The Collapse of Argentina's Economy: Free Market Madness

Revolutionary Worker #1152, May 26, 2002, posted at http://rwor.org

"And if a solution isn't found to the `medical state of emergency' declared this week, it will certainly affect an elderly woman I met recently on the outskirts of Buenos Aires. In a fit of shame and desperation, she pulled up her blouse and showed a group of foreigners the open wound and hanging tubes from a stomach operation that her doctor was not able to stitch up or dress due to lack of medical supplies."

*****

After several years of recession, the economy of Argentina--the second largest in South America-- collapsed in late 2001. The effects of this crisis have been devastating for millions of people, even in the middle class and more so for the growing numbers of unemployed and poor. Argentina finds itself with enormous debt owed to foreign investors. It has sold off its formerly state-owned companies to corporations. And it is utterly dependent on flows of imperialist capital. Many small businesses have either gone under or have been eaten up by larger firms, both foreign and domestic. Poverty and unemployment have skyrocketed, and for those lucky enough to have jobs, their incomes have plummeted. In a country that has been one of the world's major food producers, hunger is becoming a significant problem.

Behind the crushing crisis of the Argentine economy and the assault on the Argentine masses lie the dictates of imperialist financial institutions, primarily the International Monetary Fund (IMF), which is dominated by the United States.

In 1991, the government instituted a massive program of so-called "free market reforms." For a while, these measures made Argentina a safe and stable bet for global investors. Throughout much of the 1990s, international capitalists praised Argentina as a model of the "free market" economy in the Third World. Economic growth was spectacular for a number of years. Now that the economy has collapsed, Argentina is shunned by these same capitalists. It is portrayed as a country where corrupt Latin Americans don't know how to manage their economy, and which hasn't done enough to open up to capitalist investment.

Articles in the mainstream press analyzing the economic crisis in Argentina point to the errors of various economic policies and actions undertaken by the government. But the simple fact is that imperialist financial institutions, primarily the IMF, have played the major role in directing the destruction of the Argentine economy. Argentine economic policies over the last decade have been in strict compliance with demands by the IMF and the "international investment community." And now these same institutions and investors are refusing to provide new financial assistance or allow Argentina to restructure its debt payments. Meanwhile, the Argentine government has continued to beg the IMF for a bailout, and has continued to institute economic measures that are designed to please global capitalist investors, but which cause even more suffering for the masses.

The economic crisis has given rise to widespread unrest. In January, in the provincial capital of Rosario, shantytown residents and newly impoverished middle class people began breaking into supermarket stores to seize meat, vegetables, cooking oil, and other necessities. The storming of the supermarkets quickly spread from the poorest provincial areas to other parts of the country, including the capital city of Buenos Aires. In the city of Cordova, workers protesting wage cuts and other government austerity measures took over the municipal building and set it on fire. In a Buenos Aires shopping mall, two government officials were chased by a crowd of people shouting "Thieves! Thieves!"

Broadly among the people, there has been a sense that the whole class of rich and powerful at the top is corrupt and not fit to rule. A woman living in Martinez, a working-class neighborhood of the capital, told the Los Angeles Times , "They have sold us out until we have nothing left. I cry for Argentina. Pity those of us who have very little, because those with more have taken it and left."

In the late 1980s, Argentina was rocked by economic instability. It experienced extremely high inflation, reaching at times a rate of over 200% per month . In 1989, the government of President Carlos Menem came to power and embarked on a "free market" path. It began a massive economic "reform" program to open up the economy to foreign investment and hopefully stabilize the economy. It linked the value of the Argentine peso to the dollar--one peso to one dollar--(known as the Convertibility Plan), lowered tariffs on foreign imports, opened up financial and stock markets even more to foreign capitalists, sold off state companies and utilities to private investors, and carried out "austerity" programs. For the masses, "austerity" programs typically mean a lowering of social benefits, removal of subsidies for basic commodities needed for survival like food, utilities, and cooking oil, and reduction of wages and pension benefits for state workers.

This economic package was very attractive to foreign investors and lenders. Since the peso was directly linked to the dollar, they believed they could count on the value of their investments being maintained, and that the cost of doing business in the country would be stable. The privatization plan would allow the purchase of state-owned companies at bargain prices and help break the power of trade unions. The "austerity programs" would help keep wages and taxes in check, and the lowering of tariffs would make foreign imports less expensive, helping foreign capitalists break into the Argentine market.

The economic measures instituted by the Menem government did bring inflation under control, and brought a flood of international investments to Argentina. This led to both an increase in economic growth in the 1990s, particularly in the early part of the decade, and an increase in consumer spending, leading to the strengthening of the middle class. Growth averaged close to 6 percent from 1991 to 1998. Exports grew from $12 billion in 1992 to $25 billion in 1999, while imports also grew from $15 billion to $25 billion. Some analysts imagined that Argentina would emerge from Third-World status and join the "first world." The country was put forward as an example of how free market economics could work in the Third World.

