Why Argentina Crashed and Is Still Crashing

September 25, 2007

The catastrophic collapse of the Argentine economy during the second half of 2001, and its accelerating decline during the first half of 2002, has created hardships of a scale and scope that fully justify concluding that the country is undergoing a "Second Great Depression." On the heels of four years of recession, Argentina’s default on its $140 billion national debt triggered an economic contraction of more than 15% during the first six months of 2002. Unemployment has skyrocketed to encompass a quarter of working age Argentines, and the poverty rate in what was once Latin America’s most prosperous republic has surpassed 50% of the population. In improvised markets throughout the land, economic transactions are increasingly being conducted through barter: The combination of drastic devaluation and limits on withdrawals from savings accounts in an essentially frozen banking system has left citizens without access to cash to spend on everyday household needs. Meanwhile, lacking resources with which to pay state employees, pensioners and other recipients of public funds, many government agencies are resorting to a proliferating array of non-currency instruments to make good on their obligations. The dissatisfaction expressed by the millions of Argentine citizens presented with government bonds of dubious value or with one or another form of scrip is fully understandable. It is exceeded, however, by the rage of countless of their neighbors to whom the state has made putatively ironclad commitments but who are receiving nothing at all.

Long-time Peronist kingpin Eduardo Duhalde was selected by the Congress on January 1 to serve as Argentina’s fifth President in a period of barely two weeks during which popular demonstrations provoked the resignation of incumbent Fernando de la Rúa and a succession of three other hapless politicians. So far, he has managed to remain in office, but boasts few accomplishments beyond that of survival. Indeed, Duhalde’s government has careened from one desperate stopgap measure to another, making little headway in its quest to prevail upon international financial institutions and developed country governments to come to Argentina’s assistance. The government’s ineptitude has reinforced the generalized contempt with which Argentine citizens have come to regard the country’s political class. As enraged citizens fill the streets with cries of que se vayan todos (throw them all out) and as foreign technocrats demand still more ironclad restraints on future government spending as a condition for releasing more funds, scenarios for renewed political stability or for economic recovery are noteworthy for their absence.

Argentina’s plight has justifiably provoked renewed scrutiny of the role of such international financial institutions as the International Monetary Fund (IMF). The IMF has indeed become a key player in determining the fate of developing countries in this environment of U.S.-dominated economic globalization and neoliberal restructuring. Within Argentina itself, the IMF and its patrons in Washington are routinely vilified by frustrated politicians and by a resentful citizenry, but criticism of the Fund and its orthodox recipes for developing country economies are increasingly under challenge from observers elsewhere. Columbia University economist and Nobel laureate Joseph Stiglitz, who served a controversial stint as Chief Economist at the World Bank during the Clinton administration, has been among the most relentless of the IMF’s antagonists, but he has hardly been alone.[1] Especially striking have been the angry denunciations of the Fund by generally mainstream "technopols" elsewhere in Latin America, perhaps most notably Peruvian Finance Minister Pedro Pablo Kuczinski. Not surprisingly, the IMF also has been singled out for blame by progressives who have long opposed the Washington Consensus recipe of market-oriented restructuring. They have particularly criticized its emphasis on deregulation, privatization and curtailment of government spending, all of which were pursued with gusto by the administrations of Carlos Saúl Menem, the flamboyant Peronist leader who governed Argentina with steady support from the multilaterals throughout the decade that began in 1989. [2]

The debate over who is to blame for the Argentine nightmare is important, and only in part because of its significance for Argentina itself. Indeed, while the "contagion effect"—the spread of Argentina’s economic ills to other countries—has been less severe than many observers anticipated late last year, and indeed for a time appeared limited to neighboring Uruguay, the impact of rising interest rates on Brazil’s public finances as that country’s October presidential elections draws near highlights the risks confronting all of Latin America. It is entirely plausible that 2002-2003 will be remembered as a watershed period in the region’s economic history, much as we look back today on the debt crisis of 1981-82 as the beginning of the current neoliberal period that has transformed economies and polities in the region.

