[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










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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

                              ----------                              
                                                                   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

                              ----------                              


                      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


 
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