"En este país está todo mal hecho, peroestá tan bien hecho que es indestructible."(Everything in this country is made badly, but it is so craftily done as to beindestructible.)
--Argentine President Arturo Frondizi (1960)
What a time Argentines had in the nineties, that age of economic marvels.Long-standing corruption and mismanagement seemed to be swept away by a barrageof free-market reforms and a massive influx of foreign capital. Years ofhyperinflation and stagnation gave way to a stable peso pegged to the dollar and asolid economy growing at 8 percent annually, apparently untouched by financialcrises in Mexico and Asia. Overnight, the perennial underperformer had become themodel case of free-market reforms. Everything seemed on track, at last. OrdinaryArgentines could trust in and plan for the future. During the last years ofPresident Carlos Saúl Menem's second administration, many spoke admiringlyof how he had placed economic policy "on autopilot."
Argentina was a poster child for neoliberal economics--privatizingeverything in sight, restraining wages, limiting social spending, defending thecurrency, and opening the door wide to foreign capital. So how did everythingslide so easily into the four years of deepening recession, rising unemployment,and inexorably increasing debt that have finally led to the largest default inhistory?
Argentina, like much of Latin America, industrialized in fits and starts.Argentine industrialization was shaped by shifting and unstable alliances amongan interventionist state, a rent-seeking elite, and a powerful labor movement.The result was a half-century of wildly oscillating economic growth and politicalinstability. The military brought this cycle to a close with a coup 25 years ago.While the military were torturing, murdering, and "disappearing" students,workers, and activists by the tens of thousands, a group of monetarist economistsimplemented free-market policies that devastated domestic industry but rewardedfinancial speculation. Fueled by ballooning external indebtedness, this house ofcards came crashing down in 1982, leaving the state holding the bag. Monetaristpolicies in Argentina were undone by monetarist policies in the United States, asFederal Reserve Board Chairman Paul Volcker's abrupt hike of interest rates madean unwise external debt suddenly unpayable.
Even after the military regime collapsed, this debt would frustrate futureattempts to set the economy on a sound footing. All the political courage,democratic convictions, and heterodox economic-growth strategies of the newcivilian president, Raúl Alfonsín (who served from 1983 to 1989),ultimately foundered in the face of the debt. He managed to hand over power to ademocratically elected successor--for the first time in 60 years--but he wasforced to do so six months early by inflation running at 4,923 percent annually.
Carlos Menem came to power in 1989 with a mandate for dramatic change.Repudiating the historic policies of his Peronist Party, he embraced theneoliberal recipe and initiated an aggressive set of spending cuts, marketopenings, and privatizations. Yet these reforms did not bring immediate reliefand inflation spiked up to 1,100 percent.
In April 1991, Domingo Cavallo, Menem's third minister of the economy,launched the policy that would become the centerpiece of the reforms. He peggedthe Argentine peso to the U.S. dollar, one to one. This literally meant that thegovernment could print only as many pesos as it had dollars in its vaults. Afterdecades of inflation and recent bouts of hyperinflation, this stable currencyoffered a new common basis for Argentine life. For many, this stability restoredthe possibility of planning for the future, of dreaming of social mobility, ofworking and living without the terror of imminent catastrophe. One could hardlyoverstate how deeply this all-or-nothing wager came to structure Argentinepolitics. For Menem and Cavallo, this was not just a package of measures, but"The Model" for future economic development. But after years of being awash inworthless currency, few Argentines stopped to ask: What might happen if thecurrency becomes too valuable?
The Dollar Collar
At first, the strong currency, pent-up demand, and suddenlylowered trade barriers served to spark a consumer boom. Dozens of huge shoppingmalls opened up across the country, while thousands of factories and small shopsclosed down, unable to compete with shiny imported goods. These social costs wereevident from the beginning but were explained away as a passing phenomenon.
