The Argentine Crisis

T h e A r g e n t in e C r is is JOSEPH HALEVI The C onceptual Setting Historically, monetary crises have been related to hyperinflation, from which Argentina has often suffered. Hyperinflation is generally viewed as a calamity leading to the destruction of the capitalist monetary system of circulation. In the present Argentine crisis, however, there has been a complete implosion hyperdeflation. requirement of economic to pay an unsustainable There is a substantial difference deflation. and monetary This is the strangulation In hyperinflation, relations due to of the economy by the debt. between hyperinflation and hyper- prices race endlessly forward at ever- increasing speed. Those classes whose incomes are not fully indexed to prices and who do not own houses and other fixed assets quickly lose ground. In hyperdeflation, however, prices will not race backwards. Today, in just about any part of the world, the system of monopoly capital prevails. Large corporations, large retail companies, trated financial capital are its hallmarks. As a consequence and concenof monopoly capital, deflation, even when made so severe as to become hyperdeflation, will not result in falling prices. Prices will keep rising, albeit at a moderate pace. In this context, portation, medical fees, municipal rates, etc.) are actually increased to raise revenues for budgetary the prices of public services (trans- purposes. The national government's budget has to be austere, with little or no deficit, especially in matters not related tures-thus to capitalist interests, such as social security expendi- a deflation policy is officially dictated by the need to pay the external debt. Meanwhile, on the very same austerity principle, a wage freeze is imposed upon workers. Wage earners now lose, because their wages are frozen while prices grow slowly and social services are curtailed. Therefore, hyperdeflation does not imply a dramatic fall in prices but rather a collapse of real demand, production, The Argentine integrate hyperdeflation and employment. is the direct result of attempting the economy into the international financial to capitalist sys- Joseph Halevi teaches in the Political Economy Discipline at the University of Sydney and is associated with the Institut de Recherches Economiques sur fa Production et le Divewppement (IREPD) at the Unioersiie Pierre M endes France in Grenoble, France. The author wishes to thank the CEMAFI (Centre Etudes en M acreconomie et Finance Internationale) of the Unioersite de Nice for hosting and supporting him while writing this paper. 15 M O NTHLY 16 REVIEW APRIL 2002 tern by permanently enforcing an anti-inflationary and anti-expansionary policy. In so doing, Argentina's capitalist class, supported and prodded by the U. S. Treasury and by the International Monetary Fund (IMF), first destroyed the domestic social security system and welfare network and, in the last two years, engendered a total break- down in the economy up to the point of blocking currency circulation. The entire episode constitutes an important historical case in which domestic class interests converged with international ests, eventually leading to the destruction financial inter- of the livelihood of the bulk of the Argentine people, 50 percent of whom are now living below the poverty line. The M echanics of the Crisis The political crisis of this important South American country for- mally erupted when, in the first week of December 2001, the IMF decided to withhold a $1.3 billion loan approved for servicing the country's $142 billion external debt. The IMF claimed that the government, then led by President Fernando De la Rua of the Radical Party, was not meeting its commitment to further cut its spending. This claim was false. From the fall of 2000, when the Argentine government entered yet a new round of negotiations with the IMF, until the Buenos Aires uprising of last December, the government has systematically cut spending. It privatized social security and cut the provinces' funds, forcing many of them to use surrogate (scrip) money to meet their payments. During the summer, the economic minister, Domingo Cavallo-a undersecretary of the interior darling of the IMF who, by the way, was (Federal Police Department) during the bloodthirsty military dictatorship in 1981-set the goal of a zero budget deficit. If the target was not attained, it was not for lack of trying, but because of the galloping reaching social crisis, with unemployment 18 percent and an equal percentage ployed. Immediately after the withholding government embarked classified as underem- of the loan by the IMF, the on an even tougher round of cuts, which included freezing people's bank accounts and limiting withdrawals to $250 a week. It was at this point that the people of Buenos Aires rose up against the government. The Argentine Debt The explosion of the country's debt began with the military regime in power from 1976 to 1983. Overall, external debt rose nearly four ARG ENTINE 17 CRISIS times, from $9.7 billion in 1976 to $35.7 billion in 1981. The public component of the debt was significantly expanded by armament purchases, to the great pleasure of the U.S. government, which supported the repression of the popular forces by the Argentine military and wanted the dictatorship's participation in repression and torture in Central America. However, despite the increase in government spending, the private sector was the primary external borrower. The public component of the external debt was actually smaller in 1981 (56 per- cent) than it was in 1976 (68 percent). It follows that the expansion of the debt was more pronounced on the private than the public side. In Argentina, the military dictatorship of 1976-1983 was the avant garde of neoliberalism. It introduced a new foreign investment law facilitating and financial investment the exchange acquisitions rate from government while freeing controls. Forshadowing what