Argentina - Financial Crisis

From the March 2002 issue of World Press Review (VOL. 49, No. 3)

A Rich Country Goes Bust Again

Those Who Ruined Argentina

Laurent Joffrin, Le Nouvel Observateur (left-wing weekly), Paris, France, Jan. 10, 2002

Amid Argentina’s economic ruins, Eduardo Duhalde has settled into the presidency after the departure of four predecessors in only two weeks. But without a mandate, how long can he rule? Few agree on a cure, let alone the cause of the current crisis.

Argentina's financial crisis, which had long simmered, finally boiled-over on Dec. 19 amid looting and rioting (Photo: AFP).

You can look for any excuse you want for the International Monetary Fund (IMF) or its free-market remedies. The least we can say, if we want to remain polite, is that the results of its actions in Argentina are less than a complete success. Here is a modern, deserving, and courageous country, one that emerged from a bloody dictatorship, one that is re-establishing democracy, respects individual freedoms, and has persistently endeavored to follow the draconian prescriptions of the international financial community.

Now, for all its trouble, it finds itself ruined and handicapped for at least a generation. To be fair, the Argentine people are also paying the price for the ineptness of their own leaders. Perhaps it was to get people to forget its propensity for corruption, demagoguery, and tax evasion that the leadership suddenly converted to the most orthodox canons of international finance.

Between Christmas and New Year’s Day, the political leaders were blown away one after another before finally bets were placed on a horse marking a return to Peronism, Eduardo Duhalde, who now has to save anything worth saving among the ruins.

Therefore, we can now leave behind the domain of tasteful understatements and sum up the matter like this: The case of Argentina is one of the most complete, spectacular, and revolting economic and financial disasters we have seen since the Second World War.

The Argentine political earthquake should now make people wake up. The market cannot provide for everything, and what is needed for a country like Argentina is not another dose of laissez-faire economics, but a state worthy of the name. To put it another way, what should now occupy the IMF and the international community is a cultural revolution in the area of regulating globalization.

At the outset, however, contrary to what a certain militant line asserted, the intervention of the IMF was necessary and helpful. Succeeding a corrupt military regime, the administration of radical leader Raúl Alfonsín [president from 1983 to 1989] was unable to bring the country’s finances under control.

Through deficits and creating money, the Argentine government touched off a disastrous wave of inflation that led to the virtual disappearance of the currency. In 1989, price increases had reached an annual rate of 5,000 percent. Prices were readjusted every day. Argentines were getting rid of their currency like a hot potato.

The Peronists came back to power, led by the flamboyant and shady Carlos Menem. Being short of resources, he turned to international financiers to save a country devastated by hyper-
inflation. They prescribed two crucial measures. Parity was fixed once and for all by a constitutional law. In its most solemn charter, Argentina declared that the peso, henceforth and for all eternity, would be worth as much as the U.S. dollar. And to prevent the government, once and for all, from resorting to printing more banknotes, it was stipulated that the total currency in circulation in the country would be strictly indexed to the number of dollars held by the central bank. For having sinned by excess, Argentina was now abdicating all monetary autonomy.

Actually, the measure was not completely unjustified. When a currency sinks into hyperinflation, it cannot be saved without dramatic gestures. The currency board, according to the technical term designating the definitive linking of the peso to the dollar, had the effect of restoring confidence. Knowing that their assets, their savings, or their investments were convertible into dollars at a preset exchange rate, Argentines and foreigners working in the country began to use the national
currency again without fear of being fleeced.

The tight rein imposed on creating money was a guarantee against thoughtless demagogic excesses by a political leadership known for its irresponsibility. True, at the same time the ideologues of the IMF and the international financial community imposed “structural reforms,” consisting of abruptly dismantling the Peronist heritage of a state-directed economy and a social safety net. Government officials were laid off, there was privatization on a massive scale, and spending for education and health was cut.

