Argentina is in the throes of its most severe economic crisis in the last 50 years. A workshop in Bonn, organized by the
Friedrich-Ebert Foundation in February, brought together experts from Germany, the United States and Latin America to discuss causes, effects and solutions of the crisis. The following points were put forward by Professor Jerome I. Levinson of the American University, Washington.
1. Argentina is the country that most enthusiastically embraced the neo-classical economic model promoted by the IMF and the U.S. Treasury: market liberalization, opening to foreign investment, particularly foreign direct investment and a reduced role for the state in the direct production of goods and services, but also as a promoter of development.
2. Argentina privatized the national petroleum company, the railroads, sold off the national airline to the Spanish national airline, Iberia, and public utilities to Spanish and French state owned companies; hence, this was not so much privatization as de-Argentinization; also they permitted the sale of Argentine owned banks to foreign banks, primarily U.S. and Spanish. The signature industry of Argentina-meat packing-was also sold to the big international meat-packers. There is no Argentine-owned banking or meat packing industry. In light of this record, the statement of the U.S. Secretary of the Treasury, Paul O'Neil, that Argentina did not reform, is simply incomprehensible.
3. Most commentary in the U.S. has focused on the currency-board arrangement and the pegging of the peso to the dollar. The argument, for example, of the Washington Post is that Argentina stuck with the currency board arrangement too long, but that otherwise there is nothing wrong with the free market economic model which Argentina adopted, what Joe Stiglitz, the former Chief Economist of the World Bank describes as market fundamentalism.
4. Professor Schvarzer has written an excellent analysis of why the convertibility system failed. I would like to suggest that the economic model is more fundamentally flawed than just the currency board arrangement.
5. IMF/World Bank/Treasury theory is that as the role of the state diminished in economic activity, a more dynamic private sector would take up the slack in both investment and employment. However, that private sector would not be entitled to protection; it would have to be internationally competitive and therefore had every incentive to minimize employment, wages and benefits. Even in the years of relatively high growth, this excessive reliance on the private sector could not reduce the unemployment rate below 14-15 per cent. In every industrialized country the public sector is an important source of investment and employment. In the U.S. we have a public investment and employment program: we call it the defense budget and jail construction.
6. Unable to use the exchange rate to adjust relative international prices, the Menem government, backed by the IMF and World Bank, sought to reduce relative costs by a direct attack on labor costs: labor market flexibility, strengthening the hand of capital in collective bargaining negotiations by making it easier to fire workers without significant severance payments, and changes in the collective bargaining regime to the disadvantage of the unions. The IMF and World Bank also pressed the Menem government to dismantle the administration by the unions of health care plans, obras sociales; presented as a measure to improve health care, this measure was perceived by the union leadership as a means to weaken worker loyalty to the unions.
7. Unions had traditionally been the means by which the Argentine working class gained a stake in society and could aspire to middle class amenities: in 1996 I was on a speaking tour in Argentina sponsored by the AFL-CIO and the CGT; my wife and I stayed at a union hotel (Power and Light), very spartan but more than adequate, in the Recolleta section of Buenos Aires, an upscale neighborhood. We saw workers from various provinces, members of CGT affiliated unions who had made reservations and could eat at a subsidized restaurant affiliated with the hotel. In a world of globalization and international competition, however, these amenities were considered too expensive to be maintained. The social gains for labor of the past fifty years were now at risk.
8. The result was an increasing resentment in working class Argentina against the economic model with sporadic general strikes of varying effectiveness. This worker discontent was joined with an increasing impoverishment of the middle class in the last four years, creating a truly explosive social situation. The breaking point came in December of last year when the IMF and U.S. Treasury demanded, and the De la Rúa government accepted, a policy of still more austerity and unemployment. Argentine society, not just the unions, rose in revolt and drove the De la Rúa government from office.
9. The currency board arrangement should be understood then as the neo-classical economic model carried to its logical conclusion: all discretionary authority is removed from policymakers; the financial markets determined the level of economic activity by establishing the amount of dollars that would be available to Argentina. And to increase the amount of those dollars Argentina frantically borrowed more and more dollars until the debt to export ratio became un-sustainable and the markets declined to lend more money to Argentina.
10. The best way to understand the Duhalde government and its policy reversals is in terms of the early months of the Roosevelt Administration in 1933 and the early years of the New Deal: faced with a devastating depression, and no good alternatives, Franklin Delano Roosevelt tried a bewildering variety of approaches. If asked to produce a coherent plan, as the IMF and Treasury have demanded of the Duhalde government, all of the creative experiments of the New Deal period would have been killed at their inception. We can expect a similar period with the Duhalde government of trial and error, what works and what doesn't, what is socially and politically feasible and what is not.
11. Duhalde has attempted to allocate the burden of adjustment more equitably within Argentine society, placing the greatest cost upon the foreign owned banks and utilities. Those utilities were sold to French and Spanish investors on very favorable terms: a captive, monopoly market; facilities for repatriation of profits without limits; the fixing of tariffs in dollars, index linked to the U.S. inflation; virtually non-existent state regulation.
12. As a result, the majority of concession holders obtained very high profits, in comparison with the largest Argentine companies and with similar industries in other parts of the world. For example, in 1993-1999, the 200 top ranked Argentine companies (excluding privatized companies) reported average profits of 2.6 per cent of sales but the privatized water company, owned by French and Spanish interests, reported profits of 20 per cent of sales in 2000; similarly, the foreign banks cut credit to the small and medium industry, earning very high returns.
13. Obviously, Duhalde is gambling that the French and Spanish have too much at stake in both Argentina and the rest of Latin America to walk away from their Argentine investments.
14. Duhalde has cobbled together the most broad based government in the post-military era: he has an important part of the Radical Party, including the support of former President Alfonsin, with whom he has been talking for some time and who hates the former economic model; he also has included Frepaso, the center-left party. Both small and medium enterprise and the majority of the labor unions understand that Duhalde is their last chance: the alternative is a "deepening" of the reforms demanded by the U.S. Treasury and the IMF that can only be prejudicial to their interests. Hence, he has the best chance of any recent government to carry out a reasonable economic policy with a broad base of political and social support.
15. But the policy priorities of the Washington Establishment can only undermine that social and political base. What they appear to be demanding of the Duhalde government is a Herbert Hoover type economic policy: at the height of the depression in 1932, Hoover sought to balance the budget, deepening the depression, exactly the measures demanded of the Duhalde government that drove the De la Rúa government from office.
16. There is then a growing gap between the social and political reality of Argentina and the policy priorities of the U.S. Treasury, the Bretton Woods institutions and the American academic and journalistic establishment. Duhalde confronts the increasing outrage at growing income inequality, the de-classing of the middle class and the reversal of social gains for the working class. Growing income inequality, however, is considered irrelevant by the Washington (and American academic) Establishment, the middle and working classes in Argentina pampered and undeserving of any special concern in establishing policy priorities.