But the economic growth experienced by Argentina proved to be short-lived and without solid foundations. It was essentially fueled by a massive increase in the debt owed by the country and heavy dependence on foreign investment.

Argentina already had a large debt in the 1980s, but it ballooned in the 1990s. In the late 1980s, Argentina's foreign debt stood at $63 billion. Its foreign debt is now $130 billion, or about 25% of all "emerging market" debt.

Meanwhile, the value of the Argentine peso, tied to the value of the dollar, made it much more difficult for the country to compete internationally against products produced by other countries. The dollar rose significantly during the 1990s, relative to the value of other currencies, causing the value of the peso to rise as well. This meant that the prices of products Argentina sold on the world market rose relative to the prices of the same commodities produced in other countries.

In addition, starting in 1995, the Argentine economy began to be hit hard by a series of near- meltdowns of the economies in other countries. With the Mexican financial crisis in 1995, Argentina experienced a capital outflow of $6 billion. This was followed by a string of serious financial crises, in Thailand (1997), Russia (1998), and Brazil (1999). All these hurt Argentina's export trade. Foreign direct investment also declined. Argentina was particularly hard hit by the Brazilian crisis--Brazil is one of Argentina's largest trading partners. In 1999, Argentina's exports to Brazil dropped by nearly 30%.

This decline in exports and export earnings began to make it increasingly difficult for the government to make payments on the ballooning debt, and set in motion a vicious cycle, determined by the dictates of the IMF. In order to pay back the debt, the IMF demanded that government expenditures be reduced. But by doing so, this stalled the economy even more, causing government revenues to dwindle, necessitating a further reduction in expenses, and on and on. Argentina was caught in a downward spiral of falling growth and government income, larger deficits, more austerity, etc.

Under President De la Rua (elected in 1999), the Argentine government immediately sponsored tax increases and spending cuts to reduce the size of the deficit, and instituted a series of economic "adjustments" designed to please the IMF. But these were all to no avail as Argentina's situation continued to deteriorate. Investment, which began to plummet in mid-1998, fell 25% between the first quarter of 1999 and the first quarter of 2001.

In July 2001, the situation took a qualitative leap for the worse. International investors sensed that things were seriously awry in Argentina, and suspected that Argentina would not be able to meet its debt payments. Capital markets crashed when international investors demanded a huge increase in their returns to match the increased risk of investment, making it even more difficult for the government to make debt payments. The government responded with yet another "austerity" plan, the seventh such plan carried out in the previous year-and-a-half.

A complete collapse in the economy occurred in December 2001. The government has tried to patch things together with a few bandaids and further economic assaults on the people. The masses have taken to the streets and the government declared a "state of siege." President De la Rua resigned in disgrace. A series of presidents came and went until the ruling class decided on Eduardo Duhalde.

Although there was economic growth in Argentina in the 1990s, the increase in living standards for the masses of Argentines was very unequal. While a small fraction of Argentines may have been able to purchase the latest consumer goods, send their children to private schools, and occasionally take vacations abroad, the situation for most people in Argentina was far different. The official unemployment rate was over 10% throughout the 1990s. Official unemployment is now about 20% or more, and underemployment is 35%. In 1975, the poverty rate was about 10%--now the poverty level is around 40%.

The middle class has been affected by the privatization of state companies and the "austerity" plans that hit state workers particularly hard. In late February, the government announced it would not pay the full salaries of over 500,000 state workers. These workers have already had their pay and pensions cut under various economic "adjustments" ordered by the government. State workers had their wages cut 13% in July of last year. Retirees from state government have had their pensions cut by a similar amount. Now the government is saying it simply won't pay state workers at all. In addition, the Argentine government essentially stole $3.5 billion from state workers' pension funds to make a debt payment.

One principal of an elementary school said, "Being in education used to allow for middle-class living. But now I have teachers who have to sell their car to make it, and parents who take their kids out of school so they can work for the family's short-term survival."

The working class and poor have been hit even harder. Hunger has become widespread. Much of the "unrest" in December involved the looting of grocery stores by hungry people. People have been bartering clothes for food. Pacific News Service reports that "hundreds have resorted to selling their own hair to a wig store..." Independent plumbers and electricians haven't had a call in weeks because people don't have any money to pay for services or, due to the government's policies, are unable to withdraw enough money from bank accounts. It's estimated that workers at private companies have seen their wages decline by 20% since 1998. Average per capita income has fallen by about 14% during the recession.

The structure of Argentine business has changed dramatically over the last decade of "reform" and crisis. It is estimated that 38,000 medium-sized enterprises in Argentina operated by the petty bourgeoisie over the 1990s either went bankrupt or were saddled by crippling debt. Many more small businesses are now facing bankruptcy. In the early 1980s about a third of big enterprises were foreign-owned--in 2000, about two-thirds of big enterprises were foreign-owned.

