BUENOS AIRES, ARGENTINA -- In the Plaza Dorrego, a small, tree-lined square that occupies the heart of the historic and oh-so-precious San Telmo district, life looks and feels as though nothing has changed in 80 years. The aging Parisian buildings that surround the plaza seem to shelter it from the bustle of downtown and the ravages of economic crisis: Antique dealers sell their wares, waiters clear espresso cups and liquer glasses from the tables, and tourists snap photos. In the center of the plaza, a thin, sharply dressed man leans against an iron gaslight and tips his hat to a dama in high heels and fishnets across the way. She winks; he points to himself: "Me?" She nods; he saunters over. Just as he is about to reach her, she rises and tries to flee. He grabs her wrist, she reels into his arms, music surges forth from a radio and the tango begins.
Ten blocks away lies the Casa Rosada, seat of the Argentine government, where an equally complex, if far less elegant, dance has been taking place the last few weeks. The partners are less comely and the looks of disdain and defiance they exchange are anything but theatrical, but the dance is fascinating, if only because, like the tango, it promises a thrilling finish.
In reality, this flirtation began last December, when Argentina turned to the International Monetary Fund for emergency aid. Buenos Aires was burning, and it seemed that the IMF would at any moment come to the rescue. But a succession of five governments in a matter of weeks left the IMF nobody to bargain with. The first precondition for an accord, it was decided, was political stability.
In January, Eduardo Duhalde managed to form a government. Looting in Buenos Aires has since died down and poverty has became a way of life for more than half of this once comfortably middle-class country -- but negotiations with the IMF have moved forward with all the speed of a continental plate. Surrounded by political enemies, Duhalde does not have sufficient clout to rein in corruption and government spending, much less carry out the deep reforms the IMF would like to see. In August, while Uruguay and Brazil received massive IMF loans and promises of continued support, Argentina was told "not yet." The bearer of this bad news, U.S. Treasury Secretary Paul O'Neill, made it clear that Argentina would have to get its house fully in order before it could hope to receive aid.
O'Neill's depiction of Argentina as a bad boy unwilling to mend his ways was by no means preposterous. In this country, ubiquitous corruption and political infighting threaten to turn any proposed stimulus package into a pork barrel feeding frenzy. Nevertheless, time seems to be on Argentina's side: Two months later, it is the IMF that is looking stubborn and petty. On Sept. 24, when IMF Director Horst Köhler reiterated the fund's demand for "a minimum of political consensus" and said it was up to "all Argentines" to stand behind Duhalde, the request seemed so naive that both Argentine and international commentators began to question the IMF's sincerity. "Why doesn't the IMF just tell Argentina that there won't be any accord?" asked one reporter. "We're not asking the impossible," insisted Köhler. Whatever the case, his plea for consensus had the opposite effect: A day after it was made, a poll showed the majority of Argentines in favor of abandoning talks with the IMF.
Duhalde's team seems to have sensed this shift in political winds and tacked quite gracefully. Economy Minister Roberto Lavagna went on the offensive, claiming that Argentina had made a good deal of progress since January, with dollars accumulating in the central bank's reserves, the peso holding steady at 3.5 per dollar and inflation under control. Meanwhile, Duhalde sought to paint a picture of Argentine haplessness before the IMF's ever-changing whims. "It's a game of poker," he said. "And the IMF is holding all the high cards."
Of course, you should never believe a poker player when he tells you he's got a lousy hand, and soon enough Duhalde played his ace. His government would not, he told the press, pay the upcoming installment on its World Bank and Inter-American Development Bank (IDB) loans without a guarantee of financial security from the IMF. In other words, if no accord is signed by Nov. 1, when the grace period on the payments ends, Argentina will enter into default on its international commitments.