would come two decades later, these measures attracted capital from abroad while international financial companies and banks, awash with money from oil price increases, were aggressively pushing loans onto third world countries. Though not Argentina was no exception. neoliberal orientation without a traditional third world country, It must be stressed, however, that the of the military would not have been possible the physical extermination of the activists of the popular forces. The military dictatorship led to a tight alliance between multinationals, financial capital, and local business elites, an alliance which became dominant substitution througout the 1980s. This bloc reversed the import strategy that characterized Argentina's substantial indus- trial growth in the 1960s. It was under this alliance that the external debt explosion occurred, while the productive system started to suffer from chronic deindustrialization. I By 1981, the military regime undertook the task of absorbing the pri- vate external debt, obtaining, in the process, International Monetary Fund. After the fall of the dictatorship, policy of debt socialization was continued the support of the the by President Raul Alfonsin of the Radical Party, under the explicit request of the creditor countries. As detailed by Eduardo Basualdo (see endnote Bank and private companies would agree on a particular rate, relative to the dollar, for the reevaluation nated external 1), the Central exchange of the dollar denomi- debt in the steadily devaluing local currency. At the moment of the transfer of the debt to the state, companies would then receive a subsidy corresponding to the difference between the agreed and the actual (and now depreciated) exchange rate. Thanks to vari- 18 M O NTHLY ous schemes, REVIEW I all based on this principle, 2002 APRIL private companies were relieved of most of their debt. Initially, the main beneficiaries were the multinationals, which had also been the main borrowers, but the pol- icy was subsequently extended to Argentine businesses as well. This socialization of private debt had harmful consequences for the economy. Before the U.S.-supported military dictatorship of 1976-1983, Agentina's external economic relations were characterized by cyclical balance of payments crises. In a semi-industrialized country, bouts of growth generate a rise in imports of industrial products greater than the exports of primary products. The ensuing external deficit then compels the authorities to slow down the economy (to reduce imports) by engineering private-turned-public changed the nature debt a domestic recession. However, the incurred of the problem. longer cyclical but permanent, during the military regime The external problem was no while the link with the domestic econ- omy became much more malignant as the debt burden caused the disruption of public finances and the drift towards hyperinflation, as the government printed money to pay for its domestic expenditures. By the end of the 1980s, the new president, the Peronist Carlos Menem, vowed to end hyperinflation and stagnation through a plan that would also bring Argentina's capitalist classes back into the fold of international finance. Very quietly in 1991, the Menem government passed a law, designed by the aforementioned Domingo Cavallo. It leg- islated a monetary reform whereby the new money unit, the peso, was legally linked to the U.S. dollar on a one-to-one basis. The need to fight the vicious cycle of hyperinflation-devaluation-hyperinflation was taken as the justification for the strict dollar-peso parity. The ensuing stabilization was supposed to stop the endless revaluation of the dollar-denominated external debt, thereby allowing Argentina's ruling classes to become citizens of the world "financial community." Since the 1991 law, private debt expanded about eleven times, while the public debt grew by less than 60 percent, totalling together $142 billion by the end of 2001. In essence, during the last twenty years, the Argentine population ing mechanism. has been subjected, in sequence, to the follow- The state takes upon itself the burden of the private external debt. The private sector keeps running up additional debt, while the state sells out its public activities through privatization policies, thereby generating financial profits (rents) for the private corporations whether national or international. The state then unloads the burden of debt onto the whole economy, especially the working pop- ARGENTINE 19 CRISIS ulation, by compelling the population to deliver a financial surplus at the expense of wages, social services, and public investment. Stabilization and the Collapse into Hyperdeflation The economic validation of the law passed in 1991 depended on an automatic mechanism whereby domestic monetary creation had to correspond to the Theoretically, net amount the balance of dollars between entering the country. the net inflow of dollars and domestic monetary creation can be guaranteed through (a) large surpluses in the current accounts (exports greater than imports) or (b) net capital inflows. To make the current account sustain the whole process of monetary creation is impossible as it would require a very big surplus in relation to national income. Furthermore, throughout its post-war history, Argentina tended to have a surplus in the balance of trade but a deficit in the balance of payments. This is a common situation for countries whose productive links with the rest of the world are through the raw material sector," The surplus in the trade sector is more than offset by the payment abroad of interest, dividends, insurance, and other services. As to capital inflows, they can be stimulated by (1) the buoyancy of demand so that foreign companies want to invest there; (2) the transformation of the country into a cheap export platform like Mexico; (3) privatization of public activities such as utilities where a steady flow of rents is