FINANCE-ARGENTINA: Fall Out From, the ‘Big Bang’

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 19 1997 (IPS) - The most recent U.N. report on world trade, says the Argentinean economy – reformed in an explosive, “big-bang” – must now recover its leading role in Latin America..

The 1997 report from the United Nations Conference of Trade and development (UNCTAD) blames the world’s economic ills on slow economic growth, the subordination of production to financial investment, unemployment, the growing gap between rich and poor countries, the decline of the middle class, and the growing instability of employment.

It also warns about the necessity of the State to recover a more active role, a recommendation that seems tailored to fit Argentina, the Latin American country that adopted neoliberal reforms designed to bring a swift end to interventionism in the most orthodox manner.

Contrary to many of the economic ideas currently in vogue, UNCTAD says that greater international competition does not automatically translate into more rapid growth and development, nor do growth and development automatically reduce inequality.

“There is no economic law that establishes that developing economies, just by liberalizing their economies, will come closer to the income levels of the developed countries,” warns the report.

Within this context, UNCTAD says that the “big bang” approach, its term for the model in which States open their economies to competition without a clearly delineated program and quickly privatize public enterprises, as Argentina did, must be corrected.

In its place, it recommends a “carefully programmed liberalization” model, in which each country becomes integrated into the world economy according to its particular characteristics and its own rhythms, adjusting the process according to the strength of its economy and its institutions.

The report rejects the closed State model of economies in transition, but it highlights the cases of Asia and Chile, where liberalization was directed toward pre-established objectives.

Argentina is at the opposite extreme. The government of President Carlos Menem defeated inflation, but the role of the State was reduced to a minimum, disappearing from the area of competition as a producer of goods and services, and retreating to key areas of traditional responsibility like health and education.

During the first years of the Menem administration, the number of public employees was drastically reduced, and enterprises were privatized at a price of 20 billion dollars. Services were handed over to monopolies that had captive markets.

At the same time, with Domingo Cavallo as minister of Economy Argentina opened the economy to foreign competition, eliminated regulations and tariffs, and created incentives for direct and financial foreign investment with no stipulations in order to neutralize volatility, as Brazil, Colombia and Chile have done.

While this policy resulted in sustained growth rates between 1991 and 1995, its vulnerability became evident during late 1995. With onset of the Mexican currency crisis, investors withdrew eight billion dollars from the Argentinean financial system, triggering an economic recession that became especially harsh in 1996.

“It was believed that with the reduction of the State and the liberalization of trade, growth and development would follow, but now we see that this is not the case,” says economisdt Arturo O’Connell, who heads Argentina’s International Economic Centre. ” On the contrary, now we are seeing the worrisome effects of globalization.”

In Argentina, unemployment is 16.8 percent, the gap between rich and poor is widening, the middle class is disappearing, the economy is increasingly concentrated, portfolio investments are increasing, while employment is increasingly unstable.

“The countries that UNCTAD considers to have been successful in the process of liberalization are those that implemented interventionist policies prior to the economic opening. By contrast, UNCTAD criticizes countries like Argentina, that did not take these precautions,” O’Connell notes.

The economist says that a growing consensus has arisen over the past year that “Argentina is a typical case of the ‘big-bang’ approach to reform, a virtual shock treatment that wiped out State policies.”

O’Connell admits there are gaps and a strong social demand for greater intervention on the part of the State, especially in areas such as health, education, security-those areas where “the invisible hand of the market” does not seem very capable of reestablishing equilibrium.

According to O’Connell, it will not be easy to discipline the forces of the market now. “It is necessary to build a new political and social consensus that manages to overcome the terror of inflation and that helps Argentina get over its paralysis,” he says.

“No one is talking about reestablishing State control over the economy, but the public enterprises were transferred without any control mechanisms, which society is now demanding,” he adds.

In this sense, political scientist Oscar Oszlak observes that during Argentina’s first wave of State reform, which began in 1989 when Menem was first inaugurated, privatization, deregulation and decentralization reduced the State apparatus.

“But less State, did not mean a better State,” he says. According to Oszlak, the reformist surgery diminished the “obesity” of the patient but it also removed vital organs and increased its vulnerability.

This is why a second phase of reforms must confront the political challenge of “strengthening what is left” and incorporating new functions that seek to reestablish political and social equilibrium, which were lost in the Universe after the great explosion.