ECONOMY-ARGENTINA: Cavallo Turns to Keynes

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Apr 13 2001 (IPS) - The performance of Argentina’s controversial Economy Minister Domingo Cavallo is being closely followed by Latin American analysts who say “technocrats” could become a new class of leaders in the region, if they focus on reactivating the domestic market and addressing social problems.

“I am convinced that at a moment when the traditional political class is contaminated by corruption, politics will be exercised in today’s Latin America by technocrats, if they assume a new sensitivity to and awareness of social problems. In that sense, Cavallo is an interesting case to observe,” Colombian economist Cecilia López Montaño told IPS.

López Montaño, a public speaker for the Inter-American Development Bank (IDB) and the United Nations Economic Commission on Latin America and the Caribbean (ECLAC), has served as ambassador to the Netherlands and minister of agriculture, the environment and planning in Colombia.

“Cavallo is the great hope that the ongoing neo-liberal adjustment strategy formula will begin to move towards a new paradigm that I would call ‘socially efficient national capitalism,’ a system that would permit the generation and equitable distribution of wealth, the recuperation of the domestic market, growth and the creation of jobs.”

López Montaño believes that in recent years, Latin America’s traditional leaders have failed to provide answers to the demand for transparency and technical know-how. But she also recognised that the technocrats had limited their role to standing accountable to the business community and multilateral institutions, while ignoring the needs of the citizenry.

“I am convinced that Cavallo, a symbol of the neo-liberal orthodoxy of the 1990s, can make a break with the history of Argentina,” said López Montaño. She applauded that possible shift as a return to the source: “we economists are going to stage a return to economic policy, which we should never have left” in the first place.

Last month, Cavallo returned to the Economy Ministry, which he headed from 1991 to 1995 when, under then-president Carlos Menem (1989- 99), he launched a programme that fixed the peso to the dollar – Argentina’s currency board system – stabilised prices, opened up the economy, privatised public assets and reactivated economic growth.

The consequences were a level of stability unknown up to then in Argentina – where inflation had reached four-digit figures – and average annual growth of seven percent. In the meantime, however, unemployment soared to 18.4 percent at the peak of the country’s economic performance, and the distribution of wealth became even more unequal.

Today, Cavallo has been called on by the government of Fernando de la Rúa, who took office 16 months ago with support from an alliance of centrist and left-leaning parties.

But the internationally renowned economist has found a situation very different from the context he faced 10 years ago. The president is weak, Cavallo himself admits to having political aspirations, and although hyperinflation is a thing of the past, the state no longer has major assets to put up for auction to draw investors.

Meanwhile, the economy has been in recession for three years, and the bulky foreign debt payments are asphyxiating the country.

“I see myself doing what (John Maynard) Keynes did when he warned that monetary and fiscal orthodoxy had triggered the Great Depression of 1930,” Cavallo said, in a declaration that took analysts by surprise.

British economist Keynes, whose influence remained strong in the wake of World War II, recommended boosting public spending and wages in order to reactivate the domestic market and thus pull out of the worldwide Depression of the 1930s.

“Today’s Cavallo,” the minister himself stated, “observes and analyses reality as Keynes observed and analysed the reality of the 1930s. That is not ideology; it is the good use of the political and professional capacity of those who govern,” he told the Buenos Aires daily ‘Clarín’.

So far, the new minister has slapped a new tax on bank transactions, pledged to eliminate taxes on production, raised tariffs on imports of consumer goods to the highest level permitted by the World Trade Organisation (WTO), and slashed duties on capital goods.

With those measures, still timid in a context of economic depression, Cavallo, who in the 1999 presidential elections took less than 10 percent of the vote, has seen his popularity ratings climb to 37 percent, compared to De la Rúa’s 18 percent, according to the local polling firm Equis.

The idea of seeking alternatives to the traditional fiscal adjustment prescriptions to pull Argentina out of recession was suggested by several economists prior to Cavallo’s return. But his predecessors José Luis Machinea and Ricardo López Murphy stuck closely to the orthodox line.

Three ministers resigned when López Murphy announced an orthodox structural adjustment programme last month, and a wave of strikes then forced López Murphy himself out of office, just 15 days after he assumed his post.

Economist Aldo Ferrer maintained that Argentina’s problem was not the fiscal deficit, as Machinea and López Murphy believed, but the lack of a policy for boosting the competitiveness of local production, promoting exports and defending the internal market.

“The internal market is the destination of 90 percent of the goods and services produced in this country” Ferrer underscored.

Eric Calcagno, who has worked with ECLAC and the United Nations Conference on Trade and Development (UNCTAD), pointed out that since the mid-1970s, industry has lost its hegemony to financial capital in search of quick returns.

That system, in which capital evades productive activities in its search for a quick profit, is coming to an end “before a model has emerged to replace it,” Calcagno stated this month in an interview with ‘El Arca’, a cultural magazine financed by a private bank.

In the analyst’s view, the new model to emerge must be characterised by an industrialisation process like the one Argentina experienced in the mid-20th century.

He also suggested maintaining a policy aimed at protecting the domestic market, but in accordance with WTO standards, as well as greater state efficiency in addressing inequalities.

Calcagno, a lawyer, agreed with economist López Montaño that the traditional leadership class had failed to tackle the new challenges of today. He also stressed that until the population recovered its buying power, the recession would drag on.

But it was López Montaño who was especially convinced of the need for a new paradigm, some of whose facets can already be discerned. She underlined that the future depended on whether “technocracy touches down in the real economy, not in the theoretical one.

“The progressive line in Latin America, which is perhaps represented by the politicised technocracy today, is leaving what was once the left without any discourse, by beginning to talk about national interest, the domestic market, imposed economic prescriptions and even imperialism – all questions that until recently were considered taboo,” she concluded.

According to López Montaño, Latin America is not only facing problems of growing inequality and economic crises, but also political troubles due to the weakness of its democracies, which are subject to the scrutiny of a public that demands that its concerns be addressed in a more efficacious manner.

She added that in the region, there were human resources capable of dealing with those problems, although up to now, the best trained and best prepared – who she argued were not the politicians, but the technicians – have spoken almost exclusively with the business community, rather than the citizens.