always guaranteed; rowing on international and (4) bor- financial markets. The first condition, the buoyancy of demand, was nonexistent, as the country had been mired throughout the 1980s in an economic crisis with hyperinflation. The fixed parity between the dollar and the peso reduced the attractive- ness of the country as an export platform, so that the implementation of the stabilization program based on dollar-peso parity depended privatization and further borrowing. on Menem's monetary reform sat very well with the interests, views, and aspirations of private financial institutions, both local and interna- tional, and his policy received full backing from Washington, without which implementation would not have been possible. Privatization and budgetary austerity attracted capital, thereby expanding domestic monetary creation and leading to a euphoria 1995, generated that, between 1991 and a growth rate in excess of 4 percent per year, among the highest since 1945. The Argentine ruling classes thought that they were truly back in the fold of the advanced capitalist world. But as soon as the monetary reform got underway, the country lost its traditional L M O NTHLY 20 surplus in the balance REVIEW APRIL of trade, although 2002 not in a dramatic way. However, it kept showing a growing outflow of investment income for payments on interests and dividends abroad. As a consequence, overall current account balance deteriorated on capital inflows increased. the sharply, so that reliance The flimsy nature of the growth phase has been underscored by the recession caused by the Mexican crisis of early 1995; in its wake, the Argentine economy contracted by 3 percent. Fearing a fate similar to that of Mexico, financial capital became apprehensive, but the crisis was temporarily overcome due to trade expansion within the Mercosur area (a common Argentina, Brazil, Paraguay, and Uruguay), where Brazil is by far the largest economic unit. The government market integrating of that huge country was also following a policy of deregulation and of anchoring the local currency (the real) to the dollar, although not as strictly as Argentina's peso. This kept the value of the real high, while Brazilian inflation remained high relatively to Argentina's. This factor entailed a revaluation of the Brazilian currency, thereby stimulating Argentina's (now cheaper) exports. In 1989, around 11 percent of Argentina's exports went to the Mercosur area. By 1995, that percentage had risen to 31.7, and by 1998,just before the inevitable Brazilian crash, Mercosur absorbed 35 percent of Argentina's exports. International were treating both Brazil and Argentina financial as emerging companies markets, with highly-valued and high-risk currencies. Thus, on one hand, they were pushing loans onto them-which the voracious and rapacious local capitalists were quite willing to see granted, since it would be left to the wage and salary earners to pay anyway-but on the other hand, they wanted to protect themselves against so-called country risk. Financial companies and security houses are no fools. They know that Brazil and Argentina are not the United States, whose external deficit can be financed by issuing bonds which will be accepted by the rest of the world without placing limits on U.S. monetary authorities. In the case of peripheral countries, a persistent and rising external deficit is immediately translated into a threat of insolvency. In both Argentina and Brazil, external deficits were rising because the stabilization of the currency involved loss of domestic production in favor of imports. Hence, with the Mexican crisis of 1995, the additional "country risk interest rate" charged on Argentine borrowing increased consider- ably. When Brazil collapsed in 1998, leading to a 40 percent devaluation of the real, the game was up also for Argentina. I ARG ENTINE 21 CRISIS The Brazilian crisis put to rest any illusion regarding the possibility of long-term growth in the Southern Cone countries of Latin America. It also highlighted a fundamental mirage of spectacular truth for those not blinded by the gains from financial speculation: real produc- tion could not possibly sustain the enormous debt and interest burden of Argentina. This is indeed the crucial point. No reasonable level of net exports could have sufficed to help the country out of the debt trap. Without the debt burden, Argentina's deficit, while getting worse, was not dramatic, especially in merchandise trade. Most of the damage was done by the outflow of financial payments on interests, repatriation of dividends, and services. To this one must add the export of capital engaged in by the Argentine capital-possessing classes. After the Brazilian crisis, the country risk interest rate shot up and kept growing when it became clear that Argentina would not be able to generate even a minimal net flow of funds from its operations with the rest of the world. As a consequence, the peso-dollar parity which sustained the new wave of privatization could not be maintained and financial speculation much longer. The U.S. treasury and the IMF knew this all along but insisted on austerity plans, the real purpose of which was to put the country's assets on sale. The class-based connection between international and local finance capital can be seen from the fact that the entire adjustment of the external debt burden was imposed on the real economy, while capital was enticed with promises of easy gains through privitazations, monopolistic rates indexed to the dollar in the event of devaluation ties, for example), debilitating and the freedom (in utili- to exit the country quickly. The and, indeed, devastating effects of these policies are evi- dent in the persistent deindustrialization and increased exploitation of workers, which affected the country even during the years of the growth increased euphoria. From wages fell. During remained 1992 to 2000, hourly about 45 percent, high, the