Alternative Insight

The Fate of Argentina
A National Enron

Argentina's failures to meet the challenges of free enterprise and global competitiveness have brought many to question the worth of globalism for the less industrialized nations. The U.S. Congress and American media show less interest in Argentina than in Enron--and yet if Argentina were a company it would be called Enron, and if Enron were a nation it would be called Argentina.

Similarly to Enron, Argentina:

The failure of a company named Enron has brought economic ruin to thousands of its workers and harmed investors. The future will not be easy for Enron's workers and investors, but eventually they will redirect their lives in the huge and productive American system. The failure of a country named Argentina has brought ruin to an entire nation, impoverished millions of people, brought a banking system close to catastrophe, caused repercussions in other nations. Unlike the North American Enronians, the South American Argentineans cannot easily restore their lives. They appear doomed, which highlights questions that are not easy to answer:

(1) What are the principal reasons for Argentina's economic decline?
(2) Should the Argentine government favor its own people in lieu of facilitating the collection of Argentina's debt by foreign creditors and companies?

The Initial Story

An Argentine nation of (2000 est.): 37.0 million. reached a Gross Domestic Product of almost $300 billion and per capita GDP of almost $9,000. Argentina boasted high adult literacy (1995)--96.2%. a relatively low infant mortality rate for South America--18.41/1,000 and high life expectancy (1995 est.)--74.76 yrs.

A summary of a report prepared by U.S. Embassy, Buenos Aires, and released in July 1999 tells the story of Argentina's economic progress:

After decades of economic stagnation and chronic inflation, Argentinean leaders decided in 1989 to begin an economic restructuring based on macroeconomic stabilization, trade liberalization, privatization, and public administrative reform. In 1991 a Convertibility Law established a quasi currency board that tied the Argentine peso directly to the American dollar. In obeying the rules of free enterprise and globalization, the government privatized most state-controlled companies, opened the economy to foreign trade and investment, improved tax collection, and created private pension and workers compensation systems.
Globalization seemed beneficial; The currency link to the dollar brought monetary stability and minimal inflation. Real GDP growth averaged over 6% for the 1991-97 period. The structural reforms fostered major new investment in services and industry and Argentina's exports more than doubled in six years--from about $12 billion in 1992 to about $26 billion in 1998. The October 1998 unemployment rate decreased to 12.4 percent from 18.4 percent in midyear 1995.

Argentina's fast moving route to prosperity in the 1990's swerved to a course of financial disaster beginning in 1998. After three years of a deepening recession, forty percent of the Argentinean people find themselves living in poverty.

The Statistics Unfold the Story of Argentina's Economic Decline

Media have proposed reasons for Argentina's economic catastrophe:

It's difficult to form definite conclusions from the plethora of proposals and contradictory stories, all of which might depend upon a selective bias of those analyzing Argentina's road to default. Although statistics can also be used in a selective manner and are often not regarded as trustworthy, Argentina's recent economic statistics provide clues to the reasons for its problems.

Note: Statistics provided by INDEC (INSTITUTO NACIONAL DE ESTADISTICA Y CENSOS) - Buenos Aires, December 2001.

TABLE I:INDUSTRIAL ACTIVITY-Change in % over same month of previous year
 period Jun-01  Jul-01 Aug-01  Sep-01  Oct-01  Nov-01 Dec-01
Monthly est.   0.7  -4.0  -5.8  -9.0  -10.4  -11.6 -18.4 


TABLE II:CONSUMER SALES-Change in % over same month of previous year
 period Jun-01  Jul-01 Aug-01  Sep-01  Oct-01  Nov-01
Supermarkets 0.9   -7.4   -5.4  -8.4  -10.9  -9.0
Shopping Malls -14.8   -21.7   -15.2  -21.0  -18.5  -21.2

The sharp drop in industrial production (Table I) and consumer spending (Table II) indicate a failure of the Argentine economy to adopt to a free market system. Investment from external sources and increasing debt supported inefficient government bureaucracies at national and state levels, failed to greatly increase productivity, didn't contribute to beneficial public works, and created a sizable but temporary purchasing power. After investment and debt financing halted, financing of projects ceased, unemployment increased, purchasing power declined and the system collapsed. Lower tax receipts from decreasing industrial activity contributed to a cut in spending and accelerated the decline.

