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Latin America's free-market fall

And the Money Kept Rolling In (and Out) Wall Street, the IMF, and the Bankrupting of Argentina Paul Blustein PublicAffairs: 280 pp., $27.50 Liberty for Latin America How to Undo Five Hundred Years of State Oppression Alvaro Vargas Llosa Farrar, Straus & Giroux: 278 pp., $25

July 24, 2005|Daniel Kurtz-Phelan | Daniel Kurtz-Phelan, an associate editor at Foreign Affairs, reported from Argentina during the economic crisis.

When Argentina collapsed into economic ruin and political chaos 3 1/2 years ago, much of the world looked on with quiet satisfaction. The nation had been the star of the laissez-faire 1990s, transforming its economy into one of the world's most open, earning lavish praise from Washington policymakers and lavish reward from Wall Street investors. Yet by the end of 2001, the government had stopped payment on its massive debt and sat paralyzed as the financial system crumbled. For critics of globalization, this implosion provided a neat morality tale: How greedy capitalists and smug neo-liberals sacrificed a nation of 38 million people on the altar of free-market dogma.

At first, Paul Blustein's "And the Money Kept Rolling In (and Out)" and Alvaro Vargas Llosa's "Liberty for Latin America" seem like exemplars of this line of thinking. In his authoritative account of the nation's unraveling, Blustein calls Argentina "a victim of misfeasance, nonfeasance, and even malfeasance by foreign money interests, bureaucrats, and political figures." Vargas Llosa takes the country's crisis as a point of departure for a sweeping, seething analysis of Latin America's long history of "oppression" and "deceitful capitalist reform."

Latin America's recent past certainly provides fodder for critics of the free-market ideology that swept through the developing world in the 1990s. No other region so eagerly embraced neo-liberal reforms -- free trade and capital flows, privatization, labor flexibility, balanced budgets -- and no other benefited so little from them. But before anti-globalists brandish these books, they should read past the opening pages. For despite their indignation, neither Blustein nor Vargas Llosa is out to save Latin America from neo-liberalism; they are more intent on saving neo-liberalism from Latin America.

Blustein, a Washington Post business reporter and author of a superb 2001 book on the International Monetary Fund's response to the various financial crises of the 1990s, opens with stark images of a society's decline: pensioners banging pots in the main plaza, children starving in Buenos Aires suburbs, hordes of scavengers picking through garbage, a middle-aged woman setting herself on fire in a bank lobby after the government freezes her life savings. From there, he backtracks several years to the heady days of easy money, and asks how Argentina could have fallen so far so fast. He finds the explanation in the fluctuations of financial indicators and the debates of gray-suited economists, out of which material he crafts an absorbing tale of hope, folly and betrayal.

Most critics have railed against Washington, Wall Street and the IMF for forcing painful and misguided reforms on poor countries. (Then-Argentine President Carlos Menem called it "major surgery without anesthesia.") Blustein argues the opposite: As successive Argentine governments borrowed and spent their way toward disaster, the rest of the world was not strict enough. Argentina's fall, as he tells it, is the story of a spoiled teenager who gets a Porsche for his 16th birthday and promptly wraps it around a telephone pole. His ire, accordingly, is directed at the policymakers and investors who "indulged" the nation's fiscal irresponsibility and convinced its leaders they could do no wrong.

The key problem was convertibility -- the pegging of the Argentine peso to the U.S. dollar at a 1-to-1 exchange rate. After years of devastating hyperinflation, most Argentines welcomed the relief convertibility brought. It also meant, however, that large amounts of governmental borrowing would undermine the peso's value and the entire financial system with it. Given the pressures of electoral politics and the eagerness of foreign investors to lend, borrowing proved too tempting to pass up. The Argentine government came to resemble "a small businessman so desperate for cash to meet the immediate demands of creditors that he agrees to borrow at usurious rates from a loan shark."

How could all those PhD economists and millionaire financial analysts not have seen the crash coming? Blustein reveals just how many of them did. His heroes are the Cassandras who warned of impending disaster as everyone else sped along, drunk on a mixture of wishful thinking, political (over)sensitivity, incompetence and greed. The IMF was eager to "showcase a success story," while Wall Street, with its "voracious appetite for fee income," was more than happy to sell its clients high-interest bonds issued by the cash-strapped Argentine government. Had they faced up to the truth, they could have let Argentina down relatively easily. Instead, they cheerfully led it to a ruinous panic by investors and depositors.

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