Global Policy Forum

By Paul Krugman

Many people may think that Argentina's trouble is just another run-of-the-mill Latin American crisis. But in the eyes of much of the world, Argentina's economic policies had "made in Washington" stamped all over them.

The catastrophic failure of those policies is first and foremost a disaster for Argentines, but it is also a disaster for U.S. foreign policy. Here is how the story looks to Latin Americans.

Argentina, more than any other developing country, bought into the promises of U.S.-$ promoted "neoliberalism." (That's "liberal" as in free markets, not as in Ted Kennedy.) Tariffs were slashed, state enterprises were privatized, multinational corporations were welcomed, and the peso was pegged to the dollar. Wall Street cheered, and money poured in. For a while, free market economics seemed vindicated, and its advocates were not shy about claiming credit.

Then things began to fall apart. It was not surprising that the 1997 Asian financial crisis had repercussions in Latin America. At first, Argentina seemed less affected than its neighbors. But while Brazil bounced back, Argentina's recession just went on and on.

Argentina's slump had more to do with monetary policy than with free markets. But Argentines, understandably, can't be bothered with such fine distinctions, especially because Wall Street and Washington told them that free markets and hard money were inseparable.

Moreover, when the economy went sour, the International Monetary Fund - which much of the world, with considerable justification, views as a branch of the U.S. Treasury Department - was utterly unhelpful.

IMF staffers have known for months, perhaps years, that the peso-equals-dollar policy could not be sustained. And the IMF could have offered Argentina guidance on how to escape from its monetary trap, as well as political cover for Argentina's leaders as they did what had to be done.

Instead, IMF officials - like medieval 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.

Now Argentina is in utter chaos. Some observers are even likening it to the Weimar Republic. And Latin Americans do not regard the United States as an innocent bystander.

I am not sure 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.

Anyway, we Americans are notoriously bad at seeing ourselves as others see us. A recent Pew survey of "opinion leaders" found that 52 percent of the Americans think that their country is liked because it "does a lot of good," but only 21 percent of foreigners, and 12 percent of Latin Americans, agreed.

What happens next? The best hope for an Argentine turnaround was an orderly devaluation, in which the government reduced the dollar value of the peso and at the same time converted many dollar debts into pesos. But that now seems a remote prospect.

Instead, Argentina's new government - once it has one - will probably turn back the clock. It will impose exchange controls and import quotas, turning its back on world markets. Don't be surprised if it also returns to old-fashioned anti-American rhetoric.

And let me make a prediction: These retrograde policies will work, in the sense that they will produce a temporary improvement in the economic situation - just as similar policies did back in the 1930s. Turning your back on the world market is bad for long-run growth; Argentina's own history is the best proof. But, as John Maynard Keynes said, in the long run we are all dead. Back in April, George W. Bush touted the proposed Free Trade Area of the Americas as a major foreign policy goal, one that would "build an age of prosperity in a hemisphere of liberty." If that goal really was important, the United States has just suffered a major setback.

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