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The following article appeared in Left Business Observer #99, February 2002. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.
The first collapsing model is Enron.
Though the orthodox now blame Argentina for bringing on its own woes, not long ago it was the model of orthodoxy. The IMF's 1999 review of the country praised its "strong investment-led growth," "commended the authorities for their prudent economic management," and "noted the substantial progress made by Argentina in recent years in structural reforms, particularly in privatization, deregulation, pension reform."
Of particular relevance to the current crisis, the Fund "observed that the currency convertibility plan has served Argentina well, and continues to be an adequate framework for stable growth." (More on this in a moment.) A year later, the Fund's annual review noted the strains from recession, but continued to praise the authorities' prudent fiscal management (i.e., budget cuts) and continuing structural reforms (i.e., privatization and deregulation). The currency regime was praised again. The banking system was praised for its admirable soundness. These are the very same banks that Argentines spent the holiday season lining up in front of, hoping to be reunited with their threatened deposits.
Faced with an economic crisis in the late 1980s and early 1990s, then-economy minister Dominigo Cavallo came up with a magical solution to Argentina's woes - a currency board. This structure, which had its origins in 19th century imperialism, fixed the value of the Argentine peso to the U.S. dollar. No pesos could be issued unless the central bank had dollars in reserve to back them up. This prevented the central bank from printing currency, thereby putting the brakes on a 3,000% inflation rate. It was also designed to reassure foreign investors that the economy was in good hands.
Reassured by the neocolonial monetary reform, foreign investors poured money into Argentina, sparking a great boom. But those capital inflows were mainly debt: banks, companies, and governments borrowed aggressively. There was a brief interruption during the Mexican crisis of 1994-95, but the recession was mild, and the capital inflows resumed. By the end of the decade, Argentina was borrowing to cover its interest bills, and its debt burden had doubled.
Longer term, there's no way Argentina could live very long under a dollar standard. An exchange rate is effectively a country's price on world markets; weaker economies need currency devaluation - an economy-wide price cut - to stay competitive. But Argentina was denied that outlet. And it was also denied the freedom to lower interest rates as the recession deepened; that outlet was also blocked, since it was stuck with U.S. interest rates as its standard.
But even in the boom, growth was never equitably distributed; the World Bank conceded in its September 2000 brief on Argentina - one of its "most active borrowers" - that "poverty levels have stubbornly stayed high despite rapid economic growth." In the crisis years of 1989 and 1990, 40% of the population was in poverty; that fell to 17% a few years later, only to rise along with the GDP, up to 25% in 1998. No more recent numbers are available, but the recession has undoubtedly thrown millions more into poverty. Argentina, once a country where Brazilian-style penury was rare, is now fully outfitted with soup kitchens.
The government responded to the recession by cutting the budget to match falling revenues, a strategy that only worsened the slump. No rich country would do anything like that to itself, but Argentina had no choice if it wanted to keep capital coming in. The IMF approved, and the capital kept flowing.
Which isn't to get nostalgic for what went before, in the crisis years of the 1980s. Between 1980 and 1990, the economy shrank 14%, poverty rates rose from 8% to 40%, and inflation rose from 100% a year to over 3,000%. But the bad news goes back even further. In the early 20th century, Argentina was one of the richest countries in the world, with a per capita income 80% of U.S. levels. It then began a long, though sometimes irregular, decline to around 30% today.
There's a tendency among progressive analysts to talk as if the time before 1980 or 1990 was a Golden Age; in Argentina's case, the Golden Age was many decades longer ago. And there's also a tendency to blame it all on the IMF. Surely the IMF deserves considerable blame, but it's far from the whole story; the IMF is the most visible agent of a larger system, and the rest of the machinery deserves more attention than it gets.
So why did Argentina decline so? The story is complicated (and will be the topic of an article in a forthcoming issue) [Alan Cibils, "From Riches to Not Even Rags," LBO #100], but the salient point is that its early wealth was based on the export of grains and meats to Europe and the U.S. This was not a sound foundation for a long-term prosperity. Over time, it's become clear that there's never any dearth of competitors when it comes to producing basic commodities, whether agricultural or mineral. The country never developed its own industry or technology. It was stuck in a subordinate role in the global economic hierarchy, and fell ever-further behind. Successive governments tried aggressive foreign borrowing and the printing of money to counter this downward mobility, but it never worked. Cavallo's currency board, and his courting of foreign investors, is only one chapter in this long history of failure.
Aside from its specific history, Argentina also suffers from economic pathologies common to scores of other southern countries. Economies need to invest a large part of what they produce in order to grow. To produce more, they need, among other things, technological innovation. But a country with heavy foreign debts, like Argentina, sacrifices a large portion of its national product to interest payments. And most of the world's technological know-how is monopolized by the rich countries, who have no interest in sharing their knowledge with the less well off; in fact, the U.S. has been pushing for ever-tighter restrictions on patents and copyrights in world trade negotiations for the last 20 years. The path to a brighter future is sealed off.
And there are good reasons why so many countries find themselves so often in hock to the IMF. Countries run to the Fund because they're chronically in deficit - importing more than they export and shipping interest and dividends back to metropolitan creditors, and so chronically in need of fresh finance.
Much of the world's population lives in countries with chronic annual deficits, and large accumulations of debt to show for it. For both Argentina and Latin America as a whole, debt (relative to GDP) and the burden of servicing it (relative to national income) is higher now than in all but the worst years of the 1980s crisis. It was a crisis then because the solvency of the world's biggest banks was threatened; though it still causes poverty and maldevelopment, it's no longer considered a crisis now that the banks are safe.
It's been inspiring to see thousands of Argentines in the streets, forcing the resignations of four presidents in the last month and spreading anxiety in Wall Street and Washington about the incipient Latin repudiation of the whole neoliberal model that's dominated policymaking over the last 20 years. Let's hope for more - and that it's contagious, because a smallish country like Argentina can't do much on its own. It's embedded in a political and economic system that virtually dictates a subordinate role. Short of concerted action by a large number of countries in the global South, it would be very hard to challenge, much less overturn the hierarchy.
Despite making some rude noises, the new government of Argentina appears to be quietly cutting a deal with the IMF; the cynical thing would be to suspect that the rude noises are for domestic consumption, and not to be taken seriously. Alas, again
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