Latin America

Argentina: 'Manufacturing Poverty'

Eduardo Lavagne
Argentina's new economy minister Eduardo Lavagne surveys the formidable challenges ranged against him, May 3, 2002 (Photo: AFP).

The naming of Eduardo Lavagne as economic minister has sent sighs of relief rippling through the “Casa Rosada” and the White House, but most Argentines are still red with anger at their black future.

For caretaker President Eduardo Duhalde, the signing in of a new economic minister was like a bright clearing in the glum autumn skies. But most Argentines, bitterly accustomed to default, devaluation, inflation, and unemployment, greeted the swearing in of Roberto Lavagne with little relief.

As grey late April clouds covered Buenos Aires in gloom, Argentina’s social-economic-political crisis began to totter once again on the verge of a fathomless abysm. The last straw was the announcement of the government’s intention to turn trapped savings into 10-year bonds. “I’ve worked hard all my life to save up $10,000 and was going to use that for my mother who is awaiting an operation,” complained an angry woman to TV Channel 13 cameras, “and now they say I have to wait 10 years to collect it!”

Economic Minister Jorge Remes Lenicov, who since January had been patiently trying to convince the IMF that the country had a viable plan of economic recovery, announced the decision to turn savings into bonds as a last-ditch effort to confront a two-headed monster: on one side, the specter of the banking system’s complete collapse, and on the other, roiling anger over the corralito—the freeze on bank accounts Fernando de la Rúa’s government imposed to prevent that collapse in December, 2001.

This second rush of funds from the bank began after Feb. 1 Supreme Court decision declared the corralito illegal. Creditors lined up by the thousands to get court orders enabling them to extract their savings. This led to a near breaking of the corralito dam.

Argentina’s spectacular economic collapse has left most Argentines understandably leery of their banks and their country’s immediate economic future. So when they were finally given access to their accounts, the first thing many did was to convert their pesos into dollars. This has put enormous pressure on the exchange rate, which by April 19 was whizzing past 3.5 pesos to the dollar. Alarmed, the government decided to protect the banks by suspending practically all bank operations and urging Congress to approve the bill transferring savings to bonds. Though this rankled the banks’ customers, it did have the desired effect: By May 7, Argentina’s currency seemed to have stabilized at 3.23 pesos to the dollar.

The banks had been under assault for months by angry pot-banging and slogan-painting savers who turned the hurriedly erected protective tin facades of downtown financial institutions into exotic musical instruments or extemporary canvasses.

There was fear of a repetition of the violent incidents in mid-December when lootings, massive protests, and police repression cost the lives of 25 people and set off a series of political explosions that sent De la Rúa and a string of other short-lived presidents into retirement.

Between one visit and the next, IMF officials had been dishing out their recipe to the cook—a free-floating dollar, a 20-percent reduction in provincial government expenditures, a modification of bankruptcy laws that would enable foreign capital to freely compete in the country, and provisions aimed at guaranteeing “judicial security” in the face of boomeranging law suits against financial institutions accused of an array of allegedly illegal financial manoevers.

Duhalde insisted that an agreement with the IMF was the only way out of the crisis. Yet he found it difficult to swallow parts of the recipe that in the short run would send unemployment beyond its present level at 24 percent, and subject economic growth to strict fiscal policies aimed mainly at guaranteeing payment of the country’s US$140 billion foreign debt, thereby establishing the conditions for renewed confidence of multinational investers in the country’s future.

The measure to turn the estimated US$45 billion banks owe savers into long-term bonds paying low interests rates was seen as a necessary ingredient in complying with another IMF demand: an end to the corralito. Though somewhat less enthusiastic than his economic minister, Duhalde tried to sell the proposal as yet another “last chance” to stave off complete economic chaos.

Congress had barely begun to debate the issue on April 19 when a bomb threat sent politicians scurrying to the street. Police escorted them to safety while demonstrators shouted “thieves!” and “down with all of you!”. That precipitated Lenicov’s resignation and set off yet another “crisis within the crisis,” during which there was talk of breaking off negotiations with the IMF, advanced elections, or the resignation of the president.

