Argentina, which to so many of our emigrants had appeared like a promised land, is heading for an unending crisis

Three hundred thousand Italian savers who had believed in the recovery of Argentina after the hyperinflation of the 80s and had bought up the country’s profitable Treasury Bonds have directly experienced just how fragile Latin-American economies (and those of many other emerging countries) can be: following the Buenos Aires default of its giant foreign debt of 150 billion dollars - the biggest crack in the history of world finance - they have lost all their interest and about three quarters of their capital.
At the same time a million Italians who live on the banks of the Rio de la Plata, plus another ten million Argentinians of Italian extraction who, in theory, could take Italian citizenship again, are experiencing the tragedy of people who, after sacrificing themselves as emigrants in search of a better future, find they have made the wrong decision. During the first two months of the year alone in fact, about fifty thousand of them – including businesspersons, professionals and other exponents of the middle class - have packed their bags and returned to their country of origin in the hope of making a go of it. According to most analysts in fact, the Argentinian crisis could be irreversible, at least for the next ten years, in the sense that after seeing its per-capita income precipitate in just a few months from over seven to less than four thousand dollars, the country will find it hard to get back on its feet and not everybody is prepared to wait for Godot, meaning by that a new ruling class capable of dragging the country out of the quagmire.
It must be admitted that whosoever picks up the reins after the Duhalde interim, which should last until the elections in 2003, will not have an enviable task: at the last count, a quarter of the population of 36 million (in a country nine times larger than Italy!) is unemployed and 44% of the inhabitants of cities have slumped below the poverty line. The most disconcerting thing about it all is that, though four months have passed since it all started, no agreement has yet been reached as to the real causes, no one seems able to suggest any viable remedy and no one has the faintest idea how it will all end.
The spectacle of the downfall of what was, no more than fifty years ago, one of the richest countries in the world and which, even in 2001, will have a standard of living clearly superior to that of East-European countries, leaves one both flabbergasted and dismayed. Some take it as a pretext for an ideological debate, accusing dollarisation and liberalistic policies.
Others point their finger at corruption among the ruling classes and wild public spending. Some fall back on the quip that the Argentinians have all the faults and none of the qualities of their Italian and Spanish forebears. The fact remains that everyone, from president Duhalde to the International Monetary Fund itself is groping in the dark, adopting one day one line and the next day another, without being able to foresee, not even in the short term, the consequences of their actions.
To try and understand what is going on, we must go back to 1945 when Argentina, with its coffers full of dollars, made selling wheat and meat to a hungry world, appeared to everyone else as a potential Eldorado. This was the period of the last great waves of immigrants, above all from the countries defeated in the Second World War. Decline had already begun to set in by 1946, when Juan Domingo Peron (and his wife Evita) came into power.
Peron opted for old style protectionism which favoured the rise of a non-competitive industrial system and at the same time began printing currency to distribute to his descamisados.
When he was overthrown in ’55, a long period of political and economic instability started during which the country wasted away the wealth it had accumulated, was invested by a wave of terrorism, reacted with a fierce (and unlike that of Chile, inefficient) military dictatorship and completed the job by attacking the Falklands. If on the one hand the humiliating defeat by Great Britain for the possession of the archipelago brought about the fall of the regime and a return to democracy, on the other it speeded up the financial crisis, which under the presidency of the radical, Raul Alfonsin resulted in an inflation of 4000% and in the first mass exodus from the country.
During the 1976-1990 fifteen year period, when the banking system collapsed twice causing the same number of massive flights of capital, the per-capita income dropped on average by 1% per year, causing Argentina to move back forty positions in the relevant ratings. In 1991, after Alfonsin, powerless in the face of the crisis, had left the Casa Rosada a few months ahead of time with respect to the expiry of his term of office, Carlos Menem was elected president after being the Peronist governor of the poor and remote province of Rioja. In view of his party’s precedents and the extravagant promises made by the candidate during the electoral campaign, the markets were ready for the worst.
On the contrary, Menem did honour to his Levantine origins and, practically from one day to the next, made a full U-turn, changing from a prodigal Populist to a strong supporter of market economy. In the course of six months, his Minister of the Economy, the Italo-Argentine, Domingo Cavallo, wiped out inflation, launched a new currency anchored to the dollar and restricted monetary circulation to actual reserves. Confidence returned almost by magic.
A massive return of capital from abroad revived production and a privatisation campaign involving banks, oil companies and utilities attracted the interest of a large part of the world and filled the state coffers again. Between 1991 and 1997, the growth rate – 6.1 percent/year – was the highest in all South America and Cavallo was hailed as a new financial genius. These were years not only of prosperity but also of excitement and hope. Some people even dared speak of a miracle. But the “Argentinian curse”, as the inability of the country to consolidates its progress is called, was just around the corner.
The first shock came with the Mexican crisis of 1995, which Cavallo only managed to overcome by injecting fresh capital from abroad and raising interest rates, which took the debt over danger point.
Then, when Menem, in search of popular consent for a second term of office, started spending left right and centre in the very best Peronist style, favouring generalised corruption that spread from the government ministers right down to the very last police station, and then even got rid of Cavallo, who was beginning to cast his shadow over the president, the foundations were laid for the present crisis. In point of fact, the Country withstood the situation for another five years and the bitter fate of being overcome by events fell on Menem’s successor, the weak and inconclusive radical Fernando de la Rua, but the alarm had sounded much earlier, even though not many had been inclined to listen. As we have said, the debate around the causes of the disaster is still in full swing.