In such a context, it is all the more imperative for progressives to offer sober analyses of the roots of Argentina’s crisis and the factors that impede its mitigation. While we should take advantage of this, the umpteenth opportunity to publicize the damage brought about by the policies promoted by the IMF and its allies in the U.S. Treasury Department (and by some but not all offices of the World Bank), neither the depth of this collapse nor its specific characteristics are attributable solely to these institutions. Nor is the catastrophic situation in which Argentina finds itself exclusively the result of the neoliberal model that those institutions have pushed so aggressively on developing countries around the world. Rather, an array of factors internal to the country, political as well as economic in nature, converged with pressures from outside to intensify the crisis. Many of these same factors accentuate the country’s difficulties in finding a way out of the crisis today.

Consideration of the role of external actors must begin by asking how the crisis came about. Here, the ramifications of the so-called "convertibility" plan of Menem’s economic czar Domingo Cavallo cannot be underestimated. By pegging the peso to the dollar and eliminating any option whatsoever to devalue the currency, convertibility became the keystone of a system that overcame the devastating hyper-inflation that had eroded living standards, created maddening uncertainty and undid the first elected government of the post-dictatorship, that of Radical Party leader Raúl Alfonsín. Convertibility became much more than a strategy that appeared to have vaccinated the country against price fluctuations: As political scientist Robert Kaufman has pointed out, it also became emblematic of the first period of economic policy stability in more than half a century in Argentina.

Convertibility was not without flaws, however; these remained of concern to many outside observers who meanwhile applauded Menemismo’s radical dismantling of Argentina’s public sector and the extreme deregulation and liberalization that accompanied it. Clearly, maintenance of an artificially high—and fixed—exchange rate throughout the 1990s made Argentine exports prohibitively expensive and diminished the cost of imports. The entirely predictable effect was to destroy quality jobs while depriving the economy of resources that, particularly in a context of spiraling foreign debt, were urgently needed to support investment in productive assets. As the recession of the late 1990s made the capacity to continue making debt payments increasingly doubtful, thus calling into question the durability of the fixed exchange rate itself, investors demanded ever-higher interest rates as a condition for extending new loans.

In turn, confirming that they had learned nothing at all from their woeful mismanagement of the 1997 financial crisis in East Asia, the IMF and U.S. Treasury linked further loans to even more draconian cutbacks in public spending. In a particularly repulsive twist to the story, but one that is hardly unique to Argentina, resources secured through these loans were destined not to relieve the plight of impoverished Argentines but rather to ensure the state’s capacity to cover obligations to the multilaterals themselves. Resources were also used to pay off loans to bankers and bondholders who had enriched themselves at the citizenry’s expense during the wave of privatizations that had taken place over the previous decade.

Not surprisingly, the result of misguided austerity policies was to paralyze economic activity even further. As sharply declining tax revenues coincided with soaring popular demands for relief, and as the Bush administration begrudgingly agreed in August 2001 to an $8 billion IMF rescue package that by all accounts was too little too late, everyone came to see what Wall Street had recognized at least a year earlier: Devaluation was inevitable.

Foreign investors had acted on that conviction for some time—it was for that reason that interest rates had reached such punishing levels. But during the fall of 2001, when Argentine citizens responded to the situation en masse—and equally rationally—by rushing to withdraw their savings from the teetering banking system, a full scale implosion ensued. And when the country’s incompetent president, Radical Party leader Fernando de la Rúa (aptly nicknamed by the press Frenado de la Duda, that is, "Paralyzed by Doubt") responded by limiting access to savings and by failing to acknowledge the depth of pain that the crisis was causing, the collapse of his administration amidst an outburst of popular demonstrations was equally foretold.

Conditions since the devaluation and the ascendance of Duhalde have gone from terrible to catastrophic. A revolving door of economic policymakers has wavered constantly on conditions for re-opening the banks, on the status of dollar-denominated debts and on the range of concessions that might be acceptable for reaching a renewed understanding with multilateral lenders and donor governments. Relieved by the absence of rapid contagion in "emerging markets" elsewhere, the latter have dug in their heels, pledging not to throw away good money after bad by extending loans before Argentina can guarantee conditions for repayment. By the end of June, Duhalde appeared to have satisfied one of the most difficult obstacles to restored funding, as the last of the provincial governors agreed to tough measures to limit expenditures at the sub-national level. Yet still the lenders deferred re-opening the spigot, skeptical that Duhalde or his eventual successor would be able to deliver on pledges extended during a moment of desperation.

