The Argentine crisis

The acute Argentine crisis is rapidly evolving from one day to the next. At the time of writing (April 1, 2002), we have no certainty as to what the institutional and economic situation will be in the country when this review comes out. Events have developed very fast since December 2001, and the issues at stake are so complex it would be unwise to consider the current situation as settled or definitive in any way. Centuries seem to have passed, yet it was only a year ago that Domingo Cavallo returned to the helm of the Argentine economy as a super Minister with special powers (April 2001).

One year on, Cavallo not only completely failed in his mission, but President De la Rúa, who had desperately staked all on this last card to save his own presidency, had also resigned. In the absence of a Vice-President (De la Rúa’s Vice-President Chacho Alvárez, had bowed out a few months earlier without being replaced) and given the political vanishing act of the government alliance of Radicals and Frepaso, which in any case had become a minority after the autumn legislative elections, the Peronist majority in the Congress elected Adolfo Rodriguez Sáa as President ad interim until March 3, 2002, when there should have been a general election with a very original formula: each party was to present several candidates.

Having assumed power without giving the impression he had fully grasped the gravity of the situation, Rodriguez Sáa made a series of mindless populist statements. He lost the support of the Peronist top brass, however, since they were unwilling to share with the newly-elected President the costs of an almost desperate administration and thus ruin their chances of being elected in March.

Adolfo Rodriguez Sáa handed in his resignation after a week. On January the 1st, 2002, the Congress elected Eduardo Duhalde, the defeated Peronist candidate in the 1999 elections, who was to complete the term of office left vacant by De la Rúa (to the end of 2003).
After Rodriguez Sáa’s failure to keep order in the streets (thirty people died at the time of his fall), the assaults on institutions and supermarkets, and popular disgust expressed by mass peaceful demonstrations (the cacerolazos), the political majority opined that the conditions were still not right for a new election.

After two months President Duhalde is still beset by serious difficulties and only the lack of any feasible alternatives seems to keep his weak government on its feet. There are no guarantees whatsoever that Duhalde will be able to continue in office.

The crisis affects all aspects of Argentine life: politics, economics and society. The peso-dollar convertibility, the key element in Argentine economic policy over the last decade has gone, as has the Duhalde government’s attempt to keep the peso in a range from 1 to 1.4 pesos per dollar.

Today the country is on the verge of anarchy: the economy is practically paralysed, the peso is plummeting (last week it fell to four pesos per dollar, and then rose back up to less than three, stillvery far from the fixed parity of the last ten years), inflation is galloping out of control (prices have risen by fifty per cent in the last three months, and there is a genuine fear of a return to three figure inflation which had been definitively defeated during the ‘virtuous’ decade), and forecasts for economic growth in 2002 are catastrophic.

This is all aggravated by absolute uncertainty about future strategic choices (the state budget for 2002 was approved on the basis of optimistically unreal predictions making if not even worth the paper it is written on) and the absence of political credibility both in the Peronist majority, divided over the road to be taken, and the opposition, often completely cut off from all decision-making after the failure of De la Rúa’s presidency. There is also a complete lack of credibility in all state authorities (the ineffective executive and legislative powers are accompanied by the image ‘below all suspicion’ of a political judicial institutions, embroiled in the wide spread crisis in the country), and the desperation of millions of Argentines facing problems of subsistence with their savings running through their hands like water.

It’s difficult to imagine a grimmer scenario than that confronting Argentina today, ехасerbated by the sudden indifference shown by the international financial organisation conditioned by the Bush administration’s unresponsive attitude, they seem loath to come to the Buenos Aires’ rescue with practical measures.

Once the model pupil of the Bretton Woods Institutions, today Argentina has been left to its own devices and seems unable to rise to the challenge.

Bearing in mind these factors, and the current high degree of uncertainty, I believe it is worth while reflecting in more general terms on the lessons from the Argentine crisis, rather than trying to grapple with the details of asituation that is far from clear.