The large amounts of incoming foreign investment initially lent credibilityto this argument, providing Argentina with enough dollars to fuel 8 percentannual growth. But the government was actually financing this investment boom byselling off its patrimony. Within a few years, the administration sold offtelephone, water, oil, gas, electricity, railroads, subways, airlines, airports,and eventually even the postal service to private--and mostly foreign--investors.At the same time, this dramatically expanding consumer market also tempted manyforeign companies to enter local markets, generally by purchasing and modernizingexisting local producers. From flour mills to car manufacturers, foreign capitalseized the commanding heights of the Argentine economy. As late as 1995, six ofthe 10 largest banks in Argentina were locally owned; today, only one is.
Meanwhile, the neoliberal playbook proclaimed the need to make labor moreflexible--so the administration set out to gut labor rights. The more dynamicsectors became more concentrated, more capital-intensive, more foreign-owned, andmuch more profitable. Output per worker soared, but wages stagnated and the numberof workers shrunk.
Across the rest of the economy, wages and employment simply collapsed. Even inthe boom years, businesses did not create any net jobs in the officially measuredsector. All the expansion has come in the "informal" sector--the gray economy:Four million of the nine million Argentines who make up the economically activepopulation now work off the books. And even workers with formal contracts haveseen their rights systematically eroded, with management able to impose (or getcorrupt and discredited union leaders to agree to) lower wages, more hours,arbitrary schedules, vacations out of season, and long "trial" periods.Historically, Argentina was a labor-poor country with low unemployment. Since1991 unemployment has never dropped below 12 percent. Currently, it is over 18percent, a record high.
Even as the buying power of the middle class was driving the boom, thisausterity program was tearing that very middle class apart, creating a group thatsociologists dubbed the "new poor": the first generation firmly convinced that theywill be poorer than their parents. The industrial workforce shrank by nearly athird, poverty rates rose steadily, and old poor and new poor alike watched thelife drain out of the rickety--although once impressive, by Latin-Americanstandards--Argentine social safety net. Welcomed in hope, the model endured outof fear.
For all the hope invested in convertibility, the peso-dollar pegwas a key part of the problem. As the government could print more currency onlyif it was backed by dollars, the economy could expand only if it brought in moreforeign exchange through direct investment, sales of public enterprises, exportearnings, or loans. After the initial rush of privatization, new foreigninvestment slowed and then dwindled away after the abrupt Mexican devaluation ofDecember 1994 sparked crisis across Latin America. Meanwhile, the rising value ofthe dollar made exports prohibitively expensive. The only way to expand thecurrency supply and the economy was by taking on debt.
After revising the constitution, Menem easily won reelection in 1995. Overthe four years of his second term, the external debt doubled. This was partlybecause of the structural need for liquidity, partly because of the politicalneed after 1997 to build provincial support for a possible third term, and partlybecause of a wide range of honest or deliberate miscalculations in early reforms.For example, a futile 1995 attempt by Cavallo to increase employment by havingthe state cover part of employers' wage taxes failed to generate any jobs butsucceeded in increasing state debt by more than $10 billion a year.
Ironically, the worst deficits came under Cavallo's hyperorthodox successor,who never ceased to condemn the state and extol fiscal discipline even as heemptied state coffers and distributed favors to friends and allies. TheInternational Monetary Fund was fully aware of the trend and--to judge by thewaivers that it gave the administration every year after it failed to meet itstargets--did not care. Along with the U.S. government, they continued to presentthe country as a model for the developing world to emulate.
In the orthodox critique, public enterprise is suspect becauseit invites corruption. But so does privatization. Widespread corruption wascentral to this process, not incidental, and the state usually ended up footingthe bill. A vast web of bribes, subsidies, deals, and swindles surrounded theselling off of state assets, involving many top government officials and majorinternational corporations like IBM, Citibank, and Telefónica. This wascommon knowledge at the time, but international financial institutions, the UnitedStates, and the European Union made only token protests.
The case of Aerolíneas Argentinas is extreme but illustrative. Whenit was sold, the airline was profitable, but the state swallowed almost $1 billionin debt to sweeten the deal. To keep it running a few years later, the stateabsorbed almost $1 billion more. In the meantime, Iberia, the Spanish nationalairline that bought Aerolíneas, had sold off all its assets and gutted thecompany with dubious accounting tricks. When Iberia faced trouble, it threatenedto shut down Aerolíneas. Once more, the Argentine state came to therescue, assuming another $932 million in debt so that the company could be resoldagain. Needless to say, a large part of state investments and airline earningsvanished into a tangle of private accounts and offshore banks. The state took ondebts worth three times as much as the company and was left with an empty shellit does not even own.
