NCPA - National Center for Policy Analysis

IMF Prescribing Wrong Economic Medicine For Argentina

August 30, 1996

An International Monetary Fund team is forcing Draconian austerity policies on Argentina in exchange for more loans to the country. Experts warn the policies won't work.

  • The IMF is insisting that the country's deficit not exceed $1 billion next year -- equal to about 0.3 percent of gross domestic product.
  • It is also reportedly urging an increase in payroll taxes, even though they now are close to 40 percent and the country has an unemployment rate of nearly 20 percent.
  • Critics say these IMF policies concentrate on short-term symptom cures, rather than key structural reforms -- such as labor reform, government reform and privatization.

Observers say the IMF is putting Argentina's new free-market-inclined finance minister, University of Chicago educated Roque Fernandez, on the road to tax increases -- rather than allowing him to design a long-term program combining structural reforms with realistic fiscal measures grounded in reduced expenditures and a more neutral tax regime.

Free market economists urge reforming Argentina's extremely rigid labor legislation.

  • Collective bargaining procedures favor monopolistic behavior by unions and severely limit negotiations at the firm level.
  • Labor taxes earmarked for social services provided by unions are a source of corruption.
  • And a surrealistic system of severance payments burdens small and medium enterprises.

A whole array of taxes and regulations has slowed job creation and reduced the international competitiveness of Argentine exports.

  • While the country is slowly deregulating the labor market, a number of studies suggest that comprehensive reform could quickly reduce unemployment at least 8 percent.
  • One estimate says a reduction in labor costs of 10 percent through lower payroll taxes would generate an increase in employment of 5 percent.

Experts say that Argentina should follow the example of Chile, where free-market reforms have achieved 6 percent unemployment and nearly a 5 percent per year increase in real wages.

Source: Sebastian Edwards (University of California at Los Angeles), "More IMF Austerity Won't Cure What Ails Argentina," Wall Street Journal, August 30, 1996.


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