Today we might doubt the need for these measures, especially since the privatization program profited, through collusion and corruption, the factions of the ruling elites linked to this or that group in the political game, somewhat like in Yeltsin’s Russia.
Still, this looked like the price that had to be paid to rescue a country from the brink. Thrown into globalization like a novice swimmer into cold water, Argentina whipped up its energies and, for four years straight, found itself with an average growth rate of about 8 percent, a more than honorable performance. Inequalities were on the increase, but people could hope that the average increase in wealth would, in the end, benefit those most deprived, at least somewhat.

Alas, the structural reforms had not put a stop to the unpatriotic and dishonest behavior patterns of the Argentine bourgeoisie, who lined their pockets with the complicity of politicians while they took advantage of the financial liberalization to massively invest their fortunes abroad.

But, above all, the currency board bore within itself the seeds of its own destruction. The dollar went up in value and oil prices rose while Argentina’s main trading partners, particularly Brazil, devalued their currency. Without any internal reason, the peso saw its value rise with the dollar. The exchange rate, in the opinion of the experts, was being propelled to a level twice what was required for economic balance. Exports ceased abruptly, choked off by the overvaluation of the currency. Recession set in. The government was betrayed by the economic slowdown that was drying up tax revenues.

A vicious circle was set in motion: The Argentine state had to cut its expenditures to pay back its debt, but by reducing its expenditures, it stalled the economy, which in turn made its revenues dwindle, forcing it to cut its expenditures even more. In the 1930s, using the same methods, Pierre Laval had led the French economy to the brink of a similar precipice. Clinging to its dogmas, in a state of ideological and psychological dependency on high-finance circles, the IMF failed to see the cycle that was gearing up.

Yet many experts were predicting the catastrophe, both in Argentina and in other countries. In France, the Observatoire Français des Conjonctures Économiques, the economics institute headed by Jean-Paul Fitoussi, titled its October 2001 memorandum: “No one can expect the impossible from Argentina.”

But instead of organizing a gentle retreat from the currency board, the IMF tightened its lending terms, demanding increasingly draconian measures. That is, until the population rose up against such insane austerity, bringing down both the government and the clever schemes of the Talibans of orthodox finance.

Observing that their prescription had just about killed the patient, the free-trade doctors recommended doubling the dose. More “structural reform,” less social protection, this time an almost total dismantling of the Argentine welfare state, and handing over all autonomy to international bankers: That was the remedy prescribed.

The new government turned its back on this prescription. It decided to devaluate and to come to the aid, to the extent possible, of its poorest citizens. Argentina is entering upon a perilous phase, running the risk of an economic relapse and political subversion that would bring back an authoritarian regime to power.

This tragic fable has two morals. What Argentina lacked, in the first place, was not so much a total immersion in the market economy. Rather, it was the draconian reform of a corrupt and ineffective state. The free-marketers always forget, whether it be in Russia, in Asia, or in Latin America, that the market is not born by spontaneous generation. Without security for transactions, the impartiality of the court system, sound infrastructures, competent government officials, and government action to limit the effects of reform on the poorest people, the economy will not function. It will slide into corruption, casino financing, inequality, and tax evasion.

It is the state that institutes the market, and it does so not by retreating or disappearing. Worshiping at the altar of the market, the international experts recommended to emerging countries that they should push back the state at any price and by any means. We have seen the result.

The second lesson goes along the same lines. In intervening to manage crises, the IMF can no longer confine itself to strict financial criteria. Political and social considerations must also be present in its line of reasoning, which, among other things, includes lightening the burden of the debt. If not, populations will revolt with ever-growing violence against the prescriptions of the world financial community.

Are we moving in that direction? No. The experts close to George W. Bush have found a more radical way to shield the IMF from criticism: They propose eliminating it. Financial crises would then be entirely managed by the private sector. After one kind of brutality had been called into question, it would be replaced by an even greater kind of brutality. The Argentine people have not yet finished suffering.