New IEO report: Watchdog faults Argentina, but also IMF

• Pages: 229-232

Page 229

IMF SURVEY: Why does the role played by the IMF in Argentina's crisis-unlike other cases, such as Indonesia and Korea-deserve special attention?

TAKAGI: In Korea and Indonesia, the IMF wasn't involved immediately prior to the crises, and these crises came as a surprise. But the IMF was involved in Argentina almost continuously for 10 years prior to the crisis.

IMF SURVEY: Why wasn't the IMF able to help Argentina prevent the crisis?

TAKAGI: In all fairness, there is only so much an international institution can do to influence a country's policy choices. Ultimately, accountability for a Page 230 country's economic policy must rest with its authorities. But having said that, there are several reasons why the IMF wasn't effective. First, IMF staff may not have fully appreciated the formidable political obstacles in Argentina. The authorities knew what they needed to do, but they didn't have the political ability to deliver. At the same time, the IMF didn't use the available tools from its surveillance and program relationships with Argentina as effectively as it could have. Conditionality was weak, and Argentina's failure to comply with it was often accommodated.

The IMF-although it wasn't alone in this-was also overoptimistic in its estimation of the impact of certain reforms that Argentina was undertaking and of the prospects for economic growth and manageability of debt. As a result, the IMF remained engaged in a program relationship too long, when the policies being supported were inadequate.

When the crisis unfolded and Argentina sought exceptional access, the IMF viewed its exchange rate or debt sustainability problems as manageable. Staff also had very optimistic assumptions about developments in the world economy.

IMF SURVEY: To what extent did IMF surveillance help identify the vulnerabilities that led to the crisis?

TAKAGI: Surveillance was not sufficiently candid about the inconsistencies between Argentina's choice of exchange rate regime and its other policies. The IMF recognized the need for fiscal discipline and structural reform-labor market reform in particular-to compensate for the fixity of the exchange rate and underpin the convertibility regime. But its surveillance underestimated the vulnerability that could arise from the steady increase in public debt-much of it was dollar-denominated and externally held-and did not consider exit strategies when it became evident that meaningful progress in structural reform...