“Nothing could be worse than this,” shouted Mabel Araujo while beating a pan outside Congress, “not even De la Rúa was worse than this. They are turning us into ants, they are committing social genocide.”

Faced with an unheard-of 15 percent decline in industrial production last month, and an unending blitz of unfulfilled promises (such as Duhalde’s promise to return dollar savings in dollars), the government found that converting savings to bonds had become a poisoned arrow. Minister Lenicov resigned. With his resignation, the “bond” solution lost its greatest supporter.

The president was then forced to choose among a series of unpalatable solutions, including a “go it alone” policy independent of the IMF, his own resignation, advanced elections, or some kind of move to stall for time. Although support for the government is at rock bottom, opinion polls indicate that the vast majority of Argentines would prefer a peaceful, orderly solution to the crisis.That feeling no doubt helped save the government from yet another collapse.

And indeed, not everyone believes in the curative powers of the IMF recipe. On April 29, the Brazilian daily Fôlha de São Paulo published an article by Harvard International Development Center president Jeffrey Sachs, in which he claimed that “the IMF shares the responsibility and blame for the chaos in Argentina” and declared that the IMF “does not have a clear idea concerning what to do. It proposes political and economic recommendations [which are] impossible to carry out, imposing drastic cuts in public services when schools and hospitals are on the verge of collapse.”

Sachs, who has visited Argentina frequently, went on to assert that the IMF is applying the same policies that precipitated the 1929 stock market crash, when conservative governments attempted to cut expenditures and ended up deepening the recession. That situation, Sachs reminded his Brazilian readers, was reversed with the introduction of policies based on the theories of John Maynard Keynes. Therefore, Sachs concluded, rather than insisting on fiscal austerity, international finance should guarantee deposits in Argentine banks in order to reestablish confidence in the country’s financial institutions.

As banks closed again in the last week of April, Argentina lost millions of dollars in tax revenue. In what Buenos Aires’ conservative La Nación described as a “shameful” spectacle, retired workers were forced to collect their already shrunken pensions at such exotic places as bakeries, police stations, drug stores, and merry-go-rounds. In one widely reported incident, an 80-year-old man died of a heart attack while waiting in line, and many others had to be given first-aid assistance.

Amid a parade of politicians, trade unionists, and provincial governors, the Duhalde government finally decided on a 14-point program that responds to most IMF demands. This, plus the naming of the orthodox but not completly market-oriented Lavagne as economic minister—supported by both Duhalde’s faction of the Peronist party and a faction of the Radical Civic Union (UCR) lined up with ex-president Raúl Alfonsín—brought a few sighs of relief. The view of most observers is that this has done nothing but prolong the life of the Duhalde administration. However, few dare to bet on the future.

Although the possibility of Duhalde’s resignation or a call for elections before Duhalde’s term expires in 2003 appears to be momentarily out of the picture, the situation could change rapidly if a radical turnabout is not forthcoming. An additional concern is that conditions here could lead to a “light” Argentine version of the coup attempt in Venezuela, in which conservative economic, political, military, or intelligence groups would force a showdown to open the way for a political solution favorable to their interests.

A number of political realignments may be waiting in the wings. A less pro-government sector of the trade union movement is increasing its criticism of the IMF and threatening strikes. A number of “moderate” government supporters have distanced themselves from the government or packed their bags outright. In getting agreement on the 14-point program, Duhalde had to win over the support of an important number of governors who have been demanding elections as a solution to the crisis.

A certain amount of stability might return should the government suceed in holding down the exchange rate. However, to do so it must use Central Bank funds, something opposed by the IMF. The government will likewise very likely return to some form of bonding the trapped savings, which could also endanger the respite Duhalde has eked out for himself.

For now, the question on most Argentines’ lips is: How long will this breathing spell last? Will it enable the government to come to an agreement with the IMF? Will it allow Duhalde to get enough support to finish his term? Will the government be able to prevent a social explosion among the army of poor and hungry?

Few observers dare attempt an answer to that question. Nevertheless, a sign raised by a protester in front of Congress appeared to express the feelings of the millions of impoverished Argentines: “Duhalde manufactures poor people.”