TABLE III: Budget deficit as a percentage of Gross Domestic Product (GDP)
 YEAR 1980  1990  1999  2000
Budget Deficit  2.5  2.5  2.6  2.1

The budget deficit has remained relatively constant as a percentage of GDP. It does not seem likely that a deficit that is only 2.5% of GDP and has not grown as a percentage of GDP is a principal reason for the economic catastrophe.

TABLE IV:FOREIGN TRADE-In millions of $ and % change from previous year
 period Jun-01  Jul-01 Aug-01  Sep-01  Oct-01  Nov-01
Exports 2537   2355   2510  2218  2104  2103
Exports (% Change) 6.0 --- 13.0 3.0  1.0 -2.0 
Imports 1778   1768  1818 1431 1511 1333
Imports (% Change) -18.0 -20.0  -22.0 -31.0  -32.0  -39.0 
Trade Balance 758  587  692  787  593  770
 period 2nd trim 00  3rd trim 00 4th trim 00  1st trim 01    
Balance of Payments -1427 -2288 -1969  -2939     

TABLE V:Argentina's Trade from 1997 to 2001-Note: 2001 values are close estimates

Although many commentators have stated otherwise, the bind between the Argentine peso and the American dollar did not harm Argentina's global trade or its access to resources. Exports (Tables IV and V) remained high, dipping slightly in 1999 but rising again in 2000 and throughout most of 2001. In dollar amounts, imports (Tables IV and V) fell drastically, following the sharp drop in industrial production and purchasing power. A strong dollar assisted Argentina in acquiring resources and commodities at lower prices --an unrecognized benefit of the currency board that had the peso tied to the dollar. Deflation rather than inflation characterized price levels and the trade balance remained favorable.

The foremost culprit in Argentina's decline appears to be the flight of capital. Although the trade balance (Table IV) was highly favorable, the balance of payments (Table V) was highly unfavorable. The likely sources for this anomaly were disinvestment followed by a flight of capital by foreign investors and Argentina's legions of currency speculators.

Can Argentina Return to Solvency?

Current President Eduardo Duhalde used words to disclose his thrust in promoting Argentina towards economic revival:

``We are in disagreement, naturally, with the design of global policies that have been absolutely asymmetric, that have meant protectionism in the north in relation to the products in which we are strong, agricultural products, while seeking the indiscriminate opening in the south. How could we be in agreement with that?''

``But this is the new order we have created because we came to the end of the century dominated.''

``...getting along with the United States and Europe is fundamental for our country but we will be deepen ties with neighbors in Mercosur, the political and customs union Argentina belongs to with neighbors Brazil, Uruguay and Paraguay. We must continue thinking seriously about a Mercosur currency,''

Duhalde has tried to spread the "pain" after eliminating the currency board. The Argentine president initially devalued the peso by 30 percent, watched its devaluation rise to 45 percent, and fixed an exchange rate of 1.45:1 for foreign trade and banking deals. Economists usually consider a two tier exchange rate as a license for arbitrage speculators to gamble on the currency. The IMF has termed Duhalde's move as being unworkable.

Evidently the president wants to separate the Argentina economy from subtle controls by the United States and give his government greater flexibility in monetary policy. He expects the government will now be more able to determine interest rates, increase the money supply by simply printing pesos and stimulate export industries by devaluation.

President Duhalde and his team of economists have access to all the information and details of the economic crisis. It seems presumptive to outguess his moves and criticize them. Nevertheless, Duhalde's action has, stimulated debate. The public desired the currency board as a means to discipline the system, and the currency board does not appear to have been a strong factor in Argentina's demise. Exports, which have remained relatively constant for several years are less than 10% of the Argentine economy and increasing exports will not substantially increase the gross domestic product. Devaluation does not guarantee more competitive exports--import prices of vital goods used in export industries will rise and other nations can retaliate with their own devaluations.

