Universitetet i Oslo Towards a critical understanding of the Argentinean crisis of 2001 A Marxist approach Kanditatsnummer: 8800 Semester: Vår 2015 Emne: LATAM 4506  Introduction In this essay I will develop an alternative explanation to the causes of the Argentinean crisis of 2001. The predominant approaches, based on mainstream economics, argue that the causes of the crisis are to be found in elements outside what they consider as the economic sphere. I will argue that these approaches are based on an approach that abstract economics from its social foundations and does not consider certain fundamental aspects of the contemporary mode of production. Using their epistemology will therefore lead to a narrow understanding of events such as economic crisis. In this sense, I will need to move beyond mainstream economics’ understanding of social reality and propose my own framework, based on a Marxist approach. Then I will be able to give some important nuances to the debate. I will show that capitalism has a tendency towards overproduction and economic stagnation. It therefore depends on the disciplinary forces of crisis to re-establish the conditions of capital accumulation. In this sense, my main argument will be that the Argentinean crisis of 2001 was a geographically concentrated devaluation of overproduced capital. Understanding economics and the predominance of the mainstream approach The modern economics is relatively new and contemporary to our time. Different theories have been developed to understand the contemporary economic system since it started to consolidate during the XVIII and XIX centuries. A brief historical account of modern economics might therefore help us to realise that different interpretation of our economic reality will lead to different kind of interpretation of the outcomes the new mode of production might have. After all, those who theorised the new form of economic organisation differed on how they were to interpret the new mode of production and the consequences it might have for society (Furlong and Marsh, 2002; Varoufakis, 1998 pp. 16-28). However, since the end of the XIX century, and the advent of positivism, the epistemology of neoclassic economics became predominant when it came to try to understand modern economics. Their epistemology reduced the interpretation of economics events to mathematical models that were detached from any other factor that might be ‘irrelevant’ to the perfect functioning of these models. This approach is based on the belief that an absolute truth can be reached through constant observation of social events through methods that have showed to be useful for ‘hard’ sciences such as natural sciences. In this sense, they have based their interpretation of social events on a parsimonious approach that take as their starting point the neutral assessment of empirical evidence (Varoufakis, 1998 pp. 34 – 38; Hay, 2002 pp. 30 - 31). The work traditional political economist had developed was to be readapted to the needs of modern economics. Schumpeter, for example, who was schooled in the Walrasian neoclassical tradition, reinterpreted Smith’s philosophical work and reduced it to the study of simple equilibrium states, thereby dismissing Smith’s work on morality and how Smith related this aspect of human nature to his understanding of modern economics (Watson: 2005 pp. 4-11). The decoupling of economics with the rest of social sciences was further reinforced throughout the XX century. In 1954, for example, Gérard Debreu and Kenneth Arrow provided a definitive mathematical proof of the existence of a general equilibrium through the paper Existence of an Equilibrium for a Competitive Economy (Debreu and Kenneth, 1954). Keynesianism brought some nuances to the debate. Keynes claimed that to understand economics we should move beyond the traditional sphere of neoclassic economics. Particularly important was to realise that rational actors could, under certain circumstances, act irrational, and therefore produce imbalances in the price mechanisms. He considered it as necessary to regulate the market economy in order to prevent the negative effects of such behaviour (O'Donnell, 1989). However, and despite this critique, Keynesianism bases its assumptions in the belief that the market system is the best of all known mechanisms to allocate resources efficiently. Keynesian basically still believe that events such as crisis are caused by exogenous shocks, which disrupts the perfect functioning of the economy, functioning that has already been discovered and established by the principles of neoclassic economics (Dunn, 2011 pp. 524 – 525; Resnick and Wolff, 2010 pp. 170 – 172). These currents are what we could call as ‘mainstream economics’. These mainstream economic approaches have dominated the debate about the Argentinean crisis of 2001. This should not surprise us given natural ‘superiority’ of their epistemology, even in other fields of the social sciences. Predominant economics is considered as a ‘hard’ rather than a ‘soft’ social science (Bohle and Greskovits, 2009 p. 361). Its methodology and approach to reality can even be used to explain events beyond economics (e.g.: Frank, 2008; Levitt and Dubner, 2005). Mainstream economist might differ about the ultimate causes of the Argentinean crisis of 2001. However, they more or less coincide in that the causes of the crisis are to be found outside on exogenous factors that interrupted the perfect equilibrium of the economy. Argentina’s road to the crisis and the mainstream approach Argentina went through a deep economic crisis during the 1980s, known as Latin-America’s debt crisis. It was precipitated by a sudden change in the interest rate in the US. The Latin-American countries had borrowed great amounts of money from foreign banks in order to keep financing their industrialisation programme, better known as Import Substitution Industrialisation (ISI). The rate of interest was rapidly transferred to the loans the Latin-American countries had. At the same time capital began to fly out of the region. Suddenly Latin-American economies were unable to pay their obligations and had to default on their debts (Franko, 2007 pp. 78 – 88). Argentina had to borrow money from the IMF and went through a series of reforms in order to stabilise the economy, but without major success (Wijnholds, 2003 pp. 101 – 104). In this context the recently elected president Carlos Menem and his economic team, headed by Domingo Cavallo, decided to liberalise the economy (Lewis, 2009 p. 52). During the 1990s Argentina carried out an economic policy that was firmly grounded in the theories expounded by US-educated economists, the US Treasury, the IMF, the World Bank, and the Inter-American Development Bank, better known as the Washington Consensus (Lewis, 2009 p. 56; Rodrik, 2003 p. 16; Williamson, 1990). Argentina aimed at reducing sovereign risk, in order to regain the confidence of the market, and attract foreign capital to the country (Rodrik, 2003 pp. 16 – 17). The programme’s cornerstone was the convertibility programme, which pegged the peso to the dollar at a rate one to one (Lewis, 2009 p. 80). The convertibility plan and the liberalisation of the financial system attracted highly volatile external financial flows, which financed Argentina’s economic growth at the same time as made the country’s economy highly dependent on these flows (Ocampo, 2003 p. 22 – 23; Lewis, 2009 p. 55). A highly overvalued currency had disastrous consequences for the local industry, which could not compete with cheaper imports from abroad (Lewis, 2009 pp. 81 - 84). The country was heavily dependent on foreign capital, either as investments or loans. It therefore felt the negative consequences of the ‘tequila effect’, which was triggered by the Mexican crisis of 1994. However, Argentina managed to survive due to loans made by the IMF, the World Bank and private banks (Lewis, 2009 pp. 86 - 87). Nevertheless, it did not help in the long run. The Asian crisis of 1998 and Brazilian devaluation of 1999 made financial actors less eager to lend money to Argentina and the rate of interest the country had to pay for its already existing debt rose. In 2001 the situation became unsustainable and the country defaulted on its debt, precipitating the economic crisis (Ocampo, 2003 pp. 23 - 25; Rodrik, 2003 pp. 17 - 19). Wijnholds (2003), a former member of the Executive Board of the International Monetary Fund (IMF) during 1994 – 2002, argues that Argentinean authorities failed to follow the recommendation made by the IMF, at the same time as they were overoptimistic about the viability of convertibility programme. However he also highlights the complicity of the IMF and their willingness to lend money to the country until the economy collapsed in 2001. In this sense, the IMF failed to act as an independent and rational actor. On the other hand, a lack of strong and efficient market institutions made it difficult for Argentina to regain the confidence of the market (Wijnholds, 2003 p. 116). Following this logic, Birsdall et al. (2011) try to explain the failure of the Washington consensus not due to the content of the programme, but because its implementation was incomplete and not carried out in a proper way. Within such a framework, we should also consider the weaknesses of Latin-American institutional arrangements compared to advanced economies. In historical terms, Latin-America’s institutional arrangements have favoured a narrow group of privileged class, that through their political connection and influence, were able to lobby for a protectionist economic policy that protected them from the disciplining forces of the market. That led to inefficient market economies if compared to the ones of advanced capitalist countries (Haber, 