3 The Mistaken Assumptions of the IMF

Argentina’s adoption of a convertibility regime in the early 1990swas a legitimate attempt to restore a viable monetary and financial system in a country that had lost confidence in its authorities ’ ability to manage the currency. Among all the available options, however, the system that was chosen was the one that restricted the economic authorities ’ manoeuvring room the most. At the time, this option was seen as the best mechanism for building credibility in a country in which economic agents had lost faith in the successive Administrations ’ ability to manage the economy properly. Nonetheless, it was obviously not the only option available and, in fact, none of the other Latin American countries that had been afflicted by hyperinflation in the 1980s or early 1990s (Bolivia, Brazil, Nicaragua and Peru) chose a similar system. The new scheme worked well for a time. It was effective in bringing about a rapid recovery in the early 1990s, a fairly swift remonetisation of the economy, the reconstruction of the financial system and the reappearance of corporate and personal credit. The convertibility system did, however, have two other very closely related effects: a strong dependency on highly volatile external financial flows and, given the absence of any scope for flexibility in economic policy, a sharp business cycle. The country’s heavy dependence on external financing was, in turn, reflected in a strong tendency to run a trade deficit, together with a clearly overvalued currency. Advocates of the system tended to underestimate thes