Duhalde's Dilemma

Duhalde Argentina
Argentine president Eduardo Duhalde pauses after signing an agreement with the workers union allowing them access to social benefits March 8, 2002 (Photo: AFP).

To Jorge Luis Borges, his native Buenos Aires was eternal, rooted in myth, full of silences, slums, and despair. Today, tourists visiting Buenos Aires to admire the city's modest but glittering skyscrapers, turn-of-the-century opera house, or the neat gardens of the city's wealthy neighborhoods must pass along highways circumventing dusty, labyrinthine slums. Locals call them villas, a mordant euphemism for neighborhoods where jobless residents must live with no garbage collection, open sewers, little access to fresh water, and rampant crime.

Despite having been one of the continent's most diligent students in the lessons of neo-liberal economic policy, Argentina is sinking in a quicksand of economic depression and social unrest. To many here, the way to solid ground appears as distant and illusory as a mirage.

The numbers speak for themselves: More than 20 percent of Argentines are unemployed, nearly 40 percent live near or below the line of poverty, production fell 18 percent in January, tax revenues dropped 25 percent during the same month. Argentina's foreign debt—last clocked at US$135 billion—is skyrocketing. Its gross national product is steadily decreasing; its factories are idle. Beggars line the streets. Shrinking budgets for science, technology, and education are chasing record numbers of educated workers into economic exile. Yet the figures themselves are but the frame of a much more complex picture.

What went wrong? How is it possible that one of Latin America's richest countries—with a small population, vast natural resources, a well-educated middle class, and highly skilled workers—is staggering under economic stagnation, unemployment, hunger, and political instability?

It is not infrequent to hear disgruntled middle-class Argentines mutter, "It's our fault." In protests that have filled the streets of Buenos Aires almost every day for two months, they complain of political corruption, mismanagement, nepotism, the lack of an independent judicial system, and a host of other evils. At the other end of the political spectrum, leftists and nationalists accuse foreign investors of backing unscrupulous governments and seeking to further their own interests at the expense of the country's long-term health.

Argentina's creditors and bankers insist that structuring the country's economic policies to encourage international investment is the surest path to ensuring its long-term health. The protesters complain that their savings are evaporating before their eyes as the peso sinks against the dollar and the banks continue to prevent them from withdrawing their savings. The banks have extended vague promises of returning clients' savings at devalued rates in the distant future, but protesters say this is not good enough: They want their investments returned in dollars. Recently, many have been urging the government to cut its foreign debt payments and to use the money saved to develop the economy and create jobs.

President Eduardo Duhalde's caretaker government appears to be putting one foot in each camp—the financiers and the protesters—and has therefore been attacked as "populist" by the United States, and as falling back on his promises by the protesters. He is trying to convince Washington that he has given up the nepotism and paternalistic style of his Peronist predecessors, and is battling even harder on the domestic front to cast himself as a pragmatic innovator. Historically, Peronism's strength has been built on support from trade unions, appeals to nationalism, and on the party's almost mystical cultural appeal that has inexplicably preserved its image despite the party's ideological zigzags and internal contradictions.

The Historical Backdrop

In March 1976, a military junta led by Gen. Jorge Rafael Videla seized power from Maria Estela Martínez de Perón, the third wife of two-time Argentine President Juan Domingo Perón. Shortly after taking power, Gen. Videla, an adamant advocate of counter-insurgency theories then in vogue in the United States, told the country he would sacrifice as many Argentines as was necessary to insure the preservation of Argentina's "republican institutions."

Videla and the junta made good on their promises. Between March 1976 and October 1983, when the junta ceded power to Raú l Alfonsín of the Radical Civic Union, they sacrificed an estimated 30,000 Argentines. Civil liberties were suspended. The junta ruled through intimidation, kidnapping, torture, and murder.

The echoes of this reign of terror are still resounding. The middle class, weary of decades of chaos, initially endorsed the coup. Many believed the junta's contention that if someone had been arrested "there must be a reason." The air of distrust that pervaded all of the country's institutions under the dictatorship persists. Today that air has been whipped into a windstorm of public distrust of political and judicial institutions.

Economically, the junta put the first touches on a policy that largely continues today. Import barriers were torn down. Millions of dollars were borrowed from international financiers, though most Argentines would be hard-pressed to identify the benefits of all this borrowing. Alfonsín's early attempts to protect Argentine businesses were scuttled by inflation as high as 200 percent.

Alfonsín, faced with one of the worst economic crises in Argentina's history, resigned in June 1989, amid scenes of looting similar to those seen in December 2001. His successor, Carlos Menem, ran a campaign on criticisms of the International Monetary Fund (IMF). But once in power, he established what he called "carnal" relations with the United States, introduced market economics on a vast scale, sold off government corporations at bargain prices, and continued borrowing millions abroad. In 1991, Menem pegged the Argentine peso to the dollar, ending decades of inflation, but artificially and awkwardly tying the fortunes of Argentina's lackluster economy to the booming U.S. economy. Though he had temporarily succeeded in establishing a measure of economic stability, Menem also left a legacy of corruption and 15-percent unemployment.

