And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina

Equally disturbing was the severity of the economic downturn that beset the country following the government's default on the bulk of its debt and its decision to let the peso sink in early 2002. Like an engine that has seized up for lack of oil, the Argentine economy ground to a virtual halt, as additional restrictions on bank withdrawals led to a breakdown in the system by which people and businesses paid each other, and the bank credit that companies needed for day-to-day commerce dried up. National output shrank 11 percent in 2002, leaving nearly one quarter of the workforce unemployed and a majority of the population below the poverty line, even as prices soared for basic food items such as bread, noodles, and sugar. Average annual income per capita, which in the late 1990s peaked at $8,500—double Mexico's level—sank to $2,800 in 2002. Although that low level was attributable in substantial part to the 75 percent decline in the exchange rate of the peso against the dollar, it reflected the privation felt by millions whose living standards plummeted and personal savings withered in value.

The impact struck Argentines of every social class. One of the country's richest women was forced to auction off paintings by Gauguin, Degas, Miró, and Matisse. Members of the middle class became nervous wrecks over their lost nest eggs; in one widely publicized case, a fifty-nine-year-old woman who could not get her dollars out of her bank account walked into her bank, doused herself with rubbing alcohol, and set herself ablaze. Hardest hit, in general, were people on the bottom economic rungs. Among the most heart-rending tales were those of children suffering in rising numbers from malnutrition, and even dying from it—a shocking phenomenon in a country abounding with cattle ranches and wheat fields. Residents of fashionable Buenos Aires neighborhoods grew accustomed to averting their gaze when hordes of people called cartoneros would descend on their streets in the evening, ripping open plastic trash bags in search of anything saleable. In a grisly symbol of the nation's abasement, an overturned cattle truck outside the industrial city of Rosario in March 2002 attracted hundreds of shantytown residents wielding machetes and carving knives, who slaughtered and diced up twenty-two Angus steers on the freeway, then fought over bloody hunks of meat.

Argentina's downfall was especially painful for its citizens to bear—and for outsiders to behold—because during the 1990s the country had seemed at long last to be moving full steam toward its rightful place in the ranks of advanced nations. Argentina is the most Europeanized of Latin American countries, boasting the region's highest education levels and a throbbing intellectual and cultural pulse. The Continental influence is readily apparent to any Buenos Aires visitor who has strolled past the city's manicured parks, Beaux Arts buildings graced by balconies with wrought-iron railings, and bustling cafés that look as if they were transplanted from the Via Veneto or the Champs Elysées. The people of this proud land understandably thought they were leaving behind their history of squandered riches and destructive upheaval when, from 1991 to 1998, the economy grew at an average rate of 6 percent a year, reaching a total gross domestic product of nearly $300 billion, with almost no inflation. That performance marked a drastic departure from the stagnation, bouts of hyperinflation, and repeated currency devaluations that had afflicted Argentina since the mid-twentieth century. Thus the pain was all the more excruciating when these raised aspirations were dashed.

If Argentina's economic unraveling were an isolated case, it might be dismissed as a pitiable curiosity that has little bearing beyond the country's borders. But it came in the wake of financial crises that struck other fast-growing "emerging markets" such as Mexico, Thailand, Indonesia, South Korea, Russia, and Brazil. It offers a case study of a pernicious syndrome that global capitalism has manifested in recent years: A developing nation shows great promise by unleashing the forces of private enterprise; foreign capital streams in, generating an investment boom; amid the ensuing euphoria, the country's economy is puffed up to the point where serious vulnerabilities develop; an economic reversal degenerates into turmoil and panic; and finally, international rescue efforts fail or make a bad situation worse. A good analogy would be the membership process for an exclusive country club, in which hopeful applicants are given tremendous encouragement that they are meeting all of the strict criteria for joining, only to have the club door slammed in their faces and find themselves cast out on the street just as they are nearing the initiation rite. Think of the world's rich nations as the members of this club, and the emerging-market nations as the aspirants for membership who, one after the other, suffer this cruel setback. As an ugly example of the genre, Argentina presents an unsurpassed rise and fall, and the culpability of the international community—both the official and private sectors—is weighty. For believers in the power of globalization to raise living standards in the developing world (and I include myself among them), this dispiriting saga is an eye-opener to the need for systemic change.

Argentina prided itself on following free-market, economically orthodox policies during the 1990s. Few countries if any were so lionized for hewing to the "Washington Consensus," a sort of economic Ten Commandments prescribed by the IMF, the World Bank, and the U.S. government. Among the main elements of this recipe are the eradication of inflation, the privatization of industry, the deregulation of the economy, and the removal of trade barriers, all of which the Argentine government vigorously pursued. The Heritage Foundation, a conservative think tank that evaluates countries according to an "Index of Economic Freedom," rated Argentina in 1999 as tied with Chile for the best policies in Latin America, and almost equal to Australia and Taiwan. (The criteria include the degree of government intervention in the economy, respect for property rights, extent of black-market activity, and so on.) But having been a poster child for the Washington Consensus, Argentina is now a poster child for the growing disenchantment with the model in the developing world.