The first question to be raised is: given that Argentina was acclaimed for years as a model in terms of its economic liberalisation, privatisation, re-balancing the public books, and monetary system, how come the scene has changed so dramatically in only a few months?

It is all their own fault, as American Treasury Secretary Paul O’Neill rather glibly claims in every pious statement, or is there something rotten in the state of the international financial system?

Similarly, is the situation in Argentina today the outcome of the last government’s misguided economic policy or does it go back further to long-term contradictions? In short, are Argentina’s problems due to a temporary crisis or deeper structural factors?

I believe that the crisis is the outcome of persisting with an economic model that had already fulfilled its task and the Argentine authorities’ lack of resolve to thoroughly reform the country’s competitive system, at a time when the umbrella of the currency board would have allowed them to do so.

Going further back in time, the Argentine crisis today is the outcome of a series of decisions – or rather non-decisions – made by various Argentine governments over the last century, that is from 1880 to the present day. In the outbreak of the crisis short-term factors (such as clinging too long to the currency-board model and shortfalls in the modernisation of the economy) coincided with the structural factors that had long been stifling Argentina’s potential.

From 1880 to 1930, the Argentine economy was driven by the growth of an economic model based on farm exports, fully integrated into the British international trade networks. Argentina exported farm products and imported industrial products from Europe, mainly from Britain. This trade allowed the country to achieve per capita incomes almost on a par with those in Europe at the time, and a respectable share of world trade (3 per cent).

The Argentine crisis that began with the First World War and the weakening of the British trade system highlighted the excessive dependence of the country on international trade. This realisation led to the second phase of Argentine economic history, from 1930 to 1975. The new economic model was based on replacing imports, through a process of industrialisation with considerable public funding (which, moreover, was a dominant feature in all late industrialising countries).

The results were appreciable both in industrial and infrastructural terms. During the Peronist period, great efforts were made to increase the working classes’ purchasing power and there were also ambitious policies for health, education and welfare leading to a significant rise in the living standards for those classes forming Perón’s power base. Perón’s terms in office, especially the first triumphal presidency (1946-1951), created the illusion of Argentina as a power with world ambitions.

But this was a mirage. It was more due to the unusual situation created by the repercussions of the Second World War and the relative impoverishment of the main world industrial powers, than any effective solidity of the Argentine industrial system. The industrial Argentine trade balance continued to be in the red for the whole of this period and Argentina failed to emerge as an innovative industrial power.

Then in 1976 the military dictatorship imposed an orthodox neo-liberal model on the country. The hub of the economy shifted from the industrial sector to the financial sector, and public finances ran wild. The return to democracy took place in the context of this economic catastrophe caused by the resignation of the albeit charismatic popular Radical President Raúl Alfonsín (in Argentina there is a caustic running joke about radical presidents’ inability to complete their terms of office).

Menem’s two terms in office (1989-2000) were dominated by the drive to liberalisation: deregulation, privatisations, freer trade, the globalisation of the labour markets and services, and regional economic integration in the framework of Mercosur. This was a genuine revolution for Argentina, whose bulwark became the currency-board system (the one-to-one parity of the peso and the dollar). This effective radical measure successfully froze inflation, which had had destabilising effects in the 1980s.

But in fact wecan say that this kind of system is only sustainable in the short to medium term. Unlike Brazil, which having brought inflation under control through the Real plan, abandoned fixed parity with the dollar four years later (through the model of controlled devaluation at a rate of 7.5 per cent annually), in Argentina the fixed peso-dollar parity had become sucha point of national pride that no one dared call it into question.

To do so would have meant political ostracism, given that in the meantime the middle classes’ debts were in dollars, since they trusted in the long-term reliability of the system. The system undoubtedly had its merits, but over time, especially after the Brazilian financial crisis and its abandonment of the monetary-system model, the Argentine economy became increasingly stifled by this straitjacket overpricing Argentine products and dramatically raising the cost of living.

If we then add the spectacular rise in foreign debt,which grew fivefold from 1975 to 2000, but especially in the Menem decade, we can conclude that the ‘wild’ liberalisation of the Argentine economy and society, although bringing some definite benefits, rested on fragile foundations.

