Argentina's Crisis By John Cherian • Hit by a recession induced by free-market economic policies, Argentinians force out their President. Now the new government's decision to renege on foreign debt repayment spreads panic across the world. The writing was on the wall for quite some time. The neo-liberal economic policies that successive governments implemented with the support of Western financial institutions had led to a protracted and painful recession, which set in about four years ago. The economy had been contracting at an annual rate of 11 per cent and unemployment hovered around 20 per cent. The international financial institutions had tried their best to bail out one of their star clients by extending loans of unprecedented levels, which had been denied to more deserving countries. But they had attached stringent conditions. In the past one year, the International Monetary Fund (IMF) helped arrange loans worth $48 billion for Argentina. At the same time the government was forced to adopt more austerity measures to meet IMF/World Bank conditionalities. All this was too much for the people who had undergone years of unremitted suffering. The IMF wanted the government to cut fiscal deficit to zero in 2001. In early December, it warned that it would not release the last crucial tranche of loan worth $1.3 billion, unless the government either devalued the Argentinean currency or made the dollar the country's official currency. In the event, the loan was insufficient to keep the beleaguered government of President Fernando de la Rua from collapsing amid chaos and the government that followed from defaulting on loan repayment. The last straw for most Argentineans was the government's decision to impose limits on cash withdrawals from banks and the attempt to impose an even harsher budget aimed at restoring the $2.7 billion loans suspended by the IMF and other international agencies. The government desperately needed the money, to avoid defaulting on repayment. Among other things the budget recommended was a further cut in spending by $9.2 billion. Finance Minister Domingo Cavallo, a blue-eyed boy of Western financial institutions, claimed that the austerity measures envisaged in the new budget, such as further cuts in the public sector workforce and a reduction in the salaries of government servants, would help save the economy. The government even wanted to withhold the traditional Christmas bonus. Most Argentinians had voluntarily accepted large pay cuts. The government was also delaying the payment of pensions. Expenditure in the social sector was sought to be curtailed by 70 per cent. Looting and violence engulfed Buenos Aires, the capital, and its suburbs from the middle of December. The police used force and fired rubber bullets at the rampaging mobs. Twenty-seven people lost their lives, most of them in police firing. A few looters were killed by shopkeepers. A Korean whose shop was looted committed suicide. The first to step down was the Finance Minister. He resigned as the rioting spread. President de la Rua tried to hang on to power even as the demonstrations against him intensified. A state of emergency was declared and de la Rua held a lengthy meeting with his predecessor, Carlos Saul Menem, who had recently been acquitted by a court of the charge of gun-running. It was Menem who started the "dollarisation" of the economy. The Argentinean peso was pegged to the dollar and was made freely convertible. He also dismantled the state structures and went on a privatisation spree. Menem, who wants to make a third bid for the presidency, would have liked de la Rua to continue until his term ended. He is constitutionally barred from contesting for another two years. But almost the whole of society was affected by the economic and political turmoil. A national survey found that 93.8 per cent of the respondents were "experiencing distress, sadness, depression or bitterness due to the socioeconomic crisis". It was clear by the end of the year that de la Rua and his Radical Party stood totally isolated. In the third week of December, the President went on television pleading for a government of national unity, but there were no takers. He was left with no choice but to resign, in order to prevent further bloodshed. De la Rua, who had two more years to govern, resigned on December 21 after lifting the state of emergency. The presidential election was in the normal course to be held in 2003. There was widespread rejoicing as news of the President's resignation spread. Most Argentinians hold him responsible for their woes. He was perceived as being indecisive. Law and order has returned for the time being as Argentina once again begins to chart a difficult course towards economic recovery. The last time Argentina was in a big financial mess was in 1988 during the presidency of Raul Alfonsin, also of the Radical Party. Mobs had then gone on the rampage, as the peso became almost worthless. It took the legislators more than two days to decide on an interim President to replace de la Rua. Finally, on December 23, Adolfo Rodriguez Sua, the tough-talking Peronist Governor of the province of San Luis, the most popular politician in the country at the moment, was named for the post. One of his first acts was to renege on repayment of the country's huge foreign debt. A survey done in the middle of 2001 found that 42 per cent of Argentinians wanted the foreign debt to be restructured while 22 per cent wanted it to be repudiated. Commentators have described the new government's action as the biggest debt default in history. Many analysts believe that the renegement on the repayment of Argentina's debt, a staggering $132.1 billion, has the potential to impact adversely on the global economy. Argentina's interest payments alone account for $10 billion a year. Many neighbouring countries are waiting with bated breath for the economic repercussions. Argentina is among the five largest debtor countries in the world. The new President is a votary of a strong peso and is obviously making a last-ditch attempt to stave off the inevitable. Most economists are of the view that devaluing the currency and changing the national currency are the only two alternatives before the country. Rodriguez Sua has a business-friendly profile and has so far eschewed the populism that Peronists have been well-known for since the time of Juan and Evita Peron. Besides, Sua is known to have long-term political ambitions. He was the front-runner among the Peronists to be their flagbearer in the election that was due in 2003. All indications are that Sua will tread cautiously while attempting to please the voter. At the same time he has to keep the international financial institutions happy. Argentina had not too long ago enjoyed European standards of living. At the turn of the last century, Argentina was among the 10 richest countries in the world. Today, around 20 per cent of Argentinians live below the poverty line. Demonstrations have already begun outside the presidential palace to protest against the supplanting of one set of free marketeers by another. Copyright © 2002, FRONTLINE MAGAZINE. All rights reserved. Reprinted with permission.
