[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ARGENTINA'S ECONOMIC MELTDOWN:
CAUSES AND REMEDIES
=======================================================================
HEARINGS
BEFORE THE
SUBCOMMITTEE ON
INTERNATIONAL MONETARY POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 6; MARCH 5, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-52
U.S. GOVERNMENT PRINTING OFFICE
77-785 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on International Monetary Policy and Trade
DOUG BEREUTER, Nebraska, Chairman
DOUG OSE, California, Vice Chairman BERNARD SANDERS, Vermont
MARGE ROUKEMA, New Jersey MAXINE WATERS, California
RICHARD H. BAKER, Louisiana BARNEY FRANK, Massachusetts
MICHAEL N. CASTLE, Delaware MELVIN L. WATT, North Carolina
JIM RYUN, Kansas JULIA CARSON, Indiana
DONALD A. MANZULLO, Illinois BARBARA LEE, California
JUDY BIGGERT, Illinois PAUL E. KANJORSKI, Pennsylvania
MARK GREEN, Wisconsin BRAD SHERMAN, California
PATRICK J. TOOMEY, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
CHRISTOPHER SHAYS, Connecticut CAROLYN B. MALONEY, New York
GARY G. MILLER, California LUIS V. GUTIERREZ, Illinois
SHELLEY MOORE CAPITO, West Virginia KEN BENTSEN, Texas
MIKE FERGUSON, New Jersey
C O N T E N T S
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Page
Hearings held on:
February 6, 2002............................................. 1
March 5, 2002................................................ 31
Appendix
February 6, 2002............................................. 79
March 5, 2002................................................ 105
WITNESS
Wednesday, February 6, 2002
Taylor, Hon. John B., Under Secretary for International Affairs,
U.S.
Department of the Treasury..................................... 6
APPENDIX
Prepared statements:
Bereuter, Hon. Doug.......................................... 80
Oxley, Hon. Michael G........................................ 84
LaFalce, Hon. John J......................................... 85
Paul, Hon. Ron............................................... 86
Taylor, Hon. John B.......................................... 88
Additional Material Submitted for the Record
Bereuter, Hon. Doug:
CRS Report for Congress: The Argentine Financial Crisis: A
Chronology of Events....................................... 93
CRS Report for Congress: The Financial Crisis in Argentina... 99
WITNESSES
Tuesday, March 5, 2002
Bergsten, Dr. C. Fred, Director, Institute for International
Economics...................................................... 41
Hanke, Dr. Steve H., Professor of Applied Economics, Johns
Hopkins
University; President, Toronto Trust Argentina................. 47
Meltzer, Dr. Allan H., Professor of Political Economy, Carnegie
Mellon
University; Visiting Scholar, American Enterprise Institute.... 38
Weisbrot, Dr. Mark, Codirector, Center for Economic and Policy
Research, Washington, DC....................................... 44
APPENDIX
Prepared statements:
Bereuter, Hon. Doug.......................................... 106
Oxley, Hon. Michael G........................................ 109
Hanke, Dr. Steve H........................................... 129
Meltzer, Dr. Allan H......................................... 111
Weisbrot, Dr. Mark........................................... 118
Additional Material Submitted for the Record
Bereuter, Hon. Doug:
``Aid to Argentina: Strings Attached,'' Washington Post,
March 5, 2002.............................................. 158
Page
Hanke, Dr. Steve H.:
Currency Boards, Annals of the American Adademy, January,
2002....................................................... 139
Meltzer, Dr. Allan H.:
Additional written comments to Hon. Barney Frank............. 115
``A Solution for Argentina,'' Financial Times, January 24,
2002....................................................... 117
ARGENTINA'S ECONOMIC MELTDOWN: CAUSES AND REMEDIES
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WEDNESDAY, FEBRUARY 6, 2002,
U.S. House of Representatives,
Subcommittee on International Monetary
Policy and Trade,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
room 2220, Rayburn House Office Building, Hon. Doug Bereuter,
[chairman of the subcommittee], presiding.
Present: Chairman Bereuter: Representatives Toomey, Capito,
Ferguson, Frank, C. Maloney of New York, Carson, Sherman and
Sanders.
Chairman Bereuter. The hearing will come to order. I
apologize for the cramped conditions of the room, but our major
hearing room is under renovation at the moment. We'll follow
the normal Committee rules with respect to the Ranking Member
and this Member and limiting us to 5-minute opening statement
and other Members who might appear 3 minutes. We have many
conflicts, including some mandatory conferences going on right
now.
In any case, the Subcommittee on International Monetary
Policy and Trade meets today in open session to examine the
financial crisis in Argentina, including the activities of the
International Monetary Fund (IMF) within this country. The
subcommittee will hear from the Under Secretary of the
Department of the Treasury for International Affairs, Dr. John
Taylor, on the subject of Argentina, as the Department of the
Treasury is responsible for implementing U.S. policy toward the
IMF.
The subcommittee has jurisdiction, of course, over
international monetary policy generally and the United States'
participation in the IMF, both of which are relevant to today's
hearing. This is the first hearing under my Chairmanship of
this subcommittee which addresses the activities of the IMF as
it relates to a particular country. Last year, the subcommittee
focused on the regional multilateral development institutions
and the Export-Import Bank.
At the outset, I would like to convey to the subcommittee
Members the sensitive nature of the political and economic
situation in Argentina. For this reason, I would urge the
Members to not focus on the internal workings of the Argentine
government, but to instead focus on the Argentine policies
which are relevant to any future IMF or U.S. assistance to the
country.
Before introducing our distinguished witness, I would like
to remark upon the overall fiscal situation in Argentina. At
each subcommittee Member's desk, the following two products are
found. The Congressional Research Service has provided, at my
request, a chronology of events in Argentina and a recent CRS
report on the Argentine financial crisis.
[The information referred to can be found on page 93 in the
appendix.]
The focus of today's hearing is as follows:
1. Recent Argentine political and economic history.
2. The recent economic plan supported by the Argentine
government on February 3, 2002.
3. The recent role of the IMF in Argentina.
4. The recommendations of the Meltzer Commission and its
dissenting views as it relates to the IMF preconditionality
criteria for Argentina; and five--and I'll do this by unanimous
consent----
5. Extending my remarks, some of my own views about the
IMF. Because of the limited time, I ask unanimous consent that
I may extend my entire statement into the record.
Without objection, that will be the order.
First, in order to understand the current economic and
political turmoil in Argentina, it's necessary to review recent
Argentine history. In 1991, the Argentine government
established a currency board to set the peso's value on a one-
to-one peg with the U.S. dollar in order to curb
hyperinflation. However, because the value of the dollar
appreciated over the past 10 years, it became increasingly
difficult for Argentina to export its products. As a result, in
1998, Argentina began to fall into a deep recession. At least
that was part of the reason. By the end of 2001, Argentina had
a total debt of approximately $132 billion.
Furthermore, on November 30, 2001, President de la Rua of
Argentina imposed a $1,000 per month limitation on personal
bank withdrawals. As a result of this restriction and other
austerity changes in the Argentine government, violent protests
broke out and President de la Rua was forced out of office on
December 20 of last year. Over the next ten days, there were
four different presidents of Argentina, including Mr. Eduardo
Duhalde, who is currently in power.
When Mr. Duhalde took over as President, he implemented
immediate economic reforms. He announced the end of the
currency board with its peg to the dollar and his plan for the
devaluation of the peso. President Duhalde implemented a dual
exchange rate in which the peso was floated for financial
transactions and fixed the ratio at a 1.4 pesos to the dollar
for foreign trade and certain other transactions. He also
continued the freeze of bank deposits in dollars over certain
thresholds.
Second, on Sunday, February 3rd, 2002, the Argentine
government came forth with a new economic plan, which would
completely free float the local peso currency and loosen an
unpopular freeze on bank accounts. This new economic plan was
in part a response to the decision of the Argentine Supreme
Court which declared the current freeze on bank deposits to be
unconstitutional. To further illustrate the current political
and economic instability in Argentina, their Congress is
considering impeaching the judges who rendered the decision.
Furthermore, the Argentine government on February 3
announced it would turn all dollar debts into pesos at a rate
of one-to-one. This change would help debtors pay back their
loans since it will reduce the value of their debt
substantially because the floating value of the local peso is
at a volatile actual market rate of around two pesos per
dollar. However, both the creditors and the banks will suffer
losses because of the pesofication of debt. Furthermore, this
economic plan also turns all dollar deposits into local pesos
at a rate of 1.4 to the dollar. This devaluation of deposits
has angered middle class demonstrators, of course, because of
their loss in savings.
Argentina declared a bank and foreign exchange rate holiday
on Monday and Tuesday of this week to prepare for the new
economic measures. The effectiveness and political
ramifications of these reforms remain an open question.
I ask unanimous consent, in order just to cover the
background, that both the Ranking Member and I have 2
additional minutes of the normal Committee rules. Without
objection. Thank you.
Moving on, third, it's important to note that Argentina has
received extensive assistance from the IMF over the past years.
For example, in March 2000, the IMF agreed to a 3-year, $7.2
billion arrangement with Argentina. Moreover, in January 2001,
the IMF augmented its earlier agreement by pledging another $7
billion for it as part of a larger $40 billion assistance
package which involves the Inter-American Development Bank, the
World Bank, Spain, and private lenders. However, due to the
fiscal instability in Argentina, the IMF withheld its $1.24
billion loan installment on December 5 of last year.
Fourth, the concept of preconditionality for IMF assistance
was endorsed by the majority report of the Meltzer Commission--
a controversial recommendation. I take particular interest in
the Meltzer Commission, because I'm the father of that
legislative language which ended up in an Omnibus
Appropriations Act in 1979.
This Commission, which completed its work in March of 2000,
was charged with studying the future of the IMF, the World
Bank, and the regional multilateral development banks. I would
encourage Members and their staff to review both the majority
report and the dissenting views of the Meltzer Commission, as I
find them very instructive regarding this controversial
recommendation.
With respect to the preconditionality for IMF assistance,
it appears from press reports that both the IMF and Secretary
of the Treasury Paul O'Neill support some form of IMF
preconditionality as it relates to Argentina. Examples of
preconditionality include the free-floating of the local
Argentine peso and the reduction of deficit spending. I do see,
of course, merits of a country having a sound economic
structure in place before receiving IMF assistance.
With that background information in mind, I'd like to
introduce Dr. John Taylor, the Under Secretary of the Treasury
for International Affairs, who will, I am sure, assist the
subcommittee in examining these important issues. Dr. Taylor
has a very distinguished academic and professional record. He
received his undergraduate degree from Princeton University and
his Ph.D. from Stanford University. He's taught economics at
Columbia, Yale, Princeton and Stanford University. He has also
directed the Monetary Policy Research Program at the Stanford
Institute for Economic Policy Research. In addition to these
academic positions, Dr. Taylor was a member of the President's
Council of Economic Advisers during the Administration of
President George Herbert Walker Bush. Moreover, he has also
served in the private sector as an analyst for Alan Greenspan's
Wall Street firm, Townsend-Greenspan, in the late 1970s and
early 1980s.
Dr. Taylor, we welcome you to these hearings, your first
appearance before a subcommittee. And before we move to you,
I'd like to turn to the Ranking Member of the Minority, the
gentleman from Vermont, Mr. Sanders, for 7 minutes if he'd care
to use them.
[The prepared statement of Hon. Doug Bereuter can be found
on page 80 in the appendix.]
Mr. Sanders. Thank you, Mr. Chairman, and welcome, Dr.
Taylor. I think we all know that Argentina today is in a major
financial crisis. Unemployment is about 17 percent. The economy
is in its fourth year of recession, and the country is now in
the process of defaulting on its foreign debt.
I am sure that there is a lot of blame to be spread around
regarding the Argentine financial crisis. Generally speaking,
it is not our job to try to get involved in the internal
financial crises of countries all over the world. My interest,
and what I think is relevant to this subcommittee is that we
are the international financial organizations subcommittee,
which deals among other things with the IMF. So what interests
me is what role the IMF may or may not have played in
precipitating or expanding the crisis that exists in Argentina.
And obviously there are a lot of differences of opinion about
that.
Let me just quote, if I might, from an article that
appeared in the American Prospect by Robert Kuttner, an
economist from Massachusetts. And he says, and I quote:
``Argentina followed the IMF model faithfully, more faithfully,
than almost any other nation. Its economy was opened wide. Its
peso was pegged to the dollar. For a few years this sparked an
investment boom as foreigners bought most of the country's
patrimony--its banks, phone companies, gas, water, electricity,
railroads, airlines, airports, postal service, even its
subways. As long as this money came in, there were enough
dollars to keep plenty of pesos in circulation. But the dollar-
to-peso peg led to an overvalued currency which killed
Argentine exports, and once there was little more to sell off,
the dollars ceased coming in, which pulled money out of local
circulation. As Argentina tanked, the IMF's austerity program
pushed the economy further into collapse.''
There was another op ed that appeared in the San Francisco
Examiner about 2 years ago, which indicated that about 2 years
ago, Argentina signed a technical memorandum of understanding
with the IMF which required Argentina to cut its budget, slice
civil services salaries by 15 percent, and cut pensions by 13
percent. If Argentina followed this program, the IMF argued,
their production would increase by 3.7 percent. Instead,
production fell by 2.1 percent. It has now dropped off the
charts.
In other words--and I won't go into great detail--while in
general it is not our business to worry about the internal
affairs of Argentina, Brazil, Colombia or any other country,
what should interest us is that the role the IMF has played not
only obviously in Argentina, but in countries around the world.
And some of us for many years have had a great deal of concern
about that.
So I, Mr. Chairman, would yield back the balance of my
time. And Dr. Taylor, I would appreciate in your remarks if you
might want to say a few words about the role of the IMF.
Chairman Bereuter. Thank you very much, Mr. Sanders. I ask
unanimous consent that the other Members now in attendance have
5 minutes instead of the usual 3 under Committee rules if they
care to use it. And then for people coming in after this point,
we'll revert to the normal 3 minutes if they wish to be heard.
The gentleman from Pennsylvania, Mr. Toomey.
Mr. Toomey. Thank you, Mr. Chairman. In the interest of
hearing from Mr. Taylor sooner rather than later, I will yield
back the balance of my time and wait to have a chance to ask
some questions.
Chairman Bereuter. Thank you, Mr. Toomey.
Mr. Frank, the gentleman from Massachusetts.
Mr. Frank. Mr. Chairman, this is a very important hearing
and I appreciate your having it and I appreciate Dr. Taylor
being here. Obviously we've got a short-term crisis in terms of
the violence that was aimed at us, and dealing with that
violence is going to take a lot of our energies. But there is
an ongoing fundamental public policy issue that we have to
address of which this hearing is a part. And it is the question
of how do you promote policies in the world that increase
prosperity without so exacerbating inequality that social
tensions reach the point where it interferes with progress?
We've got a worldwide consensus that capitalism is without
question the best way to generate wealth. There was a few years
ago a consensus that said in addition to a capitalist system,
you needed to make that work by a very minimalist public sector
approach. And that I think has been called into question by
events. When Franklin Roosevelt became President, he made the
decision to try to preserve the capitalist system. There were
some hems and haws in how he ultimately decided to do that. But
the notion was that we would have the capitalist system plus a
Government role involving some regulation and some intervention
to provide social equity.
Our challenge today is to try and duplicate that kind of
approach on the global scale. Now it's extremely harder. You're
not dealing with one sovereignty. But it's the same kind of
intellectual problem. How do you give full rein to the
capitalist system, which after all depends on inequality to
work, if you do not have people unequally rewarded according to
how hard they work, how smart they invest, how cunningly they
anticipate public needs, and so forth? Then you don't get the
wealth creation. What I believe and many others, and I think
this was what Franklin Roosevelt argued, there is a point
beyond which the inequality can become dysfunctional. That it
can be more than is necessary to give the proper incentives.
There is also a need for some forms of regulation.
A few years ago it seemed to me we were close to a
consensus among policymakers that essentially all you needed to
do was to remove the restrictions on capital and let capital
find its most profitable niche anywhere in the world, and we
would be, on the whole, better off. I think that that has been
disproven by a good number of events. Clearly, the thrust of
the New Deal was to say, yes, we want capital to be able to
find its best area of return, but not without other factors
being taken into account. Again, it's much harder to do that
internationally.
Argentina for a while was an example of the success of a
fairly unrestrained capitalism. And what we have seen now is
that in the global economy, that is not enough. And this is the
point we have to make--no matter what people think about the
appropriate public policy, there is a reaction now within
Argentina politically to people have perceived to be that
fairly unrestrained capitalist model that may be going further
than is reasonable. Certainly, it's going further than is
reasonable in many people's minds. And you see these
connections. This Administration has made a free trade
agreement for the Americas a high priority. That's endangered
in part by the political reaction you are seeing in Argentina.
So this, to me, is part of an ongoing effort to try to find
a way to harmonize support for the capitalist system with
attention to the kind of policy issues that Franklin Roosevelt
successfully launched here in the United States. And unless we
can come up with a better balance, I think we will continue to
have these problems. I would just point out I was encouraged to
see in the world economic forum in New York City, at least as
it was reported to me--I wasn't there--the discussion was
somewhat different and I would say more balanced than it had
been before. There was more concern about the social aspect.
And this is our challenge: How do you maintain globally a
system in which capital is free to do its job of creating
wealth, but not in a way that so exacerbates tensions and
inequality either within countries or between countries where,
ultimately, popular resistance will bring it down?
Chairman Bereuter. Thank you, Mr. Frank.
The gentlelady from West Virginia, Ms. Capito.
Ms. Capito. Thank you. I don't have an opening statement.
Chairman Bereuter. Thank you very much. For the information
of the subcommittee and others interested, we will be holding
the next round of hearings on the subject on March 5th. We will
have private witnesses and perhaps other Administration
testimony as well.
Dr. Taylor, Mr. Secretary, we welcome you, as I said, to
the subcommittee for your first appearance here. Your entire
statement will be made a part of the record. I am not imposing
any time limits on your comments, your presentation, because I
want you to deal with it as thoroughly as you feel comfortable.
Thank you. You may proceed as you wish.
STATEMENT OF HON. JOHN TAYLOR, UNDER SECRETARY FOR
INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY
Mr. Taylor. Thank you very much, Mr. Chairman, Mr. Sanders
and other Members of the Committee for inviting me to this
hearing on a very important topic--the economic situation in
Argentina.
Let me first say that what's quite clear is that the people
of Argentina are facing extremely difficult and trying times.
And as President Bush has made very clear, Argentina is a close
friend and a close ally, a country that we're interested in
supporting. We want Argentina to succeed economically, become
an engine of economic growth for its people and for the whole
hemisphere.
In my written testimony, Mr. Chairman, which I would like
to put in the record, I reviewed recent events in Argentina, a
description of the IMF program and what U.S. policy has been
not only regarding Argentina, Latin America, but emerging
markets in general.
In my oral remarks here I'd like to focus on the events in
Argentina itself. I think it's very useful to go back, as you
did, Mr. Chairman, in your opening remarks, to the early 1990s
when the government of Argentina took on a series of very
important economic reforms. Perhaps most visible and effective
is the one you referred to. That is, the conversion of monetary
policy to what was formerly a highly inflationary policy
leading to inflation of over 3,000 percent per year, so-called
hyperinflation, changing that policy to a convertibility law,
which not only pegged the peso one-to-one with the dollar, but
limited the amount of money creation that the Central Bank
could generate. That in itself was a major shift in policy.
There was also a move to fiscal policy which led to better
control, if you like, to more fiscal discipline in the
privatization program that Mr. Sanders referred to in his
remarks. I also think it's important to note that there was
removal of barriers to trade and international investment.
If you look at the effects of these reforms, I think
there's no question that they were quite impressive and
remarkable. Of course, the hyperinflation ended, to many
people's amazement, very quickly, from over 3,000 percent to
nearly zero in short order.
There was also an increase in economic growth from
negligible amounts in the 1980s, near zero, slightly negative,
to growth over 4 percent in the early 1990s and into the mid-
1990s. Investment in exports grew remarkably rapidly during
this period. That is, through the 1990s.
I think when you evaluate the impact of economic reforms,
it's very important to pay attention to the response of these
market-oriented reforms, as I've just indicated.
As I look at the situation, the policies began to change in
the mid- to late 1990s. And also there were a series of
external shocks that affected the economy. The thing that I
focus on is that the government budget deficits began to
increase quite noticeably, an indication of a waning of fiscal
discipline if you like. That caused the debt to begin to rise
more rapidly. It began to raise concerns about sustainability
of the debt. Risk premium began to rise, and of course higher
risk premium means higher interest rates, which in turn, tends
to reduce economic growth.
This increase in debt itself was compounded by several
other problems. One, a persistent deflation which continued
into the late 1990s into 2000 and 2001; a depreciation of
currencies that Argentina trades with, in particular countries
in Europe and Brazil, which led to less competitiveness in the
Argentine economy.
I think it's also important to note that expectations,
persistent expectations of depreciation of the peso, even in
the face of the convertibility law where the Currency Board
created interest rates in Argentina higher than they would
otherwise be. In particular, peso interest rates higher than
dollar interest rates. That, in turn, tended to reduce economic
growth, as anyone can see in any other country.
These difficulties of low growth, of growing debt, high
interest rates, continued right through last year and
culminated at the end of last year in the events which really
brings us here today.
It became increasingly clear to the government of Argentina
and to private participants in the markets, that efforts to
adjust the budget were just not working. Economic growth was
not increasing. And therefore, it became clear that the debt
profile was becoming unsustainable to a greater degree over
time. And that's why last fall the president of Argentina at
that time, President de la Rua, decided that he would
restructure the government debt to bring the debt burden down
to more manageable levels. Very significant announcement at the
time.
However, as that restructuring was underway, because there
had been so few restructurings of sovereign debt over time,
there's always a great deal of unpredictability over how it
will proceed and delays. In any case, as that restructuring was
proceeding, uncertainty about its impacts began to develop, in
particular uncertain about its impacts on the banks which had
held some of that debt. This uncertainty began to lead to large
deposit withdrawals. People in Argentina would be withdrawing
their deposits from the banks. And in order to stop these
withdrawals, the de la Rua government decided to impose
restrictions on those withdrawals from the banks.
Soon after these restrictions were imposed, we began to see
the social and political protests which unfortunately turned
violent, and President de la Rua then resigned.
If you think of where we are right now, it's clear the
economic circumstances in Argentina have deteriorated since the
imposition of these restrictions on deposit withdrawals. Right
now there's a lack of a functioning payment system, which
brings economic activity to a near halt. There's a shortage of
liquidity because people are restricted in how much they can
bring out of the banking system.
What we see now, however, is Argentina is beginning to find
ways to remove these restrictions and to restore liquidity. It
announced last Sunday the outlines of an economic plan to
gradually remove the restrictions, to float the peso, which
will allow the Central Bank to provide more liquidity. They've
announced that the amount of liquidity provided will be limited
to a certain amount, thereby constraining the inflationary
forces that could otherwise be created by the provision of
liquidity, and I think through these measures will effectively
be freeing up the payment system so that economic activity can
begin again.
The government of Argentina has just given the outlines of
a broader plan with changes in the revenue sharing agreements
with the provinces, changes in the tax system. And those
changes also must be made if Argentina is to grow again.
