Argentina   Argentina2  Korea  Mexico  Equador


Argentina today is a country in shambles. It isn’t completely responsible for its own dire state—its banks broke and economy in the worst shape in history; the International Monetary Fund and US government have certainly been important actors in bringing about the tragedy. Argentina, Brazil, and Chile were favorite whipping boys of the Clinton Commerce Department’s anti-trade officials, brandishing their labor, environmental, and ‘anti-dumping’ regulations. Shamefully Bush—who preaches free-trade—hasn’t faired much better, supporting steel tariffs and refusing to take a stand against embarrassingly high subsidies for US agricultural interests which have priced Latin Americans out of the US market. Yet it is the IMF, incessantly waving about its money bags and spewing its bad advice that has emerged as the Argentine political elite’s closest ally in bringing about the devastation. The best prescription for Argentina? That depends on who you ask. The Wall Street Journal’s Mary Anastasia O’Grady offers her own proposition: “Export the IMF, Import Everything Else” (The Americas column, 6/23/00). The witty recommendation was made over two years ago, but makes no less important a point today. The IMF refuses to learn from its mistakes, first of which is its own (universal) prescription for developing countries; fearful of ‘overheating,’ those perched in the fund’s towers call for higher taxes and ‘currency equilibrium.’ What these fancy analysts fail to take into account in preaching their book-smart theories is that poor Argentines—now over half the country—earn so little that raising their taxes will do little to fatten the national wallet; wealthier Argentines have never really paid their taxes and certainly aren’t about to start now—a failure of government policy and enforcement. What the IMF and Argentine interim president Duhalde have succeeded in accomplishing by violating the convertibility law, devaluing the peso and allowing it to float is forcing the Argentine middle-classes into poverty, slaughtering the value of deposits by ‘peso-ifying’ them, and then restricting the amount depositors could withdraw. Perhaps the worst of the IMF’s offense is that it has continuously props up bad governments and their ineffective and often corrupt political elites. It was a money laundering scandal allegedly involving central bank governor Pedro Pou that served as the catalyst for convertibility’s downfall (Ibid, 11/30/01). Treasury Secretary Paul O’Neill, commenting on further lending, specifically to Brazil, but also referring to Latin America in general, spooked markets by committing the fatal error of uttering the truth: “They need to put in place policies that will assure that as assistance money comes, that it does some good and it doesn’t just go out of the country to Swiss bank accounts” (Fox News Sunday, The Beltway Boys, 8/3/02). O’Neill had lifted the curtain. The IMF and other lending organizations should take heed and quit bailing out investors and subsidizing bad government and its corrupt officials.


Collaps of the Central Bank in Argentina

What happens when country’s central bank is rendered useless? One does not have to look further than the current economy of Argentina. After four years of stagnation, the fixed exchange rate (1 peso =1 dollar) fell apart in December 2001. The central bank quickly exhausted its reserves in the aftermath. Moreover, it has been estimated that Argentine citizens have withdrawn a total of $10 billion from the banking system (The Guardian, August 23, 2001). Many provinces, especially the Buenos Aires province, simply lack the cash to pay salaries. It would be reasonable to conclude that the Argentine economy is paralyzed due to the lack of money circulation and staggering rates of inflation. Yet Argentine citizens have found a way to obtain basic goods and services through barter clubs. Barter clubs started in Argentina in 1995 and were limited to small towns outside the Buenos Aires province. Now they can be found in every neighborhood. People go to these clubs and exchange goods for goods, goods for services and lately both for a new type of currency called a patacone, which essentially started out as IOUs for goods and services. The peso has become so devalued that providers of these goods and services would rather accept the patacones than the central bank issued pesos. In this sense, the Argentine central bank has been rendered temporarily out of commission. In my opinion , one of the most important tasks of a central bank is to inspire confidence in and maintain the value of a country’s currency. Based on the emergence of these barter clubs and the patacones, it is clear that with the devaluation that these two criteria have not been met. In light of this, Argentines have resorted to other means to survive, which brings up an interesting point- although central banks create monetary policy, it is inevitably the actions and expectations of the citizens that lead the policy to be successful or not.


In 1997, Korea experienced an economic crisis due to the lack of foreign currency in the central back of Korea. It's been a long time since the politicians and the Korean economy have been deeply connected, and this factor made the Korean economy collapse in the end. The government used to force the central bank to lend the huge companies, called chaebol, capital with low interest rates. However, with the collapse of the one huge company, which was Hanbo group, many big and small businesses connected with that group went into bankruptcy. After this incident, many other chaebol groups collapsed with huge debt. This lead the foreign currency deposit in the central bank to be exhausted. In a sequence, the foreign exchange rate increased, which made the Korean currency to have a lower value than dollars. As a result, the Korean economy was in a crisis with a less competitive international market and had to borrow dollars from the IMF(International Monetary Fund) for a long term. The lesson that the Korean economy learned is that the government should have been in control of the separation between the politicians and the Korean economy in order to increase the competition among the domestic companies and with the international businesses.

