Not carved in stone
By Avraham Tal
Haaretz, December 30, 2004
When the Israeli economy was on the brink of a crisis in 2002, we heard warnings that it could deteriorate to "an Argentinean situation." At that time the crisis in Argentina reached rock bottom - the currency plummeted, unemployment soared, economic activity declined, and many were poverty-stricken and fled the country (and even came here). The government was incapable of paying its debts and called for their cancellation. Argentina appeared to be on the verge of disintegrating.
Three years have passed and there has been a complete turnaround in Argentina. Contrary to all the forecasts, the economy quickly pulled out of the crisis. A New York Times reporter in Buenos Aires wrote this week about the country's prosperity. In each of the last two years the Argentinean economy has grown by about 8 percent, the currency has stabilized, exports are flourishing, unemployment has dropped from 20 percent to 13 percent, the flow of foreign investments - mainly from Argentineans who are returning the capital they withdrew during the crisis - is increasing, and foreign balances are again approaching $20 million.
Even so, Argentina has still not dealt with mammoth foreign debts totaling $176 billion.
The interesting thing is that this turnabout took place with disregard for and even in contradiction of recommendations by the International Monetary Fund, which the Argentinean government blamed largely for the crisis, after it adopted the IMF's recommendations for severe restraint in the 1990s.
The government refused to grant priority to overseas creditors, froze prices, raised taxes on exports and financial transactions, forced wage hikes in order to increase demand - and additional steps not exactly taken from the IMF's recipe book.
There are already experts who have been disappointed by the IMF's advisory activities toward governments struggling with economic crises. One such well known personality is Joseph Stieglitz, a Nobel Prize-winning economics professor who was the chief economist at the World Bank (a sister organization to the IMF) from 1996 until 1999.
Stieglitz held the IMF responsible for the failure to prevent the crises and even for deepening them in Southeast Asia and Russia in the 1990s, due to strict recommendations for a policy of restraint. Argentinean President Nestor Kirchner apparently remembered the conclusions of the IMF's detractors and did not allow the IMF to interfere in his economy.
For years the IMF has been closely following the Israeli economy and providing the Bank of Israel and Israeli government with annual reports based on visits by its delegations to Israel. The IMF is considered the bastion of conservative orthodoxy in economics, and by nature views a monetary policy aimed at maintaining low inflation as a primary goal of economic policy in general.
It is therefore only natural that the IMF has identified over the years with the Bank of Israel's positions and has supported the opinions it has presented to the government. In recent years the IMF has expressed satisfaction with the policy that led to restraining inflation, and was not particularly impressed by the economic price paid in terms of increased unemployment and lost product.
The latest report filed last week by IMF economists showers compliments on both the government and the central bank and generally supports their policies. In an uncharacteristic display of flexibility, the IMF "approved" next years anticipated deviation from the budget deficit goal (3.4 percent instead of 3 percent, for financing the disengagement plan), but quickly retreated to its fortress of orthodoxy, warning against any additional deviation and disregarding the circumstances that reduce the risk of controlled deviation.
On one very sensitive issue the IMF maintains a stance contrary to that of both the government and the central bank - the need to legislate the separation of the provident funds and the mutual funds from the banks. The IMF feels this could suppress the entry of new competitors to the capital market, and fears that the banks' reaction will necessitate increased supervisory measures (the IMF believes that the continuation of the reforms in the capital market will increase competition between the banks and lower the risk of conflicts of interest).
The timing of this recommendation is very poor from the perspective of the finance minister and members of the Bachar Commission. This is a good time to recall the Argentinean lesson - the IMF's word is not carved in stone.