Economic growth is the most essential thing for the Argentine
economy, for the people of Argentina. And I think we're
encouraged that the steps have been taken. In fact, Secretary
O'Neill just said earlier this week that he's very encouraged,
and I certainly endorse this, that Argentina is beginning to
take substantive steps to address these economic problems.
So I'd like to leave it at that, Mr. Chairman, in my
opening remarks and take questions as you and the other Members
see fit. Thank you very much.
[The prepared statement of Hon. John B. Taylor can be found
on page 88 in the appendix.]
Chairman Bereuter. I thank you very much, Secretary Taylor.
We will now proceed under the 5-minute rule and perhaps we'll
have an opportunity for a second round of questions too if we
don't have many more Members attending.
We have such incredible levels of social and economic
agitation today in Argentina that one has to wonder if the
prescriptions that might be recommended by the IMF, whether or
not they're the correct prescriptions, can be swallowed. And it
certainly is a very difficult situation for the President and
for the Congress and the other governmental institutions.
I'd like you to comment on three items if you could. One,
to what extent do you think that the external factor of the
Brazilian devaluation was a major factor in the problems that
Argentina faces, especially in light of their membership in
MERCOSUR with Uruguay?
Second, what do you have to say about the dollar-to-peso
peg and the length of time in which it was put in place, given
the accelerated value of the dollar? Hong Kong, of course, has
a direct peg, too. And although people have tried to break it,
they've not been successful. But then Hong Kong has fiscal
discipline and more than $90 billion in reserves.
And finally, at least, I would like to start you down a
path if you have time to talk about the recommendations of
preconditionality for IMF assistance to a country as
recommended by the Meltzer Commission, but strongly objected to
by the minority opinion.
Mr. Taylor. Thank you very much, Mr. Chairman. With respect
to your first question, the effects of the depreciation of the
Brazilian currency, and for that matter, the depreciation of
the euro relative to the dollar, I think these were certainly
factors in preventing Argentina from growing more rapidly in
the last 2 or 3 years. It is not the only factor.
Argentina is, at this point in time, not as open as one may
think in the sense of the fraction of exports, the GDP is
relatively low. It's not much different than the United States,
in fact. It's not nearly as important for the overall economy
as other small open economies in Latin America.
So I think it's important to look at other factors in
addition to the depreciation of the real and the euro here. And
to me, those are the higher interest rates generated by
basically expectations of depreciation of the peso, which
generated higher interest rates in Argentina.
And I think also these changes in policy which I referred
to, basically a movement back away from reforms where the
deficits were beginning to increase again and raising questions
about debt sustainability, I think that policy shift maybe not
so noticeable at the time, certainly not as noticeable as the
remarkable change that occurred in the early 1990s, but a
gradual shift away from those things, the fiscal discipline,
the move toward privatization, and so forth. I think that also
is an important part of the growth slowdown and negative
growth.
Taxes have to be favorable for economic growth. The tax
system in Argentina is not as favorable as it could be. So I
would add all those other reasons to the depreciation itself.
With respect to the dollar-peso peg itself, I always say
when I talk about this that that provided an enormous degree of
stability to the Argentine economy because it ended the
hyperinflation. In fact, it was a very popular law among
Argentine people, because of the end of the hyperinflation
which has very painful memories in most people's minds.
There's no exchange rate system, however, which works
perfectly in all dimensions. And pegs, even very strong pegs,
have the disadvantage of not allowing changes in the exchange
rate. And sometimes it's better if those occur. I am of the
view that if you have pegs, they should be as strong as
possible. For example, the European Union effectively has pegs
for the countries in that union. It's very strong and
effective. Greece is joining the European Monetary Union,
thereby pegging its currency in a more or less permanent way
with the euro. Those are very strong, very credible, and don't
have the difficulties of credibility that other kinds of pegs
do. So the interest rates in Greece will converge very quickly
to interest rates in the rest of Europe. That did not happen in
Argentina. Interest rates in Argentina, the peso interest
rates, were generally higher than dollar interest rates because
of the possibility of depreciation or devaluation.
I think at this point in time, the Argentines have chosen
to have a flexible exchange rate. They recognize that that
means there will have to be other ways to contain inflation.
And they have outlined a program whereby the Central Bank will
limit its increase in money growth. And I think that's going to
be very essential to keep inflation low, even without the
convertibility law. What would be very pleasing I'm sure for
the Argentine people and I know for economic growth if
inflation ultimately can be at the very low levels that it was
in the early 1990s after the end of the hyperinflation, and no
different from levels in Chile, Brazil, which are coming down
still, and for that matter, the United States.
The third question you raise about the preconditions. I
think that is a very important issue. This Administration has
emphasized prior actions or preconditions in many times, many
programs already. Terminologies differ. I think the basic
concept that you're referring to is that a country before it
starts into a program takes actions which are in place and will
not only make the likelihood of the program continuing greater,
but will increase economic growth. And there was a program in
Turkey that was developed during the course of last year,
actually voted on early this week at the IMF. That program in
many respects at Secretary O'Neill's urging, the U.S.
Government's urging, contained I think more prior actions than
many other programs. And that has been very accepted positive
by the Turkish government, and they have made changes. For
example, changes in the banking law, changes in privatization.
And I think the more we can have changes up front, the more
we can limit the amount of conditions that have to be monitored
as you go through time, I think the more effective the programs
would be.
So the general concept of prior actions I think makes a lot
of sense, and we'll be trying to work with the IMF to have as
much of that as possible.
Chairman Bereuter. Of course, Argentina was in the midst of
a plan, so that's a little bit different than the application
of preconditionality.
Mr. Taylor. Yes.
Chairman Bereuter. But I'll come back to that later. I'd
like to turn to the gentleman from Vermont, the Ranking Member,
for his comments and questions.
Mr. Sanders. Thank you, Mr. Chairman.
Dr. Taylor, I think it's no secret to you that many people
in the developing world and some of us in the United States
have the feeling that the IMF to a large degree represents the
interests of large and powerful multinational corporations and
does not serve the poorest people of the world well. A lot of
people hold that feeling. I share that feeling.
I want to, if I can, combine three questions to you and see
if you can respond to them. And it deals in fact with the role
of the IMF in Argentina. The Argentine government pegged its
currency to the dollar in 1991. Approximately how much money
did the government borrow from the IMF, either directly or
through packages arranged with the help of the IMF from that
point on? So number one, first question is, what kind of
economic relationships existed between the IMF and Argentina?
And I start off with the assumption, which is no great secret,
that the United States is the 2000 pound gorilla within the
IMF. We have veto power, and that reflects back on the policies
that our Government develops. That's question one.
Question two, it now seems to be recognized by the vast
majority of economists that this decision of pegging the peso
to the dollar was a fatal mistake and explains much of the
recent meltdown. Should the IMF accept responsibility for this
mistake since it supported the fixed exchange rate for years
with tens of billions of dollars of loans? And then again, and
obviously this was also before your time, and what about the
role of the U.S. Treasury in urging the IMF forward on that
policy?
Third, the IMF now claims, as I understand it, that it was
against the fixed exchange rate regime all along. There is no
written record of either the IMF or Treasury trying to persuade
Argentina to abandon the peg. Can you think of any other
country to which the IMF continued to loan and arrange loans
for very large amounts of money to support a policy that the
Fund thought was wrong and which if wrong could lead to
economic disaster? In other words, they're saying now they made
a mistake, but most of us when we look back on the IMF, the IMF
doesn't lend money to countries who are not following their
dictates. To clarify, we are not talking about a country
missing its targets for the money supply or running a central
government budget deficit bigger than what it committed to. In
other words, the issue here is, to what degree should we hold
responsible, understanding that the Argentines themselves of
course deserve a great deal of the responsibility, but this
Committee deals not with the internal workings of Argentina,
but with the IMF and Treasury's role within the IMF.
So those are some of the questions that I would like to
address to you and appreciate your response.
Mr. Taylor. OK. Thank you very much. The IMF programs that
are currently actually in play, but they're in suspension if
you like after December, really got started in March of 2000,
the current program, if you like.
Mr. Sanders. If I may interrupt you. The original programs
go back a lot earlier.
Mr. Taylor. Yes. Many programs, there was loans. The loans
were repaid back, and basically I can go through all the loans
that were made and then paid back, but would you like me to----
Mr. Sanders. Can we stay on the issue of the pegging of the
dollar to the peso, which began in 1991? It's hard for me to
believe that that was not supported, despite what the IMF may
be saying today, by the IMF at that time. Could you comment on
that?
Mr. Taylor. Right. There were programs at that time. The
programs in the early 1990s, and there were loans made, loans
paid back, loans made, loans paid back. And what I can do is
get you the actual details of where all those stand exactly to
the dollar amount if you'd like. But, there were certainly--
there were programs that go back a long period of time with the
IMF, IMF programs.
Mr. Sanders. But, the simple question--and I would
appreciate that if you could get it to me as soon as you
could----
Mr. Taylor. Yes.
Mr. Sanders. But, the question is, if I am the IMF and I'm
going to lend you money, and I say I'm not going to lend you
money for fun. I want you to follow my policies. One of the
policies I want you to do is to peg the dollar to the peso. Now
in 2002, it doesn't look like such a good idea. And then I
said, well, actually, that wasn't my idea in the first place.
What's the story?
Mr. Taylor. Well, I'm not sure where the changes of opinion
you're hearing about are coming from. But let me just say, and
try to answer your question in this way, the views about
exchange rates, about pegs, about floating, about
dollarization, about single currencies, amongst economists,
amongst the private sector, evolve over time. And until the
Asian financial crisis, there were many more pegs around the
world than there are now. And I think partly as a result of
that crisis, but partly as a result of other factors, there's
been a move away from pegs of the kind that we've seen that are
unsustainable.
But there's been a movement away in two directions. One
direction is toward flexible exchange rates, as Brazil has
recently undertaken, that Chile undertook before that. Mexico
is following that kind of a policy. The movement away from
pegged rates toward flexible rates. And those moves always
require that the country adopt a monetary policy that focuses
on keeping inflation low. So if you'll notice, each of those
countries have some kind of an inflation-oriented price
stability program associated with it.
The other move is toward, if you like, harder pegs. That's
like dollarization is used in Ecuador. Greece joined in the
European Monetary Union. Pegs which are viewed as more
sustainable, that don't have the threat of causing expectations
of depreciation.
I think that movement is correct. And I believe either
direction is correct away from this middle ground which has
caused so much difficulty.
I think that the IMF, from what I understand from what I
understand of their staff, is in agreement with that basic
philosophy. That the pegs in the middle here have led to
difficulties. And one other recent example of this is Turkey.
Turkey's IMF program started with a peg and it fell apart in
the middle, and now they're in a flexible system, and I think
many people think that that's working better. That doesn't mean
that dollarization or single currencies is a bad idea. On the
contrary, in many respects it's a good idea. What it means is
these pegs in the middle are bad.
So I really can't answer your questions about shifts in the
IMF's view or saying that their view was different three weeks
ago or four weeks ago from what it is now. I do know--I'll
maybe finish my answer with this--that what the U.S. Government
feels is that an exchange rate decision by a country is one
that is very important to emphasize the country's ownership of
that. Exchange rate systems involve history of the country,
involve politics, really the inner workings of a country more
so perhaps than many other policies, but certainly a policy
where ownership is important.
So what we have said in our policy about exchange rates is
that's a decision for the country. And in terms of which works,
I think my view here about the ends of the spectrum are the
ones that tend to work and the ones in the middle----
Mr. Sanders. Can I ask one great big last question?
Chairman Bereuter. I ask unanimous consent that the
gentleman have an additional minute. Is there objection?
Hearing none, the gentleman may proceed.
Mr. Sanders. Thank you, Mr. Chairman.
In your view, what role did the IMF austerity program on
Argentina have to bring about the current crisis?
Mr. Taylor. I think that the IMF has over this period of
time tried to give recommendations to Argentina to get their
economy growing again. I think there's many things an economy
can do to increase growth. But to me, it's basically lower
taxes, a more efficient tax system, if you like, tax reform.
Mr. Sanders. You're not asking the question, sir. The
austerity program imposed by the IMF in causing the current
crisis. Austerity program meaning cutting budgets and so forth.
Mr. Taylor. I would not characterize the IMF's program that
they worked out with Argentina as an austerity program.
Mr. Sanders. There are some who would respectfully disagree
with you on that point.
Mr. Taylor. Of course. I know that, sir. But it seems to me
that what the IMF wanted to do was work with Argentina to find
a way to get their economy stable. In fact, it was the
Argentine government this year that decided to move toward the
zero deficit law, which I think in the terms that you're
talking about would be classified as quite austere.
Mr. Sanders. I should think so.
Mr. Taylor. And they did that because they wanted to
continue with the program and not begin to restructure their
debt. That was the decision that they made in the summer. That
turned out not to be sustainable, and they're off of that
program. Now the new government announced I believe yesterday a
program where there would be a deficit for the year 2002.
Mr. Sanders. Thank you very much.
Chairman Bereuter. Thank you, Mr. Sanders.
I want to call Members' attention to the CRS report before
us, January 14th. On page 5, you'll see that the record of the
IMF lending to Argentina traces back to 1986 and the repayment.
Your staff may look at that to see if you agree with that. You
may not have to send information. This is from the IMF website.
The gentleman from Pennsylvania, Mr. Toomey, is recognized.
Mr. Toomey. Thank you, Mr. Chairman. It seems to me what's
vitally important for an economy is that there be a medium of
exchange in which all players can have confidence. Borrowers,
lenders, consumers, everybody can have confidence that the
value will remain roughly constant and that there not be
excessive inflation or deflation, and therefore a credible
peg--and I think that's an important distinction that you
made--can serve that goal very, very well. And there are
examples, many, in which it does.
And in fact it strikes me that contrary to the notion that
the peg was the cause of the economic problems, it seems to me
this is a very clear example of where free market, classic or
liberal economics were working extremely well. From the
history, as I understand it, and correct me please if I'm
wrong, but having established in the early 1990s a solid
currency in which investors and borrowers and others could have
confidence, imposing fiscal discipline on the part of the
government, lowering trade barriers and privatizing government
entities, generated tremendous economic growth and prosperity
and income growth and job growth and trade and so on.
And in fact, it was when the government lost that
discipline on the spending side and started incurring an
unsustainable level of debt that the problems began to occur.
Do you believe that the excessive level of government spending
and therefore debt contributed more to the economic decline in
Argentina than the fact that they chose to peg their currency
to the dollar?
Mr. Taylor. Yes I do, Mr. Toomey. I think, just as you say,
the changes made in the early 1990s had a great deal of
success, and as long as they were continuing, things were
working just fine. So I would point to the problem you just
mentioned, is moving back from those reforms as a major factor.
It's not to say there weren't external shocks and changes
in exchange rates or interest rates in the U.S. economy and
other economies around the world. But I think you're pointing
to the fundamental fact.
Mr. Toomey. My follow-up question is, by early 2000, do you
recall approximately what was Argentina's debt as a percentage
of its GDP?
Mr. Taylor. Approximately--you'll have to accept some round
numbers--approximately 45 percent.
Mr. Toomey. And looking to grow significantly at the time?
Mr. Taylor. Yes.
Mr. Toomey. As opposed to the United States where we're
somewhere in the low thirties as a percentage of GDP and as a
percentage of GDP, not likely to grow terribly significantly?
Mr. Taylor. It has been falling remarkably.
Mr. Toomey. The United States has been falling remarkably?
Mr. Taylor. Yes.
Mr. Toomey. Argentina's been going up. My question really
is, do you believe it was really prudent for the IMF to
contribute to increasing this debt load, which it did, from
March of 2000 adding, as I understand it, over $7 billion in
debt? January of 2001, another $6 billion. August of 2001
another $8 billion. Increasing the debt which arguably was
significantly contributing to the very problem while there was
not systematic reforms that would bring back the discipline yet
that had gotten the economic prosperity in the first place? In
other words, was the IMF now contributing to the problem?
Mr. Taylor. Well, that's a very good question. The most
recent augmentation of the IMF program occurred last August.
And that was for a particular purpose which was actually to
stem or to halt, curtail a run on the banks. Basically deposits
were being withdrawn last summer at a pretty rapid rate. And so
those funds were put in there for that purpose.
The IMF makes loans. That's the way their funds are
distributed. So their support is always in the form of loans.
So since that was for that particular purpose, I think it would
not qualify as something that would cause the dangers you refer
to.
The second part of that was a $3 billion loan which would
be available if Argentina began to restructure its debt. So in
other words, that loan was for the purpose of actually reducing
overall loans. IMF loans are of course a much lower interest
rate than Argentina has to pay in the market. And so that loan
actually was used as a way, if they wanted to do it, to begin
to restructure the debt and therefore reduce the debt.
However, I would say in general, your question raises some
important issues. And that is, is it really correct when a
country is in a high debt situation to provide loans? And the
general thought about that is if you're convinced, if the IMF
is convinced and the shareholders are convinced that those
loans will, if you like, bridge to better times where you can
see a decline in the level of debt compared to GDP, then we
make sense. But, if it's just loaning to an increasingly high
level of debt compared to GDP, then it doesn't make sense and
it shouldn't be done. And I think that's where we have to
insist on more. That we don't provide loans in those
circumstances, because effectively those loans are bailing out
the bondholders who at that point in time having received very
high rates of return, shouldn't be bailed out.
Mr. Toomey. Thank you.
Chairman Bereuter. Thank you very much. An important
conclusion I think.
The gentleman from Massachusetts, Mr. Frank, is recognized
for 5 minutes.
Mr. Frank. Mr. Taylor, one of the problems I think we have
is however they got into the fix, they're in it and here it
seems to me there is this dilemma. The things that they need to
do in Argentina to reduce the problem almost certainly will
have unpleasant short-term effects on a large number of people
in Argentina. And that's part of the dilemma. How do you get a
democracy to do that? I mean, this is one of the things I think
we have to deal with. It's a democracy, and we have a
commitment in the U.S. which has been bipartisan. In fact, one
of the encouraging things about Latin America is if you go back
30 years and compare it to today, democracy has clearly
thrived, and it has clearly improved its standing.
But how do we deal with that? I mean, this it seems to me
is a major issue for policymakers. How do you get a democratic
electorate to accept politically short-term pain? We have seen
a succession of very obstreperous, and in some cases, as you
point out, violent responses to things. Given what we would
suggest Argentina do, do you see a problem in getting a
democratic government to persuade its electorate to go for it?
Mr. Taylor. I think at this point in time the payment
system needs to be freed up.
Mr. Frank. What system? I'm sorry.
Mr. Taylor. The payment system in Argentina needs to be
freed up. There needs to be at least a gradual removal of the
freeze on deposits, and both of those things are going to be
things that the Argentine people would like right now.
Mr. Frank. Well, except you're saying gradual removal. They
don't want a gradual removal. They want a quick removal. A
gradual removal means a continuation for a while. It seems to
me a gradual removal was not all that popular.
Mr. Taylor. At least it's an improvement from where it is.
You mentioned in your question about frequently economic
changes or reforms require pain in the short run in order to
get the gain in the long run. And I think in this case there's
a real opportunity to relieve the pain in the short run.
Mr. Frank. You're coming in in the middle of the movie, and
they were there for the whole movie. That is, yeah, once you've
got the freeze, it is better not to gradually relax the freeze
than to keep it going, but should they have had a freeze in the
first place?
Mr. Taylor. Well, I think in the first place it would have
been better and everyone agrees that they never got to the
position where they needed the freeze.
Mr. Frank. I agree. The best way to go on a diet is never
to get fat in the first place. I understand that.
[Laughter.]
Mr. Frank. But I don't think you make a lot of money
selling that as a diet plan, except maybe on the internet where
you can sell anything. But the question is, given where they
are today--I think you're just ducking the question, frankly. I
don't understand the point of that. Yes, it is better to have a
gradual, from a political standpoint, it's better to have a
gradual relaxation of the freeze than to have it forever. But
the problem is, if you thought a freeze was necessary at all,
yeah, it would have been better not to have needed a freeze.
But do you think they needed a freeze? And if they did, how do
you sustain that in the face of political unhappiness even if
you're going to gradually relax it?
Mr. Taylor. Well, as I said in my opening remarks, they
imposed the freeze because of this withdrawal of deposits. And
in a reserve banking system in the currency regime they were in
at that time, they couldn't have this continual withdrawal of
funds. That's the reason they put it in.
Mr. Frank. I understand that.
Mr. Taylor. You could say that, given that situation, they
had to put the freeze in and----
Mr. Frank. Well, you could say, you want to say. I mean,
you could say a lot of things. What do you want to say?
Mr. Taylor. Well, I want to answer your question.
Mr. Frank. OK. Then answer my question. My question is, do
you think given where they were they had to put on the freeze,
and if they did, how do you deal with the political resistance
to something like a freeze which is unpopular?
Mr. Taylor. Dealing with the political resistance it seems
to me is you want to emphasize to people the benefits of
getting to a better system. And if there is in any case some
pain in the short run, you want to emphasize to people that
that is short run and there are going to be such good gains for
you in the future that you should pay attention to those.
The other thing is you can find ways to relieve the pain in
the short run. In many societies, the United States included,
we have ways to help people who lose their job, who have no
income, and that's----
Mr. Frank. But those require government spending don't
they? In the short term to help people who have lost their
jobs?
Mr. Taylor. Well, certainly.
Mr. Frank. And they would add to the deficit. But that's
the dilemma that if believing that part of the problem was an
increase in government spending, then alleviating the pain in
the short term.
Let me turn to one other quickly. By the way, when you talk
about the long-range gains, I know you're not a Keynesian. But
Keynes' political advice I think was superb, regardless of what
you think of his economic advice. But public reaction, as you
know, when they are told about the long run, they say in the
long run we'll all be dead. The public understands that and
their tolerance for long-range gain over short-term pain it's I
think hard to deal with.
Chairman Bereuter. I ask unanimous consent the gentleman
have another minute so he can get his last question in, without
objection.
Mr. Frank. I have just one regional issue. The banking
sector, obviously, is heavily engaged. And it seems to me
there's another dilemma. Yes, people who lend money know
they're at risk. On the other hand, if the result is nobody
wants to lend any money in the future, we also have a problem.
Have you looked at what the impact might be on a couple of
major American banking institutions? And obviously I don't want
to see moral hazard, but I don't want to see the reactions of
any kind of support there's a total withdrawal. How do we deal
with that dilemma?
Mr. Taylor. Well, I think one of the biggest problems that
have existed in these emerging markets in the last 3 or 4 years
has been a decline in the flows going through them. If you look
at a chart of emerging market----
Mr. Frank. Decline in what? I'm sorry. You said a decline
in what? I didn't hear the words.
Mr. Taylor. Decline in capital going through the emerging
markets, into the emerging markets, capital flows, if you like.
It's declined dramatically in the last 3 or 4 years. And what
we've been trying to do is trying to reverse that, because
those flows are really what's going to help developing
economies, emerging market economies grow more rapidly.
So one of the ways you want to do that is to have a more
sensible IMF policy, a more predictable policy with respect to
debt sustainability.
So that's a fundamental----
Mr. Frank. Is there a tension there between that and trying
to totally eliminate moral hazard?
Mr. Taylor. I didn't hear the first part of your question.
Mr. Frank. Is there a tension between that goal and totally
eliminating any moral hazard?
Mr. Taylor. I actually think it's a win-win situation. If
we reduce moral hazard, create better certainty, more certainty
in the markets, more predictability, I think there will be more
flows into these markets. The difficulty in these markets is
too much uncertainty.
