While the world’s attention has been focused on the Middle East, South America has been headed toward chaos and collapse. And worse, it is not merely an economic collapse, but a collapse into a disastrous intellectual confusion that threatens to make recovery impossible for many years.

A measure of this confusion is the fact that Argentina just swore in its fifth president in two weeks. The fourth president resigned his post the moment he got it, explaining that whoever takes office “has to have a serious program of government” — a confession that he didn’t have one, and didn’t know how to come up with one.

But now, the new president, Eduardo Duhalde, has projected a strident certainty and a willingness to act vigorously. And that is Argentina’s biggest problem. The only person who is certain of his views is a rabid anti-free-marketer, who is peddling, as an antidote to the nation’s economic ills, the exact same poison that has already destroyed Argentina’s economy.

Argentina is a lynchpin of South America. For the past decade, it has been a “model citizen,” with a stable currency and a relatively strong economy, thanks to relatively pro-free-market policies. Now, those free-market ideas are being blamed for the nation’s crisis, both by Duhalde and by some commentators in the United States.

To find out the real story behind the Argentine crisis, I talked to economist Richard Salsman, who first warned me of this impending disaster last April. The cause, he says, is not free-market policies, but Argentina’s systematic repudiation of those policies.

The story begins back in 1991, when a crucial free-market reform — the stabilization of the Argentine peso under a currency board with strictly limited powers — tamed the country’s runaway inflation, bringing it from a high of 3,000 percent down to a mere 2.2 percent, slightly less than in the United States.

A stable currency attracted more investment, which was good for the economy. But Argentina’s government abused this advantage, launching a spending spree financed by massive borrowing. As the nation’s debt mushroomed, private lenders grew nervous, fearing the government would default. That, says Salsman, is when the turning point came. In March of 2000, Argentina turned for help to the International Monetary Fund.

The IMF, Salsman explains, provides cheap loans, subsidized mostly by the U.S. government; in return, it dictates economic “advice” to the borrower. That advice is always the same. First, the IMF tells a country to increase its taxes in order to reduce budget deficits. The IMF always advocates higher taxes, never lower spending. Then the IMF suggests devaluing the nation’s currency, a kind of one-shot hyperinflation that allegedly “stimulates” the economy and encourages exports.

Free-market policies? No, the IMF’s prescriptions are as far from the free market as you can get: unchecked government spending, higher taxes and government-induced inflation.

The results in Argentina were predictable. Higher taxes sent the economy deeper into recession. Then, early last year, Domingo Cavallo, the architect of Argentina’s stable currency system, made plans to demolish his work, proposing a thinly veiled devaluation that dropped the peso’s value by 7 percent. Last fall, he began hinting that the peso was “overvalued” and needed to be brought down further.

Investors got the message: He was planning to make the peso worthless. They bailed out, everyone raised prices, and the economy went into a tailspin. The final result? The angry mobs of newly impoverished Argentines who rampaged in the streets in December. It’s the same cycle we saw after the IMF gave advice in Russia and Southeast Asia. As Salsman quips, “Wherever the IMF goes, rubber bullets are sure to follow.”

Against all reason, free markets are being blamed — and the poison is being offered as medicine. Duhalde just announced the first component of his economic program: to devalue the peso by another 40 percent. Bear in mind that 80 percent of Argentina’s private and government debt is denominated in dollars, so borrowers will now have to pay many more pesos for every dollar they owe. Under this scheme, any Argentine business that has not already gone bankrupt, will.

What advice is America offering? President Bush has offered to give Argentina financial assistance, if it can come up with a “credible” recovery plan. What counts as “credible”? The plan must be supported by the IMF.

The root of Argentina’s economic crisis is not economic, nor is it limited to Argentina. It is the failure of the world’s intellectuals, economists and politicians to understand and defend a genuine free market.

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Robert W Tracinski

Robert Tracinski was a senior writer for the Ayn Rand Institute from 2000 to 2004. The Institute promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead. Mr. Tracinski is editor and publisher of The Intellectual Activist and TIADaily, which offer daily news and analysis from a pro-reason, pro-individualist perspective. To receive a free 30-day trial of the TIA Daily and a FREE pdf issue of the Intellectual Activist please go to TIADaily.com and enter your email address.

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