In the bankrupting of Argentina, the key events of which took place between 1996 and 2001, two sets of actors from abroad belong at the center of the drama—private market financiers and top international policymakers, the latter being principally at the IMF and the U.S. government, the Fund's dominant overseer. By putting human faces on these players, demystifying their operations, and chronicling their actions at critical junctures, I seek in this book to lay bare, in an accessible manner, the uncomfortable story of the international community's role in the Argentine debacle. It may seem obvious that Argentina, for all its own failings, was a victim of misfeasance, nonfeasance, and even malfeasance by foreign money interests, bureaucrats, and political figures. But only by going behind the scenes can the scale be truly appreciated and put in proper perspective. Thorough scrutiny of these events also helps pinpoint the factors that led Argentina over the cliff. Some of the recriminations that have been leveled in the wake of the country's collapse are offbase, and it is important to draw the right lessons from what went wrong.

One crucial (and often ignored) factor in the collapse is the modern system of globalized financial capital. This engine is remarkably powerful but volatile. Just as it would be unwise to put a fourteen-year-old behind the steering wheel of a Ferrari, newly developing economies are not always able to thrive for long with the wild ride of money moving freely across international borders. This is a facet of globalization about which economists harbor growing misgivings. It is one thing to open a country to foreign goods and to investment in factories by multinational firms. It is quite a different matter to open it to the giant flows of international finance, which can be expansive and buoyant during some periods, timorous and flighty in others. At a time when Argentina's indebtedness was mounting in the late 1990s, global markets lauded the country as a paragon of the developing world and poured money in, lulling the government into complacency. The IMF also overlooked Argentina's vulnerabilities, but even when the Fund tried to sound alarms, the markets' optimism rendered the Fund's concerns irrelevant. Nancy Birdsall, president of the Center for Global Development, has coined an apt phrase to describe how Argentina was treated: The country was "the spoiled child of the Washington Consensus."

Globalization is not supposed to work this way. According to globalization's most ardent boosters, international markets reward good, sound economic policies by steering capital to countries that practice them. The influence of the capital inflow makes the government even more disciplined, because policymakers know that otherwise investors may yank their money out. As Thomas Friedman put it in his book The Lexus and the Olive Tree, the "Electronic Herd"—the agglomeration of the world's investors—"can impose pressures [for good policy] that few governments can resist. It has a self-interest in doing so and it generates in others the self-interest to comply.... The Electronic Herd turns the whole world into a parliamentary system, in which every government lives under the fear of a no-confidence vote from the herd."

That's the theory. In practice, foreign funds numbed Argentine policymakers into minimizing the perils of their policies. The effect was similar to a dose of steroids, giving the economy a short-term boost while insidiously increasing the risk of breakdown in the long run.

Argentina was not a wholly innocent victim—far from it. Democratically elected and appointed Argentine officials made the decisions that led the country down the road to economic disaster. They spent more than they should have, taxed less than they should have, and borrowed more than they should have—all the while keeping a currency system that required much stricter fiscal discipline—because they wanted the political benefits they could accrue from these practices. But in putting their nation's economy on a collision course, they got plenty of help. Argentina will be paying the price for a long time, not only for its own mistakes but for the mistakes of the international community as well.

"It's like a nephew who becomes dependent on a very rich, doting uncle," said William McDonough, who was president of the Federal Reserve Bank of New York until 2003. "Suddenly the uncle dies and leaves the money to someone else, or decides he doesn't love the nephew anymore and cuts him off. You can ask, who's responsible—the uncle or the kid?"

For the markets, doting on Argentina was understandable to some extent, given the great strides the economy was making and the government's commitment to free-market reforms. But fueling the flow of money from abroad were forces that went well beyond the age-old phenomenon of irrational exuberance.

Upon close scrutiny, the conduct of the markets in Argentina is redolent of the scandals that rocked Wall Street following the bursting of the stock market bubble in the United States. Striking parallels can be seen between Argentina's crisis and some of the most notorious flameouts of recent years, such as Enron Corp., WorldCom Inc., and Global Crossing Ltd., in which major brokerage firms pumped up the companies' securities prices, issuing bullish forecasts that were later seen to be tainted by self-interest. In Argentina's case, though, the injured party was not a company or group of stockholders. It was South America's second-largest country, a nation of 38 million people.