While this cursory review of the role played by multilaterals highlights their contribution to Argentina’s predicament, it is crucial to note that internal factors were also pivotal. Without recognition of the domestic roots of economic decline, prospects for reversing it will be even dimmer. In this regard, three factors stand out as worthy of mention.

First, there was no shortage of support within Argentina itself for the misguided formulas emanating from Washington throughout the Menem years. Indeed, a succession of elected—and re-elected—governments chose to embark on that course. They were operating under pressure from abroad, of course, but so were the Brazilians, who managed a much more limited adoption of neoliberal orthodoxy and a successful if somewhat rocky devaluation in January 1999. Nor was Argentina’s adherence to orthodoxy, particularly with regard to convertibility, solely a reflection of elite sentiment. The country’s struggling middle classes—whose mortgages and most other debts were denominated in dollars—took an understandable yet ultimately untenable stance against devaluation. Indeed, as opinion surveys demonstrated consistently over the past decade, the success of "convertibility" in overcoming hyper-inflation generated support for the fixed exchange rate in virtually every sector of Argentine society, including in popular sectors that would need to form the basis for the (today essentially invisible) Argentine left.

Secondly, progressives are justified in asserting that neoliberal reforms implemented under Menem devastated the central state in Argentina, with many pernicious consequences. Employment suffered terribly, state services grew more scarce and diminished in quality [see "Cutbacks Threaten Argentina’s Children," p. 34], and domestic and external private actors were permitted to amass monopolies and oligopolies through which to line their own pockets and those of many of the public officials who were supposed to regulate them. But it is also the case, as neoliberal critics emphasize, that both the Menem and de la Rúa governments failed to rein in expenditures at the regional level. Contrary to the position taken by some observers, this was far from trivial. Governors committed growing proportions of a shrinking pot unwisely, at best, to varying combinations of personal enrichment and pet projects. To be sure, many households benefitted from the public sector employment this entailed—even if they were woefully underpaid they had jobs—but advocates of the Washington Consensus are not wrong to insist that in exchange for pathetically low paychecks those workers all too often provided pathetic services to the public, along with their loyalty and votes that maintained the power of a corrupt political class.

Aggravating the problem was the fact that, once the provincial governments lacked funds to meet these payrolls, they resorted to printing money on their own, in the form of the infamous patacones that are now supplemented by several other forms of scrip. This exacerbated the predicament faced by central authorities who lacked even a semblance of control over state policies at the sub-national level. IMF officials are not mistaken in insisting that an institutional problem—the inability of the central government to exercise authority over regional political elites—is partly to blame for the depth of the present crisis, and for the difficulties that the present government and any near-term successor(s) will face as they endeavor to do so.

It is worth underscoring this point, and not only because defenders of orthodox economic policies will cite it—rather than their own policies—as responsible for Argentina’s collapse. It is foolish to attribute the collapse of the whole edifice to this particular remnant of the old order, but it would be equally foolish of neoliberalism’s critics to pretend that it did not matter, or that it will not matter in the future.

This brings us, finally, to a third factor behind Argentina’s economic debacle, a monumental failure of politics. As if taking their cue from the grotesquely inept military governments that preceded them, both major parties have mismanaged the economy systematically since democracy’s return in 1983, and have continued a decades-long pattern of squandering resources at an alarming rate. Malfeasance has magnified the effects of incompetence on the part of Radicals and Peronists alike. The haplessness of de la Rúa’s administration is surpassed only by the irresponsibility of the Peronists, diverse factions of which were and remain more concerned with advancing their own (intra-) partisan positions than in overcoming the country’s grave problems. Menem himself merits an enormous portion of the blame, but the other party bosses, including President Duhalde (Menem’s erstwhile vice president and now his arch-enemy), are amply tainted as well.

Eric Hershberg has served on NACLA's Board of Directors since 1996. He is a Program Director at the Social Science Research Council in New York City and an adjunct professor in the School of International and Public Affairs at Columbia University, where he is also a senior research fellow at the Institute of Latin American Studies.

1. See, for example, his "Argentina Shortchanged: Why the Country that Followed the Rules Fell to Pieces," The Washington Post, May 12, 2002.
2. Representative of this trend is the April edition of the Minneapolis-based progressive monthly newsletter "Connections to the Americas." Portions of this article draw on my contribution to that debate. See Eric Hershberg, "Who Crashed Argentina."

Tags: Argentina, neoliberalism, economic crisis, politics, austerity

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