The Economist has pinpointed at least three schools of thought that tend to integrate one another. The first points a finger at the peso’s being tied by law to the dollar, a measure that had been welcomed in 1992. This law deprived the government of any chance of using monetary policies to tackle new situations, such as the irresistible rise in value of the dollar, the fall in prices of agricultural produce, which represent the big share of Argentinian exports and the devaluation of the currency of Brazil, the country’s major business partner. To support the fixed rate of exchange, Argentina should have implemented drastic structural reforms and a gradual “Americanisation” of its economy.
Instead, it continued in the same old way, gradually losing competitiveness and heading straight for a no-return recession, with the result that numerous multinational companies which had invested in Buenos Aires took flight. Theory number two makes out that the problem lies with a fast increase in public spending, most of which financed by issuing foreign bonds at high rates of interest during the second Menem presidency. Instead of concentrating national resources on modernising the economy, he tackled unemployment caused by privatisation by distributing subsidies left right and centre and allowing the expenditure of the provinces, which Buenos Aires is constitutionally called upon to straighten out, run out of control.
At the same time, he was unable, or more likely did not want, to reform a tax system of rare inefficiency tailored ad hoc to enable the wealthier classes to evade their dues. The third school of thought places most of the fault on the foolishness and corruption of the politicians in whom the Argentinians (who, with the so-called “dishpan revolution”, liquidated four presidents in the space of just four weeks, a record) have lost all confidence.
Such foolishness, already evident towards the end of the Menem era, became even more obvious when, following the election of De la Rua, the Casa Rosada again returned to the left while the Peronists still had the majority in Parliament and the control of a large share of the provinces. After wasting a year quarrelling with his coalition, changing one minister after another and then refusing to adopt the solutions they presented, at a certain stage, De La Rua was unable to come up with anything better than recalling Cavallo and granting him full powers. Initially, the markets reacted well and a light appeared at the end of the tunnel.
Unfortunately, the man no longer had the magic touch of the early-90s and went on to make a series of fatal mistakes: first of all he tried to save his creature, the peso-dollar parity, at all costs, invoking the support of the International Monetary Fund; then he jeopardised the solidity of the banking system and pension funds by forcing them to lend money to the government at impossible conditions; finally, on December 1, by now in dire straights, he virtually froze the savings of the man in the street, imposing a ceiling of 1,000 dollars a month on current account withdrawals. Faced with a general revolt, De la Rua decided to throw Cavallo out, but only a few days later, by now besieged in the Casa Rosada and forced to use the army to quell the anger of the people, he himself was forced to resign, opening a constitutional void finally filled by the election of Eduard Duhalde, the Peronist candidate defeated by De la Rua less than two years earlier. One of Duhalde’s first moves was of course to unhook the peso from the dollar, but by now it was too late.
Duhalde is now faced with the almost impossible task of reconciling the need to keep the masses calm with that of adopting the inevitable “blood and tears” measures required to set the country back on its feet and continue receiving international aid; a battle for survival to be fought on two fronts, without even being sure that the Peronist party to which he belongs will protect his rear. For the time being, Duhalde, under the pressures of popular riots, perhaps fuelled by his political opponents, has concentrated his attention on the first need rather than the second and placed all the weight of peso devaluation on the shoulders of the banks, of the electricity and telephone companies and of foreign creditors. But this decision could well have a boomerang effect - the collapse of the banking system and the withdrawal from the country of a part of the large foreign banks which control it, something that would make it almost impossible to re-launch the economy. Meanwhile the peso, no longer linked to the dollar, is slipping further and further down, opening the path to an inflation with which Latin America is unfortunately well acquainted. When it comes to words, the entire world appears to want to help Argentina, though it is hard to understand how a country with so many resources, with 90% of the population of European origin and well educated, has managed to get itself into such a mess.
Spain, which currently has the presidency of the EU, has huge interests in Argentina and is doing its best to rally its European partners to give Buenos Aires a hand. Italy is also doing its best at both political and economic level. George Bush, after a period of relative disinterest, has in turn realised that an implosion of the south-American country would create instability and uncertainty in the entire continent just at a time when the USA is trying to set up a free-trade zone from Alaska to Tierra del Fuego. Consequently, the Monetary Fund has also fallen into line. But the good intentions will soon come to an end unless Duhalde presents an organic recovery plan that goes well beyond the measures adopted so far: apart from the default problem, to which the international community has by now become resigned, he must impose a budget with cuts in expenditure amounting to at least 10 billion Euro and stringent economic restrictions on the provinces, which are reluctant to give up their historical independence. So far, the measures he has taken have only caused critical reactions in international financial spheres, which are convinced that the man has neither the ability nor the authority to really take the bull by the horns.
Apart from his inconsistent fluctuation between Peronist populism and declarations of allegiance to the market, he lacks the very ingredient that is so essential at the moment - the confidence of his fellow citizens.
Today, those who still have some money are simply waiting for the restrictions to be lifted before moving their capital abroad. Very few in any case are prepared to accept the fact that the Country has lived for too long above its means and that the only solution is to tighten its belt.
(trad.Interpres-Giussano)