But the problem was not only monetary. Making fixed parity with the dollar permanent only on financial grounds was certainly an illusory move.The dollar reserves in Argentina were so large that the politicians responsible believed the Argentine financial system was impregnable. From the strictly technical point of view this was true, given that the dollar reserves were equivalent to the peso, that is the fixed parity was materially guaranteed, but what brought the crisis to a head was the inert industrial sector. It is unthinkable that the Argentine economy, based, like a century ago, on the export of raw materials (today wheat, soya, meat and oil), could be the basis for permanent monetary parity with the America economy, forty times stronger in terms of volumes and the leading player in the 1990s in the extraordinary rise in productivity due to new technologies.

The mirage of dollarisation can be useful in a country like Panama, which is so small that it lays no claim to influence international trade. But for an intermediate country like Argentina, giving up the national currency to adopt a strong currency permanently was a short-term scenario, in which the existence of cheques could still be useful in stabilising the economy. This choice was not sustainable in the long term, especially in the context of globalisation making the financial resources available for emerging countries very costly.

The mistake made by Cavallo and his colleagues was not that of relying on the currency board, but to insist with this model when it had already served its time. In economics there are many theoretical models which are valid in practice, but none of them will be valid in all circumstances. Any economist claiming to have identified a universal model suitable for all situations is labouring under an illusion.

Unable to meet the challenge of a lame economy, De la Rúa called in Cavallo believing he had some kind of magical gifts. Cavallo was given almost absolute powers to pursue the reforms required to breathe new life into the country-model.

What did this mean in practice? Menem’s real great shortcoming had been not the misguided monetary regime, which was only a mistake in terms of duration. Nor was there too much focus on the social, a consequence, not a cause. Neither can excessive corruption be blamed, although it too was there. The real problem was the lack of rigour in the liberalisation process.

The wildfire Argentine privatisations in the early 1990s were the outcome of a limited and partial vision of the concept of privatisation. In those years the Thatcher-Reagan idea that ‘public equals bad’ and ‘private equals good’ prevailed. By definition and unequivocally. Privatisation was good in itself. This type of approach to the issue was rife almost everywhere in the world. But after ten years of this type of operation, we know that privatisation must not be assessed in ideological terms. Rather, it must yield results in terms of more efficient markets and better choices and quality for consumers.

In the 1980s, and in Argentina in the early 1990s, unregulated privatisation took place without making provisions for the new market being created. It was a question of first come first served, without any new framework of rules to ensure the overall economy effectively benefited. The logic was ‘fill the coffers’ and in rigidly ideological way. Since then well conceived and well implemented privatisations have led to improved market workings worldwide, made up of mainly private operators but not only, working within a system of fair rules.

Privatisations without this kind of framework have yielded terrible results and this is especially true in sectors like transport or energy, in which they have created problems almost everywhere.

In the Menem years privatisation was pursued in this way. In some sectors (especially telecommunications), spectacular improvements were made, but in many others the new economic context did not provide those virtuous stimuli for competition which are the main aim of privatisation.

In the 1990s Argentina missed a golden oрportunity to rewrite for good the regulations for the workings of its own economy, to finally establish a competitive sustainable economic model. After the end of the farmexport model and the entrepreneurial-state model, a turn to liberalism was required. But it should have been informed by a strategic spirit, involving efforts to modernise the Argentine economy, and not simply to hand it over to other people.

The strictly financial approach pursued by Menem and Cavallo (who later split up over questions of personal political ambition) was valid in the years when the enemy to be defeated was inflation. But inflation is like a high temperature, a symptom of the illness, and it’s no good believing that once prices are under control, the economy will work of its own accord with no other intervention required.

Argentina was unable to create a model to go beyond an economy based on the export of raw materials. In 2002 Argentine foreign trade still depends on exports of meat (despite this, foot-and-mouth disease has still not been brought under control), wheat and oil. It is difficult to argue that a country wishing to modernise and enter the First World can do so on the basis of a production structure with these features.