What's happened in the last year, which I think we need to
recognize, is that the markets have showed much less of
contagion from one country hitting another country, than
existed several years ago. And there are many reasons for that.
But it's a very important development, and I think a favorable
development, which will keep people in these markets and in
fact bring more people into them. I'm not sure if I answered
the full part of your question.
Chairman Bereuter. The gentleman's time has expired. We
will be able to come back if the gentleman sticks with us.
The gentlelady from West Virginia, Ms. Capito, is
recognized for 5 minutes.
Ms. Capito. My original first question was much along the
lines of my colleague in that can you restore confidence with
all the civil unrest and turnover in the presidents, and so
forth. Can you stem the tide of civil unrest? But I'm curious
to know as well the leadover effect on other countries in South
America, and certainly their economies are intertwined and
where you see the reforms that are trying to be taking place in
Argentina or the political situation there playing out in the
rest of the continent.
Mr. Taylor. Well, first, the fact that there has been less
economic or financial contagion I think is important to note.
And the emerging markets generally have--the spreads have gone
down. It went up on 9/11, of course, but they've come down
dramatically since then, surprisingly.
The political carryover, if you like, sometimes people call
it political contagion, to answer your question on that, it
seems to me that it needn't occur if we are very clear about
what actually has happened and has happened in Argentina. One
thing I've tried to do in my testimony is indicate that it's
not economic reform, it's not market principles. It's not
fiscal discipline. It's not low inflation that caused the
problems in the Argentina, it was moving away from those
principles.
So if anyone wants to draw lessons from that, that seems to
me that should be the lesson. And that suggests that there
shouldn't be a movement away from good economic policy that
seemed to work in other countries. And I think what we need to
do is communicate that based on the facts and based on the
analysis.
To me, discussions about possible political contagion here
are similar to all the discussions about globalization that
have occurred over the last few years. People for various
reasons arguing that reduction in trade barriers, market
principles are really not beneficial to the world economy, and
many people trying to argue that that's not the case. That free
trade is a way to reduce poverty and improve people's welfare.
And I think because of events like this, we may have to have a
response that pertains in particular to Argentina, and in
particular to other countries in Latin America. But the
arguments are very much the same. And that is to show as much
as we can the facts, the reality that market principles, free
trade, growth-oriented policies are good for people.
Chairman Bereuter. Next we'll go to the gentlelady from New
York, Mrs. Maloney, Ms. Carson and Mr. Ferguson. The gentlelady
from New York is recognized.
Mrs. Maloney. What's going to happen next? We thought the
IMF was going to give them a loan at $1.3 billion in December,
and they have backed off from that. So what's next? We need the
market reforms then they'll give them the loan? What's going to
happen next? They obviously need help.
Mr. Taylor. That's true. The IMF in December, as part of
its regular review of what was happening in Argentina, as in
every program, judged that the fiscal targets in the program
were not met and that on that basis did not give the next
tranche, the next loan, the next installment, if you like. And
so what's next is for Argentina to make the decisions, as
they're beginning to do, to get their economy moving again so
they can get into a program again.
So the next part is really playing out as it should in
Buenos Aires and Argentina to take some decisions to improve
growth in the Argentine economy.
Mrs. Maloney. And what if they don't do that? What happens?
Mr. Taylor. Well, I very much hope that they do do that,
and I don't want to think of any alternative. That's the
alternative is to continue to have low growth and continue to
have policies which are painful to people. There's a great
opportunity to improve things, and I very much hope they----
Mrs. Maloney. Why is there less contagion now? It used to
be that something like this would happen and there was like
just an international concern that it would destabilize more
countries and really hurt individual investors and mutual funds
and retirement plans.
Mr. Taylor. That's a very interesting question.
Mrs. Maloney. Because I can remember Indonesia having
similar problems, everyone--some of the Asian countries. But
this one they're treating it very differently. So I'm wondering
why you're thinking there's no contagion.
Mr. Taylor. Well, I think several things have happened. One
is, there's much more analysis of what's going on in these
markets than there was 3 years ago at the time you're referring
to. So that investors themselves differentiate between
countries' policies, good policies, bad policies. And they also
differentiate between policies and external events that hit
countries. And that's not just with respect to Argentina vis-a-
vis other countries, it's with respect to all the markets.
I think that the U.S. and this Administration has tried to
build on that change by commenting on it very early in our
Administration, we commented on how contagion is changing. It's
not automatic. It's more based on fundamentals. And in fact we
were criticized quite a bit for that. But our purpose there was
to communicate with the markets that we understood what was
happening there and that our policies were going to reflect
that. And I think that has helped to reduce the contagion as
well by making our policies hopefully more predictable.
Mrs. Maloney. What is the role of the international
financial institutions in this? I know at one point they
threatened to leave the country when they were going to
structure the conversion to pesos really to a disadvantage to
their accounts. What role will they play in this in helping
to----
Mr. Taylor. Well, the international institutions have a
role to play in emerging markets. I think their role can be
improved in various ways, by greater transparencies and other
things. But they do have an important role, not just the IMF,
but the Inter-American Development Bank and the World Bank. And
what they do, of course, not just with respect to Argentina,
but with respect to other countries, is to provide loans.
That's what the IMF does, provide loans, to help bridge to
better times, if you like. And I think they do that in the
context of actions the countries take. So, for example, I just
mentioned before, Turkey has taken some actions, on that basis
they got loans hopefully to better times and things will
improve and then the country can get off the IMF program and
proceed with its policies independently.
Mrs. Maloney. You mentioned earlier that they're not
competitive in their exports, given their position as the third
largest economy in South America, and that that's one of their
problems. They're not able to generate their economy. Could you
elaborate? What are they doing that--why aren't they
competitive? Are their financial markets there controlling it
too much, or what is happening? Running up the price? Or what's
happening with their exports? They have a lot of things they
could export. Why aren't they successful?
Mr. Taylor. I think the main reason for the lack of so-
called competitiveness recently was the change in the currency
in Brazil and Europe, which basically--there was a lot of trade
particularly with Brazil, and the devaluation of the real.
Mrs. Maloney. So it was really external actions?
Mr. Taylor. Yes. That's what that term means as I was using
it. But it also means something internally about competition,
and I think Argentina and many other countries could have ways
to have their markets be more competitive. And ultimately,
what's going to determine the degree of competitiveness for a
country is how productive the country is. That is, how rapidly
productivity increases. And that's a growth strategy, and that
has to do with doing things, greater competition, less----
Mrs. Maloney. Are they implementing a growth strategy?
Mr. Taylor. Well, I hope so. I hope so.
Mrs. Maloney. I thought Mr. Toomey's comments earlier were
interesting. I was in Argentina in the mid-1990s and we met,
the International Relations Committee with then-President
Menem, and it was being touted as the economy to watch, the
growth economy in South America, and that pegging the peso to
the dollar had been a smart move, and this was the whole talk
internationally and in Argentina at the time. And then to see
complete reversal. And you just say that's increased
uncontrolled spending that happened?
Chairman Bereuter. The time of the gentlelady has expired.
The gentleman may respond.
Mr. Taylor. That was part of it. But I think the changes
then were important. They had some very good effects. The
problems now I think are not those changes, but moving away
from those changes.
Chairman Bereuter. The gentlelady from Indiana, Ms. Carson,
is recognized.
Ms. Carson. Mr. Chairman, I'd like to yield my time.
Chairman Bereuter. The gentlelady may do that.
Mr. Frank. Thank you.
Mr. Taylor, let me go back. Given the circumstances in
which they were at the time, do you think the freeze was a good
idea? The freeze on bank deposits.
Mr. Taylor. I think given that they were not going to make
other changes at the time, yes. Other changes that could have
been made.
Mr. Frank. Like what?
Mr. Taylor. Well, they're of course now moving to a
different exchange rate system. That would have been a
possibility.
Mr. Frank. But, I thought they had moved--hadn't they
unpegged? They had unpegged, hadn't they, when they froze?
Mr. Taylor. They imposed the freeze before there was any
move.
Mr. Frank. OK. So you think if they had simply unpegged the
peso and let it float?
Mr. Taylor. Well, as I was saying before, moving away from
the peg toward solid dollarization or if you moved to a
flexible----
Mr. Frank. Would they then have not had to do a freeze? If
they had done the right currency policy, do you think the
freeze would have been unnecessary?
Mr. Taylor. I think so, yes.
Mr. Frank. And which would that have been, in your
judgment? What would have been the best policy?
Mr. Taylor. Well, as I indicated, you can either----
Mr. Frank. Pick one. Are they equally good?
Mr. Taylor. It would depend on the circumstances at the
time. But I'd say----
Mr. Frank. This is not a hypothetical. This is like a real
country. So we know the circumstances at the time. Argentina,
2001.
Mr. Taylor. Well, as I said before, and I believe this--I'm
not dodging your question--that decision depends very much on
what the country's history is like and their politics.
Mr. Frank. But we know that.
Mr. Taylor. From an economic perspective.
Mr. Frank. Yes, but we know that. Again, this is not a
hypothetical, Mr. Taylor. It's a real country. Argentina in
2001. And what would have been your recommendation?
Chairman Bereuter. I think the gentleman understands your
point. We'll just let him respond.
Mr. Frank. He's not responding.
Chairman Bereuter. He may. Give him a chance.
Mr. Taylor. I at that point in time thought that
dollarization would have been good for Argentina.
Mr. Frank. I'm talking about--but couldn't dollarization,
we're talking about last year when they had to get off
dollarization.
Mr. Taylor. They were not in dollarization and they're not
now. They're going in a different direction.
Mr. Frank. You would have recommended that they move in
2001 to complete dollarization?
Mr. Taylor. I wasn't recommending that. Because, as I said,
U.S. policy, it's for the country to choose. But, if you're
asking my view----
Mr. Frank. That would have been your view?
Mr. Taylor. That would have been my view.
Mr. Frank. That leads to another question, though, which is
what would the short-term social impact have been of
dollarization, do you believe? Would there have been any
greater one way or the other?
Mr. Taylor. First let me say the political side--I won't
address that, because it depends very much on what the politics
in the country is. But from the economic side, dollarization
can have advantages to a country. It removes the threat----
Mr. Frank. I'm sorry, Mr. Chairman, if this bothers you.
But we're not talking about a country. We're talking about
Argentina in 2001. And the problem again, because I want to get
back to this, is that is there is this problem which I think
you are enlightening too easily and this is what we have to
really deal with. I understand your tendency is to say if they
had done better in the first place, the problem wouldn't have
arisen. I agree with that. But almost always we only deal with
the problems that have arisen. There are a number of countries
that have done good things. We don't have hearings about them.
We don't have to make policy about them. We're in the grief
business. That's what you do and that's what we do.
The question is, given that these mistakes were made by
people there, how do you deal with it? Because you acknowledge,
you agree with Mr. Toomey that excessive government spending
and deficits are part of the problem. The problem, though, is
that what you said could be done to alleviate the short-term
pain adds to a deficit. So that's the complex of tough issues I
think you have to deal with.
If you're going to take steps that are remedial, but
increase short-term pain, how do you do that? Or is that then
an appropriate role for international aid? Should we come in
and help them with money to alleviate short-term pain if we're
convinced that they are doing this as part of a program that's
going to provide some long-term advantage?
Mr. Taylor. I think that's the way that the programs are
frequently put together. As I was saying, a bridge to better
times to give them some resources.
Mr. Frank. But then let's go back to the Meltzer
Commission, because they made it in a different context. Should
they be grants instead of loans? One of the arguments of the
Meltzer Commission that did seem to me to have some
plausibility would be that we use loans too often for people
who are in terrible trouble when we should be doing grants. But
differing with them, is that I don't think they were ready to
put the additional resources into that that I think that calls
for.
But, should we have considered in a situation like
Argentina if people are willing to adopt a policy that has
long-term gain, short-term pain, should there be on our part
and on the part of the international institutions a willingness
to provide some money, perhaps through grants, to help them get
over that?
Mr. Taylor. I think grants are an excellent way to proceed
for very poor countries.
Mr. Frank. So they're not Argentina?
Mr. Taylor. They're not Argentina.
Mr. Frank. So you would not propose grants for Argentina?
Mr. Taylor. I think the loans are just fine for Argentina.
The grants, however, for the poorest countries in the world----
Mr. Frank. I realize we're not talking about the poorest
countries. Thank you, Mr. Chairman.
Chairman Bereuter. The time of the gentlelady which was
extended to Mr. Frank has expired. The gentleman from New
Jersey, Mr. Ferguson.
Mr. Ferguson. Thank you, Mr. Chairman. I appreciate, Mr.
Chairman, your holding this hearing and I thank the witness,
Mr. Taylor for being here. I appreciate your understanding. I
wasn't here the whole time. I didn't hear some of the other
questioning. I have read some of your testimony, but my
apologies in advance if some of this is duplicative.
Obviously the situation that we're dealing with Argentina
is tragic in many ways. People there are experiencing very
trying times. I appreciate what you have said and some of the
principals that the Administration and the President laid out
in terms of wanting to be friends and allies, to be there for
our friends in their time of need.
But I think something you also said was to try to reduce
the frequency of financial crises such as this in the future.
And I think our reaction, and the actions that we take now in
response to some of these crises and some of the actions taken
by those in Argentina are gong to have a lot to do with
avoiding these types of situations in the future, because not
only do we want to make sure that this is a long-term and not
simply a band-aid approach to helping Argentina during this
time, but for their neighbors, for the rest of Latin American,
and frankly, for the rest of the world are going to base their
actions in some part looking at the reaction that we have to
this situation.
I certainly don't want to take steps now to try and put a
short-term solution on this situation and create additional
long-term problems, and I'm sure you share this view. But
that's kind of the mindset that I bring to this. And I
certainly will not claim to be an expert on this situation. I
certainly would not claim or pretend to know as much about the
details of this situation as you do or perhaps as Mr. Frank
does.
But I just have a couple of questions. What is your
understanding of the measures taken by the Duhalde government
against the United States companies that have invested billions
of dollars in Argentina, such as folks in the electric and gas
sector, the telecom sector, other sectors? What is your current
assessment of the actions that have been taken?
Mr. Taylor. What we've tried to do in talking with various
firms is to emphasize to the Argentine government that it's
important to treat all investors fairly--foreign investors,
investors within their own country. And we'll continue to do
that.
They're now going through this process of changing from
dollars to pesos. It's part of a reform program. And that
entails changing valuations, basically devaluation. And they're
doing that in a way that tries to address the fact that if you
change a denomination of a loan or a deposit, it has big
impacts on individuals. It's going to sometimes force people
into bankruptcy or to other dire situations.
So they're looking for ways to smooth that out. And
ultimately, people are going to have to make adjustments to
that. And I think what we can do and we are doing is
emphasizing to them is to do this in a way that is fair and
predictable and sensible, and when we see they're not going in
that direction, we comment on it.
And I think there's an important reason to do that in
addition to the ones that you're indicating, and that is,
that's how they're going to have foreign investment and growth
in the future.
Mr. Ferguson. How do you feel, though--I mean, we're
talking about making sure that the actions that they're taking
and the way that they are addressing the situation is fair and
equitable. And I frankly have some concerns about what my
understanding is the way that they're going about it. Do you
share those concerns?
Mr. Taylor. We've received many phone calls from people
that are concerned about it. And we've in turn expressed those
concerns. They of course have received many concerns as well.
And what I'd say is, they're now working on these concerns and
trying to take them into account. They haven't finished. A
program is being developed, and how the pesofication works is
still being developed.
So, again, what I would like to do is to continue to work
with them, work with the private sector to give suggestions
about how to make it work. It's not finalized at this point in
time.
Mr. Ferguson. Are we having conversations? Is Treasury
having conversations with IMF right now about the nature of
trying to ensure some protection for U.S. investors in
particular? I'm thinking of the energy sector in particular. I
mean, are we----
Mr. Taylor. What we're having discussions with the private
sector, with the government of Argentina, with the IMF is to
argue that all investors should be treated fairly--foreign
investors, U.S. investors, everyone else. So, yes, the answer
to your question is yes, we are.
Mr. Ferguson. Are we prepared to take actions with regard
to that? I mean, are we prepared to insist that money being
released to Argentina through the IMF is withheld until a fair
process can be worked out or some agreements can be worked out?
It's the estimation of a lot of folks that they're not going
about it in a fair way.
Mr. Taylor. I'd say yes, that is a factor in any advice we
would give to the IMF about this, certainly.
Mr. Ferguson. Where would you put it on a scale? I mean,
are we very high?
Mr. Taylor. Yes.
Mr. Ferguson. Finally, what is your understanding of the
protections provided to U.S. investors under the Bilateral
Investment Treaty with Argentina? And I'm thinking specifically
about your understanding of any recourse that may be available
to these companies, to any of these investors, particularly
when we're talking about actions tantamount to exappropriation.
Chairman Bereuter. The time of the gentleman has expired.
The gentleman may respond.
Mr. Taylor. I want to make sure that that doesn't happen
and work toward that. And if it does, then I'll try to answer
your question when it happens if that's OK. But certainly, as I
say, we're working very hard on that. We recognize the
importance of the Bilateral Investment Treaty. We have lawyers
who are looking at it carefully and policy experts, and it is a
concern. But at this point the contacts we have both in the
private sector and in the government say that they're working
on things right now. Your questions to me and my responses I
hope are helpful as well in terms of indicating how important
we think this is.
Mr. Ferguson. Sure. I thank you, Mr. Chairman. I appreciate
Mr. Taylor's testimony. And I would just reiterate that some of
the concerns that I have--and you can see what I'm getting at
through some of my questions--still exist, and I'd be happy to
continue to work with you and as we have questions in the
future, if you could continue to be as cooperative as you have
today, that would be great. Thank you.
Chairman Bereuter. As a matter of fact, we'll permit the
Members, by unanimous consent, to submit questions to the
Secretary for the Treasury to respond to for all Members.
I'd like to begin a second round and focus really on two
things. First of all, I appreciated your response about the
reason we haven't had, fortunately, the degree of contagion
that we might have expected or that we saw in the Asian
financial crisis.
I am highly critical of the IMF's activities with respect
to Thailand and Korea. I think they prescribed medicine that
wasn't appropriate and caused additional problems and plunged
those two countries into difficulties, but neither one were
fiscal basket cases and the IMF is accustomed to dealing with
fiscal basket cases.
I liked Mr. Toomey's comments about the structural and
microeconomic changes that have been made in Argentina. But
fiscal irresponsibility, it seems to me, is part of the
problem. And much of the problems that Argentina has in my
judgment are self-inflicted. And if you take a look at the
fiscal policies or irresponsibility of the provinces in
particular, and of course the national subsidy to them, there
have been several economists that have written about the
extraordinary corruption and flagrant expenditures by the
provinces, and they just got bigger and bigger.
Now hearing your comments about a middle type of peg which
you think was not advantageous instead of a free-floating
currency or a hard peg, do you think, if you know, the IMF loan
extended in 1996, the IMF loan in 1996 and then extended in
1998, do you think the IMF gave a recommendation at that point
about abandoning the type of dollar peg that they had in place?
Mr. Taylor. I just don't know the answer to that question.
Chairman Bereuter. Do you think it would have been
appropriate at that stage, or do you have an opinion on that?
Mr. Taylor. I really don't know the circumstances enough to
answer it. My answer in general is the one I gave before, that
there are these two sides which work well, and for a long time
I've thought the one in the middle is questionable. And were I
here at the time, I probably would have said that. But the
circumstances are different.
Chairman Bereuter. Thank you. We can go back and look at
the speculation and what was the advice at the time, but of
course we can't exactly find out because of lack of
transparency.
The second point, I think Mr. Frank and perhaps another
Member was headed this way. At least I want to convey the view
that I think there are times when the patient is too weak to
take the prescribed medicine, and that you need to try to
restore some of the health of the patient. And Argentina is in
that sick situation as Haiti was, for example, in the past, and
the IMF imposed such a high degree of austerity measures that
the political turmoil was just beyond their ability to cope
with it.
So it seems to me that we have an opportunity to permit
them to acquire more debt, or there's some sort of grant
program, and then the question might be, is that grant program
in the IMF or is it in the World Bank and a regional
development bank, Inter-American Development Bank, in this
instance. It's always easier, I think, if it was a part of the
IMF rather than a coordination between IFIs. But they don't
have that history, as far as I know.
So do you want to say something about this issue that, in
fact, the austerity measures have to be tempered in certain
cases with some assistance to the people that are out of work
and to the other people that are in some degree of
destituteness or problem?
Mr. Taylor. I think that's correct, Mr. Chairman. And the
philosophy behind the IMF's engagement with countries is to
support that view, I believe, in the sense of giving more
breathing time, more room to make adjustments and therefore use
resources to alleviate pain that might occur otherwise as Mr.
Frank was indicating.
The other IFIs, the World Bank and the IDB, can give more
direct loans for the social sector. And of course, in the very
poor countries, not Argentina, but give grants, as we're
arguing for that purpose. The IDB and the World Bank have
already indicated in the case of Argentina the willingness to
provide loans for the social sectors which could definitely
alleviate some of the pain that you're referring to.
So I think it is really part of the nature of the
assistance that they can give to countries. In the case of
reforms, there's this area where the reforms may be difficult,
may require some extra social service payments or extra aid to
people who are harmed by it. And they can provide in those
circumstances.
I think, just maybe add slightly to that, the concern that
people sometimes have is that the loans and the support goes
beyond that into more unsustainable things where there's
nothing to bridge to, and then you get these series of problems
that build up over time.
Chairman Bereuter. The gentleman from Massachusetts.
Mr. Frank. Thank you, Mr. Chairman. I'm going to pick up
where you left off, because I think this is very important and
I think we probably ought to acknowledge it. It's good that the
international financial institutions are now doing this. Not
too long ago they're doing the opposite. The IMF's response in
situations like this, and this is one of the reasons it became
controversial and many on this subcommittee were critical was
in Asia and elsewhere in 1998, they were basically pressuring
governments to do exactly the opposite; to cut back on those
social measures which alleviate pain. And I think we should
count that as a successful change in international public
policy that the IMF now, and it's very good to hear you say
that they have now reversed that and people understand that in
the short term, some of these alleviation measures have to go
forward.
As I said, again, unfortunately, if you go back in 1998 in
Asia, they were prescribing exactly the wrong things. And I
remember the specific prescriptions in Indonesia and Thailand
and elsewhere that were exacerbating these kind of issues.
I was following very closely your debate--not your debate,
your colloquy with Mr. Ferguson. Obviously people who lend
should bear risk, but there are lot of tensions in this. One of
the tensions is between telling all the foreign lenders that
they're entirely on their own and don't come to me, and then
saying, oh, by the way, it would be a good idea if you lent to
those people. And I think if in fact we have a national policy
of encouraging lending, then there is it seems to me some
obligation to try and not bail them out completely, but to
help. I do think this argues strongly for some form of
international agreement dealing with what you do when you've
got these kind of defaults.
But, let me ask from the Treasury standpoint, is there any
concern--we've got a couple of large financial institutions.
One of them is obviously the major one in the State that I
represent, that have been heavily exposed there largely for
good reasons. Is there any concern in the Department that their
exposure could become a problem for us here domestically?
Mr. Taylor. Well, we've looked at the numbers, talked to
them. They obviously are very concerned with what's happening,
and relating to the discussion with Mr. Ferguson, communicating
to us how they see it.