Kmguru: I read the above post with interest as I have been following that country's problems in the on - line version of the Buenos Aires Herald. I noticed that you didn't directly offer a solution to its crises, only an indirect derision of free markets that was contained in the original author's article. On a forum where most everybody directly declares their positions, I miss the direct proselytizing. I don't have any high level education in economics but I do understand Econ.101 well enough to following the drift of an economic discussions. As for Argentina, it seems very sad to me that a country that has abundant resources, and energetic and educated people, can't pick it up and make it go without outside help. It appears to me that economists have become so enthralled with money that they have forgotten that an economy really runs on the hands an feet of working people. But I'm curious to know what economic methods do you think might work for Argentina? Fairfield
Imagine, If you will, a situation where your grandmother dies and leaves you with a massive inheritance, mostly in property holdings and resource assets. Unfortunately, she's built her wealth by borrowing heavily from elsewhere, and those creditors are now demanding full repayment. Because she's never had the means or never bothered to repay those creditors in the past, you are now in a position where her paper wealth is a myth, and although you have abundant property and resources as a result of her leaving it all to you, your creditors are demanding you sell it off or give it to them as payment on outstanding debts. You are now in a position where although you have the means to perhaps pay off those debts given time, you are unable to do so because you must either sell the property you have, or sell access to your resources. If you do either, you are left with nothing. You dont have time to develop those resources yourself, because A: you dont have the cash on hand to do so, and B: even if you did, by the time those resources and property are in a postion to start giving real returns, your debt has amounted to the point where the interest payable is higher than the potential earnings you might receive. Nobody will loan you the money to develop your own means of income, because your outstanding debt is already too high. If they do loan you the money, the interest on this coupled with the existing repayments effectively wipe out any potential earnings from your resources. Because all your potential earnings are used to repay debts, you never have the opportunity to plow those earnings back into your infrastructure to ensure long term benefit, leaving you in a position where your competitors pull so far ahead of you that you cant ever catch up. You then are left in a position where your product is no longer economically viable because everyone else can produce it "faster and cheaper" and you are forced to borrow money to catch up..... How can any third world nation possibly become "first world" without having the monetary means to build up their infrastructure? The cycle continues.
The problem was not just inherited debt. It was terrible mismanagement, continually, by each successive ridiculous government. Rather than use borrowed money to built up some sort of industrial-economic infrastructure, they just kept buying and buying. They all did it; it was not just one dead grandmother government. They were irresponsible and stupid, the people let them get away with it, and now they're screwed. Welcome to here, by the way.
Fairfield: I posted regarding Argentina in another thread under the same name where I do provide my opinions. I usually elicit response from fellow members before I comment when I start a thread. That way, I have a better idea of my audience. The reason, I keep bringing up Argentina is that the solution is fairly easy, only when you look at the big picture. I wanted to know how many people think they are stupid and therefore they could not perform. Adam has it right - they are irresponsible and stupid. Now to the solution. Since my last new thread (on Argentina), I decided to do something about it. Let us just say that I do have previous experience in these matters with other countries including Nepal (there is a discussion in another thread). So I did contact several US private agencies who have done business there in the past. Through them, I contacted several Argentina agencies who do business with their government. We are talking about multi-billion dollar global corporations from the US side. Every path I took ended up as non-responsive from the Argentina side. After hearing the details - my US contacts told me to forget about Argentina. Then why I am posting here? Well, as you know, the sciforums pages are tracked by Google. I am hoping that some smart cookie in Argentina will read this and decides to do something about it. The ideas are available - it is the implementation that is the hard part. Let me give you an example. A lot of people lost their jobs after 911. I know a friend of mine who is at a very senior level in IT field. At that level, normally sending out resumes or contacting employment agencies does not work. One must have a good network in place to get anywhere. And he did just that. It was a complex web of process that landed him a great job (he was too close to bankcrupty). What we did was to review his resources and networks and the outside world. We mapped the objectives and started taking actions in a methodical pattern. His actions this time were different from the past scenarios because of the unusual nature of our economy post 911. Same hold true for Argentina. They need to review their resources (and they have plenty) and the nature of global economy. Information is very important. The right people need to have the right attitude to manage that Information. The past practices may not work. Basically they need to "re-engineer" their society (ref: Michael Hammer). And this is where I would like to open the thread for discussion. My opinion is that to re-engineer a society, one has to look at every part of the society and not just one or two items. When great companies fail, they fail because it is a systemic problem. Same happens to great countries and societies. You may be surprised to know that while Dr. Hammer intended his prescription of 'reengineering the corporation' for business, it has been extensively used by US military - in fact they were the first ones to use it. Today, you can see the results.
I see there is no shortage of ideas and solutions available on sciforums regarding Argentina's economic problems. Since no one, so far, seems to be taking up Kmguru's request to discuss re-engineering Argentina's society, I wonder if, in the interim, I could direct the attention of some of you readers and writers, so fluent in economics, to a more academic subject, namely a thread I posted some time back called Mischievous Free Markets. I only got a couple of responses to that post although I realize that that may be because it is not worthy of much comment. But I would appreciate any criticism you can come up with, as the apparent implications of my main thought in that post are rather troubling to me. Also, Kmguru, I am very curious to know what are the twelve volumes of books "a certain American company sold them (the Chinese) ..... for twelve million dollars".(Mentioned in your earlier thread on Argentina) Thank you. Fairfield.
Sorry...it is a privileged information. What I can tell you is that it was a set of preliminary design report. I can not say any more - that can hint or identify the persons or companies involved. A lot of juicy stuff that goes on in business is rarely put in books or make news. Someday, when I retire - I will post it on my webpage.
