False Economy - Alan Beattie [20]
This time the hubris was located in the government of Carlos Menem. In manner and populist appeal he was, arguably, not unlike an Argentine version of the U.S. president for most of the 1990s, Bill Clinton. Both were former governors of impoverished backwater states whose personal charm and charisma propelled them into the presidency. Menem chose a cabinet of talented technocrats, many of them educated at the same American universities as their counterparts in the Clinton administration and the International Monetary Fund. Although he came from a Peronist background, Menem edged away from economic isolationism, deciding there was one useful thing Argentina could import from America: credibility. He linked the Argentine peso irrevocably—or so the intention was—to the U.S. dollar. This meant adopting US. interest rates and fixing the amount of pesos circulating in the country to the amount of dollars held in the government's foreign-exchange reserves. Argentina could borrow like America only when it acted more like America.
This was a high-risk course. Argentina had gotten used to printing as much domestic currency as it saw fit. It now had to earn dollars with an economy that had for decades forgotten how to export. It also had to control public spending: a government persistently spending more than it earned would increase the need for dollars to fund it. So Argentina had to do two things for which it had little talent. In fact, it had to stop acting like Argentina.
For a while, this approach seemed to work. Inflation dropped and the economy stabilized. A wide-scale privatization program followed. The IMF, desperate to find a model globalizer to parade before the rest of the developing world, unwisely began touting Argentina as an exemplar. Menem was invited to address the IMF's 1998 annual meeting in
Washington, the only head of government thus honored apart from Bill Clinton, its host. But once again Argentina proved a delinquent, better at borrowing than earning. For much of the 1990s it was cheap to borrow in hard currencies like the dollar, as money poured into emerging-market countries. After 1998, though, when a succession of Asian countries and Russia were hit by a financial crisis, it became harder for any emerging-market country to roll over its debt. The drying up of capital markets after 1998 did not in any sense compare with the credit drought of the First World War, but the melancholy withdrawing roar of the tide was enough to leave some overloaded boats stranded.
Investors started pulling dollars out of the country. Argentina had borrowed too much when borrowing was easy for it to survive when it became hard. As dollars flowed out, so the supply of pesos had to fall, too. In countries that controlled their own currencies, such as the United States, the severity of the worldwide economic slowdown of 2001 was minimized by rapid cuts in interest rates—that is, the price of money. The U.S. Federal Reserve slashed the cost of borrowing rapidly in 2001, ensuring that the American economy would go through only a brief and shallow recession despite huge falls in the inflated share prices of technology companies.
In Argentina, whose currency was tied to another, the shortage of dollars in its reserves drove interest rates to punishingly high levels as demand for the limited supply of hard currency rocketed. Argentina was caught in a death spiral, and the skyrocketing interest rates crushed businesses and bankrupted families. In desperation, Buenos Aires doubled down on its bets, borrowing billions of dollars from the IMF in the hope that the economy would pull out of its dive. But the investors on whom Argentina depended weren't convinced. In December 2001 the IMF pulled the plug, and Argentina was forced into the largest government bankruptcy in history.
Per capita income dropped by nearly a quarter in three years. The central government had no money to bail out the