There are many more stories like this, and they help to explain how theArgentine government could sell off everything it had and end up more than twiceas indebted as before. Meanwhile, dollar convertibility not only failed to drawrunaway capital back into the country but greased the wheels for even more to flowout. In 1990, Argentines held an estimated $48 billion abroad--an amount roughlyequal to the national debt at the time. Today, the most conservative estimates ofoffshore assets run to $100 billion. Bank deposits inside the country total only$65 billion--and are dropping.
Orthodoxy Impeached
In the end, little separated the age of marvels from theyears of tragedy. They are not even two sides of the same coin; rather, they arethe same continuous side of a Möbius strip: The appearance of the marvelalso marked the onset of the tragedy.
As the boom went bust, orthodox commentators insisted that the problem wasnot the reforms done but those left undone. If only the state were trimmedfurther, if only labor markets were liberalized a bit more, they promised, growthand foreign investment would return. Not only did this undying orthodoxy fail toconfront problems, it made them worse. These commentators portrayed the crisis asprimarily economic, and even financial, in nature. But the cause of Argentina'scollapse is political, not economic. What's missing is political power,leadership, and imagination in the face of the shortsighted reasoning promoted bythe international financial community and embraced by local elites. What thecountry lacks is not orthodox solutions but the political will to escape from anexhausted model whose only remaining basis of support is fear of the unknown.
When the current president, Fernando de la Rúa, took office in December1999, the country had been in recession for 19 months. As the reform candidate ofthe Alliance for Work, Justice, and Education, de la Rúa had campaignedfor a clean version of "The Model": convertibility without corruption, growthwithout inequality. Fear of a traumatic break with dollar parity, memories of thesocial experience of hyperinflation, and pressure from big business withinvestments (and debts) in dollars drove de la Rúa to swear undying fealtyto convertibility. Campaign promises are often momentary concessions that can bechanged once a leader is in power. But the new administration's promises quicklybecame a trap with no way out.
Eager to prove himself to investors, de la Rúa raised taxes, slashedspending, and made a priority of passing the labor-flexibility law long demanded bythe IMF. The bill went to Congress in January 2000 and was passed in April. ByAugust, rumors that the law had passed thanks to government bribes of oppositionlegislators led to spectacular accusations in the press and judicial system.These accusations set off a political crisis, and de la Rúa's refusal totake them seriously drove his vice president to resign, breaking the governingcoalition in two.
When modernization becomes a goal to be achieved at all costs, as happenedwith privatization, corruption ceases to be incidental and comes to offer asubstitute for political legitimacy, undermining the institutions and,ultimately, the possibility of democratic life. By placing modernization beforecitizenship, de la Rúa destroyed both. In record time, de la Rúahad sacrificed his most valuable ally, betrayed his mandate, and squandered hispolitical capital. With his political base narrowed to his faithful lieutenants,he proved incapable of even imagining any risky moves. This year, hisadministration could not even manage to implement daylight saving time.
In the name of stability, de la Rúa honored his short-term commitmentsand abandoned his long-term goals. Since he took office, all that the IMF hasproposed and all that the government has done is cut spending, again and again.Each time the cuts deepen the recession, bringing down revenues and forcing a newround of cuts. The country is like a donkey being taught to stop eating: When itdoesn't do what it's told, it gets spanked; and when it finally does, it starvesto death.
This downward spiral has cost the heads of two economics ministers and,improbably enough, brought Cavallo back to his old post. Since the beginning ofthis year, the government has launched two orthodox debt-refinancing plans. Bothfailed. Shortly after returning to office this year, a chastened Cavallo announcedanother round of cuts, brushing aside those who said that this would only deepenthe crisis. Within months, the worst predictions had come true, and the countryhas been forced effectively to default on $132 billion in debt.
