March 22, 2002
Nobel Prize winning economist Joseph Stiglitz said on Friday the International Monetary Fund (IMF) was repeating the mistakes it had made in East Asia in Argentina and would only exacerbate the country's economic downturn.
In an interview during a visit to Hanoi, the former World Bank chief economist said Argentina needed to concentrate on expanding output rather than trying to convince financial markets its problems were solved. "The worry, at this juncture, should not be inflation, the worry should be the continuing high level of unemployment and the social mess that gives rise to," he told Reuters.
Mr Stiglitz called the notion that underlay IMF strategy in Argentina — that if deficits could be got rid of, investor confidence would be restored — "a very risky strategy".
"Their continual use of contractionary policies that exacerbate economic downturns show that they have failed to learn the lessons of East Asia," he said. "They have made the same mistakes in Argentina."
"Their response to a country in recession is for it to cut back on its expenditures or to raise taxes. Any macro-economist will say cutting back on expenditures or raising taxes will deepen the economic downturn."
The IMF suspended aid to Argentina in December after it failed to control public spending. An IMF mission visited Argentina last week as a first step to potentially unlocking nearly $10 billion in aid after the country defaulted on part of its $141 billion public debt, devalued its currency and passed an austere 2002 budget. The mission concluded that Argentina had to do more to end overspending and to restore investor confidence.
Among reforms the IMF has said are needed are more efficient tax-collecting, a restoration of confidence in the banking system and equal treatment for foreign and domestic creditors.
Asked what path he thought should be followed in Argentina, Mr Stiglitz said: "I think the beginning of the analysis is to recognise that nothing Argentina will do in the short run will attract investors back. Almost inevitably, they will have a wait-and-see attitude."
Stiglitz said attempts to cut back expenditure or raise taxes were likely to lead to a reduction of tax revenues. "As people face increased povertisation and firms face bankruptcy, it will be more and more difficult to collect taxes and the fiscal position will actually get worse," he said. "So the focus of Argentina should be not in trying to persuade the capital markets that things are solved, the focus should be on how to increase output."
Mr Stiglitz said Russia had managed to restore economic growth and capital inflows by devaluation, despite an IMF view that its economy would not expand.
"Macro-mismanagement by the IMF had led to under-utilisation of resources and growth was only restored when the IMF plan was abandoned," he said. While Argentina's situation was different, in that it did not have the oil revenues Russia enjoyed, the nature of the Russian example was that "it didn't try to appeal the international markets", Mr Stiglitz said.
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