Argentina: Poster boy for the New World Order.Argentina
Between disintegration and revolutionby James Petras Henry Veltmeyer
CovertAction Quarterly magazine, Fall
2002Throughout the early and mid-nineties, the International Monetary Fund (IMF), World Bank, the Inter-American Development Bank, and the G-7 countries, all praised Argentina's liberalization program as an economic model for the Third World. Then President Carlos Menem and Economic Minister Domingo Cavallo promised the Argentine people that they would soon become part of the "First World."
Today, Argentina is in total disintegration. Not only is the economy in its fifth year of recession/depression, but its banking system has collapsed, the unemployment rate has skyrocketed, and over half the population lives below the poverty line.
No country in contemporary Latin American history has fallen swifter and further into mass poverty and experienced as prolonged an economic collapse as Argentina. Though most Latin American countries have applied neoliberal policies, none has been as thorough and rapid as Argentina. Moreover, no Latin American country was as industrially advanced or had as diversified an economy. Finally,
Argentina had the highest standard of living in the region, the most qualified and skilled labor force, and the political leadership most determined to follow the precepts of the International Financial Institutions (IFls) and the G-7.Argentina is a test case for the efficacy or failures of the neoliberal approach under optimal conditions: a willing government, a well-developed infrastructure, a skilled labor force, long-term links to world markets, and a significant middle class with Euro-American patterns of culture and consumption.The number of Argentines below
the poverty line has grown geometrically: Ten years ago there were less than 15%, two years ago it was 30%. In June 2002 the percentage
exceeded 50%. In that month, Eduardo Duhalde's regime acknowledged 18.2 million people (51%) below the poverty line. Of these, 7.8 million are indigents according to SIEMPRO (Spanish acronym for System of Information, Monitoring and Evaluation of Social Programs), an official institution under the jurisdiction of the President. Children and adolescents living in poverty number almost 8.2 million. Between January and May 2002, the number of poor grew by 3.8 million, or 762,000 a month, or 25,000 a day. The rate of indigence is growing even faster. In 1998, 29% of the poor were indigent; in June 2002, 43%. The massification of extreme poverty is manifested in the high rates of child malnutrition-over 58% in Matanzas, a working-class suburb of Buenos Aires.
In the interior there are numerous reports of children fainting in school for lack of food, and over 60% of newborns in Misiones suffer from anemia-a direct result of government cutbacks to meet G-7 and IMF demands.INTO THE ABYSS
Apart from the top 10% of the population, all working sectors and pensioners have experienced an average 67% income decline. In 1997, the United Nations Development Program (UNDP) calculated per capita annual income at $8,950. In March 2002 it was $3,197. The decline affects all regions of the country. If we use as rough indicators of "class" the different regions of the province of Buenos Aires, we can approximate the social impact of the crisis. The income in the capital city of Buenos Aires, which we can take as largely middle class, saw the average fall from $909 a month in December 2001 to $363 in March 2002; in the working-class suburbs (conurbano) of the city of Buenos Aires income fell from $506 to $202; in the province of Buenos Aires, from $626 to $250. The largest decline is among workers in the informal sector (work without benefits or employment protections) and among pensioners. In the capital, income of the "informals" dropped from $643 to $257; in the working class suburbs from $334 to $134; in the province from $394 to $158. Among pensioners the decline was from $437 to $175 in the capital; from $320 to $128 in the working-class suburbs and from $360 to $144 in the province. The situation is far worse in the other provinces, where pay scales are lower, unemployment is higher, and where there are frequently three to six month delays in payment of salaries and pensions.
For the working and middle classes, the loss of formal employment means a sharp decline in income. Employed wage earners in the private sector of the capital earned $904 in December 2001. Those who were forced into under-employment were earning $257 in the informal sector three months later. A 30% rise in prices during the same period accompanied the skyrocketing loss of jobs.
Those whose main income is a pension are indigent in all geographical sectors, as are all unemployed workers (30% of the labor force) living in the suburbs and greater Buenos Aires. Even if we assume that some workers classified as unemployed are actually working in the informal sector, almost all are near or below the line of indigence. The massive growth of unemployment to 30% nationally, from 40 60% in the working-class suburbs, and even higher in some of the former one-industry towns of the interior, is reminiscent of the worst years of the U.S. depression of the 1930s and of Weimar Germany in the 1920s.
Accompanying and interrelated to the impoverishment of the mass of the middle and working classes is the concentration of wealth in the ruling and upper middle classes and foreign capitalists and bankers. In 1974 the top 10% received 28% of national income, in 1992 slightly over 34% and in 2001 over 37%, while the poorest 10% received 2.2% in both 1974 and 1992 and 1.3% in 2001- before the devaluation and sharp increase of unemployment.
Together the upper classes-the ruling elite plus the upper middle class-receive 53% of declared income. Because the upper classes were able to withdraw their funds (estimates run as high as $40 billion) from the banks and send their money outside the country, avoiding the confiscation of December 2001,
the percentage of wealth in the hands of the upper classes is probably close to 80%.In that confiscation, the government froze all bank accounts, and subsequently converted them to pesos. The conversion rate in June 2002 was 3.5 pesos to the dollar. In effect, the accounts were reduced from $45 billion to approximately $13 billion and declining. The regime's attempt to convert the remainder into state bonds redeemable in ten years at 2% interest would devalue these personal savings accounts even further, given the 30% rate of inflation for the first quarter of 2002. This attempt by the regime to swindle the account holders out of their savings was prevented by massive demonstrations by the impoverished middle class-the potbanging cacerolazos-which threatened the Congress and stormed the banks.