In the years of more open trade, Argentina should have pursued much more resolutely the path of economic structural reform for its production system, taking advantage of the stability guaranteed by the monetary model and the country’s high standing with international financial organisations, which would have funded ambitious development plans.

But the Argentine institutions and entrepreneurs sat back during the crisis, throwing away an historic opportunity to modernise the country. When will they get another chance? Certainly not in the short term, since Argentina has now become an international ‘untouchable’ (we will return later to the attitude of the international financial organisations).

Not surprisingly minister Cavallo, aware of these shortcomings, called his reform project implemented from April to December 2001 the ‘Competitiveness Plan’. This was the right objective, but the plan came too late.

It was late because on political grounds, Cavallo could no longer abandon the monetary model. Unable to backtrack, he focused on two objectives: postpone the medium-term deadline for Argentine debt, thus warding of the encroaching stricture, and seek to make the monetary system more flexible by an choring it to both the euro and the dollar thus paving the way to a de facto, albeit partial, devaluation of the peso.

On the international scene, Cavallo tried to work up new international confidence in the
country, blaming the Argentine situation on Brazilian disloyalty. After Brazil’s change of monetary regime (January 1999), Argentina goods became much less competitive in the Mercosur, thus weakening the country considerably. Thus although Argentina certainly had something to complain about, the situation in which the country had a trade deficit with all states in the world except Mercosur members was no longer sustainable. This was the basic problem: Brazil saw the limits of monetary rigidity in good time, but Argentina did not. Brazil successfully used economic stability to implement ambitious structural reforms required for growth. These reforms need a clear firm political approach, as adopted by Cardoso in Brazil. This explains why the plans agreed by Brazil and the IMF after the financial crisis of 1999 were successful, while ten Argentina-IMF plans have failed over the last two years. This is not simply an economic issue, but a political one: the Argentine political system, both on the Radical and Peronist sides, at the centre and in the periphery, have failed to devise scenarios to renew the country.

Cavallo’s palliative measures turned out to be insufficient. When the international economic crisis after September 11 made the Argentine economic situation unsustainable (since 1999 it has shown negative growth) Cavallo’s number was up. The introduction of the corralito (setting 1,000 dollars a month as the ceiling for withdrawals from bank accounts), together with a thirteen per ent cut in public salaries and pensions, creted an untenable situation. People in the treet lost all their trust in Cavallo, and the hew miracle had failed to materialise.

Cavallo’s demise also brought down De la Rúa, an honest but ineffective President inexplicably absent from the scene. Dubbed by Argentines as ‘Frenando de la Duda’, he even dithered over resigning, before completely disappearing from the scene after handing over power to the opposition.

As we said, Adolfo Rodriguez Sáa, Peronist Governor of the province of San Luis, was elected provisional President by the Legislative Assembly. None of the bigger Peronist names (Ruckauf, De la Sota, Duhalde and Reutemann) wished to take on the job for only two months. They had their eye on the March elections.

But the Peronist leadership seems to have failed to grasp the gravity of the situation. Rodriguez Sáa declared a moratorium on public debt with a triumphant air, as if it had been a victory for the country. Wishing to defend the peso-dollar parity at all costs, he announced the issue of a new currency, called the argentino. This rather bold idea (which in fact failed) was to maintain the peso-dollar parity, but given the lack of cash in the economy (blocked by the corralito, a measure aimed at protecting the bank system from bankruptcy), a new currency was to be created to replace all the bonds used as money issued by the provinces (the so-called patacones in Buenos Aires, which had equally picturesque names elsewhere, such as bonfles, quebrachos, bocaflores, lecops and even evitas).

This was the outcome of the intransigent defence of unsustainable model. To maintain a by then sham parity between peso and dollar, the cash in circulation was cut to a minimum and in practice the country had to invent other currencies: there was a total of seventeen (peso and dollar, and fifteen kinds of patacones). The argentino would have been the eighteenth currency in the country. This was no way to bring some relief to the stifled Argentine economy. The Peronist provincial governors with political ambitions were aware of this and did not show up for a meeting convened by Rodriguez Sáa to work out new strategies. This resulted in Rodriguez Sáa walking out.