same period, at around labor unused 30 percent productive of potential increased further as growth stalled and the crisis deepened. tors taken together and real capacity capacity. It These fac- created, from the period of the growth euphoria onward, a persistently high rate of unemployment ment now affecting more than 40 percent Furthermore, productivity while money wages stagnated and underemploy- of the active population. the structural impact of the financial liberalization peri- od isjeopardizing the possibility of some kind of recovery, even assuming the rise to power of a progressive alliance. The value of imported 22 M O NTHLY REVIEW I APRIL 2002 capital goods and spare parts for machinery rose from 25 percent of total imports in 1991 to 45 percent in 1998. This means that deindustrialization has gone so far as to prevent the establishment mal autonomy in the working and planning of the of a miniproductive apparatus. In this respect, Argentina has moved further down the ladder of undeveloping to undertake economies and is now in a much weaker position programs aimed at ending poverty and recession. The year 2000 witnessed the formation of a large social front against the alliance of the government, demonstrations occurred the IMF, and financial traders. Mass against negotiations with the IMF, which were correctly seen as leading to further austerity and economic crisis. But neither the government nor the Peronist opposition, which went so far as to suggest a total dollarization of the economy, were interest- ed in getting out of the mechanism of financial dependency. The IMF tried to open the door to financial liberalization still further. Each round of talks involved new austerity measures, and, as if the whole thing was actually stage-managed, international lenders increased the pressure by jacking up the risk interest rate on loans. Thus, financial institutions-national and international-were the usurers, and the IMF was the debt collector empowered with strangulation techniques. Yet the loan package negotiated during the fall of 2000, which brought about the explosion of the crisis, shows the tight linkages between local capital and international groups. The privatization of the social security system was the most important and explosive component of the deal with the IMF. This measure was not in the original package, but the De la Rua government wanted it in order to give a huge gift to private insurers. Too cowardly to present the measure directly before Congress, the government asked the IMF to include privatization as a condition for new loans. The bonanza for private companies is evident from the 30 percent commission they get for managing the funds that they then transfer to the government at risk-adjusted, exorbitant interest rates! For the comprador classes and government of Argentina, the only way to maintain the currency agreement with the dollar---on which the entire domestic monetary creation depended-was, after having sold all possible national assets, to borrow more. However, each additional borrowing augmented the risk premium demanded by lenders. In July 2001, the routine issuing of three-month treasury bills turned into a crisis when the requested interest rate was increased from 9 to 14 percent, despite the ongoing deflation, which makes the real bur- ARG ENTINE 23 CRISIS den of interest payments much worse. The government's to introduce additional announcing an impossible response was restrictions, with Economic Minister Cavallo zero budget deficit policy. Obviously unable to achieve this objective, the government was notified by the IMF in early December 2001 that a $1.3 billion loan was being withheld (exactly the same sum in exactly the same period was granted to strategically pivotal Turkey). The IMF decision led the government literally to steal the money from the public by blocking checking accounts and bank deposits. This was the last straw and brought a rather diverse array of classes onto the street, chasing De la Rua from office. But even in the hours of agony, the political establishment wanted to benefit the wealthy classes and the financial companies by temporarily keeping the peso-dollar parity while inventing a new currency, the argentino, not tied to the dollar. Prices, rents, and interests were supposed to stay in dollars or pesos, whereas pensions and wages were to be paid in argentinos, whose value was suspected to collapse relative to the dollar or the peso. The population caught on immediately to the swindle engineered by the interim president, the Peronist Rodriguez Saa, and chased him out in turn. The present president, Eduardo Duhalde, is now walking a tight rope between re-establishing ties with the IMF and avoiding the next explosion of popular anger. From adjustment to adjustment, from deflation to deflation, Argentine authorities and the IMF have succeeded in imploding currency, without which a capitalist However, a stable restoration unlikely in the current economy cannot of capitalist relations the the function. in Argentina is climate of world financial crises. It would be much more practical to abandon any connection with the IMF and its clients and proceed directly towards the construction of a planned economic system based on social needs. Notes 1. Fernando Hugo Azcurra, La "Nueua" Afianza Burguesa en Argentina ( Buenos Aires: Dialectica, 1988); Eduardo M. Basualdo, Deuda Externa y Poder Economico en fa Argentina (Buenos Aires: Editorial Nueva America, 1987). 2. The U.S. current account deficit is of a totally different nature. The United States has a deficit in the balance of trade and a surplus in services, most of which are financial. Moreover, the origin of the U.S. deficit is not in structural dependency relative to other industrialized countries. It is rather the outcome, as Paul Sweezy put it, of the costs of imperialism, including the necessity of supporting Japan and Eastern Asia during the wars in Korea and Vietnam.