Mr. Frank. There's another bankruptcy bill and----
Mr. Taylor. How they see it, and we listen and convey the
concerns that we hear. But it's not something that is large
enough to threaten their overall operations.
Mr. Frank. OK. That's good to hear. But it does seem to me
there's a public policy interest in their not being discouraged
over and above there's no public policy interest in whether
they make a profit or not. That's their deal.
Let me ask you one other set of questions. I know that the
Administration had identified as a very high priority this free
trade agreement with the Americas. It does seem to me that
what's going on here is going to become more difficult there.
In particular, what are the implications? I mean, clearly as
you've said, one of the problems Argentina faced were the
currency differences between Argentina and Brazil, the two
large economies there, and the disparity in the value of the
currencies have very significant impacts on trade. Does this
mean that the currency question really has to be better dealt
with as a prerequisite before you're going to get an agreement
on an FTAA?
Mr. Taylor. I think the FTAA can work well with various
currency arrangements, as long as you don't get to these ones
that are unsustainable. And if you think about what's happening
in much of Latin America, it is moving into exchange rate
systems that are more lasting, and either through
dollarization, as has occurred in Ecuador, or through the
flexible system that Chile has used for quite a while, a dozen
years. They were one of the first to start this inflation
targeting type of system with the flexible exchange rates, and
now Brazil and Mexico.
Mr. Frank. The question, though, was----
Mr. Taylor. I think those all work quite well. When you
think about----
Mr. Frank. I understand that. My concern is this. Is there
going to be a reluctance on the part of some of the countries
further to open their economies to trade if they are worried
that currency differences might have more of an impact?
Mr. Taylor. I hope not. But I think an example is NAFTA. We
have I think a very successful North American Free Trade
Agreement. We have a fluctuating exchange rate with both Canada
and with Mexico. None of this has happened with those.
Mr. Frank. Do you think that Brazil and Argentina and the
others think of themselves analogously to Canada, the U.S. and
Mexico in that regard? I mean, my sense is that the hope may be
father to the conclusion here. And it does seem to me that the
instability and difficulty exacerbated by different, not just
different exchange rates, but different exchange rate
mechanisms, and that's contributed to this. And let me just ask
you very simply, if you polled in Argentina a year ago about a
FTAA and you polled today, would you think it would be about
the same or do you think there might be more resistance?
Mr. Taylor. Well, just guessing on my part, but I would say
at least the same, maybe more favorable.
Mr. Frank. You think the Argentine public is more favorable
to an FTAA today?
Mr. Taylor. When I talk to my friends in Argentina, travel
there, talk to them here, they are so positive about trade as a
way to grow.
Mr. Frank. Were any of your friends in Argentina out
banging pots a couple of weeks ago?
[Laughter.]
Mr. Frank. I mean, you know, there are friends and friends.
Do you think that what's gone on is a good thing for the public
support in Argentina for the FTAA?
Mr. Taylor. Well, I think the importance of FTAA is so
important that we need to stress it further. In terms of what a
particular person banging pots says, of course I don't know.
But I think the genuine feeling is, is a recognition that more
trade, in particular with the United States----
Mr. Frank. Well, I envy you from your perspective your
optimism. It must make life very cheerful. Thank you.
Chairman Bereuter. Thank you. I think this is a question we
may not want the Secretary to answer in open session.
Mr. Frank. I seem to have come up with a lot of those.
[Laughter.]
Chairman Bereuter. I think we need to conclude the hearing.
But I do want to say that while I think that there are going to
be a lot of attempts within Argentina to blame everybody else,
including the United States, and perhaps there are problems
with the IMF and the advice that they gave, perhaps there are,
it's I think instructive to know that, unfortunately,
Argentina, which was among the top ten countries in the world
in per capita income at the turn of the 20th century, was one
of the ten wealthiest countries in the world, a country that
had relatively small amount of racial tension, a country that
had a highly educated population for so long, has fallen to the
problems that they have today for socio-economic reasons or
political reasons.
So I do think we have a responsibility to look at the IMF,
but I hope that, while we can provide some assistance as
necessary to people that are really hurting there, by our
international financial institutions, the country and the
people need to look at themselves in the mirror, too, and
that's my own view I just would offer at this point for
whatever it's worth. But a country so rich, one of three
countries in the world that have the best agricultural soil, a
country that hasn't really focused on exports to a substantial
extent, focusing on internal markets for the most part as
compared to their neighbors, well, you can only help people so
much unless they're willing to help themselves. And that's sad.
I would ask unanimous consent before Mr. Frank leaves, the
only Member, that subcommittee Members may be able to submit
written questions to Dr. Taylor in the Treasury Department.
Dr. Taylor, thank you very much. I think it's been a very
beneficial set of questions, and your testimony was very much
appreciated and appropriate, in my judgment. And thank you very
much.
Mr. Taylor. Thank you, Mr. Chairman.
Chairman Bereuter. The hearing is adjourned.
[Whereupon, the hearing was adjourned.]
ARGENTINA'S ECONOMIC MELTDOWN:
CAUSES AND REMEDIES,
----------
TUESDAY, MARCH 5, 2002
U.S. House of Representatives,
Subcommittee on International
Monetary Policy and Trade,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 1:33 p.m., in
room 2128, Rayburn House Office Building, Hon. Doug Bereuter,
[chairman of the subcommittee', presiding.
Present: Chairman Bereuter; Representatives Oxley, Shays,
Sanders, Frank, and Sherman.
Chairman Bereuter. The hearing will come to order.
Under the normal committee rules, we will permit the
Ranking Minority Member and the Chairman 5 minutes, as well as
the Chairman of the Full Committee, and others 3 minutes for
opening statements.
I will begin by stating the subject of today's hearing. The
Subcommittee on International Monetary Policy and Trade meets
today in open session to continue its examination of the
financial crisis in Argentina, including the activities of the
IMF within this country.
The subcommittee will hear from a distinguished panel of
private sector witnesses. Previously on February 6th, the
subcommittee listened to the testimony from the Under Secretary
of the Department of the Treasury for International Affairs,
Dr. John Taylor, on the subject of Argentina.
Before introducing our distinguished witnesses at this
second hearing on Argentina, I would like to remark upon the
current fiscal situation in Argentina and call to the Members'
attention that at your desk you have two updated products from
the Congressional Research Service that are again provided,
which I find instructive: A chronology of relevant events in
Argentina; and a CRS Report on the Argentine Financial Crisis.
When looking at these CRS reports, it is important to note that
the events are changing in Argentina on an almost daily basis.
As we discussed at our first hearing in 1991, the Argentine
government established a currency board to set the peso's value
on a one-to-one peg with the U.S. dollar in order to curb
hyperinflation. However, because the value of the U.S. dollar
appreciated over the past 10 years, it became increasingly
difficult for Argentina to export its products. In fact, by the
end of 2001, Argentina defaulted on its total foreign debt of
approximately $141 billion which resulted in an economic crisis
that spiraled into deadly protests.
On February 3 of this year, the Argentine government
declared that the local peso would free float and all dollar
debts would be converted into pesos at a rate of one-to-one.
Creditors and banks have suffered as a result of this
pesofication of debt. Furthermore, this economic plan also
turned all dollar deposits into the local peso at a rate of 1.4
to the dollar. This devaluation of deposits has angered middle
class demonstrators because of their loss in savings.
Since this subcommittee's last hearing, the following main
events in Argentina have occurred:
On February 11th, the Argentine peso was free floated, as I
mentioned. As of March 2nd, the local peso was trading at 2.15
to the U.S. dollar.
Furthermore, on February 18th, unemployment in Argentina
reached a high of 22 percent. In addition, petroleum workers
began to protest a 20 percent energy export tax. Other protests
continued as a result of the strict bank restrictions on
withdrawals.
On March 1, the lower House of the Argentine Congress
passed President Eduardo Duhalde's budget bill for 2002 which
included a proposed reduction of spending by over 14 percent.
This measure importantly eliminated the monthly minimum of $650
million in Federal grants to the provinces which has been
draining the Federal budget. According to the most recent press
reports, the upper House of the Argentine Congress has yet to
act on President Duhalde's budget for 2002.
As far as the role of the IMF in Argentina goes, we can
remember that they agreed to a 3-year, $7.2 billion arrangement
with Argentina in March 2000. Moreover, in January 2001, the
IMF augmented its earlier agreement by pledging another $7
billion to Argentina. However, the IMF withheld its $1.24
billion loan installment on December 5 of last year.
With regard to the recent budget for 2002 which passed the
lower House of the Argentine Congress, as I mentioned, the IMF
publicly welcomed this austerity measure that reduced the
federal deficit and addressed the federal/provincial
relationship. The IMF has said that it may send a negotiating
team--in fact I am told they arrived today. In fact, they will
be directed by a person accepting a newly created position of
Director of Special Operations, who will lead an effort to
focus on countries facing crisis situations.
Now, as for IMF preconditionality reform proposals as they
relate to Argentina, I think it will be interesting to see the
thoughts of the witnesses on the concept of preconditionality
for IMF assistance as it relates to Argentina. This
recommendation was endorsed by the majority report of the
Meltzer Commission, whose Chairman, Dr. Alan Meltzer, is
testifying today. I take particular interest in the Meltzer
Commission as I am the original author of the legislative
language, which created this 11-person bipartisan Commission
through the fiscal year 1999 Omnibus Appropriations Act. This
Commission, which completed its report in March of 2000, was
charged with studying the future of the IMF, the World Bank,
and the regional multilateral development institutions.
When Under Secretary Taylor testified before the
subcommittee last month, he seemed to endorse the concept of
preconditionality for IMF assistance as it relates to
Argentina. Of course, there is merit in insisting a country
have a sound economic structure in place before it receives IMF
assistance. Yet, macroeconomic circumstances such as the
political and economic repercussions on global stability also
need to be taken into account on a case-by-case basis. A
dissenting view of the Meltzer Commission, which was signed by
Dr. Fred Bergsten, another of our panelists today, makes that
point.
Let me say lastly that, with respect to the IMF, it is
important to acknowledge that there has been substantial
criticism of the IMF's past performance. I have a strong
concern about the advice that the IMF initially gave to
Thailand and Korea at the beginning of the Asian financial
crisis. The fact is that IMF's demands of Thailand and Korea
were counterproductive, in my judgment. It treated these
countries like their ``usual fiscal basket cases''and they were
not fiscally troubled at the early stages of that crisis.
Whether or not that treatment was the demand or recommendations
of the U.S. Treasury Department in the Clinton Administration
is not clear.
At the same time, we in Congress need to candidly admit, I
believe, that if we did not have an IMF or an institution
somewhat like it, perhaps a reformed one, we would have to
create one. But, we also need to recognize that the U.S.
Treasury has a very large role in influencing IMF policy and
actions--some would say an inordinate amount of influence. And
I take into account, of course, that we are the largest
shareholder of the IMF.
I would like to turn, before I introduce the witnesses at
the table, to the distinguished Ranking Member of the
Subcommittee, the gentleman from Vermont, for comments that he
might have.
[The prepared statement of Hon. Doug Bereuter can be found
on page 106 in the appendix.]
Mr. Sanders. Thank you, very much, Mr. Chairman, and thank
you for holding this important hearing, and welcome to all of
our guests for being with us today.
I look forward to the testimony of all of you. My
understanding is Dr. Weisbrot has recently returned from
Argentina. Is that correct? So we especially look forward to
what you have to say about the current situation there.
I think we all know there is no debate that Argentina is in
a major financial crisis. Unemployment is above 20 percent. The
poverty rate is above 40 percent. The economy is in its fourth
year of recession, and the country is now in the process of
defaulting on its $142 billion foreign debt.
I am confident that there is a lot of blame to be spread
around regarding the Argentine financial crisis. For example,
corruption in the Argentine government is a major factor that
has to be looked at.
But to place the blame for the crisis squarely in the laps
of the Argentine government is, in my view, shortsighted and
inaccurate.
We also have to take a look at the failed IMF austerity
program, which I believe was a major contributor to Argentina's
economic demise.
Let me just quote from a couple of op eds that recently
appeared. Interestingly enough, one is from a progressive and
one is from a conservative, and I think there are very
legitimate, strong concerns about what the IMF has been doing
for many years, including Argentina, from both the left and the
right.
Robert Cutner is one of the editors of American Prospect, a
progressive magazine. Quote: ``Argentina followed the IMF model
more faithfully than almost any other nation. Its economy was
opened wide. Its peso was pegged to the dollar. For a few years
this sparked an investment boom as foreigners bought most of
the country's patrimony, its banks, phone companies, gas,
water, electricity, railroads, airlines, airports, postal
service, even its subways.
``As long as this money came in, there were enough dollars
to keep plenty of pesos in circulation. But the dollar/peso peg
led to an over-valued currency which killed Argentine exports.
And once there was little more to sell off, the dollars ceased
coming in, which pulled money out of local circulation.
``As Argentina tanked, the IMF's austerity program pushed
the economy further into collapse.''
And according to a recent op ed in the Wall Street Journal,
not noted as a terribly progressive magazine, the IMF, and I
quote: ``austerity programs in Argentina contributed to the
collapse of tax receipts, sky high interest rates to compensate
for currency uncertainty, and investment standstill, deadly
riots, and the fall of the government.
``The IMF's policy pattern is as clear in Argentina as in
previous collapses around the globe. It gives countries bad
economic advice, then lends heavily to them, allows them to
waste the new funds, and watches as the government's popularity
plummets.
``When the economic crisis is deep, the IMF blames the
government and pulls the plug, knowing that it always gets paid
first and in full. In Argentina, as elsewhere, the population
and the private sector are left holding the bag. The result is
a country more deeply impoverished than it would have been
without IMF involvement.''
Mr. Chairman, since its modest beginning 55 years ago, the
IMF has grown to become the most powerful financial institution
in the world. Amazingly enough, this secretive organization
dominated by a few wealthy countries, has effective control
over the economies of at least 50 developing nations.
This in itself is a problem of enormous concern for those
of us who believe in democracy. But there is, I think, not only
in developing countries, but throughout the world, a growing
sense that the IMF is not doing the job it was established to
do, and it has taken on new jobs it is not able to do.
I think the bureaucratic expression is ``mission creep.''
The Argentine example is just the latest in a string of IMF
failures in Asia, Africa, Russia, and many other parts of the
globe.
I was just in Russia a couple of weeks ago and we met with
government officials there. They said, ``Well, you guys in the
United States do not listen to your economic advisors. You send
them to Russia. We listen to you, and thank you very much for
the disaster that our economy is in. Keep them at home,'' is
what they said. So I don't know.
I think many of us, for many years now, have been urging
the IMF to stop prescribing one-size-fits-all austerity
conditions that inevitably lead to economic stagnation and
poverty.
I think all of us in a world in which so many hundreds of
millions of people are living in dire poverty should be keenly
sensitive to an institution which time, after time, after time
tells some of the poorest countries on earth: Cut back on
health care. Cut back on education. Cut back on food subsidies.
That is a serious problem.
So I think there is a lot to be thought about in terms of
the IMF role in Argentina and many other countries.
Mr. Chairman, thank you very much.
Chairman Bereuter. Thank you, Mr. Sanders.
Now it is my pleasure to recognize the Chairman of the
Financial Services Committee, the gentleman from Ohio, Mr.
Oxley, for any comments he might like to make.
Mr. Oxley. Thank you, Mr. Chairman. Thank you for the
opportunity to participate in this hearing. Thank you for your
leadership in this, and welcome to our distinguished panel.
We have seen over the past several months the third largest
country in Latin America on the brink of both economic and
social collapse. The situation in Argentina is tragic, but it
is a good lens through which we can examine changes that may
need to be made in the operation of the IMF.
Following last December's decision by the IMF to stop
lending to Argentina, the government defaulted on its foreign
debt and a succession of administrations attempted to govern
the country. Some stability has returned and Argentina has
begun to make the tough fiscal, money, and political decisions
to begin the reform process.
Argentina is a valuable ally of the United States in South
America, and I hope that they can get their economic house in
order.
I am glad to see that the peso is now floating on the
international market, and that the government has approved a
budget that attempts to control spending. In particular, the
reform made in the relationship between the provincial and
federal government is key to reducing deficits and reigning in
spending. However, there are parts of the economic reform
package that are of concern. Specifically, the President of
Argentina has announced a proposal to levy a tax on all
companies that operate privatized businesses.
I question whether additional taxes should be levied on
companies that are currently struggling in the midst of this
crisis. Many of those companies are based in the United States,
and additional taxation could force them to abandon projects
that they are developing or maintaining in Argentina.
Additionally, a proposal that contracts in pesos, contracts
negotiated in good faith, be paid in dollars, is troubling. By
changing the terms of those agreements, Argentina casts doubts
on the ability of U.S.-based companies to rely on assertions
made by its government in the future.
I was encouraged by the Under Secretary Taylor's testimony
last month that the Department of the Treasury was working to
ensure that U.S. interests are being treated on a level playing
field with other foreign interests. I trust those efforts are
continuing.
As the largest shareholder in the IMF, the United States
has the responsibility to ensure that the resources of that
institution are being spent wisely.
I believe that the IMF must take a hard look at its lending
policies and ensure it is not granting loans to countries
simply because they are in need of financing.
The IMF must ensure that the money it distributes is making
the greatest possible impact on improving the lives and
economies of developing nations.
Last week, the Secretary of the Treasury outlined before
this subcommittee efforts that the Bush Administration is
pursuing to ensure that the IMF cultivates growth and
productivity in the regions where it operates.
I agree with Secretary O'Neill that increased
communications with the market, a narrowed focus, and a policy
of not bailing out countries that do not pursue sound economic
programs are key goals for the future operation of the IMF.
However, the IMF must also work with the recipient
countries to ensure that they know what policies must be
addressed prior to funding being cut off or being resumed. By
establishing a blueprint of economic reforms for recipient
countries to follow, the IMF will reduce the number of failures
and encourage sound fiscal policies.
Finally, Mr. Chairman, the IMF has proposed a plan to
encourage an orderly workout when there is a default by a
borrower country. While this proposal is in the early stages, I
am interested in the opinions of our witnesses as to whether
such a proposal is needed and how it could be established.
I would like to welcome again our witnesses, and I look
forward to a very lively and interesting debate. I yield back
the balance of my time.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 109 in the appendix.]
Chairman Bereuter. Thank you, Chairman Oxley.
Other Members are entitled to up to 3 minutes for opening
statements. The gentleman from Massachusetts, Mr. Frank, is
recognized.
Mr. Frank. Thank you, Mr. Chairman.
I want to express my hope that the witnesses will talk,
either today or at some future point, about one element of this
that is problematic.
Mr. Sanders referred to it: The question of democracy. That
is, it does seem to me we are too often in the position of
advising countries to do things which no democratic society
could easily do. Indeed, we are often telling them to do things
that most of us would not vote for.
We are telling them to impose on their own people-
restrictive policies, increases in sometimes a very regressive
taxation, cutbacks in various levels of benefits, and I am
struck at the absence of understanding of the way democracy can
and should function.
I worry that in various cases--and it may be happening in
Argentina. One of the things that troubles me about Argentina,
in addition to the economic reality, are the comments I see
reported in the press which are from people who have given up
on democracy, who blame elections, who denigrate politicians,
and that means they are denigrating the electoral process.
I think one of the defects in international economic policy
all during the 20 years I have been watching it has been a
failure to appreciate this democratic element. It is too often
that people neglect the wisdom of John Maynard Keynes in the
political field. Too often, obviously, people are told that
they should accept this or that very distasteful, unpleasant,
difficult public policy because in the long run they will be
better off.
As you all know, as Keynes pointed out, in the long run we
shall all be dead. That has a great deal of political wisdom.
It is something that people in the particular situation
understand.
So I would hope--and I must say, I do not see this
sufficiently. As far as Argentina is concerned, I am interested
to see what people have to say. It is a difficult situation.
But I am struck that throughout the economic analysis that we
get, too little is done to integrate our understanding of the
democratic process into that.
That is not simply a theoretical flaw. I think we run the
risk in various places and times of undermining democracy. I do
not want people to associate democracy with austerity, with
that kind of rigor, and as I said, I see some evidence just
from what is reported that one of the victims so far in the
Argentine crisis is the respect the Argentine people have for
the democratic process, for the electoral process.
I would hope we would regard that as something also worth
saving.
Thank you, Mr. Chairman.
Chairman Bereuter. Thank you, Mr. Frank.
The gentleman from Connecticut, Mr. Shays, is recognized.
Mr. Shays. Thank you. I appreciate deeply that you are
holding these hearings, Mr. Chairman. I cannot think of
anything--well I can think of a number of things worse, but it
is hard to imagine what it would be like to live in Argentina
now and to think your life savings have disappeared, to not
have a job, to not even know how you can begin to feed your
family, with so many middle-class in that situation, a new
experience for them.
I am also becoming more and more aware of how many
countries around the world are dealing with debt service that
is far above 50 percent. I think of 14 percent, 11 percent in
the United States, and think of how we have found that a
challenge. So I just am happy to be here, and grateful you are
having this hearing, and I know we have expert witnesses and I
thank them for their participation.
Chairman Bereuter. Thank you, Mr. Shays. Without objection,
all Members' opening statements will be made a part of the
record. And to the extent that the witnesses have written
statements, they will also be entered into the record in full.
I am pleased now to introduce the witnesses. They make a
very distinguished panel with what we expect to be diverse
views on Argentina and the Argentine-IMF relationship.
First we will receive testimony from Dr. Allan Meltzer. Dr.
Meltzer is Professor of Political Economy and Public Policy at
Carnegie Mellon University, and a former member of the
President's Council of Economic Advisors. He is currently also
a consultant to the World Bank.
Second, Dr. Fred Bergsten, the Director of the Institute
for International Economics, will testify. Dr. Bergsten has
been the Director of the IIE since its inception in 1981. He
was an Assistant Secretary of the Treasury for International
Affairs from 1977 to 1981.
Third, we will hear from Dr. Mike Weisbrot, the Codirector
of the Center for Economic and Policy Research in Washington,
DC. Dr. Weisbrot, who received his Ph.D. in economics from the
University of Michigan, specializes in international economics
with a particular emphasis on the role of the IMF. He is also
an author of a weekly column on economic and policy issues that
is distributed to the newspapers of the Knight-Reiter-Tribune
Media Services.
Finally, Dr. Steve Hanke, a Professor of Applied Economics
at the Johns Hopkins University in Baltimore, will testify. Dr.
Hanke has advised many different foreign governments on
currency reform and privatization. With respect to Argentina,
he served as the advisor to the Minister of Economy at the
Republic of Korea in 1995 and 1996. It is also important to
note that Dr. Hanke is the President of Toronto Trust
Argentina, which is an emerging Market Mutual Fund in Buenos
Aires.
Gentlemen, again thank you for coming. Dr. Meltzer, we will
hear from you. I would like to ask the panelists if they could
restrict their comments to about 8 minutes, and you may proceed
as you wish.
STATEMENT OF DR. ALLAN MELTZER, PROFESSOR OF POLITICAL ECONOMY,
CARNEGIE MELLON UNIVERSITY
Dr. Meltzer. Thank you very much.
First I would like to say, Mr. Chairman, that I owe you a
vote of thanks, and also I guess I bear some scars for your
having created, or helping to create, the International
Financial Institutions' Advisory Commission that in the usual
way has been named after its chairman, me. So I thank you for
that.
