Argentina: Sheer neoliberal lunacy

The following article provides the background to the current crisis in Argentina and traces the roots of the crisis to adoption of the neoliberal economic reforms advocated by the IMF.

SINCE 1989-90, Argentina’s neoliberal economic model has closely followed the Washington Consensus requirements: trade (tariff reduction) and financial (free capital inflows and outflows) liberalisation; deregulation of the economy (liberalisation of prices of goods); and the ‘retirement’ of the State from economic activities (privatisation of the state enterprises, e.g., oil and gas, banks, telecommunications) as well as some of its functions (coverage of social security, for example). This prescription, which has been applied mainly through the medium of the economic reform policies of the Bretton Woods institutions (in particular the IMF), has also shaped the development of many other countries of Latin America.

The emblematic symbol of the Argentine model is the currency board, which  pegged the value of the Argentinian currency (peso) at one US dollar and ensured that each peso in circulation was backed by a dollar in reserve. This convertibility of the peso was guaranteed by a law passed in 1991 by the Argentine Congress called the Convertibility Law. The object of sanctioning the convertibility by law was to reassure foreign investors that any modification could only be secured by another law.

The good times

For some time, things worked more or less well. The convertibility put an end to hyperinflation. Economic growth returned: GDP grew 10% in 1992 and nearly 6% in 1993 and 1994; after the recession of 1995 (-2.9%) due to the Tequila Crisis, growth rates were again positive until 1998. The fiscal deficit was reduced from 1991 to 1999, being always less than 2%. (But unemployment could never be reduced, staying around 15% even at the best of times and rising to 17.4% in 2001.)

The good times of the Argentinian economy coincided with two central elements. First: the extraordinary fiscal revenues coming from the privatisation process. From 1991 to 1999, according to the World Bank, the Argentine government collected US$49 billion in this way, proceeds surpassed only by Brazil’s (US$71 billion).

Second: the enormous capital inflows to the region (including Argentina) that occurred in the 1990s, in the form of direct foreign investment, loans, bond issues and portfolio investment. These flows reversed the enormous capital outflows of the 1980s (which was termed the ‘lost decade’, due to external debt payments). In the Argentine case, the net transfer of resources (NTR, i.e., capital inflows minus outflows) from 1991 to 1999 was a positive US$53 billion.

But with the crises in South-East Asia (July 1997), Russia (August 1998) and Brazil (January 1999), things changed radically. The NTR was only US$1.8 billion in 2000 and became negative in the order of US$13 billion in 2001.

The bad times

In 1998-99, once the privatisations came to an end and capital inflows began to slow down, the convertibility model started to show its flaws and the economy entered into recession. The overvalued (because of the rigidity of the convertibility) Argentinian peso, which had resulted in soaring imports and stagnation of exports, had led to an enormous trade deficit until 1998. With the recession, imports started to diminish but the trade deficit persisted until November 2000; meanwhile, Brazil, one of Argentina’s main commercial partners, strongly devalued its currency in the same period1. The recession implied a reduction in budget revenues, in a context of increasing debt payments, which, in turn, increased further the budget deficit.

The convertibility, once a solution, became the problem. Even John Williamson, who had coined the term ‘Washington Consensus’, argued that to maintain it was ‘sheer lunacy’. Because of the absence of private capital inflows, the government had to borrow in order to sustain the currency board. Government loans increased from US$900 million on average from 1992 to 1994 to an average of US$7.6 billion from 1995 to 2000.

In January 2001, the government of Argentina continued to get deeper into debt. It agreed to a US$13.7 billion credit with the IMF, which was part of a larger package of US$40 billion (with the participation of private banks, the World Bank and the Inter-American Development Bank (IADB)). This package of loans was expected to provide a ‘financial steel shield’ (blindaje financiero in Spanish) for the Argentinian economy and the convertibility. This did not work and in July 2001, the government informed investors that it would go for a ‘megaswap’ (megacanje) of its external debt in order to reduce interest payments for the next three years. As a result, the Argentinian debt payments for the 2001-2031 period increased by US$40 billion, to US$247 billion.

Sheer lunacy

Doubts over Argentina’s capacity to pay its debt led to a situation which resulted in ballooning interest rates (augmentation of what the bankers call ‘country risk’) in the international capital markets for new debt issuances. Argentina had to pay interest rates of over 14-16% in July 2001, for example. The situation was clearly untenable.  After August 2001, the international capital markets simply did not accept any more debt issuances: the market was closed for Argentina, which meant that the budget deficit could no longer be financed by foreign capital, even at astronomical interest rates.

Continuing with the ‘sheer lunacy’ policy, President Fernando de la Rua and Economy Minister Domingo Cavallo decided to implement a ‘zero fiscal deficit’ policy which was fully endorsed by the IMF, i.e., the government would permit no budget deficit. To carry out this policy, in a recessive context, the government targeted anything that moved: it trimmed retirement payments, increased all kinds of taxes and reduced the budget transfers to the provinces.