In December 1999, Fernando De la Rúa assumed power on a platform that promised to rid the country of corruption and to provide more opportunities for small Argentine businesses. As it happened, Argentina's troubled economic legacy—a deep recession, spiraling foreign debt, and the limitations of the dollar peg—proved too much for De la Rúa to handle. De la Rúa repeatedly promised to honor the debt, but ended up borrowing just to pay debt obligations, finally driving the country to financial ruin. He abandoned the Casa Rosada in a helicopter in the wake of mass lootings, pot-and-pan-banging demonstrations (cacerolazos), and clashes that took 26 lives.

After a rapid succession of short-lived presidencies, Congress finally appointed Peronist senator Eduardo Duhalde as president until the 2003 presidential elections.

What's Next?

Duhalde has decided to continue the corralito, a measure adopted by the De la Rúa administration to stanch the exodus of billions of dollars from the banks and prevent a total collapse of the Argentine banking system. Still, according to Duhalde, as quoted in the March 3 edition of liberal Buenos Aires daily Pagina 12, some US$20 billion left the country. The measure locked dollar deposits in financial institutions and limited withdrawals. Simultaneously, the government abruptly abandoned the dollar peg and began to gradually lift the corralito. At press time, the peso was officially trading at 1.4 to the dollar in currency markets, but the "floating" rate used for imports and exports and most other operations was at 2.25 pesos to the dollar, and rising. Although the Duhalde government insists that "everyone" lost in the necessary changeover, middle-class investors feel they have been cheated out of more than the rich, whose savings, they say, were in offshore accounts.

These protesters who today fill the streets of Buenos Aires view the combined effect of the corralito and the devaluation of Argentina's currency as a virtual robbery. The devaluation has not only reduced purchasing power but has introduced the specter of inflation. Prices for wheat, meat, and processed foods have increased by 15-20 percent. And though prices for some processed foods are now selling at prices 100 percent greater than they were at the beginning of the crisis, fruits and some other products are now selling for less than they once were, as vendors struggle to raise capital to buy new products at much higher prices. Meanwhile, unemployment is rising, and, as a result, the government's income from taxes is insufficient for the government to pay its expenses. Since Argentina defaulted on its loans, international financiers will not extend the country's credit.

There have been no public breakthroughs with the IMF. The fund had suggested that Argentina's national government stop subsidizing the country's 23 provincial governments, leaving them to subsist off their own incomes from taxes. Unsurprisingly, the provincial governments have registered their opposition to the idea, claiming that they would not be able to function without federal assistance. As Duhalde struggles to keep the country together, he is understandably reluctant to lose the support of the provincial governments. So many breathed a sigh of relief when Duhalde's government announced that it had reached an agreement with the provinces, a development IMF spokesman Thomas Dawson called "very welcome."

In any case, it will likely take months for Argentina to come to an agreement with the IMF, and Washington has made it clear that Argentina should not expect a bailout. International financiers are standing adamantly behind the theory that fiscal austerity is the solution to the crisis. But Buenos Aires residents living in sprawling slums without running water or sewers must have a difficult time imagining what greater fiscal austerity would look like.

The government appears to be doing its best to work out a "sustainable" plan that would satisfy multilateral financial institutions and pave the way for future assistance. But every time an agreement with the IMF appears to be around the corner, the fund's managers make more demands, or describe the government's plans as insufficient.

Perhaps the IMF is taking such a stringent line because of Argentina's weak track record. Argentine critics question whether this "excessively technical" approach can provide a solution to the rampant economic inequality in the country. High-ranking members of the Argentine Catholic church have recently described the IMF's pressure as "economic terrorism."

While an agreement with the IMF might ease the domestic situation slightly, the danger of a political explosion will continue to haunt the country. Further aid would be a first step. It would allow the government to get other loans, lower its country risk factor, partially restore its tarnished image, and perhaps ease pressure on the exchange rate. Loans could be directed toward social programs, efforts to improve employment, and programs to stimulate investment. But in the short term, the aid would go mainly to shoring up the teetering edifices of high finance in Argentina. The endemic social problems in the country would have to wait. Even if multinational corporations were to redouble their investments in Argentina, they would be unable to provide work for the masses of unemployed, underemployed, and undereducated that many here say the liberal trade policies have created. Increasing exports and cutting government spending would certainly solve many of the government's fiscal problems. But few argue that it would address the country's formidable social problems.

The crisis threatens to introduce radical changes in political and economic power. A broad, and widening, cross-section of Argentines are coming to view traditional power structures—the Radical and Peronist parties, the trade unions, the military—in a harsh light. Middle-class protesters gather in front of the Supreme Court and shout, "Down with all of them!" Well-dressed malcontents spray-paint the word "thieves" on the security screens protecting foreign banks. Rowdy protesters gather around political leaders' homes and keep them from their sleep. Neighborhood protest groups sprout across the city. Although there is a constant rejection of anything that smells of traditional politics in their meetings, perhaps it is in these meetings that one might find the embryo of Argentina's nascent political life. Likewise, the workers and unemployed are showing increased independence from the once-powerful trade unions. The demands of the piqueteros, unemployed protesters from the slums of Buenos Aires who routinely block roads demanding money and jobs, have converged with those of the predominantly middle-class cacerloazos, or pan-beaters.

Unless the government is able to pull a magic card from its sleeve, the country will likely continue on the brink of explosion until the 2003 elections. It may not survive. It may be forced to hold elections earlier. Politicians will need to court the country's most disaffected citizens to stay in power. But for Argentina to retreat from the brink of disaster, the government, supported by international financiers, will need to address the fundamental social problems that plague Argentine society.