2006; Schneider, 2009). In this sense, market-friendly reforms should be seen as a step to take in order to free Latin-American countries from old and inefficient economic structures (Coatsworth, 2005 pp. 143 – 144). Shortcomings of traditional approaches and the need of an alternative framework There are some shortcomings of the traditional approaches. The recent economic crisis of 2008 have demonstrated that not even proper market institutions, such as the one we may find in the developed world, could prevent one of the biggest economic crisis of our modern times. Particularly interesting is the case of the US, which is traditionally taken as a reference point when comparing Latin-America to advanced economies (e.g.: Sokoloff and Engerman, 2000). US’ exceptional economic growth during the 1990’s, and how they managed to overcome the dotcom crisis of 2000, contributed to perceive their model of capitalism as outstanding (Hall and Soskice, 2001). Nevertheless, the recent crisis has showed that their economic success was based on a financial bubble that developed due to falling incomes, debt dependency and an unregulated economy (Krugman, 2008 pp. 136 -152; Harvey, 2010 pp. 1 - 39). In this sense, it would be difficult to say that the market institutions that caused the crisis of 2008 would have prevented the Argentinean crisis of 2001. On the other hand, so far an overoptimistic field of economics has not been able to give a satisfactory explanation about the causes of crisis, at least one that corresponds to what we could expect about sciences that are able to propose definitive laws that emerge from empirical observations. Even worse, they have not been able to prevent them. What we actually have witnessed is the opposite, namely an increment in the frequency of crisis since 1973 (Bordo et al., 2001; Jacobs and Dungey, 2010). This is paradoxical considering that since then the world has experienced the return of neoclassic economics, in its purest form, through the neoliberal state, which has favoured strong individual private property rights, the rule of law, and the institutions of freely functioning markets and free trade (Harvey, 2005 pp. 64 - 67). Argentina, in this sense, was regarded as the example to follow. What this might suggest is that mainstream economics have oversimplified the way in which we should understand our economic reality. They have detached their assumptions from fundamental aspects of our social life. This is particularly important considering that social life is embedded in a culturally, spatially and historical context that shape actors behaviour at the same time as actors engages in reshaping the context that surrounds them (Hay, 2002 pp. 86 – 87). Thus, an oversimplification of the understanding of the economic life has made mainstream economics missed some fundamental aspects of the contemporary mode of production, which are crucial to understand the dynamics of the modern economy. In this sense, it would be useful to move beyond the mainstream framework that take into consideration historical-specific factors, which play a fundamental role in the dynamic of the contemporary economy. This means that we need to move beyond a framework that considers political and economic events as separate elements of the same reality and even think that we can take a neutral standpoint to the social reality we intend to study (e.g.: Thorsen, 2009). It would be necessary to take a critical standpoint, one that consciously engage in normative work, deconstructing established configurations by disclosing the underlying relations that govern our social world (Macartney and Shields, 2011 p. 33). After this has been realised, it will be possible to engage an analysis that takes us beyond established and predominant approaches and help us to find an alternative explanation to the Argentinean crisis of 2001. The limits of the market and the need to overcome them In order to understand how the Argentinean crisis of 2001 was a necessary event, we should first move beyond mainstream economics and incorporate into our analysis the contextual framework governing the contemporary economy. We should first realise that capitalism is unique to our historical time. It emerges from the nature of the social relations that underpin a capitalist mode of production. In this system, the workers are compelled to sell their labour power in the market. In exchange they receive a fraction of what they produce. Capitalists buy the labour power the workers sell and combine it with means of production, in order to create the commodities people (i.e. workers) need. However, once inside the system, the ultimate goal of the capitalist switches from the creation of commodities to the creation of more capital. Capitalists depend on more capital in order to buy the necessary inputs, which will create new commodities, which can be sold in the market, to