After adamantly denying any need to renegotiate for the past two years, thegovernment now must bring its creditors to the table. A third debt swap hassucceeded in considerably reducing the government's obligations to domesticbond-holders, but the more difficult negotiations with foreign bond-holders stilllie ahead; even the most optimistic estimates see the reduction in payments aloneas too little, too late. Some IMF staff have called for devaluation, and othersfor an international bankruptcy mechanism that would enable countries torenegotiate their debt in an orderly way--a proposal clearly inspired byArgentine chaos that comes too late to be of benefit. In general, the IMF seems torecognize that past recipes have failed, but keeps recommending them anyway.While the government stumbles, trying against all odds to avoid a full-fledgeddefault, the solid block in favor of convertibility is beginning to crack.Foreign-owned privatized companies and the financial sector are pushing tomaintain dollar parity as a way of keeping the value of their investments, whileexporters want to cut the peso loose from the dollar and devalue. Unable to meetany domestic commitments, the national and provincial governments have begun topay wages, months overdue, in scrip--a desperate road to hidden devaluation.
On the last day of November, a run against the banks drove Cavallo to imposecurrency controls, allowing those with bank accounts to take out only $250 peraccount per week. In the name of convertibility, he has locked up the money inthe banks. This threatens to devastate the informal economy--which operates on acash basis--and further deepen the depression. Cavallo also decreed that bankdeposits in pesos were now officially denominated in dollars, but this meansnothing since no one can access the money and, if they could, the government doesnot have enough dollars to give them anyway. At this writing, the latest IMFdemand is a 10 percent budget cut, which will only shred the remaining safety netand worsen the depression.
So the vicious cycle begins again: the weaker the state appears,the greater the power of financial markets, further weakening the state, furtherstrengthening the markets. De la Rúa's popularity is now measured in thesingle digits; Cavallo's magic has evaporated into thin air; polls say that mostArgentines who have jobs expect to lose them. The result is a complete collapseof the political system, with leaders ignoring the will of the people andsquabbling over scraps while the world around them is falling to pieces. Thislack of political leadership benefits the few and excludes the many from anyremotely sustainable long-term or even short-term solution.
During his election campaign, President Bush promised to make Latin Americathe first priority of his foreign policy. Now the most faithful adherent to theWashington Consensus has gone belly-up, and the Bush administration's response ismuted, distant, and confused. Its only concrete measure since September 11 hasbeen to push for fast-track authority in order to deepen precisely the policiesthat led to this impasse. The studied indifference of the Bretton Woodsinstitutions to the fall of their former model pupil is not surprising. But whatis striking is the silence of antiglobalization groups, who had few concretethings to say about Argentina's ongoing crisis during the heady days of lastsummer and have had even less to offer in the disarray that has followed theterrorist attacks in this country.
As Argentina is melting down, the Bush administration is crafting a strategyfor Afghanistan after the war. On November 18, Secretary of the Treasury PaulO'Neill said that the right path forward for that devastated country and itspulverized economy is to put in place a market economy and open it up tointernational capital. The extraordinary similarity of his formula for Argentinaor Afghanistan or any other part of the world only reveals once more Washington'sinability to grasp the radically different realities of this world. Are theBretton Woods institutions--the IMF and World Bank--up to the political challengeof development? Everything would suggest that they are not. With theencouragement of the U.S. government, those institutions continue to spread thegospel of the market with little regard to the failed history of earlier missionsor the diversity of the places they would convert. And the Bush administrationpushes for a free-trade agreement that would only deepen the worst aspects of thecurrent crisis across Latin America.
Within Argentina, debate continues to be dominated by the unhappy convergenceof the desperate shortsightedness of the local political class, the imperialdisdain of Washington policy makers, and the orthodox proclamations of financiers.What keeps everyday Argentines in check is as much the terror of the unknown asthe fear of the return of an all-too-familiar past.
The solutions now being proposed follow familiar orthodox lines: tax hikes,wage and budget cuts, a new IMF loan to pay off short-term obligations, and adevaluation of the peso followed by a new dollar peg, all aimed at a recoverythat will never come. Still missing is the political courage to describe thingsas they are and to imagine a different way forward.