The key question was the monetary issue, associated with the highly unpopular corralito. Since the new government could no longer revoke the measure limiting access to the banks, it tried to attenuate the negative effects by establishing regulations more favourable for credits up to 100,000 dollars and by raising the ceiling on withdrawing funds. Convertibility was ended by the introduction of a new fixed parity (1.4 pesos = 1 dollar) for foreign trade, and fluctuating
rates for all other purposes.

In practice anyone with access to credit in peso-dollars up to 100,000 dollars, had their money ‘pesified’ to 1.4. This seems to be a rip-off, but only partly so, given that over the years the deposited pesos had enjoyed very high real interest rates (around 15 per cent). There was a net loss, but within reasonable bounds. For operations over 100,000 dollars, the exchange rate was that of the market.

The big losers in this system were business firms, especially Europeans, who came to the Argentine market to offer services (telephony, energy, etc.). Their concession contracts were bound to the dollar, but now their incomes are in devalued pesos. The situation, especially in the banking sector, is critical: many banks will probably go bust, generating a fairly uncontrollable situation.

Although the exchange rate of the peso remained at a reasonable level for a few weeks, under two dollars, in recent weeks the uncertainties due to the confused picture as regards reforms and the lack of prospects of international intervention have pushed up the exchange rate to almost four dollars. The government had to introduce draconian measures to bring the rate backed down to acceptable values, but the devaluation of the currency has triggered of inflation, which will probably be into three figures by the end of the year. This marks a dramatic return to the past for Argentina, to a climate thought to have been left far behind. As regards the GDP growth rate, current figures suggest values are around -8.5 per cent for 2002. This is a very serious situation, especially considering that the figures for GDP growth have been negative since 1999.

The impoverishment of the country is also dramatic. Around 40 per cent of the population is estimated to live in poverty, which must be even harder to bear given that the country had become accustomed to much higher levels of well-being.

In this complex picture, the international community is asking Argentina for credible reforms on tax, monetary policy and the organisation of the state. As mentioned above, Argentina has already missed many opportunities to seriously reform the system in the country, where there is a good deal of parasitism, macroscopic inefficiencies, and squandering off public funds due to political nepotism.

But in fact the issue is not always purely economic, but also a question of the way the country is organised. We may well wonder where to begin or what is left, if the political system is no longer able to offer credible alternatives, the private sector is inefficient and often lives off favours and rents, and judges are politicised (even the credibility of the supreme court is very low because its members are notoriously associated with former president Menem and have gone to great lengths to clear his name in the case of international arms traffic).

For the moment the only strength left seems to be that of those banging pans in the street in the name of a civil society which has been deceived and swindled. But the understandable indignation must be articulated into positive political action, and nobody in Argentina today seems able to rise to this challenge.

Significantly, to remedy the lack of ideas and projects, Duhalde’s government has proposed a tripartite social dialogue. This is the so-called Argentine Dialogue, bringing together representatives of politics, economics and Argentine society, and promoted jointly by the government, the Catholic Church and the United Nations Development Agencу (UNDP). In other words, public players are so discredited in Argentina that the government has turned to institutional help from the Church and the United Nations in trying to work out a new project for the country.

Arguably the only comforting note in the current Argentine debacle, concerns the role of the army. Faced with such a deep crisis throughout society, the Argentine army has never for an instant considered moving into action. And, given the past role of the armed forces in Argentine political history, this is very significant! It means two things. Firstly, from a domestic point of view, the armed forces got such bruising after the last dictatorship that they are no longer a credible alternative. Secondly, from the Latin American point of view, it confirms a theory we have defended for some time in this review: the army, once such a powerful force in the political history of the sub-continent, has gone back to the barracks for good, having played out its political role. The separation between the civil and military sphere is now clear cut, and it has been left up to civil society to govern, since the military ‘shortcut’ is no longer an option.