Anne Krueger, first deputy managing director of the IMF, responded by warning that should Argentina default, it would lose all IMF aid for social programs. But Lavagna, on his way to Washington to meet with officials before the annual meeting of the IMF and the World Bank on Sept. 29, was one step ahead of her. "The world won't end if we don't reach an accord with the IMF," he told reporters, pointing out that since the peso's devaluation in January, Argentina had paid more than $3.8 billion in interest and principal payments to international organizations -- and had yet to receive "1 cent" from the IMF or the World Bank. "We're still trying to negotiate with the [IMF]," he said. "But we are getting tired of all this 'blah blah blah.' "
The timing was exquisite. With the annual meeting only days away, the last thing that Köhler and company wanted was to appear intransigent and uncooperative. Köhler's frustrations with Argentina showed through when he told the general assembly of the IMF and the World Bank that new mechanisms had to be found to deal with countries unable to meet payments on their debts. Meanwhile, Ricardo Hausmann, former chief economist of the IDB, warned that an Argentine default would jeopardize the credibility of the IDB itself, almost certainly leading to a loss of its AAA rating. The potential repurcussions of such a development led many of the Group of Eight (G8) nations to express concern over the situation in Argentina, putting further pressure on the IMF to reach an accord.
Indeed, shortly thereafter, Anoop Singh, director of the IMF's Western Hemisphere Department and occasional good cop to Krueger's bad, told the press that the organization was nearly ready to sign a provisional mini-accord with Argentina that would last until the elections in early 2003. IDB President Enrique Iglesias announced on Oct. 3 that the bank was ready with a loan of $500 million as soon as an accord was signed. Lavagna, not overly pleased with the idea of an accord that only grants security for a few months, nevertheless told reporters that an agreement was near.
But this tango isn't over yet. Later the very same day, the IMF backpedaled, announcing several new prerequisites, including a stipulation that Argentina let its currency float freely, with no intervention from the central bank. Argentine Secretary of Finance Guillermo Nielsen was livid. "This issue was closed," he said. "You cannot keep on reopening the discussion." Last week, Nielsen arrived in Washington for negotiations with the IMF. He returned to Buenos Aires on Friday -- a draft of an IMF letter of intent in hand -- as IMF officials said that some progress had been made but that other issues remained to be resolved.
After all this melodrama, it's hard to imagine that some kind of accord won't be reached, and soon -- a November 1 default would be unfortunate for everyone. The real question, though, isn't so much what will happen to Argentina as what will happen to the IMF. Argentina's plight has been a worst-case scenario for the organization: One of its prime pupils has become an international basket case. The heavyweights of development economics -- Paul Krugman, Joseph Stiglitz and Paul Wolfensohn, among others -- have weighed in on the merits and flaws of the IMF's policies in Argentina, and the case is already destined for study by a new generation of economics students.
But whatever the fate of the Washington Consensus -- and these days it looks like it is headed for the garage, if not the scrapyard -- the Argentine crisis has revealed a more deeply imbedded structural weakness in the Bretton Woods system of international economics: the lack of a nuanced understanding of politics. This is evident in everything from the startingly indelicate tone IMF functionaries have taken in their numerous public statements on Argentina to their naive pleas for consensus in a country utterly defrauded by its own political system. The IMF has gone so far as to criticize the decisions of the Argentine Supreme Court -- which has awarded damages to some plaintiffs whose savings are frozen in banks -- suggesting that has it has shown a lack of regard for constitutional law and due process.
In this light, Lavagna's frustration with the IMF makes perfect sense: Argentina may be hurting economically but it is clearly on the path to recovery. Just the fact that it has survived a 350 percent devaluation of its currency with almost no inflation is a small miracle. But the IMF's demands are increasingly of a political nature: consensus, support for Duhalde and resolution of the institutional conflicts between the provincial governments and Buenos Aires, as well as those between the executive and the judiciary branches. Indeed, the true crisis in Argentina is not economic but political. Elections are set for early 2003, but they alone are unlikely to resolve the problems of patronage, clientelism and institutionalized corruption that have plagued the country for decades and have become suffocating in the last 10 months.
The thought of dirtying its hands in such a cesspool has -- understandably -- led the IMF to distance itself from Argentina's political problems, falling back on an "it's up to you" stance. But the IMF's belief that it can isolate economic issues from internal politics is not only unrealistic, it is dangerous. The offer or denial of billion-dollar loan packages radically alters the political landscapes of the countries the IMF and World Bank work with. If they mean to make good on their promise of cutting world poverty in half by 2015, the economists who run these organizations will not only have to accept this truth, they will have to embrace it -- lest they find their clients ever more inclined to sit out the dance.