In the meantime, money deposits in the banking system began diminishing rapidly. In 2001 alone, some US$13 billion was withdrawn from the banks, an amount equivalent to 20% of the deposits; not even the Swiss financial system could have resisted such a huge drainage. The banks now only have US$4 billion of the original deposits of US$70 billion.

People in the streets

In order to avoid the inevitable, de la Rua and Cavallo decided on 3 December to freeze savings deposits in the banks: a person could draw only US$1,000 a month (US$250 a week) from his or her savings accounts (this is called the corralito). In the middle of December 2001, the IMF, unconditional partisan of the convertibility plan and the Argentine economic model, decided not to disburse a portion of its loan.2 Default was, then, just around the corner.

The panic caused by the fact that Argentina was close to default led to illegal reparation of deposits by the banks themselves from the end of November and the beginning of December 2001, sending the money directly to the United States3.

All this led to massive demonstrations by the Argentinian people. They saw very clearly that all the economic measures that hit them so hard were designed merely to save the convertibility and to pay the external debt, in a vicious circle that had no end. And on top of that, the banks and the big investors were taking money away from the country. This was the last straw. Angered, betrayed and fighting for dignity, men, women and youths took to the streets and toppled the government, but not before 30 people were killed.

Initial conclusions

Three conclusions can so far be drawn from the Argentine crisis. The first is that the propaganda from the neoliberal right that the crisis is due to fiscal mismanagement is absolutely false. The deficits had not exceeded 2.5% until 2001, and last year’s increase (to 3.5%) too was due to the policies of ‘sheer lunacy’. Moreover, Brazil had fiscal deficits of 10% in 1999 and 8% in 2001 without experiencing anything like the Argentinian situation.

Secondly, it is the neoliberal economic model that is in crisis, aggravated, in the Argentinian case, by the currency board. The neoliberal model is dependent on foreign capital inflows. It is not self-sustainable. Also, it is biased against the industrial productive apparatus, thus promoting unemployment. The privatisation of the oil and gas companies has increased the prices of fuels, and the privatisation of telephone and electricity companies has led to higher prices and loss of competitiveness. While the model privileges the financial sectors with an overvalued currency, it has increased poverty and aggravated the inequality of income between rich and poor in the country.

Thirdly, the political class in Argentina has no credibility with the Argentinian people. The Peronista party, under Carlos Saul Menem, had been in power for 10 years (1989-99) before being succeeded by an alliance of the Radical Party and a coalition of centre-left parties led by de la Rua, which was in turn booted out in December. The current president is Eduardo Duhalde, another Peronista, who is scheduled to see off de la Rua’s term which ends in December 2003. People blame the political class for economic mismanagement and outright corruption. President Duhalde has said that he wants to change the direction of the Argentinian economy, away from an alliance with financial capital in order to privilege the national productive sectors and employment. But the government is on shaky ground and power is very much on the streets. The  outcome is not at all clear.                   

NB: The economic measures taken by the new government and an analysis of the impact of the Argentine crisis in Latin America will be dealt with in the next issue of TWR.

Endnotes

1 ‘When [the convertibility] was introduced this system offered a welcome guarantee that hyperinflation would not return, and contributed to a stunning economic recovery. Now, however, the system’s fatal flaw has become obvious. Argentina’s international competitiveness has been undermined by devaluation in neighbouring Brazil and by the weakness of the euro; domestic demand has fallen as consumers and companies lose confidence; but because the currency board allows no flexibility in monetary policy, policy makers cannot respond, Greenspan-style, by opening the monetary spigots.’ (Paul Krugman, New York Times, 15 July 2001)

2 Analysts in Latin America affirm that the situation after 11 September contributed to the US Treasury-backed IMF decision not to disburse a loan to Argentina in the first days of December 2001, thus triggering debt default. They say that Latin America counts little on the world strategic board and is considered, now more than ever, as the United States’ backyard.

3 The Federal Police has started an investigation in the headquarters of the Bank of Boston and Citibank, two of the banks accused in connection with the illegal flight of deposits. This is in response to a complaint made by lawyers charging that some US$26 billion was transported in trucks to the international airport of Ezeiza and illegally transferred out of the country before President de la Rua announced the banking restrictions on 3 December. The deposit flight took place in the space of ‘15 days’, but ‘there are two days that are key: 20 November and 1 December’. These dates precede the financial restrictions of the corralito. According to a lawyer, the main destination of the funds was the United States (Diario Clarin, 19 January 2002).

Humberto Campodonico is an economist with the United Nations’ regional Economic Commission for Latin America and the Caribbean (ECLAC). The views expressed in the above article are those of the author alone.