It is hard to think of a modern nation that has suffered as great an economic disaster without losing a major war as Argentina.
While Argentine households’ standards of living remain well above those in most developing countries, they have suffered through four consecutive years of rising unemployment and shrinking incomes only to see near-total financial collapse at the national level.
Nor has the resignation of a hapless president and a much-hated economics minister brought any relief. Indeed, things are likely to get substantially worse before they get noticeably better for most Argentines.
Perhaps the greatest tragedy is that few, if any, participants are learning the right lesson from the whole debacle. This applies to such institutions as the International Monetary Fund, the current Bush administration and the international financial community—as much as to the Argentine electorate.
Argentina’s fall is so humiliating because it once soared so high. Good internationally comparable statistics are scarce, but a century ago Argentina was clearly one of the richest nations in the world. Buenos Aires was comparable to Paris or Rome in its beauty and modernity
Education and health indicators were the highest in Latin America and better than all but a few European nations.
Per-capita incomes were about that of Canada and Australia and about as evenly distributed as in the United States.
But the Argentine economy went off the rails six decades ago and has never gotten back on track.
After Juan Peron came to power during World War II, government alternated between his brand of quasi-fascist populism, ineffectual conservatives and military regimes. Growth stagnated, inequality increased, government grew much faster than output and the manufacturing sector became increasingly uncompetitive with the rest of the world.
Stagnation and inflation led the last military government to roll its political dice on the popular cause of recapturing the Falkland Islands from the British administration.
When that effort ended in humiliation, the generals ceded power to an elected government once again.
Raul Alfonsin, the new civilian president was moderate and honest, but unable to deal with chronic fiscal deficits that caused growing foreign indebtedness. Amid prolonged high inflation he resigned before the end of his term, yielding office to that very charismatic populist, Carlos Menem.
Menem’s government succeeded in taming inflation by reducing government spending and instituting a currency board that surrendered sovereign control of the peso and made it convertible one-to-one with the U.S. dollar. Menem also oversaw the sale of numerous state-owned companies including the national airlines, the petroleum company, the steel industry and telephone, electric and water utilities. Some of the proceeds from privatization retired debt, some plugged holes in the federal budget.
Menem’s government also lowered import barriers and joined in a four-country free-trade area called Mercosur. Following the dollar-peso tie in 1991, Argentina’s economy grew strongly for the first time in decades. Argentine exports flourished, especially to Brazil, which had never been a major trading partner before. Multinational corporations invested in new plants and equipment and foreign portfolio investors bought shares in newly privatized firms.
But the “convertibility” plan always had feet of clay. Adopting a currency board that limits one country’s money supply to its holdings or some other country’s currency is inherently an admission of institutional failure.
It says, in effect, “we are incapable of managing our own money supply without catastrophic inflation.”
The plan cut inflation, but in tying Argentina’s domestic money supply to its dollar holdings it made the country vulnerable to the usual effects of an overvalued currency—unduly cheap imports and expensive exports that are hard to sell in world markets.
When the dollar-peso link was made, its architects did not know that the 1990s would be a period in which the U.S. dollar would get stronger relative to most other major currencies. Nor did they know, when entering into Mercosur, that their new major trading partner would follow monetary and foreign exchange policies diametrically opposed to their own.
And while the Menem government did take major steps to free the economy from excessive government ownership and high tariffs, it made little progress–many would say little effort—in three other key areas.
It did not implement fiscal reforms at state and local levels to eliminate a deeply embedded tradition of deficit spending. It did not reduce the maze of labor regulations that Peron himself had modeled on Italian dictator Benito Mussolini’s fascist labor code in the 1930s. And it did not tell Argentines that their system of public and private pensions were overly generous and unsustainable except in the short run.
The currency board and peso-dollar convertibility were not a cure. They were a palliative measure to keep inflation in check so that more fundamental reforms could be made.
Things went well initially. Incomes grew through 1998, when problems in Asia and Russia again told First-World investors that investing in emerging markets had its dangers.
Since then, Argentina has been in a recessionary spiral exacerbated by external and internal events.
Where it may go from here and what other nations and Argentines themselves should learn are the subject of next Sunday’s column.
(This column is part one in a two-part series. Part two, “Argentina needs to face deeply embedded problems,” continues the discussion of how Argentine’s current expectations are affecting the outcome of the financial debacle.)
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.