is interesting to note, in both cases the economy responded positively to the devaluation despite a warning from the IMF that doing so would bring in runaway inflation. That never happened. Argentina has now turned to the same medicine — devaluation — but only after much bleeding has taken place.

One of the most deplorable but least known aspects of the Argentinean crisis is the plunder of workers’ pension funds by the Buenos Aires government, local banks and the Wall Street. Billions of dollars in savings by public employees were placed as collateral on the government’s call to rescue Argentina from default on foreign debt. These funds fell prey to the greed of foreign and domestic capital. They were invested in stock market and government bonds.

The removal of all restrictions on foreign investment and capital repatriation gave an opportunity to the foreign capital to make quick profit and leave the country. (Enron had also converted its employees’ retirement funds into shares of the company and when it went bankrupt the employees got nothing. The callous misuse or plunder of pension funds seems to be a new trend in such situations.)

According to The Washington Post: “The new developments mean that Argentines will be forced to accept a significant decline in what had been the highest standard of living in Latin America. They will also mean tens of billions in losses for the Belgian dentists, Spanish banks and American pension funds that once invested enthusiastically in Argentine bonds”.

Argentina’s crisis raises fresh questions about the role of the International Monetary Fund (IMF) in crisis management and its claim about the benefits that the free market, free trade, and open investment policies offer to the developing countries. There is a consensus that the IMF doomed the Argentinean economy by imposing a harsh regime of spending cuts and tax increases at precisely the wrong time — when the recession was rampant — as a condition for new loans. And the IMF continued to lend money to Argentina even when it was clear that default and devaluation were inevitable.

The underlying problem was that Argentina had accumulated too much doubt and it was caught in a vicious spiral in which it was forced to borrow more and more money just to meet its ever-increasing interest payments. Another problem was its currency regime adopted in 1991 that pegged the value of the peso to the US dollar. It worked well for some time. As the value of dollar soared in recent years (the US has so far borrowed $1.4 trillion — 70 per cent of the US federal budget to keep overvalued dollar from falling), peso’s value also went up making Argentine products uncompetitive on world markets and pushing the economy into recession which is now in its fourth year.

Economy Minister Domingo Cavallo refused to even discuss devaluation and default which after his and his government’s fall did come into play as the last resort to save the economy from sliding into total chaos — looting of shops had already begun.

Besides, since peso was pegged to dollar, monetising Argentinean debt was not an option. The only other option was to finance its debt by borrowing the money, either from its own people or from foreigners. And borrowing it did — up to a record figure of $132 billion — until last spring when lenders began demanding higher interest rates or simply refusing to lend at all.

Then came the hour when the US is notoriously known for abandoning its allies and friends when it becomes certain that they will never recover from the crisis they have landed in. By August, US treasury secretary Paul O’Neill made up his mind and advised the industrialized countries and the IMF to halt further lending to Argentina. Carallo begged the IMF for one more chance and got $8 billion loan package on harsh conditions. It proved to be too little and too late. On December 5, the IMF announced a suspension of all further lending and on December 18 declared a lack of confidence in the government of De la Rua.

In Argentina’s disaster, the IMF’s role was crucial and decisive. It arranged large loans, including $40 billion a year ago to support the peso. This was the IMF’s fatal error. Now the IMF clams that it had always been against the fixed exchange rate and large loans to support it — a turnabout the IMF is also known for after its policies had totally failed to work.

The IMF staffers had known for months, perhaps, years that peso-dollar parity could not be sustained. They could have offered Argentina guidance on how to escape from its monetary trap. Instead, the IMF officials — like mediaeval doctors who insisted on bleeding their patients and repeated the procedure when the bleeding made them sicker — prescribed austerity and still more austerity, right to the end.

Paul Krugman, a columnist of The New York Times holds the United States equally responsible for the crisis Argentina has landed in. “It is also a disaster for US foreign policy... Argentina’s economic policies had ‘Made in Washington’ stamped all over them... (but) how many Americans, even among the policy elite, understand this. The people who encouraged Argentina in its disastrous policy course are now busily rewriting history, blaming the victims.”

Larry Rohter of The New York Times thinks that what has happened to Argentina “is also a blow to the United States and the IMF which had invested much of their credibility and prestige here, yet proved unwilling to help when things began falling apart.” A well-known brokerage firm, BCP Securities, is of the view that it will end up as a very costly experience for the United States because it was “very clearly the treasury department that pushed Argentina over the edge and allowed it to collapse”.

What is astonishing is treasury secretary O’Neil’s indifference to Argentina’s predicament and his clumsy statement that “they’ve been off and on in trouble for 70 years or more ... Nobody forced them to be what they are” did help accelerate the loss of capital and confidence in Argentina.

A similar posture was adopted by President Bush (whose father was too eager to sell Argentina’s example to other Latin American countries) who found it convenient to overlook Washington’s earlier role and keep a distance from that country’s growing problems. Any desire on the part of the United States to help Argentina wriggle out of its current crisis is not in evidence. On the other hand, the US imposed high tariffs on Argentinean exports. As a result, the Argentines were operating in a vacuum without a clear sense of what the US was thinking to help them or what it expected of them to do.

Peru has publicly blamed the IMF for the crash of Argentina saying the Fund did not sound the alarm in time and when things began becoming difficult it took a very hard line. The IMF’s attitude only confirms to the rest of Latin America that the US is an undependable ally.

A lesson from this sorry episode is that the only way out for the countries which face the financial crises is to throw away the IMF “textbook of wisdom” and go on their way. Malaysia has done it. It imposed capital controls during the Asian crisis in defiance of the IMF advice while Hong Kong had nationalized large chunks of the stock exchange also against the IMF guidance. And the unorthodox remedies did work.