Unhinging the peso and the dollar has created a dilemma--if debts are retired in dollars then the debtors will need 1.5 to 2 times the pesos to retire the debt. Argentinean debtors, especially the middle class, will be crushed. The more wealthy, who have their money outside the country will survive. If debts are retired in pesos at parity of 1:1 then the creditor banks will suffer huge losses. "U.S. and other foreign banks control nearly half of all deposits in Argentina, and analysts estimate that the banking sector could lose more than $6 billion in the crisis" (2002 Miami Herald). If debt is retired by having the peso at parity with the dollar, Argentina will find it difficult to obtain additional loans on the world credit markets. Already Spain's largest bank, Santander Central Hispano, has threatened to abandon Argentina if the government does not guarantee the financial system will remain profitable. Banco Santander has effectively written off the entire value of its investment in its Argentine subsidiary, Banco Rio de la Plata, setting aside $1.13bn to cover potential losses (Financial Times, January 23, 2002). Banco Santander can offset that loss with an almost equivalent profit from its sale of its stake in Vodafone, the UK telecommunications giant.

Correcting the financial system and removing the huge debt are initial steps for reviving the economy. The more difficult struggle is to revive the industries, get workers back to work, give them purchasing power and regain confidence of the Argentinean people. No matter which direction the government takes it might not be able to resolve the problems. The Argentinean populace might have to take the initiative to resolve the economic problems.

A Solution to the Crisis-The Argentine People

Investors took the risk, invested in a speculative country, made profits for many years, miscalculated and are now suffering losses. The number of investors, individual and institutions are small compared to the Argentinean population which is suffering greatly from the economic debacle. The impoverished local populace should receive greater attention and more assistance than the foreign investors, especially when the latter abruptly stopped the investing, quickly withdrew funds from the country and further exacerbated the economic decline. Monetizing the debt and having debt retired with the peso at parity with the dollar appears to be the preferred direction for relieving the burdens of the people; which is the burden a government must most regard.

For whatever reason, although the government installed free market reforms, a totally free enterprise economy did not succeed in the Argentina mindset and institutions. No legislation can suddenly modify the mindset and institutions and make them operate effectively in the rejected model. Normally in chaotic economic conditions that defy solution, a military or totalitarian government takes the reins and forces the ship of state through uncharted waters. Argentina broke with that past--military control and totalitarian operation are no longer possible. If liberal economics cannot provide a solution to the crisis then Argentina needs a new approach to global and domestic politics or it will be permanently doomed.

More loans and investment capital seem to be the obvious solution to the dilemma. However, despite low interest rates in the United States, U.S. investment in emerging nations is not increasing, which is an ominous sign of the state of the world economy. Investment risk is growing and Argentina leads the list of risky nations. Returning to pre-1990 policies of regulation, market controls and public operation of some industries only starts a rejected economic process again and will be counterproductive.

If the United States and the IMF cannot effectively resolve the dire situation, then the Argentinean people might have no choice but to provide the solution themselves. The Argentine government has already steered a course towards devaluation leading to an inflationary approach for diminishing the debt. Their solution makes the people ask if a capitalist nation can be profitable without excessive debt and remain profitable in a static or deflationary monetary environment that permits accumulation of the debt? Argentina has a skilled, well educated and resourceful population. The population has no trust in the government . Due to the temporary freezing of bank accounts and inequalities in the act privatization, the people could become skeptical of the bedrock of the capitalist system--the concept of individual property rights. A sizable portion of the workers belong to unions. With unemployment hovering close to 20 percent and 40 percent of the populace living in poverty, a "new deal" of social legislation that gives more economic power to the people and gives more equitable sharing of the economy might be demanded and accepted. Although it seems far fetched, a workers share of ownership of industrial enterprises might provide the initial stimulus and motivation for lifting the economy off the ground.

If Enron disappears as a company, Enron's workers will still be able to control their destiny and join other companies. Argentina cannot disappear as a nation. Its people will always be Argentineans. They should be given the opportunity to control their destiny and not be subjected to the whims of global capital. Their fate will serve as a guide to similarly constituted nations.


alternativeinsight
February 1, 2002

HOME PAGE     MAIN PAGE
 
alternativeinsight@earthlink.net
Mailbox