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O'Neill's Hands-Off Dogma

July 15, 2001

Symptoms of weakness in the world economy are growing. Europe suffers from high unemployment, stubborn inflation and an anemic new currency, the euro. Japan is an economic basket case, Taiwan's and Singapore's currencies and stock markets are sinking. Now comes the threat of a debt crisis in emerging markets.

Unfortunately, the Bush administration seems readier to wait than act. Earlier this year it did reluctantly intervene to help save Turkey from catastrophe when its currency melted down. At the time, the Treasury Department argued that it had inherited a mess.

Now, serious warning signs have arrived from Argentina, which may default on its $130-billion foreign debt. To raise cash quickly, Buenos Aires floated short-term notes at 14% annual interest. Such panicky measures may instead prompt skittish investors to pull out of the Argentine stock market. In a globalized economy, the Argentine malady may quickly infect other Latin American countries. The Brazilian real has plummeted, and Spanish and U.S. banks such as Citibank have large exposures in Argentina. When part of the global system unravels, the whole thread can unwind.

We've been here before. The Clinton administration, led by its capable Treasury secretary, Robert E. Rubin, acted quickly to treat incipient illness. Thus, President Bill Clinton bailed out Mexico, which paid off in regional economic stability. Similarly, the United States got the International Monetary Fund to arrange for loans when Russia suspended debt payment in 1998. For Argentina, Washington needs to push through a pending IMF loan and loudly endorse belt-tightening.

However, Bush administration Treasury Secretary Paul H. O'Neill and Treasury Undersecretary John Taylor see it differently. Having denounced the Clinton administration for pursuing the foreign policy equivalent of welfare, they have called for a laissez faire approach.

The United States does have a right and obligation to demand that IMF loans to emerging market countries be closely tied to economic reforms. This condition has been lightly observed and must be enforced. Argentine President Fernando de la Rua has proposed a deficit reduction program, but it's not clear that his center-left coalition will agree. Pressure from abroad can make it an easier sell at home.

In its reluctance to intervene overtly where it can be effective, the Bush administration will compound the problems that Argentina and other countries confront. A belief that the United States won't step in, either to apply pressure or lend a helping hand, only increases investor uncertainty. O'Neill needs to add some common sense to his hands-off dogma.

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