Argentina at the Brink

Long-standing economic troubles and pent-up citizen frustration exploded in Argentina in December 2001 in a series of events that toppled two presidents and left 30 dead The common demand among the looters, the looted, and the middle class was that the economic regime had to change. People also said "Enough!" to politics as usual, corruption, and clientelism. Colorful chants were directed at finance minister Domingo Cavallo, then-president Fernando De la Rúa, and the entire political class.

Background: Argentina 1976-1999

Absent from most media coverage, however, was deeper analysis of the roots of the Argentine crisis in the last 25 years of IMF-sponsored neoliberal economic policies. On March 24, 1976, a brutal dictatorship came to power through a military coup. The military reversed decades of protectionist development policies aimed at industrialization and developing the domestic market. The regime opened markets to trade and capital markets to international investment and financial speculation, while it brutally repressed what had been a militant and organized labor force, leaving 30,000 "disappeared" and wiping out a generation of activists.

The dictatorship ended in economic, social, and military disaster with the Falklands/Malvinas war. Argentina's industrial capacity shrunk by 30% and capital flight dramatically increased Argentina's foreign debt. Income distribution had become highly unequal, shrinking Argentina's considerable middle class. When civilian Raúl Alfonsín came to power in 1983, he tried to reverse the dictatorship's neoliberal policies, but increasing hostility from international financial institutions among other factors created a chaotic domestic situation, including runaway inflation, that forced Alfonsín to hold elections and leave office five months early.

Carlos Menem of the historically pro-labor Peronist party came to power in 1989. He campaigned on traditional populist themes, but once in power, relied on more conservative economic policies.. For a year and a half Menem tried to stabilize the economy, but was unsuccessful. As the economy spiraled out of control once again, Menem named Domingo Cavallo, a Harvard-trained economist, as finance minister. Under the guidance of the IMF, Cavallo implemented the most far-reaching structural adjustment program in Argentine history, including a radical opening of Argentina's goods markets to trade, elimination of all restrictions on foreign capital inflows, and privatization of all state enterprises. The cornerstone of Cavallo's policy package was the pegging of the Argentine peso to the US dollar.

Menem's ten years in office resulted in a radical restructuring of Argentina's economy and society. Trade liberalization undercut some domestic industry. Privatization of state enterprises was taken to extremes: mail services, the rail system, airports, social security, and all utilities were sold off, often at bargain-basement prices. Even profit-generating firms were privatized, resulting in a substantial loss of revenue to the state. Initially, lifting restrictions to capital mobility led to massive capital inflows. However, each of the financial crises in Mexico, Asia, Russia, Brazil, and Turkey led to massive capital outflows, sinking Argentina into a deep recession, with record levels of unemployment and people living below the poverty line.

1999: Enter De la Rúa

Fernando De la Rúa, the conservative presidential candidate of a center-left coalition, won the 1999 election. His economic strategy was to administer the economy he inherited according to IMF austerity guidelines. According to the IMF, foreign investors would resume lending to Argentina when the country reduced its budget deficit to zero by cutting already low social expenditures. But the cuts in government spending deepened Argentina's two-year recession. Argentina was thus caught in a downward spiral of falling growth and government income, larger deficits, and more austerity.

When in March 2001 it became obvious De la Rúa's strategy was not working, he appointed Menem's finance minister, Cavallo, who made a last-ditch effort to save Argentina from disaster. Cavallo continued with the austerity and adjustment policies of his predecessor, which worsened the recession. While the one-to-one peg to the dollar was heralded by international observers as providing currency stability and an end to the inflation that had plagued Argentina for years, there was a steep price for keeping the national currency at an artificially high rate. Argentina's exports were overpriced and lost markets, damaging the economy. Domestic investors lost confidence and began withdrawing bank deposits en masse. In order to halt the run on bank deposits, Cavallo issued a decree on December 1, 2001 known as the "corralito" (little corral or play-pen), limiting cash bank withdrawals to $250 a week.

The "corralito" affected the whole social spectrum. Given Argentina's recession and high unemployment a large number of Argentines are paid in cash "under the table." Furthermore, most people pay for rent, food, domestic help, and children's schooling with cash. The economy ground to a halt, bank lines grew long, and people became desperate.