We have thus answered some of the initial questions. The Argentine collapse is not only due to a temporary conjuncture-type crisis but is structural and the outcome of a series of factors, some recent, others going back a long way in time.

But what can be said of the international community’s approach to the problem? Can we rightfully claim that the crisis is an Argentine issue and must be solved by the Argentines alone? Certainly the basic mistakes thatwe have listed are mainly internal. Since over the last few years the political class has failed to organise the country on solid and efficient foundations, they must take a large share of the blame.

But until recently Argentina had been considered a model to be emulated in financial matters. It was the country (along with Chile) where reforms had been made in a radical drastic way, and was a very promising market, etc. The mistakes which we have mentioned, on the other hand, are far from new. We might argue that the assessments of the achievements of the last decade were a little hasty, and that everything that glittered in the Menem years was not gold. But more importantly, we must ask if the international financial organisations, which until a few months ago had insisted on the importance of the currency board, may also be accused of contributing to the sinking of Argentina. Now they have backed off, claiming that those decisions were Argentine and the problem lay in the inability of successive governments to implement the plans agreed with the IMF.

Serious reforms were required, it is true, but all this rigour applied to a country in such a deep crisis is hypocritical and unfair. Argentina must be helped in everyone’s interests. Unfortunately, the new American administration’s priorities lie elsewhere. At the time of the Brazilian crisis a rescue plan, drawn up under Us leadership and with a decisive financial contribution from Europe, was of crucial help in getting out of the impasse. After only a year of zero growth, by 2000 Brazil showed a positive growth rate again, surprising almost all analysts, and shocking the Wall Street boys – the whiz kids who decide the world’s fate from the limited viewpoint of their computer screens.

Today the Bush administration points out that Argentina has already burnt 63 million dollars of aid in a year without solving its problems and does not deserve to be helped any further. These figures are all very well,but we must ask who stands to gain from the Argentine disaster? The United States has lost considerable ground in Mercosur over the last few years, while European firms have been much more dynamic in taking up the opportunities offered by the region’s economies in the 1990s. The Eu-Mercosur Trade Round has progressed much further than the Free Trade Area of the Americas (FTAA).

Thanks to successes in the 1990s, Mercosur, and in its wake the whole of Latin America, has acquired a much greater strategic weight, which would have been almost unthinkable only ten years ago.

Perhaps my view is a little cynical, but at times being cynical does no harm: keeping Argentine in a tight corner means dealing a fatal blow to Mercosur, an integration project that has always irritated the United States, reluctant to find itself with strong partners in Latin America. One way out for Argentina could be forced dollarisation, associated with indiscriminate and rapid trade liberalisation in the framework of the FTAA as the extension of NAFTA on a continental scale. This project is opposed by Brazil, the only country able to counter (in relative terms) US geopolitical dominion in the region. A continuing Argentine crisis would mortally wound Mercosur and would inevitably have negative consequences on Brazil, which for the time being
has been holding up.

But who do we find behind Argentina and Brazil? Europe is Mercosur’s prime investor and principal trade partner, and thus risks much more than the United States in the region. This is another picture in which the United States is not all that upset about letting the Argentina troubles simmering on. The message cuts across borders and is not only directed at Buenos Aires.

Moreover, this kind of picture highlights the need for the Eu to sharpen its strategies and modalities of action in crises like these. Although geographically remote, Argentina is culturally and economically close to Europe. European countries should make more efforts to co-ordinate their action in the international financial organisations in order to exercise more influence, theoretically considerable (when it is a question of footing the bill) but in practice too dependent on US choices (when it is a question of making decisions). And here we are not even talking about military action, a field in which the United States is clearly light years ahead of us, but about economic and financial issues, in which the Eu counts as much as the United States.

This, then, is the situation in Argentina today. The picture is far from positive, the rain clouds have gathered, but we must not fall into the error of believing that this is only a domestic problem. The Argentine crisis raises doubts and issues that must be analysed seriously and require coherent and bold responses.