Impact of Financial Collapse in Mexico
Ever since I can remember, my father would always give my sisters and I casual lessons on the way the world works. We got history, we got science and very often we got finance. He even made his weekly financial revision and bank statement organization a family bonding experience. I remember laying on my parents bedroom floor with my father going over every number and concept on the bank statement explaining to me what everything meant. I must have been no older than six (I know, its really non-conventional, but neither is my father). Interestingly enough, the only thing that really sunk in was the fact that if you have your money in a bank, you'll make a "profit" given the interest you receive in the account. Later, I opened my own junior account and received monthly statements showing that I had made ten cents on my five hundred peso account. I loved those ten cents (however insignificant) because I figured that eventually, after many years of receiving ten cents, I would be a very wealthy kid. Many years later, in 1994, when Mexico was hit with a massive financial crisis, it dawned on me that interest rates can work against you as well. As I am from Mexico and was living there at the time, again, my father was giving me a financial lesson while we were on the way to the bank. We were discussing the situation and I noticed he was very stressed. He mentioned that, given the situation, he was having a very hard time paying the mortgages on our apartment and meeting the car payments. I was confused and asked him to explain. Well, after the crisis hit, the interest rate was kept very high to attract investment. As a consequence, many Mexicans were left in a very awkward situation, where their debt to the bank had increased dramatically. The car stopped, we got out and walked into the bank. I couldn't believe it; the entire bank was filled with people's living rooms, bedrooms and kitchens. There was furniture, TV's, VCR's, frying pans, washing machines, everything and anything you can imagine. The bank had confiscated all the goods that people had bought using bank loans but hadn't been able to pay back. That's when it dawned on me that perhaps the car we were driving in, and that the home I had to live in might also be taken by the bank. Interest rates 101, the hard way. That's when it really hit me...but really, really hit me, that interest rates take as much as they give.
To end the cycle, later that year, a bank moved into a building owned by my father. But even the banks were out of money and so, not very often but on occasion, they would pay my father rent by giving him the TV's, the VCR's and the furniture that they had taken from other peoples homes... almost like bartering. We agreed to this because, in all honesty, we had to take what we could and hope to later sell it ourselves.


The number one villain for most Ecuadorians is the banker, and not far behind is the politician. This is not surprising when we take a quick look at Ecuador’s financial crisis in the late 1990’s, what eventually pushed the country to dolarize in the year 2000. Starting in the mid 1980’s there was trend to liberalize the banking system in Ecuador. In 1994 a law passed which almost completely deregulated financial markets and intermediaries, granting the central bank very little power over a bank’s activity. New financial institutions proliferated, each setting interest rates at their own will since the government could not intervene. This caused interest to rise dramatically. Meanwhile, capital was being drained out of the country through offshore accounts, which had been legalized. Many times the main actors of the capital drain were the banks themselves. Corruption was rampant, with credit only given to businesses closely related to banks or even ghost companies. While high inflation and interest rates hurt the legitimate sectors of the economy to the point that many businesses went bankrupt which seriously affected Ecuador’s growth. Unofficial dolarization started with the increase demand for dollars, as the sucre continued to devaluate and both public and private debts increased (both in dollars.) Ecuador's problems were further worsened by huge public spending in the war against Peru in 1995, the losses on the coast caused by El Niño in 1997, and the drop of oil prices in 1998. Not to mention the sharp increase of unemployment and the decrease of real wage, rising the poverty rate to 80% of the population. Toward the end of 1998, the Agency of Deposits (AGD) was formed and was financed by the Central Bank. Its main objective was to work as a depositor’s insurance, as well as administer bankrupt or risk of bankruptcy banks. The creation of the AGD had two negative effects. First, it inspired distrust in within depositors since it signaled that something was wrong. Second, the moral hazard increased because it gave banks a financial cushion that permitted them to make riskier decisions. There was also a “sucrerization” of private debt, which means that the Central Bank bought private bank's debt, which was in dollars, for sucres. This translates to the government having to add what was private dollar debt to its own, which in 1999 was 118% of GDP. It is estimated that private banks received between three to six thousand million dollars during this time, the exact number is not known for the lack of transparency in these corrupt transactions. This obvious transfer ,through the banking system, of capital from public hands to private becomes more obvious when we state the fact that 60% of the deposits in banks before the crisis belonged to only 1% of the depositors.
Only outright theft like this could explain how this small country which is incredibly wealthy in natural resources is so impoverished. Although dolarization increases some financial security against inflation, it also ties the Central Bank’s hands when it comes to monetary policy. After studying such horrifying banking maneuvers, maybe it is better that Ecuadorian bankers and politicians have less of a say on their country’s economy.

Plitman, Ruth. "La Crisis Financiera del Ecuador." Practicante de la Fundación Friedrich Ebert. March - April 2002.





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