generate more capital, in order to buy more inputs, and so on. The workers are essential in this process. Their labour power is the only input that can create new value within the processes of production. The total value created by the workers has to be deducted from the value of the initial inputs, which are the value of labour power and the means of production. The remaining value is what Marx called the surplus value. After the surplus value is realised the capitalist will have the necessary capital they need to continue with the process of capital accumulation (Harvey, 2006 pp. 5 – 29). Capital is a process, not a thing (Harvey, 2010 p. 40). It changes and takes many forms during its self-expansionary process, in the form of money, machinery, labour, ships, buildings, and any animate or inanimate object that is used to expand the value of already existing capital. As Clarke (1990, p. 454) clearly states, the purpose of capitalist production is not consumption, but the expansion of value through the production and realization of surplus value. An economic crisis is the interruption of this process. However, it is also a necessary event that restores the conditions of capital expansion by devaluating or destroying overproduced capital (in its many forms), and generating the necessary conditions to realise more surplus value, restart an interrupted process of capital expansion and overcoming its own limits. It all starts when competition among capitalists causes the rate of profit to fall and surplus value cannot be realised. Capitalists will need to increase the productivity of labour, so raising the rate of profit by reducing the cost of the means of production and the value of labour power. The immediate effect is increased productivity and the need to realise more surplus value. However, saving on living labour and constant capital means that the tendency to overproduction cannot be absorbed by the market and surplus value will not be realised. One should be tempted, of course, to think that this might be avoided as long as markets are truly regulated and put reasonable restriction to capital production. However, the disciplining forces of competition will always reward the capitalist that speed up the process of capital circulation and realise the surplus value before the rest. Capital is only valuable if it is used to produce even more capital. If local markets cannot absorb this capital other markets could do it. Thus new markets are found or developed, just to serve the needs of capital and engage in the processes of creating more capital. The new market might temporarily help capitalists to overcome the limits of the market. Nevertheless this market becomes also part of the system and its logic, and adopts the internal contradictions that are inherent to the system. At some point, the falling rate of profit cannot be compensated by reducing the value of labour power and reducing the cost of the means of production. Surplus value cannot be realised and the process of capital circulation and expansion stops. Capital is set out of motion and devalued or destroyed. Capital circulation is interrupted and the economy enters an economic crisis (Clarke, 1990). A Marxist explanation of the Argentinean crisis of 2001 Since the 1970’s the world economy went into a crisis of overproduction. The long post-war recovery, fuelled by Keynesian macroeconomic policy, came to an end when capitalists in the western world had produced more capital (in the form of commodities, machinery, buildings, etc.) than what the market could absorb, resulting in a decline in the rate of profit (Bello, 2006 p. 1347; Clarke, 2001 pp. 6 - 10). Those who wanted to remain competitive, and maintain their rate of profit, had to explore new market opportunities. In the US, wealthy capitalists found that the financial sector offered lucrative returns to their investments through sophisticated financial instruments (Resnick and Wolff, 2010 p. 181). As it already has been mentioned, those funds where reinvested in developing countries such as Argentina. However, countries that suffered from structural poverty and economic inequality (Franko, 2007 pp. 380 – 426) could not absorb the overproduced capital, which flowed to the region in its money form but was not able to be set in motion in order to produce more capital. Argentina overcame this limitation by opening its financial market and attracting financial speculators who, expecting high rates of return, invested in the country. Argentina, and the rest of the Latin-American countries, became part a reformed world economy, where international institutions and nation-states were reshaped and adapted according to the needs of the global capital. Through neoliberal projects, such as the one promoted by the Washington consensus, nation-states were encouraged to open their boarders to the international capital looking for