ECONOMY-ARGENTINA: From Miracle to Nightmare

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, May 24 2002 (IPS) - Argentina has been left to its fate by the multilateral credit organisations, the same institutions that in the mid-1990s pointed to the South American country as the model result of implementing neoliberal economic reforms. It is a success story turned nightmare.

More than 25 percent of the economically active population is unemployed, poverty has risen rapidly in the past few months and now affects nearly half the population of 36 million, hunger is widespread, and there is fear that hyperinflation will return.

Throughout the Argentine decline from economic miracle to the worst recession in the nation’s history, financial experts and politicians alike agreed that the cause of the current crisis could be found in the so-called “convertibility” plan, which pegged the Argentine peso to the dollar at one-to-one parity from 1991 until January of this year.

The currency exchange law, implemented by then-minister of Economy, Domingo Cavallo, initially served to eliminate hyperinflation, but ended up putting the brakes on the nation’s economic growth.

Now, Argentina has halted payments to its private creditors and needs urgent financing to avoid having to do the same with respect to its obligations to multilateral lending institutions.

But no other country, and neither the International Monetary Fund (IMF) nor the World Bank, is willing to grant a line of credit to Argentina.

Just six years ago, the IMF and its managing director at the time, Michel Camdessus, cited Argentina as a positive example of its economic policy recipe, and praised the government of Carlos Menem (1989-1999) and the leadership of minister Cavallo.

Menem, of the Justicialista (Peronist) Party, reached the presidency with strong popular support for carrying forward a neoliberal-leaning economic policy, with sights on full trade liberalisation and an ambitious privatisation plan.

The politically independent Cavallo contributed his convertibility plan, which Congress made into law. The new currency policy halted the hyperinflation that had erupted towards the end of the Rául Alfonsín administration (1983-1989), of the centre-left Radical Civic Union Party.

The structural reform process facilitated economic growth in the mid-1990s at an annual average of seven percent, while hefty investments flowed into Argentina for the oil and mining industries and for privatised services. But unemployment and debt began to rise.

Camdessus described the process as “a silent revolution” that transformed the country, and applauded the “vision and leadership of Menem and the courage of Cavallo.”

The IMF chief also considered the currency plan a success because it provided economic stability.

But the praise began to dissipate in the final years of the Menem administration, when the economic model began to show its shortcomings. Foreign financial commitments piled up in a context of growing social unrest triggered by the recession that began in the final quarter of 1998 and the resulting loss of jobs.

The recession deepened until reaching the point of collapse, bringing down the government of centre-leftist Fernando de la Rúa, who resigned Dec 20 amid a wave of violent protests and looting.

One day earlier, Cavallo had stepped down as minister of Economy, a post he had taken up again under the De la Rúa administration in March 2001.

Peronist politician Eduardo Duhalde, who Congress designated to the presidency Jan 1 to serve out the rest of De la Rúa’s term, now leads a country with high unemployment, rapidly rising poverty, and a threat of hyperinflation in the wake of abandoning the currency parity programme.

The IMF is projecting that Argentina’s gross domestic product (GDP) will shrink 15 percent this year.

The praise of the last decade has given way to an international offensive.

The IMF, United States, and the rest of the Group of Seven most powerful countries hold Argentina solely responsible for the severity of its own crisis and, far from authorising financial assistance, they seem bent on teaching the South American country a lesson.

“There was terrible hypocrisy in extolling Menem when it was known that the convertibility regime was a corrosive scheme at its roots,” economist Eduardo Curia, a former financial minister, told IPS.

A tool that should have been used for an emergency situation became a structural policy, and that is when the problems began, he said.

The plan Cavallo had designed in 1991 was also fingered by current Economy Minister Roberto Lavagna as a cure that turned into a disease.

“Convertibility was enormously useful for halting inflation, but maintaining it required a series of assumptions that did not play out,” he said.

Lavagna explained that the currency regime would require strict limits on public spending, stable financial markets and a profound liberalisation of the global market. But the opposite occurred: state expenditures doubled, financial markets are in crisis and the multilateral round of trade talks stalled.

“This set of factors placed Argentina in a situation of permanent internal and external deficit, especially once it had sold its public enterprises and fresh funds were no longer coming in. Convertibility was technically over in 1994,” Lavagna had said shortly before becoming Economy minister last month.

The collapse of the currency scheme at that time was prevented by emitting bonds in the Argentine provinces and thanks to several financial aid programmes through the multilateral institutions.

“But the more a crisis is allowed to progress, the higher the domestic costs are later,” said the minister.

His view of the Cavallo plan coincides with that of U.S. economists like Paul Krugman of the Massachusetts Institute of Technology (MIT), and Joseph Stiglitz, Nobel laureate in Economy in 2001 and former chief economist at the World Bank. They are two of the most outspoken critics of the international financial entities’ stance with regard to Argentina.

Krugman has stated that the orthodox currency policy is to blame for the catastrophe in Argentina. “As little as three years ago, Argentina’s ‘currency board’ monetary system was the subject of extravagant praise in publications like Forbes and The Wall Street Journal,” he said.

The MIT economist believes that the Argentine problem is not fiscal in nature, but rather economic, and that the austerity measures required by the IMF will only deepen the recession, social tensions and the lack of investor confidence.

In the same vein, Stiglitz has been insisting for some time that the IMF demands for Argentina to reduce its fiscal deficit “have only made matters worse.”

He points out that it is normal for an economy in recession to run a deficit because tax revenues fall sharply while the need for social spending increases.

There are two views of the Argentine crisis: the U.S. opinion is that “a profligate government and its populists policies have brought the country to ruin… while bewildered Latin Americans ask what happened to this poster child of neoliberalism and the notion that free markets would ensure prosperity?”

Stiglitz comments that the U.S. view is exaggerated because Argentina has a fiscal deficit of just three percent of GDP, and that most of the blame for the crisis afflicting “the worst student in the class” stems from the convertibility scheme.

In that respect, the IMF tried to make it clear that the idea for the peso-dollar parity system did not come from that institution, as its spokesman Thomas Dawson has reiterated.

Argentina adopted convertibility and it had broad popular support, but it seems that Stiglitz thinks the IMF should have required the government to change that strategy, Dawson said, highlighting the irony of the Nobel laureate’s criticisms of IMF loan stipulations.