In order to help make debt payments, promote "free enterprise," and diminish the power of trade unions, the government sold off billions of dollars in state-owned companies to private firms in the 1990s. Now the government doesn't have these firms bringing in revenues to make debt payments.

In the past few years, there has been a significant wave of mergers and takeovers in Argentina's banking system. Because of mergers and acquisitions, the number of Argentine banks fell from 300 in 1990 to less than 100 in 1999. Foreign-controlled banks now hold over 40% of bank deposits, and six of the top 10 banks are controlled by U.S. and European financial institutions.

Argentina officially defaulted on its debt payments on December 23, 2001. Speculation immediately began about how quickly Argentina would abandon the Convertibility Plan and devalue the peso. Even before the government finally decided to devalue the peso, analysts were worried this would just make the situation worse. The New York Times noted that "bank loans inside the country are valued in dollars and any move to devalue the peso may only serve to make repayments impossibly expensive for Argentine borrowers."

Nevertheless, in early January 2002, the government finally abandoned the Convertibility Plan and the one-for-one peso peg to the dollar. On January 7, 2002, the peso was devalued to 1.4 pesos to 1 dollar. In early April, the peso value had fallen to more than three pesos to one dollar . Since 80% of Argentina's already huge debt is in dollars, this meant that the real debt to Argentina had suddenly almost tripled in just a couple of months. The continuing slide of the Argentine peso is likely to trigger new rounds of inflation and bankruptcy--precisely what the "free market reforms" of the late 1980s were supposed to solve.

Despite the obvious fact that its debt and the IMF-directed "reforms" were at the foundation of its problems, the Argentine government is now trying to come up with a budget and an economic plan that will please the IMF--so that yet another loan will be made, this time for another $22 billion. But even an Argentine budget that included another 15% cut in government spending was not enough for the IMF in March.

The U.S. has also indicated no willingness to put together a financial "bail-out" package for Argentina as it did with Mexico in 1995. Of course, when the imperialists talk of "bailout," their main concern is protecting and bailing out large foreign investors. Financial "rescue" packages are always accompanied by savage assaults on the living standards of the masses. On January 23, 2002, the Wall Street Journal editorialized on Argentina's predicament: "Despite all of this, Argentina continues to beg for $15 billion --$20 billion in new IMF cash. And the IMF and Bush treasury keep saying they'll talk if Argentina comes up with the right plan. But a country behaving like Argentina doesn't even deserve the hope of international aid. It deserves to be ostracized from capital markets of all kinds, private and official...Argentina deserves to be treated like any other banana republic."

Another Wall Street Journal writer commented, "It is fashionable now to blame Argentina's problems on the free market...But Argentina's tragic crack-up occurred not because pro-market reforms went too far, but because they did not go nearly far enough."

Ricardo Caballero and Rudiger Dornbusch, two MIT economists writing in the Financial Times , counseled: Argentina "must temporarily surrender its sovereignty on all financial issues...give up much of its monetary, fiscal, regulatory and asset-management sovereignty for an extended period, say five years." The country's spending, money-printing and tax administration should be controlled by "foreign agents," they say, including "a board of experienced foreign central bankers."

*****

In the book America in Decline , Maoist economist Raymond Lotta succinctly captures the role imperialism reserves for countries like Argentina:

"How capital is allocated within the imperialist countries, though inseparable from international relations, is mainly determined internally, notably by the material reality and needs of an imperialist base of accumulation. In contrast, the economic structure of the oppressed nations is shaped mainly by forces external to them: what is produced, exported and imported, financed, etc., reflects first and foremost their subordination, and not principally the internal requirements and interrelations of different sectors. They answer to another's `heartbeat.' The momentum of these economies is predicated on capital infusions from and demand in the imperialist countries (what is called the center in relation to the oppressed periphery), the scope and magnitude of which depends on the overall profitability of imperialist capital. Moreover,... because of disarticulation [the lack of a balanced and integrated industrial-agricultural structure] they require and can only operate through steadily increasing financial injections; viewed in relation to external finance they become what may be described as `junkie economies.' Thus the staggering dependency of so-called `miracles of growth' in the Third World on imperialist loan capital. But the imperialists can only inject capital into these countries at levels required to sustain and stabilize reproduction so long as they can make continual extractions from them as well."

The U.S. and other imperialists are clearly sending Argentina and other Third World countries a message: Countries with serious debt problems should not expect "bailouts" from the IMF until they even more slavishly adhere to the dictates of the IMF and the free market doctrine of imperialism, make their countries an ultra-low wage, low cost, open market and resource haven for imperialism, and fully support the broader post 9/11 political objectives of the United States.

This article is posted in English and Spanish on Revolutionary Worker Online
rwor.org
Write: Box 3486, Merchandise Mart, Chicago, IL 60654
Phone: 773-227-4066 Fax: 773-227-4497
(The RW Online does not currently communicate via email.)