new market opportunities, and thereby overcoming the limits capital had faced in the developed world (Bello, 2006 pp. 1348 – 1350; Robinson, 2004). The path of development Argentina took during the 1990s was part of the flexible mode of accumulation the capitalist system needed in order to overcome its own limits to accumulation (Robinson, 2008 pp. 289 – 293). It was not an irrational model. It was the system’s rational response the needs of capital. However, the system’s rationality cannot solve its own disproportionality. At some point capital needs to be devalued in order to re-establish the process of capital accumulation, which has been interrupted when capital remains idle and is not used to expand capital. Capitalism’s uneven development can send the burden of devaluation to another geographical region (Harvey, 2006 pp. 424 – 438). The neoliberal project and the flexible mode of accumulation that was established after the 1970s (better known as ‘globalisation’) have made it easier for capital to overcome the political and social barriers to accumulation. Likewise it has also made the necessary devaluation of capital to geographically concentrated events. Before Argentina other geographical locations had to carry the burden of devaluation of capital: Japan in the 1980s; Mexico and other Latin-American countries in 1994; East-Asia in 1998; then Russia and Brazil. In 2001 the burden of devaluation of overproduced capital was to be carried by Argentina. Already in the 1980s Argentina felt the consequences of devaluation when the country went through a period of hyperinflation and devalued massive amount of capital in its money form (Franko, 2007 p. 132; Harvey, 2006 pp. 307 – 315). The temporary solution, as we have seen, was to liberalise the financial market and rely on more credit money in order to stabilise the economy. However, as it always happen in capitalism, credit does not solve the crisis of overproduction, it only postpones and reinforces its final consequences (Clarke, 1990 pp. 459 -462). During the 1990s the massive devaluation of capital continued in the South-American country when factories had to shut down, unemployment rose and labour power remained idle. On the other hand State-owned companies were privatised and sold bellows their market price (Lewis, 2009 pp. 37 -38). All of this, it is worth to mention, encouraged by the IMF and the Washington consensus which conditioned economic and political support to the implementation of policies of labour flexibility, privatisation and fiscal austerity. However, as long as financial speculators and foreign companies still believed in the Argentinean miracle they would compensate for the devalued capital by injecting fresh capital into the Argentinean economy. Nevertheless, investors’ confidence in the Argentinean economy started to crumble after the tequila crisis of 1994. Some of them, of course, saw it as an opportunity to buy up the devalued assets of local capitalists (Lewis, 2009 pp. 100 – 105). They implemented new technologies, fired redundant workers and speeded up the process of capital accumulation. Overproduced capital could not be realised. At this point only credit was sustaining an economy that suffered from massive devaluation of constant capital and labour power: official unemployment was 16 percent and half of the labour force employed in the black market at low wages (Lewis, 2009 p. 123). When credit dried up and the IMF was unwilling to keep the bubble growing. The illusion was finally over. Credit money was not available to suspend the natural contradictions of the system and capital had to be devalued at great scale in 2001. Argentina felt the disciplining forces of capitalism and had to carry the geographical concentrated burden of devaluation of capital, which the system needs in order to re-establish a new process of accumulation. Conclusion In this essay I have showed that a Marxist framework may help us to understand that the causes of the crisis are not to be found on exogenous factors, such as the irrationality of economic actors or political mismanagement. Economic crisis are inherent to capitalism, and cannot be avoided. Argentina, as part of the capitalist economy, had to carry the burden the devaluation of capital that capitalism need in order to re-establish the processes of accumulation. Moreover, the causes of the crisis are not the lack of proper institutional arrangements or corrupt politicians. These factors might have contributed to the extension of the crisis and that capital devaluation occurred in Argentina rather than in another place. However, the underlying causes are have to be found on the contradictory nature of capitalism, which tendency towards overproduction make crisis a necessary event that devalue capital and re-establish the conditions of capitalist accumulation. 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