18 March 2004

Interview with Eduardo Aninat

18 March 2004
The Times of India

Fund or Foe?

Interview with Eduardo Aninat, former DMD of the IMF

A former finance minister of Chile during that country’s experiment with a Tobin-type tax on short-term capital flows, Eduardo Aninat served as deputy managing director of the International Monetary Fund (IMF) from 1999 to 2003. This period saw the IMF involved in controversial macroeconomic "stabilisation" efforts in Africa and Latin America, especially Argentina, which often led to the imposition of huge social costs on the working and middle classes. In an interview with Siddharth Varadarajan , Mr Aninat, who was in Delhi recently, acknowledges the IMF made some mistakes but also says many of the criticisms levelled against the Fund are unfair. Excerpts:

Would you agree that the IMF is suffering from a crisis of credibility? It doesn't predict crises or prevent them, the cures it prescribes are sometimes worse than the disease. After the handling of the Asian financial crisis, there was much introspection in IMF-World Bank circles but then you have the thing in Argentina.

It is true that the Argentine crisis, which was the default during the last days of the de la Rua government, happened in the period I was there, and it is true that in this period, some of the aftermath of the Asian crisis were still ringing in our ears. It is my personal opinion that the problems of Argentina were long in the making, for more than a century. There is a double phenomenon. First, the federal government has never really taken too much hold over the provinces and this underlying fiscal problem has only got compounded through time. Second, Argentina is not yet truly open to the rest of the world in spite of reforms. They have privileged their domestic markets, especially consumption goods. So this double phenomenon makes Argentina a puzzle for development theory. It is as if policymakers for a long time were opting for the wrong road, either fiscal irresponsibility or more and more protectionism.

The kind of reforms the IMF pushes ignores the great social costs involved in bringing about macroeconomic adjustment. Isn't there need to shift paradigm, to ensure poor people do not bear the burden of adjustment?

In the Argentine case, I insist we have to look at very many domestic factors. For example, in the settlement reached last week, there is an opinion that Argentina was already in arrears. So the question is whether the IMF is acting too harsh on Argentina or too soft. Many outside critics say the IMF has been too soft. First, in the 1990s by lending too much. And now, by "accommodating" — that is not my view — too much.

In the mid-1990s, the IMF was full of praise for Argentina's fixed exchange rate of one peso to the dollar. So even as the crisis was brewing during this period, as you put it, isn't it ironic that the IMF considered Argentina one of its great successes?

On the convertibility factor, I would tend to agree with you. That was a policy where personally I always had doubts. I even counselled my old friend (Argentine finance minister Domingo) Cavallo in private to get rid of that at the beginning of the Menem-2 period because it was not effective for the economy. All fixed exchange regimes (expect perhaps in Estonia) have produced more costs than benefits. And in that, the whole world has learned. People are staying out of administered fixed rate regimes because they seem to put undue pressure on the real economy for no benefit.

Malaysia is one of the countries that has taken a different approach from that advocated by the IMF and done well. Its central bank says private companies should not borrow money abroad for projects that do not have foreign exchange earning potential. Is this an approach countries like India should look at?

Statistically, Chile would be like the better case for a similar but not quite IMF-inspired policy and Malaysia is the odd case where they did the opposite to what the IMF was preaching at that time and have done well. The two cases are rarities and the world is in between. As for the deeper content of your question, I do worry about the question of matching, leveraging and hedging. And I think if I can give any counsel to the Indian authorities, it is that the issue of not having mismatches between the assets and liabilities of the banking system and those of companies of Indian registration is important. Particularly focusing on the short-term liability and asset composition in foreign exchange. Because when mismatches develop within short-term assets and liabilities in dollars, sometimes problems tend to accrue.

Didn't Tobin suggest a way out? You keep the benefit of markets setting the exchange rate, but by taxing speculative capital flows, you also reduce volatility. Chile ran a kind of Tobin tax for five years when you were finance minister. What was your experience?

We were the only country to use it in the spirit of Tobin, only we invented it ourselves. But in 1999, we went over it and stopped it because markets had deepened enough. Looking back, we were right because things are going even better for Chile. The fundamental conceptual problem is who judges the speculative component of short-term capital flows? Money that comes in for a plant may include short term money, say for working capital. Is that speculative? One can have methodological problems.

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