Argentina is now suffering from a deep and prolonged social
and economic crisis. Its roots are political as well as
economic. The political system seems unable to develop a
coherent, consistent plan to solve or improve either
Argentina's current position or its longer term structural
problems.
The need for a plan or program to restore growth and output
and employment without renewing inflation cannot have escaped
the leadership. They have received this message from President
Bush, Secretary O'Neill, the IMF, and others, including me, and
Adam Lerrick when we were in Argentina talking to many of the
people who are now in the government just before the new
government formed.
Without a plan that begins to resolve current liquidity,
financial, economic, and human problems, there cannot be a
resolution of the crisis. Additional financial assistance from
the international financial institutions, led by the IMF,
cannot solve Argentina's problems unless Argentina adopts a
coherent, consistent plan. This is the democratic solution that
Mr. Frank discussed so fully a moment ago.
Argentina has three fundamental problems that brought it to
its current deplorable position, with massive loss of wealth
and increase in misery.
First, its debt could not continue to grow and be serviced
by Argentina's economy and exports. Astute observers recognized
publicly more than a year ago, and privately as early as 1999
in my experience, that Argentina's foreign currency denominated
debt was unsustainable.
Second, Argentina's budget deficit increased its debt and
undermined its monetary policy. The convertibility law tied the
peso to the dollar and permitted unrestricted convertibility at
a fixed exchange rate. This arrangement could not cope with an
unsustainable debt on one side and an over-valued exchange rate
on the other. The appreciation of the dollar and the
depreciation of the Brazilian real made Argentina an
unattractive place for investment and a costly place to buy.
For example, when we were there, Argentine apple growers
and people with orchards said that the cost difference between
their product and Brazil's was something on the order of 30
percent.
Third, Argentina made many reforms in the early 1990s, but
it did not develop a budget policy, or pass a fiscal
responsibility law that controlled provincial spending. And it
did not remove some of the structural impediments to growth.
The current Argentine government has not proposed a
coherent, consistent plan. Some of the actions that have been
taken are piecemeal efforts to solve a particular problem
without regard for the larger consequences. For example, the
monetary authorities did not have enough dollars to convert
peso deposits into dollars, as required by its monetary regime,
so the government declared that all dollar deposits had to be
converted into peso deposits at 1.4 pesos per dollar. This
increased the potential money supply by about 30 percent,
raising concerns about inflation. To assure the public that
they would not lose from inflation, the government suggested
indexing peso deposits to inflation. As inflation increased,
the government or the central bank would print more money. This
policy would lead to hyperinflation.
Argentine citizens have had such miserable monetary and
economic experience for the past 50 years that they understand
better than most the links between the central bank's printing
press and inflation. Their response is to run from the peso
before the inflation reduces the value of their money. This
response further drives down the value of the peso, raising
Argentine costs and prices. Unions, anticipating inflation,
have asked for a 40 percent increase in wages.
The economy is collapsing. Construction activity in January
was 44 percent below year-earlier levels. Because bank deposits
were frozen, January's supermarket sales were 30 percent lower
than the previous month. The unemployment rate is above 20
percent and rising as the economy sinks. The government
announced that it does not have enough money to pay the wages
of government workers. Meanwhile, it raised the incomes of
those in the senior brackets of the civil service and in the
government.
No one can fail to be concerned with and distressed by the
fate of the Argentine public. People are fleeing the country.
Lifetime savings are threatened, and bankruptcy and joblessness
are high and rising. A decade after suffering the chaos that
accompanied hyperinflation, people suffer from renewed economic
collapse.
What can the IMF and other international institutions do?
What should they do? The IMF has not ignored Argentina. In
March 2000, it offered a $7.2 billion loan. In January 2001,
when the sustainability of Argentina's debt was very much in
doubt, it offered $7 billion more as part of a $20 billion
official package. In August 2001, it advanced an additional $5
billion to prevent a banking and currency run. It should be
clear to all that more money without policy changes did not
work. The IMF announced new negotiations last week.
Would more money now help Argentina or its people? Until
Argentina has a credible, coherent plan, the public has no
reason to want to hold pesos. Giving money now would give the
Argentine government money to support its exchange rate and its
budget. That is another way of saying the holders of Argentine
pesos would be able to get dollars on more favorable terms, and
the Argentine government could maintain a larger budget deficit
and avoid pressures to establish fiscal responsibility. This is
not just conjecture. It is a description of what happened to
much of the aid Argentina received in the last 2 years.
I favor assistance to Argentina once it has adopted a
coherent, consistent plan. Such a plan is needed to ensure that
money advanced to Argentina is not used to support an exchange
rate peg or slide, to sustain budget deficits, or to permit
creditors to avoid losses. That is how additional support would
be used in the absence of a plan that the government adopts and
implements.
In December 2001, Adam Lerrick and I discussed these issues
with members of the Argentine government, and with those who
were then in the opposition but are now in government. There
were seven problems that have to be addressed. Some are
interrelated.
First, external debt has to be reduced to a sustainable
level. The debt is now in default. It has to be renegotiated.
It cannot be renegotiated until there is some kind of coherent,
consistent plan that allows the creditors to get some judgment
about what they are likely to get.
Second, Argentina needs a credible exchange rate regime to
replace the present blocked exchange system of currency
controls.
Third, no exchange rate regime can remain credible or be
sustained unless the monetary system produces low inflation or
stable prices. The government must make the central bank
independent and adopt a rule that prevents the central bank
from printing money to finance the budget deficit.
Fourth, a stable fiscal regime, with budgets close to
balance sustains credibility of the monetary system and
exchange rate stability. The fiscal system should also
encourage efficient use of resources to increase living
standards, and the government should adopt the fiscal
responsibility law applicable at all levels of government. Many
of Argentina's fiscal problems, as many of you have pointed
out, result from excessive spending by the provinces financed
by the central government.
Fifth, adjustment of the Argentine monetary and exchange
rate system should avoid asset and liability mismatch.
Argentina's current government has wiped out the capital in the
banking system and crippled the payment system.
Sixth, any policy today must convey unpleasant news. It
should also convey some good news by reducing the 21 percent
value-added tax as much as possible to stimulate private
spending and to shift spending from the informal to organized
markets.
Seventh, there is a pressing need for liquidity. Adam
Lerrick and I proposed a way to reconcile an increase in
liquidity and spending with safety and soundness of the
financial system. The government adopted a version of this
proposal.
The Argentine crisis affects not just the IMF, it poses a
challenge for the World Bank with 8 to 10 percent of its
outstanding loans to Argentina, and the Inter-American
Development Bank, with 20 percent of its loans to Argentina. An
Argentine default on these debts would severely impact the
capital of these institutions. The lesson from this problem
should not be to send more money; it should be to reform these
financial institutions.
In summary, I support the IMF's current program. It is a
major step forward from the open-handed bailouts of the 1990s.
The new policy is exceedingly painful for Argentina because the
government has failed to make adjustments and reforms necessary
for growth. Financial support is wasted when the economic
structure is unsound. I urge the Members of this subcommittee
to support the important steps toward reform that Secretary
O'Neill and Managing Director Koehler have underway. I urge
them to continue with their effort to reward performance and to
insist that promises must be kept.
Thank you.
[The prepared statement of Dr. Allan H. Meltzer can be
found on page 111 in the appendix.]
Chairman Bereuter. Thank you, Dr. Meltzer.
We will now hear from Dr. C. Fred Bergsten, Director of the
Institute for International Economics. You may proceed as you
wish with 8 minutes.
STATEMENT OF DR. C. FRED BERGSTEN, DIRECTOR, INSTITUTE FOR
INTERNATIONAL ECONOMICS
Dr. Bergsten. Thank you very much, Mr. Chairman.
I largely agree with the analysis and presentation that Dr.
Meltzer has just put forward. So in my remarks I would like to
focus on the relationship between what has happened in
Argentina and the role of the International Monetary Fund and
what implications the Argentine developments have for the
functioning of the international monetary system and, likewise,
what changes or reforms in the monetary system have meant for
the effects of the Argentine situation outside Argentina
itself.
Let me first talk about the interaction between Argentina's
travails and the functioning of the International Monetary
Fund. I think the IMF is in severe danger of whipsawing itself
over Argentina.
The problem for a very long time was not that the IMF was
too tough on Argentina, but rather that the IMF was much too
soft on Argentina.
All during the period of Argentina's boom in the late
1990s, the IMF did not insist that Argentina tighten its fiscal
policy and develop the kind of responsible underlying measures
that would have sustained its boom.
There was no pressure on fiscal policy during that period.
There was tolerance of a currency board arrangement that was
bound to become unsustainable and lead to a crisis.
The IMF, in short, tolerated unsustainable debt and
exchange rate situations over an extended period of time. Then,
with its two large rescue packages in 2000, and particularly in
the summer of 2001, the IMF threw huge financial packages into
the support of unsustainable policies.
In short, the IMF was much too soft. Indeed, when the IMF
went to its second rescue package in August of last year, it
seemed to be gambling for redemption. When its first package
did not save the day, it went for a bigger second package, just
like we sometimes say private banks facing bankruptcy try to
gamble for redemption. It is almost like the IMF was doing the
same thing.
The IMF then was viewed as too harsh once the situation
exploded and the crisis hit. But I want to underline that it
was too soft for much too long. And only belatedly did it begin
to suggest the kind of policy changes that are needed.
My fear, however--and this echos something that Mr. Frank
said a moment ago--is that the IMF might now become too harsh.
If it sits back too long, if it fails to accept a responsible
program that is the best the Argentines can do within the
context of their democracy, as Mr. Frank mentioned, then it
will become too harsh, will fail to help the Argentines recover
from their own circumstance, and will further discredit the
IMF.
In other words, if the IMF goes from being too soft to too
harsh, it will be just like the private commercial banks who
lend too much when a country is booming, and then back out when
the country is hurting and make the situation worse by
increasing the gyrations on both sides of the seesaw.
That, I think, is the problem that faces the IMF now. Dr.
Meltzer is, of course, right that there has to be a solid
program that gives a prospect of recovery. But if the IMF, the
U.S., and everybody else insist on that program being too harsh
after they have failed to insist that Argentina tighten its
belt back when it could have done so without huge costs, they
will make the situation worse and it will implode further.
My second point is that the U.S. Administration, much as I
hate to say it, has performed even worse because they already
have whipsawed themselves.
They came into office indicating that they would not
support, quote: ``big bailout rescues of emerging-market
economies,'' yet they did it. They supported rescues for
Argentina, which have clearly turned out to be unsustainable,
as I and others and Dr. Meltzer per his testimony, were saying
as long as 2 years ago.
They did the same thing in Turkey. They have already
whipsawed themselves by saying they would not go for big
unsustainable rescue packages, then going ahead and doing it.
They have gotten the worst of all worlds. Their credibility has
suffered.
They too have to get back on track in the same way as I
suggested the IMF has to.
Now having thrown some brickbats, let me note that the good
news is that the Argentine situation has generated much less
contagion now than we would have expected in recent years.
And I think the really good news is it is because of some
basic improvements in the functioning of the international
monetary system, the kind of reform that many of us have called
for over the years.
In fact, I would note not only has there been very little
negative contagion, there has actually been some positive
contagion.
The Mexicans, for example, will tell you that they have
gotten capital inflow as a result of money moving out of
Argentina.
One reason the Mexican peso has been the only currency in
the world stronger than the U.S. dollar over the last couple of
years is because money moving out of other emerging markets has
moved into Mexico.
As the Mexicans have performed well, their policies have
been strong, they have been linked to our own strong economy,
they have gotten positive contagion.
The reason there has been much less negative contagion is
of course partly because the Argentine crisis had been
anticipated for a long time. But so was Thailand in 1997. So,
to a large extent, was Mexico in 1994. So that is not the sole
explanation.
I think the key differences are changes in the functioning
of the international monetary system indicating there have been
improvements in the architecture.
First of all, markets are learning to differentiate among
different countries. It is not like in 1997 when everybody ran
for the exits from all Asian countries when Thailand had its
crisis.
That differentiation has been helped by the increased
transparency of the system, the increased requirements for data
submissions, the greater knowledge and sophistication of
appraising the individual countries, which that have come with
the attention paid to the international financial architecture
over the last few years, fueled by things like the Meltzer
Commission and other efforts to pursue improved performance.
Second, many of the other emerging markets, especially in
Latin America, have strengthened their domestic banking
systems. Their reforms are not yet complete by any means, but
they have strengthened their system extensively in response to
the call for such reforms dating back to at least 1997.
The creation of the Basel core principles that year really
began to put the pressure on individual emerging markets to
strengthen financial systems.
The weakness of those systems was of course a common cause
of all the crises in the mid-1990s from Mexico through East
Asia. And the strengthening of those systems is one reason we
have less contagion today.
Third, and I think probably most important, is the nearly
universal adoption now of floating exchange rates--not free
floats but managed floats. Indeed, how to manage the floats is
now one of the most important reform issues. However,
practically every developing country has now moved away from
the currency pegs of the past is whether it was a currency
board, an adjustable peg, or whatever else, to floating rates
which provide important buffers against crises, particularly
buffers against contagion from crises in the neighborhood as in
Latin America now, and that helps mightily to avoid contagion.
So the really good news is the lack of contagion at least
so far in the traditional economic sense.
I share some of Mr. Frank's concerns about political
contagion. That depends on how fast Argentina resolves its
situation and how effective and responsive the outside world is
in supporting them.
Finally, since I was the leader of the minority of the
Meltzer Commission, as you mentioned, Mr. Chairman, I cannot
fail to note that, at least in my judgment, the Argentine
situation reveals the shortcoming of Dr. Meltzer's majority's
recommendations for prequalification for IMF programs.
You will recall that those prequalifications focused almost
solely on domestic financial systems. As I go back and read
what the majority wrote, under its proposals Argentina would
have qualified fully for IMF aid when the crisis broke.
Indeed, as I suggested in my original comments and
criticism at the time, the Meltzer majority proposal would have
underwritten the profligate fiscal policy of Argentina by
authorizing IMF credits without any effort to correct it
because the majority said that they do not believe in
conditionality. We do not believe in going after countries. If
they have got their financial system in order, then go ahead
and lend.
It seems to me that what has happened in Argentina clearly
indicates the mistake that would have resulted. I am therefore
pleased that the recommendations of the majority were not
accepted. I think the Argentine case suggests the wisdom of
that outcome.
Chairman Bereuter. Thank you, Mr. Bergsten.
Next we will hear from Dr. Mark Weisbrot, Codirector,
Center for Economic and Policy Research. You may proceed as you
wish, Doctor.
STATEMENT OF DR. MARK WEISBROT, CO-DIRECTOR, CENTER FOR
ECONOMIC AND POLICY RESEARCH
Dr. Weisbrot. Thank you, Mr. Chairman. I am going to go
straight to these five points in my prepared remarks, because I
hope we can actually look at some of the numbers having to do
with what people have been saying about Argentina's fiscal
situation over the last few years.
So the first point is that the IMF must acknowledge that it
played a large role in causing the current crisis of
Argentina's economy. This is much more than setting the
historical record straight. It is necessary to prevent the Fund
from causing further damage. For example, Argentina has been in
recession for nearly 4 years. During this time, the Fund has
supported, with lending and political encouragement, fiscal
tightening of the central government budget. This is something
that economists in the United States would never recommend for
our own economy during a recession, and it has undoubtedly
worsened and/or prolonged the downturn in Argentina.
The Fund has also contributed enormously to the crisis by
arranging tens of billions of dollars of loans to support the
convertibility plan, which was clearly not a viable exchange
rate regime. The result was an insurmountable debt burden,
which ended in default last December. As shown below in the
appendixes attached hereto, it is this debt trap, not
overspending by the government--and I have to emphasize this--
it was the debt trap that caused the crisis.
Basically, the interest payments of the Argentine
government increased consistently without the government
increasing its primary spending, beginning with the Fed's
decision to raise interest rates in 1994 and then on through
the Mexican peso crisis and the Asian financial crisis, and the
Russian and the Brazilian devaluation. That is explained in the
appendix.
But we should come back to that, because it is very
important to get the causes of this straight and not pretend,
as so much of the press and popular discussion does, that this
is a crisis caused by the overspending by the Argentine
government.
Second, the IMF, the World Bank, and the Inter-American
Development Bank and other official creditors should declare a
moratorium on Argentina's debt service payments until the
economy has recovered from the recession and achieved solid
growth for at least a year. I think this is the very minimum
these institutions can do to avoid worsening the crisis. Since
the Fund presently functions as the leader of official, and
often private, creditors, its decision--and therefore the
decision of the U.S. Treasury Department--to declare a
moratorium on debt service would help remove much of the
uncertainty that now hangs over Argentina's financial future.
Furthermore, the Fund could persuade private creditors to
observe a similar moratorium.
An official moratorium on debt service is extremely
important, because this is the biggest cloud that hangs over
the Argentine economy. The government has been running a
primary budget surplus, and the economy has a trade surplus.
This is very important, because it means that there is no
``adjustment'' of the economy, usually referred to as
structural adjustment, which is necessary if debt service
payments are suspended.
Further adjustment along the lines historically pursued by
the IMF would likely only prolong the recession.
Third, the IMF and U.S. Treasury should not try to impose
austerity conditions on Argentina, and they should not take
advantage of the crisis to impose other conditions for
opportunistic or ideological reasons.
By dragging out the negotiations of the government of
Argentina insisting on unnecessary austerity, the Fund is
adding to the uncertainty that undermines economic recovery.
And I spoke with Argentine businessmen who told me that Spanish
banks want to open lines of credit to Argentine companies in
spite of the default, but they are waiting for the IMF to reach
agreement with the government.
This is just one example of how this creditors' cartel,
which is headed by the IMF, can impair economic recovery in a
time of crisis.
And I want to get back to this, too, because this is really
relevant to the question raised by Congressman Frank--I hope we
can pursue this--of democracy, which is the most serious, or
very serious political problem here.
During the Asian financial crisis, the Fund imposed more
than 140 conditions on Indonesia as part of the loan package.
As a result, the Fund's main impact was to get the government
to guarantee private loans, rather than to promote economic
recovery. More than 4 years later, Indonesia still has not
reached its pre-crisis level of GDP. It would be a tragedy if
the IMF led a similar so-called ``bailout'' in Argentina.
Fourth, the first priority of any economic program must be
to revive spending and production and pull the economy out of
the depression. I emphasize this because many people have
pointed to this, all the long-standing problems, corruption,
the deep distrust of politicians, lack of confidence in the
banking system as the root causes of the crisis.
But these problems may exist, but it is not necessary or
sufficient to cure them in order to get the economy going. And
we can talk more about that if there is time.
Finally, the most important question, I think, facing us
right here is the IMF should state publicly what it is
demanding from the Argentine government. The complete lack of
transparency in the negotiations between the IMF and the
government of Argentina invites abuse and corruption, and
thwarts democracy in Argentina.
This is something, if they cannot put forward what they are
demanding, I do not see why economists and journalists and so
many people just say, ``Well, the IMF is demanding a sound
program, a responsible program.'' Clearly they have gotten it
wrong. They got it wrong for the last 9 years in Argentina.
They got it wrong in Brazil when they poured tens of billions
of dollars into the Brazilian government and saddled them with
debt to maintain a fixed exchange rate that was not viable
there, and the economy recovered only after the currency
collapse.
They got it wrong in Russia a couple of years ago.
So clearly, they are not necessarily the best judge of what
is a sustainable plan. If we allow them to determine in secret
what the government of Argentina's policy is, we are inviting
serious trouble.
Now just to return to the question of the provincial
spending which has been raised--and that is the latest thing
that people are pointing to--I think we should understand that
the provincial spending did not contribute to Argentina's
crisis.
There was overspending in the provinces, and it did rise
very rapidly in the last couple of years, but it was not
absorbed by the central government.
So, for those who were loaning money to the provinces, it
is the same as if they were loaning money to California or
Illinois in the United States where the Federal Government does
not guarantee their debt. Those lenders did not have to loan to
them, and we should not allow the Fund or anyone else to just
point to the provinces as a problem, or the source of the
problem, because the central government of Argentina did not
increase its revenue sharing with the provinces while they were
increasing their spending.
So this really was a problem of a debt trap. Argentina had
a debt that was barely payable going into 1994, and they were
hit by a series of external shocks. And I know Mr. Bergsten
says, well, they should have cut more out of the budget. They
cut 2 percent. According to the IMF, they cut 2 percent in
fiscal 2000. That is the equivalent of $200 billion in the
United States being cut from our budget in a deep, deep
recession.
How much more could they have cut? We could get rid of our
$450 billion current account deficit in the United States, if
we wanted to, by going through another Great Depression, but
that is not how it is going to happen, right? The dollar is
eventually going to fall, and that is how it is going to be
reduced, probably gradually.
That could not happen in Argentina because they fixed their
currency to the U.S. dollar. So you see this was a major set of
mistakes that destroyed the Argentine economy, and it is unfair
and counterproductive, I think, to try and blame it on the
Argentine government's spending as though there were some kind
of fiscal policy that might have saved this economy from the
disaster that it is facing today.
Thank you.
[The prepared statement of Dr. Mark Weisbrot can be found
on page 118 in the appendix.]
Chairman Bereuter. Thank you very much. You finished in
only one second over. Good timing.
Next we will hear, finally, from Dr. Steve Hanke. Dr. Hanke
is a Professor at Johns Hopkins University, and President of
Toronto Trust Argentina. You may proceed as you wish.
STATEMENT OF DR. STEVE H. HANKE, PROFESSOR, JOHNS HOPKINS
UNIVERSITY; PRESIDENT, TORONTO TRUST ARGENTINA
Dr. Hanke. Thank you, Mr. Chairman.
I have prepared some remarks that I would request be put in
the record, and I will make just a few comments here
particularly motivated by your opening statement as well as
some of the statements that your colleagues made.
It is very difficult to make any sense, really, out of this
whole Argentine mess: what happened, how to diagnose it, as
well as prescribe what should be done.
I think most of the commentary is confused and very
confusing. I would commend the current issue of The Economist
Magazine. They have one of the leaders on Argentina and then a
several-page analysis of Latin America. It contains everything
but the kitchen sink. If you can make any sense out of it, you
can go to the top of the class, I think. And this is just
typical of what you have to contend with when you are trying to
grapple with the problems.
One example of this, by the way, Mr. Chairman, you
mentioned what I call the overvaluation story. Some of my co-
panelists have also alluded to it. Argentina tied the peso to
the dollar in 1991. The dollar appreciated, was very strong;
the peso became overvalued, the economy became uncompetitive.
The problem is, the story just does not hold water. It is
an interesting story. It has been repeated ad nauseam. But to
be uncompetitive, your exports have to be weak and declining.
Ever since 1991, in each full year, with the exception of
1999, exports have grown in Argentina. And in fact, in the
first 11 months of last year exports increased by 3.2 percent.
Last year, world trade only went up 9/10ths of 1 percent in the
world.
So the relative performance of Argentina on exports has
been very good. In fact, if the economy would have been growing
at the rate exports have been growing, that debt service burden
probably would not have overwhelmed them in the end.
So you can cut the overvaluation story a number of
different ways. If you want to get, shall we say, more
scientific, we can use the Big MAC Index, and the Big MAC Index
said in 1999 that the peso was overvalued by 3 percent. In
2000, it was not overvalued or undervalued. In 2001, it was
undervalued by 2 percent.
