When President Arturo Illia took office 18 months ago, Argentina was in the grip of a severe, two-year recession. Deciding that the cure was increased investment in basic industry, Illia boosted the money supply 61%, curbed all but essential imports and introduced tight exchange regulations aimed at halting the flight of capital. He was partially successful. After two straight years in which G.N.P. had declined an average 4.6%, the government reported that output in 1964 rose 8.2%. In the process, however, wages and living costs both shot up 30%, while meat, grain and wool exporters began complaining that high production costs and an artificially low exchange rate made it almost impossible to compete in world markets.
This month, as Argentina's reserves dwindled to some $70 million, Illia was forced to ask help from the International Monetary Fund in stretching out repayments on the $2.5 billion his nation owes abroad—of which $500 million are due this year. It was a humiliating about-face for the President; during his campaign he had attacked IMF as an economic intruder and recommended a "break in relations." Even more dismaying were the IMF's firm list of conditions for help in bailing out his nation: drastic curbs on government spending and a slowdown of the money presses.
Fearful of the political repercussions of deflation, Illia broke off talks in Washington and called his emissaries back to Buenos Aires, explaining through Economy Minister Juan Carlos Pugliese that the government could not accept the terms laid down by IMF "without prejudicing its own plans for the gradual deceleration of the inflationary process." And on that ominous note, the regime last week devalued Argentina's once proud peso from 151 to 171 to the dollar.
Linking devaluation to the IMF debacle was a baldly political attempt to saddle Washington with the blame for years of fiscal mismanagement in Argentina. Moreover, though Illia's government announced bravely that it would now deal independently with the nation's creditors in Europe, the U.S. and Japan, hardheaded foreign bankers are not likely to stretch out repayment terms—as they did for Brazil and Chile —without IMF backing for the Argentine government. Meanwhile Illia announced new export taxes that will virtually cancel out any profits that exporters stood to gain through exchange devaluation.