On December 18, residents of a very impoverished suburb of Rosario city looted a supermarket. Throughout the night and into December 19th looting spread throughout the country, reaching the Buenos Aires and its suburbs. The president's response was to declare a national state of siege, which proved to be the last straw. People spontaneously poured out into the streets, en masse, noisily banging pots and pans and demanding an end to neoliberal policies, and the resignation of finance minister Cavallo and president De la Rúa. By 1:20 a.m. on December 20 Cavallo had resigned.

Peaceful protests continued through the night and the following day in spite of the most brutal police repression in decades, which left five dead downtown. By 7:30 p.m. the president resigned.

Adolfo Rodriguez Saá was chosen to succeed De la Rúa, but was ejected after a week in office by another massive, peaceful, popular pot-banging protest and lack of support from his own party. This time the protest was against continuing bank restrictions and corrupt Menem-era cabinet members appointed by Rodriguez Saá.

After much internal wrangling, Peronists nominated Eduardo Duhalde, then senator for Buenos Aires province, to complete De la Rúa's term. Duhalde promptly declared that the old marriage between government and international banks was over, upheld the default on foreign debt, and chose to break the decade-long peg of the peso to the dollar.

What next?

Duhalde is walking a fine line between the demands of the IMF and international banks and the much-postponed needs of the Argentine poor and middle class. While the government explicitly states that it upholds the debt default declared by Rodriguez Saá, it is still looking to the IMF for approval. At the same time, many Argentines hold the IMF and the international banks responsible for Argentina's current crisis and reject any role for the IMF in economic policy formulation.

Duhalde faces the impressive challenge of spreading the burden of the financial pain. He recently declared that Argentines could pay back most dollar-denominated mortgages and other loans at the old one-to-one exchange rate. This bold move helps protect the poor and middle classes from financial ruin, but requires banks to make up the difference. The international financial institutions and investors have vociferously opposed such policies despite having profitted handsomely during the last ten years of both neoliberal policies and lax regulations. Many Argentines believe that it is time for the banks to shoulder part of the adjustment burden. People have become aware of their power and it is unlikely that they will passively put up with more hardships without a sense that the future will improve.

General Assembly
Excerpts from "Hope for a Global Future: Toward Just and Sustainable Human Development" (pp.128 -136)

Equitable Debt Relief - Principle: The repayment of debts and interest at the expense of the basics of life raises serious questions of justice. The burden of debts must be shared equitably in ways that reduce poverty, protect the environment, and avoid perverse incentives in the future.

The 208th General Assembly (1996):

• Calls upon all governments, the multilateral lending institutions, and commercial banks engaged in international lending to strive to insulate the poor of indebted countries from the costs of debt repayment and to consider seriously debt forgiveness or debt relief for the most heavily indebted and poorest countries.
• Calls upon the International Monetary Fund to insist on the following conditions in all future structural adjustments for debtor countries: (a) reduction of inappropriate levels of military spending; (b) preservation of spending on basic needs, including education and health care; (c) assurance of a safety net for those most severely affected by adjustment policies; (d) prevention of adverse environmental effects such as deforestation and soil degradation; and (e) a system for monitoring and correcting (as may be necessary) the effects of adjustment policies.
• Calls upon the World Bank and the International Monetary Fund to (a) replace current structural adjustment efforts with policies and programs that meet the needs of the poor and promote sustainable, participatory, and equitable development; (b) cancel or substantially reduce multilateral debts, especially of the poorest countries and increase support for the reduction of commercial and bilateral debt; (c) make the World Bank and the International Monetary Fund more accountable to the people affected by their policies and projects through increased transparency, greater access to information, and greater participation in the development of projects, programs, and policies.

Just and Sustainable International Trade - Principle: In an interdependent world, no nation can be fully independent of other nations, and no nation should be overly dependent on other nations. This means that the international trading system must incorporate the basic norms of social justice and environmental sustainability rather than depend solely on the norms and outcomes of free trade.

The General Assembly calls upon the U.S. government to develop sustainability criteria to appraise the likeliest impact on developing countries of existing and proposed United States trade policies. These criteria should reflect the principle that trade, to be supported, must genuinely promote poverty reduction, democracy, and ecological sustainability.