But, that did not stop The Economist Magazine from
producing 26 major articles in that timeframe in which they
claimed that the overvalued peso was making the economy
uncompetitive and dragging the economy down in Argentina.
So, those are the kinds of issues, and we have a long list,
that we really have to get through if we are going to analyze
Argentina.
What made Argentina unique, I think, has really been
missed. That is, their monetary setup really was unique. The
U.S. dollar was legal. The peso was legal. They circulated in a
bi-monetary system at a 1-to-1 exchange rate. That was one part
of it.
The other part that made it unique is that the peso holders
had property rights in U.S. dollar reserves held in safekeeping
by law by the central bank. Those were the two aspects that
really made the system unique.
This means that the devaluation is not a normal devaluation
in Argentina. It was a totally unique devaluation. It was not
Brazil. It was not Russia. It was not Southeast Asia. What made
Argentina's devaluation atypical was that the peso holders had
property rights in those dollars that were backing--100
percent--the pesos that were outstanding.
And when you did away with the convertibility system, you
did away with those property rights to the tune of $17.8
billion. And, Mr. Frank, this is the issue of the rule of law
and why you do not have any respect for the politicians in
Argentina. They have sticky fingers and a long history of
sticky fingers. So when you did away, through the devaluation,
you really confiscated $17.8 billion worth of property.
But of course, then we have gone on with pesofication of
the economy. That has also rapped the rule of law on the
fingers and created this governance problem and democracy
problem.
To have democracy, Mr. Frank, you have to have the rule of
law. And of course, they do not have this in Argentina now.
With the pesofication, what do you have?
Loans were pesofied. This meant the banks lost $23 billion.
Deposits were pesofied. This meant that depositors lost $12
billion and banks gained, of course, $12 billion.
And also in the middle of the night, the central bank sent
out armored cars and confiscated, seized, $1.6 billion in
federal reserve notes in the banks.
In addition to that, you have had many contracts that have
involved U.S. citizens and U.S. corporations that have been
torn up in the process of pesofication.
Now as far as the IMF's role, let me just quickly go
through that.
From 1990 to 1994, GDP grew on a per capita basis by an
amazing 72.8 percent. This is when they put the convertibility
system in and did some of the big privatizations. The IMF had
virtually nothing to do with that.
Post-the Mexican peso crisis in December of 1994, the IMF
became very involved, and reforms, in effect, stopped in
Argentina.
In 1999, President Menem wanted to dollarize the economy
and fix the currency problem once and for all. The IMF poured
cold water on that.
In 2000, de la Rua came in, and the IMF, in the middle of a
slump, encouraged three very large tax increases. And these tax
increases put Argentina in a very unusual situation with a
large and mounting tax wedge the difference between gross labor
costs and net wages. In other words, this is how much labor
gets taxed: 42 percent. There is only one country in Europe
where the tax wedge is higher--that is France at about 43
percent. This is almost double the tax wedge in the United
States.
Then you wonder why unemployment is so high and the
underground economy is so vibrant.
Then in 2001, as the situation went out of control, the IMF
essentially turned a blind eye to the whole thing. The meddling
with the convertibility system, the further tax increases in
the middle of a recession, and meddling with a monetary system
that had the effect of tightening monetary conditions. So you
tighten monetary conditions and increase taxes in the middle of
a recession.
So what shall we do?
Many people think that the move toward floating has been a
good thing and they heap praise on it. I do not think we are
going to see the peso floating on a sea of tranquility. We have
had a long history of sinking pesos.
I think, in closing, it is very interesting that, thanks to
Congressman Frank, Under Secretary Taylor finally fessed up
that the best thing they should have done--and what they should
have done in early December--was to dollarize the economy to
give it a positive confidence shock.
I think it is too bad that these things were not
articulated by the Administration in a clearer game plan that
could have been somewhat helpful in the situation in early
December, but in any case, what they should do is dollarize the
economy, point number one.
And point number two, the U.S. Government should respect
U.S. laws. If you look at Title 22, various provisions in the
U.S. Code, it states that if property is seized or contracts
are nullified in a foreign country involving U.S. citizens or
U.S. corporations, U.S. foreign aid should not be forthcoming
and the President should instruct the executive directors of
the IMF, World Bank, and Inter-American Development Bank to
vote no for any disbursements from those organizations to the
country involved in trampling on the rule of law and property
rights.
Thank you.
I know I went over, Mr. Chairman, but I will shorten it up
in the Q&A session.
[The prepared statement of Dr. Steve H. Hanke can be found
on page 129 in the appendix.]
Chairman Bereuter. That's all right.
The three of you went over equally. Actually, we could
probably stand back and just let you throw verbal arguments at
each other, but I am going to recognize Chairman Oxley for 5
minutes, and the 5-minute rule will proceed in the normal
fashion.
Mr. Oxley. Thank you, Mr. Chairman. I appreciate that.
It is tempting to follow that advice and just have a jump-
ball here among our distinguished panelists, and we may get to
that if I have time.
Let me ask you, Secretary O'Neill was here last week,
Thursday, and testified regarding contagion. He basically
pointed out that in his estimation contagion is simply a man-
made phenomenon and that he saw little if any contagion with
other countries because of the Argentina crisis.
I am wondering if our panelists agree with that assessment
from Secretary O'Neill? Or is it perhaps too early in the game
to make that kind of a statement?
Let's try Dr. Meltzer and then move on down.
Dr. Meltzer. Well, sir, it has been a very interesting
experience, because not only, as Fred Bergsten has said, has
Mexico received an inflow of capital, but Peru went to the
capital markets and was able to borrow at 9 percent interest
for 10 years. It is the first time they have been in the
capital markets in 70 years. They did that after the Argentine
crisis, just 2 weeks ago.
Brazil has been cutting its interest rates. In all the
countries in that neighborhood, for example Chile, most of
those countries have not had a problem. And the reason for
that, I believe, goes to the fundamental part of what contagion
is about.
Contagion was big in Asia because there were many countries
that had similar problems, or appeared to have similar
problems. It is just like the experience we are having right
now.
People look at Enron and say it has a bad balance sheet.
They then go to look at all the other companies that have bad
balance sheets.
When they looked in Latin America, they saw that most of
the other countries did not suffer from the Argentine problem,
and that is why they left them alone. And, in fact, in many
cases they received more capital, or they have been able to
borrow in the capital markets. So no contagion.
Mr. Oxley. OK. I knew Enron would come in here somehow.
Dr. Bergsten.
Dr. Bergsten. As I said in my testimony, I agree with
Secretary O'Neill on this one. I think there are three basic
reasons why there has not been contagion in this case.
First, the markets do differentiate better, partly because
of greater transparency in the markets, and better information
in them.
Second, because the countries in Latin America in
particular have strengthened their banking and financial
systems so they do not have the same underlying structural
difficulties that was the case even 5 or 6 years ago.
And third, the move to floating exchange rates, which does
provide a very important buffer.
There was one other important reason for the contagion in
Asia, and it was certainly man-made. It was the role of the
Japanese banks. It is still not widely known that the Japanese
banks were the major source of contagion in Asia. When the Thai
crisis hit and weakened the already weakening balance sheets of
the Japanese banks, they then pulled their loans out of other
countries in the region--out of Indonesia, out of Malaysia, out
of Taiwan, out of Korea.
The contagion from the withdrawal of Japanese bank funds
went right around the horn of the region and was an important
factor in the contagion. Fortunately, we do not have that now,
for the reasons I indicated, and I think that is likely to
continue. I do not think it is a transitory phenomenon.
Dr. Weisbrot. Well, you might actually get agreement here.
If you put all the economists end to end around the world, they
are never supposed to reach a conclusion. But I think on this
one there is basic agreement.
The only thing I would add about the--and I think O'Neill
was right about this, too--is if you look at the contagion from
Asia to Russia and then Brazil in the 1998-1999 crisis--well,
it actually started in August of 1997--that was really the
profound irrationality in the financial markets.
The part that Fred just described that's different: That is
the Japanese banks pulling out their loans. But, investors
pulling their money out of Brazil after the Russian devaluation
is more of just an irrational phenomenon where they looked
around and they said, ``Well, where is the next emerging market
that other investors might think is in trouble?'' even if there
was no solid economic basis for that.
So, that kind of thing is really fundamentally irrational.
It is part of the functioning of financial markets. It could
happen again, but it does not look like it is happening here
now.
Dr. Hanke. I think one reason that we have not realized a
lot of contagion from Argentina is their unique currency board
like convertibility system. It is an extremely tough system
that, in fact, surprise, did not fail.
They had 100 percent reserves covering the monetary
liabilities of their monetary authority at the end of the day
when they threw in the towel.
Usually when we have contagion motivated by an exchange
rate crisis, what happens? The central bank loses all of its
reserves. It cannot defend the exchange rate anymore. And the
thing blows up. This was the Asian case. This was the Russian
case. This was Brazil, and so forth.
If we want to really eliminate the possibility of contagion
being motivated by foreign exchange rate problems, we should
dollarize these emerging market economies. We should not be
floating. Floating is not the way to go.
If we look at Argentina, they had a central bank. It was
established in 1935. The peso has depreciated against the
dollar by a factor of 6 trillion since 1935. They have had one
crisis after another with the only decade of exception being
the decade of convertibility.
So, if you think that a floating exchange rate is going to
solve your problem, I think you are whistling in the wind,
given the Argentine case. You can anticipate all kinds of
problems and chaos, and ultimately, I think, official
dollarization will see the light of day.
We know everyone prefers dollars in Argentina, and you have
a lot of unofficial dollarization, and will see more of that. I
think ultimately when they really hit the wall they will go to
official dollarization.
Mr. Oxley. Thank you, Mr. Chairman.
Chairman Bereuter. Thank you, Mr. Oxley. I say to the
Chairman and all Members that since the House is not going to
be voting until 6:30, we will not be interrupted. That is the
positive side. So we can proceed with the second round of 5-
minute questions, if that is the desire. I think it is probably
desirable.
The downside, of course, for witnesses' information and for
the audience, is that we do not have many Members back yet
until 6:30.
The gentleman from Vermont is recognized under the 5-minute
rule.
Mr. Sanders. Thank you, Mr. Chairman.
I do not claim to be an expert on Argentina, but I find
this discussion to be extremely curious. In Nicaragua today,
which is a small Central American country, unemployment, I
think at last I heard, was 60 or 70 percent. Nobody really
cares anymore. Left-wing government is gone. The New York
Times does not care. It doesn't matter. People go hungry. It's
OK.
I suspect that the situation economically in Guatemala, El
Salvador, total disaster. Who cares? Doesn't matter. Poor
countries.
Suddenly there is great concern about Argentina. And I
detect a bit of arrogance on the part of some people. Some
people suggest Argentina is a bad country. They do not respect
the rule of law.
Well, all of us believe in the rule of law. But that is
what they do. And yet, billions of dollars have been invested
in that country by very, very smart people--by U.S.
corporations, by banks, by all these people, in a country that
does not respect the rule of law.
So what interests me, first of all, is why all this
interest in Argentina? Are you guys worried about the children
in Argentina today who are hungry? Are you worried about the
educational system, which is collapsing? Are you worried about
the health care system in Argentina? Are you really worried
about the people in Argentina? Or maybe, just maybe, is there
something else involved in here?
I think Dr. Hanke was perhaps most up front about this when
he talked about how the IMF should perhaps not fund countries
which do not respect the rule of law and are doing terrible
things to American corporations.
So, are we here because we are interested in protecting the
investment of American corporations? Or are we concerned about
the people of Argentina?
Now again, I do not claim to be an expert on Argentina. I
am aware that there has been massive corruption in that
country, as well as other countries around the world. So what?
So what? Why do American taxpayers or American citizens stay up
nights worrying about that? That is their business.
But, I detect that all of this interest in Argentina really
has to do with something else. Not the people of Argentina, but
corporate investments and the need to protect those
investments.
Now in that regard, I note that an article, March 2nd,
Knight-Reiter Tribune News Service, quote: ``After more than 18
hours of debate, the lower house in Argentina passed and sent
to the senate a budget that slashes spending by 14 percent
compared to 2001 levels.''
Now, my guess is that will mean less health care, less
education, less affordable food, and other basic necessities of
life.
Question to all of you: What is the reason for concern
about Argentina? Is it the people of Argentina? Or is it
American corporate investments in Argentina and the dangers
that they are incurring?
And second of all, in your economic judgment, if a country
in the midst of a major depression cuts spending, unlike what
we do when we have a recession, how will that impact on the
poorest people in that country?
Let me start off with Dr. Weisbrot and then go to the
others, please.
Chairman Bereuter. Try to answer the gentleman's questions,
both of them, but we need to be relatively brief.
Dr. Weisbrot. Sure.
Chairman Bereuter. For all of you. I understand.
Dr. Weisbrot. Obviously, we are concerned about the people
of Argentina. I have written recently about Nicaragua and the
situation there as well. They are the only country in Latin
America whose income per person is lower than it was 40 years
ago.
There are also a lot of failed policies promoted by the IMF
and the Bank in that country. These policies had something to
do with its decline.
When I was there, I spoke with a doctor who is running a
health clinic in the neighborhood of Matanza, which is about 26
kilometers outside downtown Buenos Aires, and he told us that
the malnutrition rate among children there was about 30
percent. The infant mortality rate was about 35 per 1000, which
is very high.
He said everything was getting worse because hospitals were
running out of supplies. It is a very severe crisis. It is
affecting the poor, and I think it is horrible that the
government is cutting their hospital budgets.
I have not focused on the human side at this hearing,
because I think the economic side is what people here need most
to understand, because it is because of the widespread
misunderstanding that our government is supporting, and, in
fact, the IMF is pressuring, the government of Argentina right
now to make those budget cuts.
I feel that is wrong from an economic point of view, and it
is terrible in its impact on the people there.
Mr. Sanders. Thank you.
Dr. Meltzer, in a country in which children are suffering
from malnutrition and their economy is collapsing, is it your
economic judgment that they should cut back on subsidies for
food, health care, and education?
Dr. Meltzer. I think those are questions that are best left
to the government of Argentina.
Mr. Sanders. Really?
Dr. Meltzer. Yes.
Mr. Sanders. But, what we are talking about here is the
power of the IMF over that country. Can that country make
decisions independently anymore?
Dr. Meltzer. In fact, that's, I believe, what we have been
fighting for, is to give those countries--put them in the
position where the IMF does not dictate to them, where the
World Bank does not dictate to them, but where they choose
their own policies.
I want to say that in response to your question, I do not
share the dichotomy that you have set up. I do not think that
there is a conflict between American corporations and local
people.
American corporations in most places are one group among
many foreign corporations. There are many, many Spanish
corporations, and indeed, many more Spanish dollars invested in
Argentina than American dollars invested in Argentina.
What was the Argentine government's first response? It was
to put a tax on the foreign corporations in order to pay for
the mistake, in my opinion, that they made in adjusting the
banking system. That was a mistake. They blew a hole in the
banking system, and then they said, ``Well, we will just make
up that money by taxing oil companies.''
Now, you may think that is a good idea. Let me just say the
immediate reaction of the Spanish government was, ``we are
going to protect our corporate citizens.'' So they went to
Argentina and they negotiated that down, and that left a hole
in the banking system.
Mr. Sanders. No, no. I am not saying whether it was a
good--it does not sound to me like good economic policy, but
the point is----
Dr. Meltzer. It wasn't good any kind of policy. It was a
stupid thing to do.
Mr. Sanders. Let's assume that if you were an advisor to
the Argentine government you say ``this is a stupid thing to
do.'' What does this have to do with the average middle-class
taxpayer in the United States that the Argentine government
does stupid things?
Dr. Meltzer. Let me answer it this way. I think that there
is a human problem, and I talked about that human problem in my
testimony. I think that we have tried hard, and, in fact, even
though Fred Bergsten and I disagreed on many things about the
so-called Meltzer Commission Report, one of the things we
agreed on very much was on the use of grants in place of loans
so that we could help people in poor countries, and the
President's program has been to push that.
So, I am not against humanitarian aid. I am for
humanitarian aid. But in the case of Argentina, we have
provinces where 50 percent of the population in the province
works for the government.
If you go to an Argentine office, you see obvious signs of
overmanning. Just lots of people standing around doing nothing.
There is room to cut some of those budgets.
Their tax rates are very high.
Mr. Sanders. If I could----
Dr. Meltzer. So it is possible to make major fiscal changes
without cutting education. That is a democratic decision of the
Argentine government.
Mr. Sanders. Here is my point, and then I will----
Chairman Bereuter. Just a brief comment, Mr. Sanders, and
then we will come back to you.
Mr. Sanders. Everything you are saying may well be right.
So they have a bad government.
Dr. Meltzer. Yes.
Mr. Sanders. What does this have to do with what the IMF
does and whether we punish them or not?
Dr. Meltzer. Well, there are two ways you can go on this,
as you and I both understand, Mr. Sanders.
You can say let's give them the money and help them, and
allow them to continue to do the things that they do; or take
away the money and get them to do some sensible things which
will make it better in the future for both the children and the
grandchildren of those people.
And people, you and I, can disagree about where the line
between those two things are without necessarily disagreeing
that both of those cases exist.
Mr. Sanders. Thank you.
Chairman Bereuter. We can come back to that if you would
like, Mr. Sanders.
I would like to move to Mr. Frank who Mr. Shays is willing
to let go ahead of him.
Mr. Frank. I appreciate it, Mr. Shays.
Chairman Bereuter. The gentleman is recognized.
Mr. Frank. I have an ambassadorial appointment I have to
meet, and so I apologize, too, because I would have liked to
have stayed.
When we talk about cutting back and everything, one of the
things--could I ask, some of you are more expert in Argentina
than others, and maybe I am missing something--is Argentina
under any significant danger of attack?
Does anybody know of any physical enemies menacing
Argentina?
Mr. Bergsten. Mr. Frank, Argentina is sometimes
characterized as a dagger aimed at the heart of Antarctica.
Mr. Frank. Yes, well----
Mr. Bergsten. It has no national security threat
whatsoever.
Mr. Frank. That reinforces my view that we should amend the
First Amendment and ban the use of metaphors in the discussion
of foreign policy.
[Laughter.]
Dr. Meltzer. Yes. But in fact, they have cut back
considerably on their military.
Mr. Frank. Have they cut back on the military?
Dr. Meltzer. Considerably under both the Menem government
and----
Mr. Frank. But, one of the things that bothers me is when I
look historically at the outside advice that is given, rarely
are military expenditures among the items that other
governments and the international financial institutions tell
them to cut back. I think that is an indication of the kind of
bias. People are told to cut back on other things.
We have many of these poor nations, it seems to me,
overarmed, overairplaned, over-a-whole-bunch-of-things, and in
the list of items that we are told, I can look at the IMF's
list of things in the past and we're hoping to change these,
and the military is rarely on the list to be cut back.
Dr. Hanke, do you want to comment?
Dr. Hanke. Yes. I was going to remark that President Menem
and President Pinochet sorted out the last real potential
conflict that they had on the border with Chile and Argentina
in 1989.
Mr. Frank. Well I----
Dr. Hanke. But at any rate, this gets back actually to your
point. You can almost answer your own question. You raised the
issue about democracy in your opening statement, and isn't this
democracy at work? This is the whole problem with foreign aid.
If you give them money, you know what happens.
Mr. Frank. No, Dr. Hanke, I do not follow that at all. Your
restatement of my point I do not recognize. I do not understand
how the problem----
Dr. Hanke. Well I----
Mr. Frank. Excuse me, but it is particularly my turn to say
what I said.
I must say, you did seem, to me, disturbed, at least my
sense of your reaction was that you were somewhat unhappy with
my discussion of democracy----
Dr. Hanke. I agreed with it.
Mr. Frank. As I was with your definition of it, and I will
get to that in a second. But, I do not understand how, if you
give them foreign aid, you know what is going to happen. That
just does not follow.
In fact, what I am objecting to has been an excessively
interventionist position by the international financial
institutions and others in which they were told to make changes
that I thought were unsustainable, both in terms of raising
taxes, and cutting various kinds of spending.
I was struck, because when you responded you seemed to me
to define democracy down to basically observing the sanctity of
contracts. Now I am all for that. And given John Locke,
obviously contract law has a great providence in democratic
theory. But you seem to me to restrict it almost only to that,
and particularly you said that, well, no wonder there was all
this distaste for democracy in Argentina given the way they
devalued, and so forth.
But, in fact, we went through three presidents before they
got to devaluation. I mean the rioting and the troubles, it was
not until Duhalde was in, which was two resignations already,
or three, before he became president.
So, I did want you to elaborate on your view. It seemed to
me you were attributing the lack of respect for politicians
there largely to the failure to recognize the sanctity of
contract, and things like economic inequities and people
feeling they did not have enough to eat, or unemployment being
too high did not seem to count.
Dr. Hanke. Well, those issues do count. I think what you
have to do to put the--I was not looking at it in a narrow
context--if you go back to the Federalist Papers and look at
those, for example, or particularly Hamilton's view on the rule
of law, it is really broad-gauged. And so I would put my
remarks about the rule of law, governance, and democracy in the
context of the Federalist Papers, I believe.
Mr. Frank. Well, OK, then I would----
Dr. Hanke. Broaden it out----
Mr. Frank. OK, I would say that I think that is not
sufficiently broad today. The people who wrote the Federalist
Papers and the Constitution were very smart guys for their
time, but I think they had an insufficient understanding of the
importance in a modern capitalist society of a more positive
role for government.
And I must say, I did kind of detect--let me ask one
question, if I could. It is one of the dilemmas I have. Yes, I
understand we have got debts that are contracted. They cannot
all be paid.
And there has been a lot of focus on the problem of moral
hazard of encouraging people to lend improvidently, and I think
that is something we have to deal with. But this seems to me
one of those dilemmas, because if we are too harsh here, what
is the impact on a flow in the future?
How do you deal with the problem of reducing moral hazard
without getting to the point where you discourage people from
lending in risky situations?
Let me say, if I could have 30 seconds, Mr. Chairman, I see
that analogy domestically. Sometimes my colleagues and I object
to people who engage domestically in predatory lending, and
lending to people who will be too much in debt.
Then the next day we are upset because of red-lining. And
if you never do any predatory lending, you will probably get
involved in red-lining. Or at least if you do not lend to
people who are shaky.
What about that dilemma? How do we deal with the problem of
moral hazard without discouraging people in the future in the
private sector? I assume we want them to continue to make
loans.
Start with Dr. Meltzer.
Dr. Meltzer. Yes. That is a subject I have thought about a
lot, because we have proposed various kinds of preconditions.
So, one of the ways to deal with that problem is to try to get
countries to reform.
We believe that the incentive system, which would occur
with preconditions including, of course, one of the
preconditions to correct something that Fred said, was that
there be fiscal rectitude in a country, or fiscal stability in
the country, which Argentina did not have.
So it wouldn't----
Mr. Frank. Fiscal rectitude. Now we have got from the
Federalist Papers to Dickens. You have got to find another word
other than fiscal rectitude.
Dr. Meltzer. Whatever. You use the word. But we will both
know what we mean.
Let me just say that the bulk of the money that comes to
countries comes from the capital markets. Something like 15 to
20 times as much as from the international institutions.
If a country adopts solid policies like Mexico, like Brazil
now, like Chile, then they get large amounts of money on much
better terms because they are a better country from the
standpoint of the lender.
