Argentina's economic crisis - not hemispheric free trade or US-Mexican relations, as expected - has been the first test of President Bush's often-proclaimed commitment to enhancing US-Latin American ties. For some months now, Argentina has been edging toward financial collapse as investments and lending have dried up, bank depositors have started withdrawing their savings, and tax receipts have shrunk in a depressed economy.
Last week, the Bush administration endorsed a new $8 billion rescue package by the International Monetary Fund, supplementing an earlier $14 billion loan, to reassure Argentina's bondholders and depositors that they will be repaid, at least for the next several months. This gives the Argentine government time to begin implementing tough economic measures to cut public expenditures and restart growth.
Analysts and investors are split about whether the rescue package is enough. There is, however, wide agreement that the Bush administration could have managed its role in the Argentina situation more adeptly - and that the challenge is far from over (as Bush himself recognized in a helpful recent phone call to Argentine President Fernando de la Rua).
The US should have engaged the Argentine problem earlier. When Bush took office, Argentina's financial troubles were already apparent. At the Inter-American Development Bank annual meeting in March, Argentina was the central topic of discussion - and most to blame for the despondency of the assembled business and financial leaders. Yet, it was not until August that a senior US Treasury official traveled there. True, the slow appointment process left Secretary Paul O'Neill without staff aides for many months. But the failure to act sooner has other explanations.
First, Mr. O'Neill and other Bush officials blamed Argentina for the crisis, concluding either that outside support would not help or that Argentina did not deserve it. This was both ingenuous and irresponsible. Regardless of the culprit, the threat of Argentina's woes spreading to Brazil, other Latin American countries, and emerging markets worldwide should have been enough to engage the US Treasury.
Moreover, while Argentina's economic management was far from ideal, it was by no means reckless or foolish. An unlikely combination of external shocks - falling export prices, the Argentine peso's link to the appreciating dollar, the dramatic depreciation of neighboring Brazil's currency, and ballooning interest rates for emerging markets generally - turned what might have been a barely adequate performance into economic disaster for Argentina.
Second, the Bush administration came to Washington disapproving in principle of IMF bailouts, believing that, by salvaging bad investments with public funds, such actions encouraged unjustified risk-taking by the private sector - and that a few costly failures would deter this rash behavior.
This argument - known by economists as moral hazard - is right, at least sometimes. An Argentine crash would make future investors more wary. But that is not a policy that constructively responds to the millions of Argentines who took no risk at all but are suffering the consequences - or to the dangers of an Argentine collapse undermining economies worldwide. It was a bad idea for the US to experiment with a new policy approach whose implications had not been worked out - and, indeed, from which the administration eventually had to walk back.
The administration's aversion, right to the end, to getting involved in Argentina's financial morass had to be a discouraging signal for Latin America, suggesting a broader disengagement from the region's economic problems and their potentially destructive political consequences. The US was right to support a $15 billion IMF package to help protect Brazil from Argentina's problems, but that is hardly enough. The White House needs explicitly to recognize the dangerous economic slump that has engulfed virtually all of Latin America - and to cooperate with the governments to develop hemisphere-wide responses.
The US, after all, is deeply involved in negotiating a hemispheric free-trade zone with every Latin American country. It should demonstrate more concern about the economic performance of its future partners. The Argentine financial crises, and its predecessors of 1995 and 1999, which battered Mexico and Brazil, underscore the need for regional economic cooperation that goes beyond trade.
The US Treasury should begin to explore intensively with the other nations of the Americas how to pursue broader financial coordination as they prepare for free trade. Mechanisms must be developed that can help defend individual countries against currency crises and reduce the likelihood of their spreading from one economy to the next (while emphasizing that each country must take its own measures to prevent crises).
What Argentina makes clear is that progress toward hemispheric free trade will require serious attention to regional financial matters.
Peter Hakim is president of the Inter-American Dialogue.