So, the way we deal with the moral hazard problem is, one,
we put the responsibility, the onus, on developing the
incentive to do that on the country. We want them to choose the
set of policies. That was the whole purpose of precondition,
that they would choose the policy.
We would not get a laundry list from the IMF about things
that countries should do, that maybe they would do and maybe
they would not do, and most of the time did not do. What we
would get was that the minister of finance of the country would
go to his parliament and say ``we're going to do this because
it is going to be good for our country.''
Second, we would get--one of the preconditions was--we are
going to have foreign banks in the country. Now we have seen in
Brazil, in Argentina, and elsewhere, that that really works
quite well.
Third, we want to do something which says let's get less of
the money out of the short-term capital market, which is the
way the system worked before, and let's get it into long-term
lending and private capital flows. That is, foreign direct
investment.
Those are ways we reduce moral hazard.
Mr. Frank. That last point, in particular, is very
interesting to me. If you could give us something in writing as
to how we could do that.
The last thing is the volatility, getting it into longer
term would be a very good thing.
Any of the others?
Dr. Meltzer. I will write to you.
[The reply from Dr. Meltzer can be found on page 115 in the
appendix.]
Dr. Bergsten. Yes. I would just like to add, I think the
moral hazard problem is vastly overstated. It is one of my
least worries. This was one of the debates between us on the
Meltzer Commission.
There is virtually no empirical evidence that moral hazard
has been a source of any of the crises of the recent periods.
If you want to do something about it, one way is to limit
the magnitude of IMF support programs. A concern has been that
countries, and particularly lenders, will lend excessively,
build up excessive risk, because of the fear of an IMF bailout.
Therefore, one remedy is to roll back the size of IMF
rescues to the normal kind of quota arrangements, rather than
the excessively large packages in the recent past.
A second issue that has now come up is private sector
involvement. Mr. Oxley mentioned the IMF proposal for more
orderly debt workouts. I happen to support that, not every line
in the Krueger proposal, but I think it is the right way to go.
I think it does need to be worked out.
The main fear about that is that it will limit the flow of
private capital in the future as creditors fear that they might
get stuck in a workout position.
I actually think it will work the other way around: A more
orderly, regularized procedure will lead to a steadier and
probably more proper level of flow, reducing somewhat the huge
seesaw--the excessive lending in good days, excessive pullouts
on bad days--that I mentioned in my opening statement.
Chairman Bereuter. Your time has expired. Well, go ahead,
but make it a quick one.
Mr. Frank. Well, I just wanted to listen to what Dr. Hanke
said. I have to leave, but I would be glad to hear it in
writing.
Dr. Hanke. Related to your moral hazard point----
Chairman Bereuter. Use your mike.
Mr. Frank. Microphone.
Dr. Hanke. Related to your moral hazard point, I think it
is important that the U.S. enforce and follow its own laws, and
that gets back to the U.S. Code Title 22.
If foreign governments engage in activities in which
contracts are nullified and property is seized, it is fairly
obvious to me, if you look at the Code it should be triggered.
And I think that would help reduce moral hazard problems.
Mr. Frank. I would just add on that, if we got uniform
enforcement with the things we have put into the various IFI
replenishments about labor rights, and poverty and human
rights, maybe I could buy that as a package. But I would not
want to see selective enforcement.
Dr. Weisbrot. Could I respond? It is a really good point, I
think, and I think first of all the balance now is tipped very
overwhelmingly toward bailing out, in terms of the tradeoff,
bailing out reckless international creditors. And that is what
happened in the Asian crisis, for example, as the Fund
basically coerced the governments of Indonesia and South Korea
and the others to absorb the debt of the foreign lenders.
I think that is where transparency really comes in. If we
could know right now what the IMF is demanding from the
Argentine government, for example, we might find out what most
of the people that I talk to there believe: that there are some
bad things happening involving the guaranteeing of foreign
lenders.
Now in terms of striking a balance, capital controls have
been shown to be helpful. Chile, for example, used capital
controls very effectively and it did increase the time, the
average time of investment.
Mr. Frank. It would be the short-term problem.
Dr. Weisbrot.And finally, we also should have some
perspective on what is really being provided to countries when
foreign lenders are loaning at 19 and 20 and 25 percent, which
has been the average returned in the last year or two. Is there
any investment in those countries that is producing a return
higher than that?
In other words, is there a net gain to those countries?
I would say in many cases there is not. This is just a
speculative bubble of some sort, and it is really a drain on
those economies.
Mr. Frank. But, not forced on them. I mean we do have----
Dr. Weisbrot. No, No, I'm just saying that it is not
something----
Mr. Frank. They make the decisions.
Dr. Weisbrot. We have to worry about if that kind of
lending does not continue at its present rate.
Chairman Bereuter. Dr. Bergsten, very briefly. I want to
get to Mr. Shays.
Dr. Bergsten. Dr. Weisbrot has twice said that the IMF's
demands on Argentina should be made public and I want to pick
up Mr. Frank's point about democracy. That is one of the worst
ideas I have ever heard because then any proposal they made
would have to be rejected by any Argentine government. No
democratic government could accept the dictate of the IMF no
matter how reasonable it was.
So you cannot make it public.
Chairman Bereuter. Mr. Sanders.
Mr. Sanders. That is rather an amazing statement.
Chairman Bereuter. You will have Mr. Sanders' attention
here shortly.
[Laughter.]
Chairman Bereuter. The gentleman from Connecticut, Mr.
Shays, is recognized for equal time. You will probably get
about 8 or 9 minutes.
Mr. Shays. Well, given that I am going to stay to the end,
I do not really care. Thank you.
I am doing a lot of wrestling, because I was grown up by
strict parents who say you make obligations, you abide by them.
And I happen to, unlike Mr. Sanders, I do not think you can
repeal the law of gravity.
By that I mean there are just some basic economic
principles that come into play. What I would first like to know
is, I do not know what the debt service to their entire budget
is, the percent of their entire budget is debt service. What is
it?
Dr. Weisbrot. I have that.
Mr. Shays. Mas e menos.
Dr. Weisbrot. The percent of their current spending is debt
service as a----
Mr. Shays. Yes, yes.
Dr. Weisbrot. Let's see. I think it was----
Dr. Meltzer. They pay about an 11 percent average interest
rate on about $130 billion worth of debt, and----
Mr. Shays. And you are going to make me figure it out. All
I want to know----
Dr. Meltzer. Well, I am just trying to do it in my head.
Mr. Shays. Why don't you do it in your head and then tell
me the answer?
[Laughter.]
Dr. Weisbrot. I can't give you an exact number. I mean
all--what I can tell you is that----
Mr. Shays. No, I don't even want an exact number.
Dr. Weisbrot. Yes, yes.
Mr. Shays. This dialogue means nothing if it was 10 percent
of their overall budget. If it----
Dr. Meltzer. It is about 15 percent, maybe.
Mr. Shays. Fifty?
Dr. Meltzer. Fifteen, twenty maybe.
Dr. Weisbrot. Yes, that sounds about right.
Mr. Shays. That's all?
Dr. Meltzer. Yes, but that is not their problem. The
problem, briefly, is it is not the amount of interest payments
they have to make, it is those interest payments compared, not
to their budget, but to the amount of exports, because the
debts are all dollar or euro denominated, and they have to
import.
Their problem was that they exported about 8 percent of
their GDP, 9 percent of their GDP, and their debt service was
something like----
Mr. Shays. You know, you've got to talk a little bit slower
for me, because----
Dr. Meltzer. They exported 8 to 9 percent of their GDP.
That is where they earned the dollars. And they had to pay
something like 5 percent of their GDP to service the debt. All
right? So that left them very little room for other things.
Dr. Weisbrot. It was even more than that. I mean, it got up
to 8 or 9--it got up to the full level of export earnings. So,
it basically became impossible for them to pay off their debt.
Dr. Meltzer. Yes. The heart of their problem was not that
their debt was so big relative to their economy or relative to
their GDP, it was that they did not export a lot, and their
exports were going up, but not very rapidly, and they did not
have any room to import. Because they had to pay debt service.
Mr. Shays. And would you say that the condition in
Argentina is a crisis? Catastrophic? Desperate? How would you
define it?
Dr. Meltzer. Terrible.
Mr. Shays. Terrible doesn't do it for me.
Dr. Meltzer. Just desperate.
Dr. Weisbrot. It is a very desperate situation.
Dr. Bergsten. All three of what you just said.
Mr. Shays. Yes, that's kind of what I think.
Dr. Bergsten. All of the above, yes.
Dr. Weisbrot. It is a severe depression.
Mr. Shays. I mean, from the stories I am getting, people
who have had assets have seen them wiped out, if they are
financial. What I am hearing is that they literally go to the
bank and are only able to take out $150 a week.
Dr. Meltzer. That is because of the banking rule. I mean,
that is the rule they imposed on themselves.
Mr. Shays. And that, basically, there has just been
extraordinary capital flight, and that people who have called
Argentina their country for generations and generations are
leaving.
Dr. Meltzer. Yes. So they are losing not only their money,
but their hope.
Mr. Shays. They have lost their hope, it appears.
Dr. Meltzer. Yes.
Mr. Shays. So, and then I get kind of pulled over to where
Barney is, because it just seems to me like the regular rules
do not apply.
Yes, sir?
Dr. Hanke. I think that is the point. There are no rules of
the game. The whole structure of property rights and the rule
of law has completely collapsed.
Now, to show you how catastrophic the situation is,
normally, if you have bank runs what happens? People go to the
bank and they draw the money they have in the bank out of the
bank.
Well, during the bank runs in Argentina, they were running
their safety deposit boxes. And the reason they were running
their safety deposit boxes is they did not trust the crooks in
the government to keep their fingers out of the safety deposit
boxes.
So, that is the level you are getting at. And I can tell
you, if they continue with this lack of rule of law, no respect
for property rights, a floating exchange rate, you are not
going to have banks in Argentina for 10 or 20 years. They have
had a long history of this.
This is not the first time around for them. Who would put
money in an Argentine bank, given what has happened to them in
the last 2 or 3 months? There is just no way.
Dr. Bergsten. Could I compound your ambivalence in another
way? Because, I too have a lot of sympathy for what Barney
said. But here is the problem:
Argentina does have to get its fiscal house in order. Your
parents were right. Because unless they do, they will fall back
into hyperinflation.
The people who lose the most from hyperinflation are the
poorest. It is the poorest people that Bernie cares about, and
Barney cares about, who will be the victims if Argentina
relapses to the hyperinflation of a decade ago.
The fiscal problem is an important part of that and
unfortunately, you have to include interest payments. You
cannot just say the primary budget is in surplus. Correct, but
irrelevant.
So, they have to do fiscal tightening. The question is
then: How do they do fiscal tightening?
One huge problem in Argentina is they do not have a tax
revenue. They cannot collect taxes. There has been a history of
that. So they have to tighten up on the revenue side.
But on the expenditure side, the question is: Do you worry
about the safety nets? Or do you go after other things like
military spending? You should cut that further. There is
absolutely no doubt about it.
But the basic point is that there does have to be fiscal
tightening. I pointed out in my statement it should have been
done 5, 6, 7 years ago when Argentina was booming. It had this
wonderful record we all talked about.
Mr. Shays. I am just going to say, to show my ignorance,
which I seem to do at hearings, but I learn from it. I do not
even know why it even matters if what we are talking about is
their ability to export.
Dr. Weisbrot. Could I respond to that? Because I disagree
completely. I don't think any country should cut back on
spending during a deep depression.
You know there were people who recommended that during our
Great Depression, too, and they turned out to be overruled.
Mr. Shays. I am going to come back around----
Dr. Weisbrot. I think it's they have a debt problem. That
is why I kept emphasizing that at the beginning. Because the
IMF kept pouring, piling more and more, arranging more and more
loans for them to support the convertibility system as it was
falling apart, they ended up with a debt that is completely
unpayable. And because interest rates kept rising and they were
tightening their budget. They were cutting. As I said, the IMF
recognized they cut 2 percent of GDP out of spending in 2000.
This is big.
Mr. Shays. OK.
Dr. Weisbrot. This contracts your economy.
Mr. Shays. My time has run out. I am going to come back for
round two. But I am just going to say, the law of gravity works
both ways. And if Argentina does not have the capacity, then it
ain't gonna get paid.
And so, round two, I will look forward to round two.
Dr. Bergsten. Could I just put one fact on the table,
because it is very important. The debt-to-GDP ratio in
Argentina rose from 23 percent in 1993 to 50 percent last year.
There was a huge increase in budget deficits and deficit
spending over this time. They then cut $2 billion out. It was
much too late. They should not have done it in the face of a
recession. They should have done it earlier.
They got into a position that was untenable, which had to
be cut, or else the hyperinflation risk is there.
Dr. Weisbrot. See, that's very misleading. That is very
misleading----
Dr. Bergsten. All of which was compounded by----
Dr. Weisbrot. You're saying the debt was increased, but it
wasn't because of spending by the government. It was because
their interest rates and interest payments exploded. Those kept
rising. But the government itself was cutting its spending on
goods and services----
Dr. Bergsten. Well, all this----
Dr. Weisbrot.----And on salaries, and everything else. So
they were caught in a debt trap, and the debt was piled on
them. What you call being too lenient was actually a curse. It
was a terrible thing what the international lenders did to
them. They kept piling more debt on them, and that is what
happened to them. And the interest rates kept going up----
Mr. Shays. Mr. Chairman, you are in charge.
Dr. Weisbrot. Because nobody believed that the currency was
going to hold.
[The gavel is heard.]
Dr. Weisbrot. But that was not a spending problem.
Chairman Bereuter. I want you to go.
Dr. Bergsten. The problem was with Hanke and his currency
board because that added integrally to what you are talking
about. Absolutely right.
[Simultaneous speakers.]
Chairman Bereuter. The Chairman has not had any time yet,
and I am about to take it. I am going to throw out three pieces
of red meat here, one of which is the currency board.
Several, or two of you at least, mentioned what we have to
be concerned about now after too permissive a policy--I will
use that term, you did not use it, I have forgotten what you
used--on the part of the IMF.
Now the problem is that we may be too harsh. The IMF may be
too harsh. I would like to ask you if they are to have a
coherent, consistent economic plan, what will be the indication
that it is too harsh?
Second question: Dr. Weisbrot specifically, you said
something to the effect that the austerity programs do not work
in Argentina because of the particular circumstances. But I
would ask you this question: Without such a program, won't
Argentina continue to run deficits and never escape from the
debt burden it currently carries?
And third: Two or three of you must have something
substantial to say about currency boards that Dr. Hanke has
discussed. If not, I would be surprised, because I thought
there was a major element of controversy between at least some
of you.
So, having used only less than a minute to ask my three
questions, I would just like to see who wants to tackle any one
of those.
Dr. Weisbrot, you are first. I mentioned you by name.
Dr. Weisbrot. If I could take the second one first, because
you addressed that to me, you said without austerity won't they
continue to run deficits?
This is in the appendix to my testimony. You can see the
actual numbers. No, they will not, if they have a moratorium on
interest payments, which I think is the least they can do to a
country that has reached this crisis at least partly because
the Fund encouraged and arranged this borrowing to support an
inviable exchange rate regime.
Chairman Bereuter. Dr. Weisbrot, aren't you concerned at
all about the message that sends to other countries?
Dr. Weisbrot. No, I think this is an important thing.
First, it sends a message that these institutions are finally
for the first time in decades going to take responsibility for
their actions.
They were wrong. They made a mistake. And I think most of
all--OK, Steve won't agree, necessarily--but everyone else will
probably agree that this was wrong, everyone here on this
panel, everyone else, and so why shouldn't there be a--we're
not even asking for a cancellation here. We are just saying
roll over it, restructure it, and the Fund has already agreed
to postpone $936 million interest debt service payment for a
year.
They need to just say this, and then they can--because what
is the alternative? The alternative is to keep cutting the
spending of the government during a recession and push it
further into depression, and hurt the people who are hurting
the most.
Chairman Bereuter. Dr. Meltzer.
Dr. Weisbrot. This is, to me, completely unreasonable and
the alternative of a moratorium is very minimal.
They don't have an overspending problem. They have a debt
servicing problem from the past. And this has been true since
1993.
Chairman Bereuter. I will see if Dr. Meltzer agrees, or
perhaps he has another----
Dr. Meltzer. I want to answer your hard question. I will
answer the currency board question in a moment.
You asked how do you know when the austerity is too tough.
The answer to that question, my answer to that question, the
answer of the majority of the Commission was, you put the
problem back into the country.
You do not have a bunch of rules sent down from the IMF.
You say to the country, ``come with your coherent, consistent
plan and if it is a good plan, we will support it. But you
decide. It is your country and you have to sell, just as you
would have to sell here, you have to sell the idea to your
constituents that this is the plan that is going to work for
your country''; that they have to make some sacrifices now, cut
some tax rates, and that would at least--because the tax rates
are so high that 40-, 50 percent or more of the transactions
take place outside the market economy with no taxes collected.
Chairman Bereuter. I guess the government policies were
being tested rather demonstrably on the streets.
Dr. Meltzer. Right, so those were the bad policies. So do
it in a political way. It is a democratic country, and let the
people decide through their representatives what it is that
they can stand to have.
That is why the Commission majority, one of the problems,
get rid of conditionality; put the burden back within the
country. All right? Let them decide.
Second, on the currency board very briefly, the currency
board is a form of fixed exchange rate. Fixed exchange rates
work well. Floating exchange rates work well. They all work
well if you have good policies. None of them work well if you
do not have good policies.
So my answer is: It was not the currency board that was the
source of the problem. It was the combination of the currency
board and the policies.
Now, in Argentina, they also had the appreciation of the
dollar and the depreciation of the Brazilian real, which made
the currency board difficult to sustain. But, they did also add
a policy which made their debt unsustainable and threatened
their currency board.
Chairman Bereuter. Was the fact that the four economies had
become increasingly more integrated a problem so that when
Brazil had its change in currency, this had a greater impact on
Argentina?
Dr. Meltzer. Yes, but Argentina only exports about 8
percent of its GDP. So it is not a big integration with the
world. It was integrated in the world in another sense in that
it depended upon capital flows to build its economy, and those
disappeared. That is one of the ways in which the currency
board got threatened.
Chairman Bereuter. Thank you.
Dr. Bergsten, you would like to comment on any of the
subjects? And then I will move to Dr. Hanke.
Dr. Bergsten. Yes. I, of course, agree that almost always
you do not want to cut budgets in a recession. I yield to very
few people in having hammered Japan, and even Europe in recent
months and years for doing exactly that and making their
situation worse.
Chairman Bereuter. So that would apply to the construction
program of highways in this country, too, during a recession,
right?
Dr. Bergsten. And I certainly agree that the U.S. erred in
the 1930s when it cut the budget in the face of the Depression.
However, in none of those cases did the country face a risk
of hyperinflation.
Argentina is different from all those cases, because with
its history, with its psychology, with its lack of a solid
financial underpinning--and there I agree with Hanke--they do
face a risk of return to hyperinflation.
Avoiding that requires, first and foremost, a new and
sensible and efficient monetary policy. And I think there is
some hope that they are headed in that direction. They ought to
adopt inflation targeting. They have got a good man now to run
the central bank like Brazil did.
But in addition, they have to have a fiscal policy that
spends within their means. You do not do it overnight. You do
it in ways that protect the safety net, not make it worse. But
they do have to bring their fiscal policy back into order.
Let me just say very quickly, we did a major study on
currency boards 5 years ago. It went through every case of
currency boards that had existed to that time. What it shows is
there are two cases where currency boards do make sense. One is
in very small, very open economies that essentially do not have
autonomy over their exchange rate or monetary policy anyway.
The second is in countries that desperately need some kind of
external anchor to get rid of hyperinflation. That was the
Argentine case.
The problem is that it inherently produces an overvaluation
in the currency if left in place over time. You must have an
exit strategy to get out of it. Argentina did not. That was the
problem. Not being, to put it mildly, a small, open economy, it
was not a case for a long-term currency board.
Chairman Bereuter. Do all of you agree with Dr. Weisbrot's
comments earlier that the federal contributions to the
provinces did not go up, therefore that was not an increase?
That is contrary to some op ed pieces that have been
written, and factually, I do not know which is correct. Do all
of you agree with his assessment that on this revenue sharing
program it did not go up? Even though they may have been
prolifigate in the way they were spending it in the provinces,
it was not something that continued to go up?
Is that correct as far as all of you know?
Dr. Meltzer. I don't know.
Dr. Bergsten. But I'm not sure it's relevant, because the
issue as I mentioned is that the debt/GDP ratio, just to take
that commonly used measure, went from 23 percent in 1993 to 50
percent a year ago. it was a huge explosion of domestic, as
well as foreign debt.
That included revenue sharing with the provinces. Cuts had
to be made somewhere. I am with Mr. Sanders. I do not want to
cut the safety net. I would much rather cut the transfers to
the provinces for road spending, and so forth, and so forth.
So that, I think, is a very important part of the package.
You cannot ignore that, whether it went up or down.
Chairman Bereuter. I am well beyond my time, too, but if we
can take maybe one minute for Dr. Hanke who deserves to speak,
and then we will go to Mr. Sanders.
Dr. Hanke. I agree with Dr. Meltzer about letting the
country come up with their own game plan.
The problem is, I remain quite skeptical about these
possibilities with the current government. They have only had
one clear idea. That is, to destroy the convertibility system,
to pesofy the economy and get the dollar completely out of the
picture officially and unofficially----
Chairman Bereuter. ``They'' meaning the IMF?
Dr. Hanke. No, I am talking about the government. So you
have to have these policies homegrown. There is no successful
reform or economic prosperity program, Mr. Sanders, that has
ever been rammed down somebody's throat. These are homegrown.
You can go right across the border. There has never been one
that has been imposed from the outside.
So, it has to come from the inside. My problem is, the
current government completely is on a one-track rampage,
getting rid of the dollar. Therefore, they have no ideas about
how to go forward.
All their effort has been essentially how to destroy the
convertibility system, how to pesofy the economy, and they are
left holding an empty bag. They have no idea of what to do, and
they are not going to come up with any coherent game plan.
Chairman Bereuter. We are going to go to Mr. Sanders now,
and we will do an 8-minute round for the two of us, or anybody
else that arrives.
Mr. Sanders. What I find interesting about this discussion
is I keep thinking the issue is not currency conversation or
peso/dollar peg, it is a lot deeper than that.
There have been some statements that Dr. Bergsten and Dr.
Hanke have made that disturbed me a lot.
Dr. Bergsten said, basically, if I got it right, if the
people knew the truth in Argentina about the IMF agreement with
the government, essentially they would be panicked. There would
be an uprising. Is that what you said?
Dr. Bergsten. No. You totally misunderstand me.
I said that any program that the IMF or an external force
published would have to be rejected by the Argentine
government----
Dr. Meltzer. In advance.
Dr. Bergsten.----In advance, whether it was the perfect----
Mr. Sanders. Why?
Dr. Bergsten. If it was a program----
Mr. Sanders. Why?
Dr. Bergsten. Because, it would be imposed by the
foreigners. If you----
Mr. Sanders. Well, first of all----
Dr. Bergsten. ----Designed the program----
Mr. Sanders. First of all--hold on. Hold on.
Dr. Bergsten.----They would reject your program.
Mr. Sanders. I am asking the questions. Two points.
If that is the case, if you are saying that the average
person in Argentina did not want a program imposed by
foreigners, then you have got a problem in the first place. Why
are foreigners imposing a program on the people? If they do not
want to be--that is the first thing.
But, second of all, implicit, the program that the IMF
usually imposes works disastrously for the average people. All
right? So the truth is, people in Argentina are saying, ``Let
me see. We're being dominated by big money interests from
abroad, and their prescription for us will raise unemployment,
lower wages, cut health care and education. Hmmm.''
You know what, if I were one of those people, I would say:
``Yeah, I don't want that program either.''
Now the conclusion is, therefore, we can continue to do
this thing in secret so that the people do not know it, or
maybe we say this type of negotiation is not good and we should
not be doing it.
That is exactly what the issue is.
Dr. Meltzer. But, that is not what is happening.
Mr. Sanders. Let me finish.
Dr. Meltzer. That is not what is happening.
Mr. Sanders. Hold on one second. Let me ask Dr. Hanke, who
is very concerned about contract law and making sure the
governments respect the agreements that they sign, and I think
that is fair enough. That is fair enough.
But, American corporate interests have invested billions in
Indonesia, and Suharto's corrupt, illegal, undemocratic regime.
Now, am I correct in understanding--so we get the record clear,
and I want to be blunt on this; I do not want to be rude--you
basically represent, as President of which bank?
Dr. Hanke. Toronto Trust Argentina.
Mr. Sanders. You represent, correct me if I am wrong,
people who invest in Argentina? Is that correct?
Dr. Hanke. No. That is an Argentine Mutual Fund.
Mr. Sanders. OK.
Dr. Hanke. Now back to your question about is anyone----
Mr. Sanders. Who do you represent in that capacity?
Dr. Hanke. Just a minute.
Mr. Sanders. No. I'm asking you a question. Wait a minute,
you. Who do you represent?
Dr. Hanke. Argentine citizens. Foreigners cannot invest. It
is an Argentine Mutual Fund. All our employees are Argentines.
All the investors are Argentines.
Mr. Sanders. OK. Thank you.
Dr. Hanke. Now that gets back to your question, though,
about who is concerned about the people. I lose a lot of sleep,
I have lost a lot of sleep worrying about people, OK, with a
small ``p''. Our clients are all Argentines. All are families
of people who work for me. We have maintained our group. No one
has been let loose. We do not want to let anyone loose. They
are good people and have been with us for a long time.
So, I do worry about people on that scale, Congressman, but
on the larger scale, I worry about the well-being of Argentines
when you have a situation where in dollar terms, the GDP per
capita has been cut more than 50 percent in Argentina.
They have gone from the highest GDP in Latin America to
something that will come in lower than Chile. And I, probably
unlike you, think that as the tide goes up, all the boats come
up. This is consistent with the work of David Dollar over at
the World Bank.
The poor benefit when prosperity is booming.
Mr. Sanders. OK, but the issue here is: Are we really
discussing how the United States and the IMF can improve the
standard of living of people in Argentina and other developing
countries? Or are we primarily concerned about how we protect
the investments of the wealthy and large multi-national
corporations?
Now, Dr. Hanke, a moment ago you talked about the rule of
law and respect for the rule of law. That is a fair point. I
certainly agree with that.
I would point out that the United States today protects the
interests of companies that invest in China. Does China respect
the rule of law? Billions of dollars were invested in the
Suharto dictatorship. Pinochet of Chile, who was recently
indicted as a war criminal, is a violator of very fundamental
human rights.
The United States Government supported American companies
that were investing in there. We invested in apartheid South
Africa. Saudi Arabia, we have very close business ties with
Saudi Arabia. Are those countries which respect the rule of law
for their own people?
Dr. Hanke?
Dr. Hanke. Well, the question is, without making too broad
a generalization, I think the standard should be uniform, and
that is what the U.S. Code requires in Title 22 that I was
referring to.
Mr. Sanders. I understand.
Dr. Hanke. So, that is all I have to say.
Mr. Sanders. But, do those countries that I mentioned, does
China respect the rule of law? Does Saudi Arabia respect the
rule of law?
Dr. Hanke. According to all the studies that have been
done, the ranking is rather low in those places and that is why
economic growth has generally been lower in countries that have
a lower respect for the rule of law and property rights.
Mr. Sanders. Well actually, China's rate of growth has been
pretty good.
Dr. Hanke. China has been an outlier in those studies. But
generally, and they are statistically robust, the stronger the
rule of law, the stronger private property rights, the more
rapid the rate of growth, the higher the level of prosperity.
Mr. Sanders. But the United States Government has supported
many, many countries who do not respect the rule of law. I
happen to have real problems with that. I don't want to say I
have problems with that, but the recent Administrations
apparently do not.
Dr. Hanke. Back to your point, though, about the IMF,
getting back so we are on the same wavelength here for a
moment, I indicated that in the big boom years of 1990 through
1994 in Argentina, the IMF had virtually nothing to do. They
had nothing to do with setting up the currency board, economic
policy, and so forth.
The Argentines did it. They had a boom. After the Mexican
devaluation in December of 1994, the IMF got in there big time
with a lot of policy advice and money and screwed the thing up.
And it has been a bloody disaster ever since.
Recently, if the IMF has not given the lead, it has turned
a blind eye. So either way you look at it, all these policy
errors have either come from Washington, DC, or Washington, DC.
has looked the other way when it has been convenient and let
them go ahead blundering away with bad policy.
Mr. Sanders. So your conclusion is perhaps that we should
leave them to run their own government, and if people want to
invest in it that is fine.
Dr. Hanke. That's right. That's why I say I think we're on
the same wavelength on this particular issue.
Dr. Meltzer. May I make a very brief statement?
Mr. Sanders. Sure.
Dr. Meltzer. I think the IMF is in the process of
transition to a system. They are not sending a lot of messages,
and they are not sending a lot of conditions down to Argentina.
They are sending a message which says come with a plan that is
coherent.
The people you should be aiming at, if I may say so, are
the World Bank. They are the ones that are down there to do
structural reforms. They are the ones that are supposed to be
concerned about poverty alleviation. They have a miserable
record.
I mean, Congress, the U.S. Congress when it passes the next
IDA appropriation, should ask for a performance audit by an
independent agency of how the development banks do. Because
they have many, many programs and their success rate is awful.
Dr. Weisbrot. Can I say something, too, on this because I
really think that if the IMF really wants to let Argentina
decide, then they should state publicly what they are asking of
the government, and not just say a sustainable plan.
I am kind of shocked sometimes how many people are willing
to accept from them, to accept when it is reported in the press
that the IMF is holding out for a sustainable plan. Well, what
is a sustainable plan?
They did not have a sustainable plan the last few years
that the IMF supported them. The IMF has clearly supported many
plans that were not sustainable and ended in disaster.
So, why should we just have a blind trust? We question
Members of Congress. We question our President. Why should the
IMF be taken completely at its word?
I do not accept Fred's idea that the people of Argentina
are so blindly nationalistic and irrational that they will
reject any proposal from the IMF. If the IMF proposed a
moratorium on debt payments for the next 4 years. And in fact
they did, right? They proposed----
Mr. Sanders. Dr. Bergsten, can you respond to that, please?
Dr. Weisbrot.----A moratorium on the first----
Mr. Sanders. Let him respond to that.
Dr. Weisbrot.----Billion dollars in those loans. The
people----
Mr. Sanders. Dr. Weisbrot, let him respond to that, please.
Dr. Bergsten. Sure. I don't mean to single out Argentina.
The United States, including its Congress, would reject any
dictate to its economic policy from abroad.
Mr. Sanders. So? Fine.
Dr. Bergsten. Therefore, if you are serious about trying to
get a better program in Argentina and get a constructive role
for the IMF. The last thing you want is for the IMF to publicly
say what it is it wants from Argentina.
Mr. Sanders. You are saying what I said you said. Then it
should be kept secret, hidden from the people because the
people would reject it?
Dr. Bergsten. No. I didn't say----
Mr. Sanders. Until it is adopted.
Dr. Bergsten. No. It shouldn't be kept secret.
Mr. Sanders. I'm sorry?
Dr. Meltzer. Until it's adopted.
Dr. Bergsten. No, no, no. It shouldn't be kept secret until
it's adopted either. The IMF should not just publish it and say
here is what you must do. That is obviously the opposite of
domestic ownership, which we all want.
However, the IMF now publishes on its website all the
letters of intent. They leak to the public in every country
they negotiate with when it is being negotiated.
There is no secret. It is well known to people.
Dr. Weisbrot. We do not know what they are demanding right
now. That is the big problem.
Dr. Bergsten. They are not demanding any specifics right
now.
Dr. Weisbrot. Oh, come on. How much you want to bet that
budget cut had something to do with what they were pressuring
the government to do, that 14 percent they cut out of their
budget?
Chairman Bereuter. A little interchange is good, but we
also have a recorder here who is probably struggling. We have a
disagreement right there, Mr. Sanders, you may have noticed,
between----
Dr. Meltzer. More than one.
Chairman Bereuter. Do you want to resolve it?
Mr. Sanders. I don't think we can resolve it. Let me
finish.
Dr. Hanke. Mr. Chairman, on that point, you see the
Administration, neither the Administration nor the IMF has laid
out what the general--not the detail of the game plan, but what
the general coherent game plan might be. So there has been, I
would say, very little direction from Washington, DC. in
general.
Now that might be fine, because as I indicated earlier, if
you try these top-down approaches you are not going to be able
to force something down somebody's throat.
That said, the IMF has been involved. Dr. Krueger did
indicate that it was not feasible to dollarize the economy, for
example, on the 11th of January, she said this when they were
still going through the process trying to figure out what they
were going to do.
Dr. Bergsten. And she's right.
Dr. Hanke. She is completely wrong, and I have written
about this on several occasions in The Financial Times. But at
any rate, that is not my point, Fred.
My point is that she did intervene. She made a public
statement about something that is very sensitive in Argentina.
And that is, what kind of currency regime they are going to
have going forward.
So maybe that was not some official big blueprint that was
laid out in a comprehensive way. It was something that was in
the headlines of all the papers in Buenos Aires and had a huge
impact on the direction things were taking, and the dynamics
down there.
So the idea that the IMF is not intervening, is not saying
anything, is just nonsense. It is not true.
Dr. Weisbrot. They are just hiding the things that they do
not want people to know about. They are announcing the things--
--
Dr. Hanke. They selectively take their shots when they want
to. And they have an enormous influence, because I can tell you
even in the last Administration when Larry Summers was at
Treasury in February of 1999, President Menem wanted to
dollarize the economy, had proposed it.
Well, it was a little bit ambiguous, but if you read what
Summers said, it was technically correct and carefully stated.
The headlines the next day in Buenos Aires? ``Summers Against
Dollarization.'' And that almost deep-sixed the thing
completely right there. Just a series of headlines.
So, these things are all quite important, and I think we
have to be very careful.
Dr. Meltzer. It is my understanding that the IMF is giving
no direction to the Argentine government. It is asking the
Argentine government to come with a coherent, consistent plan.
When I was in Buenos Aires and talked to people who are now
in the government, I presented them with a plan very much like
what I have in the paper that I prepared for this subcommittee.
But we told them, over and over again, ``this is our plan. You
have to develop your plan. Here are the problems you have to
solve. It is up to you to come up with solutions that are
satisfactory within your democratic arrangements.''
That is what the IMF--that is the position, as I understand
it, that the IMF has taken. They have taken the position of
saying that certain things would not be acceptable to them.
For example, a dual exchange rate. A dual exchange rate is
a source of corruption. It would be a very bad policy for
Argentina.
Now, they did not say you cannot have a dual exchange rate;
they said we cannot support a dual exchange rate.
Dr. Weisbrot. Which means they would not get the loan if
they didn't get----
Dr. Meltzer. That seems to me to be a perfectly sensible
thing to do. Just as any lender has a right to say ``we think
that your policy is bad and we are not going to lend you money.
But we are not going to tell you you cannot do it.''
The IMF is taking the position, that kind of position. That
seems to me to be a far step forward from where they were 5
years ago, or 3 years ago, where they came in with a blueprint
for the country, which often did not work, and that had many,
many conditions on it that had nothing to do with the crisis.
Dr. Weisbrot. I agree with Allan that this is a step
forward. I mean, it is not like the list of 140 conditions that
they gave to Indonesia. But there's still--and that is fine.
That is progress.
But, it is still a major problem that they are making
demands on this government that are secret and may well hurt
the economy very much.
Now, if I could just address the one economic issue I think
of importance that we missed, which Fred raised, on the
hyperinflation. That was his argument that, even though we
would never cut our budget in a depression, that Argentina
should.
This is a serious argument. I take that very seriously
because hyperinflation is a real danger. But the question is:
Do they really need to slash their budget in a depression in
order to avoid hyperinflation?
That is a question--that is why I think this discussion
should be out in the open and it should not be done secretly
and pressured secretly, because that is a tough question. I
don't think they have to. And I think if you look at the last
two situations like this of devaluations in Brazil and Russia,
in both of those cases the Fund said very clearly ``you cannot
let the currency fall in the first place. You will get
hyperinflation.''
That was their only reason for supporting these fixed
exchange rates to the abyss. And, in fact, they turned out to
be wrong. In both of those cases, inflation was very mild and
manageable.
Now, I am not saying that is guaranteed here. But one of
the problems is, one of the biggest threats of hyperinflation
comes if people do not want to hold the peso. And the more the
IMF drags out this process, the more likely that risk
increases.
Chairman Bereuter. I would like to thank you, Mr. Sanders.
I would like to finish with three questions that I think
might be easy to answer, although there may be disagreement
among you.
First of all, Dr. Meltzer, I think you made reference to a
liquidity proposal. I do not know if you have that available to
us, but if you do I would appreciate knowing more about it. It
does not have to be stated at this point, but I would like to
see that, if that is possible.
Dr. Meltzer. I would be glad to.
Chairman Bereuter. Thank you.
Dr. Meltzer. I have it here, and I will leave it with you
at the end of the hearing.
[The information supplied can be found on page 117 in the
appendix.]
Chairman Bereuter. Thank you very much.
Dr. Bergsten, I will start with you on this one, and
perhaps others of you have an opinion. I would think Dr. Hanke
would.
The U.S. and Argentina have a Bilateral Investment
Agreement. In your opinion, was this agreement violated when
the Argentine government declared that contracts that had been
negotiated to be paid in dollars are now to be paid in pesos?
Dr. Bergsten. I actually do not have a strong opinion on
that.
Chairman Bereuter. OK.
Dr. Bergsten. I have asked my staff, who know about the
issue, to research it. We are doing that. If I could send you a
note on it in a couple of days, I would like to.
Chairman Bereuter. All right.
Dr. Bergsten. I think it is a very serious question, but I
am not sure legally what the implication is.
Chairman Bereuter. Dr. Hanke, my guess is you do.
Dr. Hanke. I think that they have violated, yes.
Chairman Bereuter. Other opinions on that question, if you
have them formed at this point?
Dr. Meltzer.
Dr. Meltzer. It is a sovereign right.
Chairman Bereuter. It is a sovereign right to change them,
therefore it is not a violation of contract.
Dr. Meltzer. Everyone who lends in those circumstances--it
is a violation of the contract, but everyone who enters into
those contracts understands that they are entering into it with
a sovereign and a sovereign has the power to change the
contract after the fact.
Dr. Weisbrot. I agree with that also. I mean it is a change
of currency regime. There is nothing they could do.
Chairman Bereuter. It is not good for future investment
climates, at least.
Dr. Meltzer. Indeed, it isn't.
Chairman Bereuter. The Washington Post op ed today noted
that a consensus is emerging that the current government after
two months in office cannot put together and execute the
necessary reforms.
[The article referred to can be found on page 158 in the
appendix.]
Is that too pessimistic? Or do you have an opinion you want
to share, any of you?
Dr. Weisbrot. Yes, I think that is overwhelmingly too
pessimistic. Again, the government is--I want to emphasize
this--they are not facing the structural problem that other
countries have often faced. They are not overspending except
for interest payments. That is the only overspending by the
government.
That is not always the case in crisis situations. They also
do not have a balance of payments problem, which is another
problem that would be much harder to reverse and would take
much longer.
So they really only need--I mean, the main thing they need
now is to not have to pay these interest payments on the debt
until their economy recovers. So that is very different from
many of the other crises that you can point to.
Obviously the Asian crisis had different causes, but this
is not as much a systemic problem as it is being made out to
be. And if I can offer just a slightly----
Chairman Bereuter. But they do reference the current
government. And of course----
Dr. Weisbrot. What----
Chairman Bereuter. The question is whether or not the
current government can do this.
Dr. Weisbrot. Well, they could, but again they would need--
--
Chairman Bereuter. And all----
Dr. Weisbrot. They would need some kind of relief from
their debt service payments to do it.
Chairman Bereuter. Ultimately of course----
Dr. Weisbrot. And that's exactly what the Fund does not
want to provide.
Chairman Bereuter. Ultimately, of course, some government
will have a plan that is acceptable. It might take a long time.
Dr. Bergsten. I might just say that I share the view that
it is too pessimistic to write off the current government. They
have done some good things, like the deal with the provinces.
We will see if it holds. But that is a step in the right
direction.
Hanke had his horror list of things they have done, but
they faced an untenable situation. They came into the midst of
a crisis. They had no money to pay all these debts. How could
they not violate contracts? So they had to make some changes.
I think it is too soon to say whether they will be able to
pull out of it, but I certainly would not write them off at
this point.
Chairman Bereuter. Our staff is going to have a very
interesting and difficult time trying to develop a consensus on
this. At least we have not had a dull panel. We've had lots of
interaction and lots of disputes.
Dr. Meltzer. May I say to that last question, I am very
pessimistic. I am pessimistic not because I think the situation
is untenable or unresolvable, but it isn't certainly going to
be easy to resolve.
I am pessimistic because most of the moves that have been
made by the current government have, many of them have been in
the wrong direction. That is, there is a strong tendency,
having met with these people and talked to them, there is a
strong tendency to want to blame foreigners and to try to
extract the solution from the foreigners.
That was the purpose of the tax on oil companies. That was
the purpose for the new tax. They came back from Washington.
They didn't get the $20 billion they wanted. So they
immediately put a tax on foreign corporations.
I mean, that is their view of how to operate. I think with
that mindset, it is going to be very difficult for them to come
with a package that is going to work.
It is not entirely difficult, nor is it easy to come with
such a package, but it is not going to be easy if you start
with a mindset that says we are going to try to get the
foreigners to pay. And the main question that we get from
Argentine radio, television, newspapers, is: Why doesn't the
IMF just give us the money?
That mindset has to change.
Chairman Bereuter. I guess that is what we did the last two
times, meaning the IMF.
Dr. Meltzer. Thank goodness we are making some progress
with the IMF.
Dr. Weisbrot. I think it is reasonable, because the oil
exporters do get a windfall from the devaluation. I don't see
anything unreasonable about taxing that.
Chairman Bereuter. Dr. Hanke, you are going to have the
last word on this series of questions.
Dr. Hanke. I remain quite pessimistic about the
possibilities of the Duhalde government coming up with
something, because what they have to do--it has nothing to do
with, I think, these things Mark has been talking about, macro
economics and everything. You need a massive confidence shock
in a system.
And, Fred, yes there was something they could have done in
the middle of the crisis. They could have done what Ecuador did
in early 2000, when they dollarized the economy, gave it a huge
confidence shock.
They were in the same kind of mess exactly in Ecuador as
Argentina. What do you have today? Ecuador is the fastest
growing economy in Latin America. The unemployment rate has
come down from about 15 percent to 9 percent. 30-day deposit
rates have come down from 60 percent to about 3.5 percent.
A complete turnaround in the thing.
So, you have got to come up with something that gives a big
confidence shock to the system, and this will be virtually
impossible for a government that has ignored the rule of law,
destroyed property rights, torn up contracts until there's no
tomorrow.
I see virtually no hope that they can pull any rabbit out
of the hat at this point in the game, given their initial
behavior.
Chairman Bereuter. Thank you. This panel has been very
patient and is very much appreciated. We have let a lot of
discussion go on among you, and I think that is appropriate
given the sharply different opinions on a few subjects.
Mr. Sherman has just arrived from California, no doubt, and
I would say we will put a statement of yours in the record, and
if you have a question or two for the record you would like to
make in a minute or two, why, you will have the last word.
Mr. Sherman. Why, thank you, Mr. Chairman.
My heart goes out to the Argentine people, but I would like
to address my questions to how this affects the United States.
Let's say Argentina simply renounced all its debt to all
agencies of the United States Government and any agency in
which we have an interest.
How much does the U.S. Government lose? Does anybody have
an answer?
Dr. Bergsten. I don't know the amounts.
Mr. Sherman. Can it be $10 billion? $50 billion? Does
anybody have a guess?
Dr. Bergsten. They would be a tiny share of any----
Dr. Weisbrot. It is nothing that big.
Dr. Bergsten. It is a tiny share of any denominator you
care to put in there. The Eximbank undoubtedly has some
outstanding credits.
Mr. Sherman. Let me----
Dr. Bergsten. The international loans----
Mr. Sherman. I have a limited amount of time.
Dr. Bergsten. The loans from international agencies are
about $40 billion, and the U.S. share is about a quarter of
that.
Mr. Sherman. So it would be over $10 billion, then?
Dr. Bergsten. Somewhere in that range.
Mr. Sherman. And what shocks me, and what I hope that this
will be a case study of, is why so many agencies are so anxious
to loan money to foreign governments that are obviously bad
credit risks, but do not want to loan to small businesses, at
least in my district, if not in Nebraska, as well. And the way
that the too-big-to-fail bailout system, you know, when a bank
loses money on a loan to a small business in my district, we
don't have hearings here as to how to bail them out.
And the tendency of our Government to insulate banks from
moral hazard when they ship tens of billions of dollars
overseas leads to some very bad lending decisions. And perhaps
the Argentine people have a right to be angry that we loaned--
that our financial institutions, or first world financial
institutions, made loans to them that were far beyond their
ability to repay.
Dr. Meltzer. I think we have made a big improvement. I
think the Commission that I headed pushed in the direction that
you are talking about. I think we have made substantial
progress, because for the first time now we have seen Ecuador,
Pakistan, Ukraine, and Argentina where the lenders take a loss.
I think one of the big, big improvements that has come in
the last year has been that lenders who lend to sovereign
countries now understand a lot more about risk than they did
before because the IMF has not been there to bail them out, as
they have over the last 25 years.
I think that is a great step forward that is going
ultimately to make a much improved international capital
market.
Dr. Bergsten. Yes, I agree with that. Note that there are
huge losses that private lenders and investors are now taking
in Argentina. So it is not a bailout to put it mildly.
Mr. Sherman. Thank you, Mr. Chairman.
Dr. Meltzer. I mean, they are going to get 20 or 30 cents
on the dollar.
Dr. Weisbrot. I agree with that, as well. But I do think
that there is still a lot of negotiation taking place, and we
do not know how much of those bad loans they are going to force
the Argentine government to absorb.
Chairman Bereuter. Thank you very much, gentlemen. I very
much appreciate it. I have not had a chance to talk to all of
you ahead of time, but I will come down there and meet Dr.
Meltzer, who I have not met yet.
The hearing is adjourned.
[Whereupon, at 3:55 p.m., the hearing was adjourned.]
A P P E N D I X
February 6, 2002
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