MACROECONOMIC INDICATORS
During the first three months of 2002, industrial activity declined by over 18%. Textiles and manufacturing were down 48% over the previous year. The number of plant closures accelerated throughout the 1999-2002 period, reaching unprecedented levels in the last trimester of 2001 and the first half of 2002. Unused industrial capacity was running at more than 50% in most sectors of the economy, including metal, textiles and auto parts.
Between 1990 and 1998, the foreign debt grew from $58 billion to $140 billion. Over the same period the cumulative sum of capital flight plus interest payments rose from $75 billion to $197 billion. In other words, external borrowing largely financed capital flight and part of the mushrooming debt payments, leaving a net deficit in capital flow. This eroded the economy's capacity to sustain growth and subsequently led to the recession, further budget cuts, and later turned the recession into a depression.
The foreign and domestic elites' massive withdrawal of funds-aided and abetted by the foreign banks led to the confiscation of savings of millions of Argentines and the virtual collapse of the financial system. Throughout 1999-2001, IMF loans merely served to pay back private banks and the IFls, while exacerbating the debt problem, deepening the recession, and lowering living standards. In order to get short-term loans, Argentina was paying 16% over U.S. Treasury notes as late as August 2001. Once the fall took place, neither the IFls nor the G-7 were willing to lend new money, unless the central government repealed its Economic Subversive Law (a law designed to prosecute illicit banking practices), abolished the provincial currencies which kept the local economies afloat, and fired several hundreds of thousands of health, educational and other public employees.
The key concern of the IFls with repealing the Economic Subversive Law was that it was an instrument to prosecute G-7 banks that were involved in the illegal transfer of over $50 billion in the year 2001-02. In June 2002, under IMF pressure, the law was repealed. While the IMF blamed the Argentine "savers" for the financial crisis-by making panic withdrawals-substantial data demonstrate that the private, principally foreign-owned banks had already consummated a massive transfer of funds out of the country and were not willing to re-capitalize the banks. Furthermore, the IMF and World Bank pressured the Argentine government to assume the private banks' obligations to their depositors and issue ten-year state-guaranteed bonds in lieu of direct payments to holders of savings accounts. Lacking funds and facing total unwillingness of foreign bank corporations to recapitalize their Argentine subsidiaries, the foreign and national private banks claimed to be on the verge of bankruptcy, at exactly the moment that the rightful claimants attempted to withdraw their savings.
The immediate cause for the collapse of Argentine capitalism was the role of the foreign-owned banks and the IFls, led by the IMF, in emptying the Argentine financial system. The longer-term reasons are rooted in regressive structural changes including privatization, Structural Adjustment Programs (SAPs), open markets, and quasi-criminal "deregulation" of the economy. All these led to the collapse of domestic production, wholesale pillage of the economy, and the confiscation of millions of saving accounts.In the months leading up to the crisis, the ten leading banks moved approximately $27 billion out of the Argentine financial system. This system operated on two levels: a formal system of deposits and loans and an "informal sector" where mega-accounts operated, largely to launder funds and carry out speculative activity in the financial sector. The "other" categories in February 2001 amounted to $57 billion in assets and $60 billion in obligations. By November the totals of "others" declined to $25 billion for assets and $35 billion in obligations. A closer analysis reveals that of the $25 billion decline in assets, over 74% of it took place among the ten biggest banks. The IMF loans to Argentina served to cover the growing drain of resources out of the financial system by the financial elites, while imposing harsher cuts in public spending and investment. The triple phenomena of deepening economic depression, financial flight, and growing indebtedness were caused by the alliance of the IFls, the foreign and local big financiers, and the foreign-owned banks. The small and medium Argentine depositors were victims of a covert financial swindle, and not the perpetrators, as the apologists charged. Their desperate and belated effort to withdraw their savings was a reaction to the financial swindle executed by the financial elite. Most small and medium savers, however, were not successful. Bank liabilities after the flight of big accounts and the drying up of overseas credits far exceeded their assets; with the economic crisis, many of their outstanding loans were delinquent and there was no way that headquarters would inject new funds to cover the demands of depositors. The government intervened to "save the banks" by freezing all deposits and preventing depositors from recovering any of their savings. The gross class character of the government's financial rescue plan infuriated the dispossessed middle and lower classes. The subsequent devaluation of the peso in effect robbed them of two-thirds the face value of their frozen savings and depressed their incomes, while the upper middle and ruling classes who got their money out of the financial system were able to lower their cost of living, production and consumption by a commensurate 65%.
PUBLIC FIRESALE
The Menem regime gave the appearance of an "affluent regime" thanks to heavy borrowing and windfall income from the selloff of public properties. Most of the inflows of capital raised upper class consumption and facilitated wholesale corruption by the entire political class and their entourages of public officials, judges, customs officers, police, and military officials. Foreign bankers were willing to lend because the interest rates were 10 to 20 points above the Euro-U.S. rates and there was easy liquidity given free convertibility, and the de facto dollarization of the economy ensured monetary stability. Thus, each step of the liberalization process weakened the fundamentals of the economy: The domestic economy shrank, entrepreneurs fled into apparently lucrative financial-speculative activity, debt payments skyrocketed, the loans-for-privatization deals were approaching their limits, and external flight of capital accelerated as the upper classes sensed that the whole liberal edifice would eventually collapse, leaving neither a productive system nor monetary resources to revive it.
Crucial to the collapse of the bubble economy was the behavior of the Argentine big bourgeoisie. Powerfully ensconced in the Menem regime, they were the initial
beneficiaries of the privatization process and the loans from overseas lenders. They were also the group that dictated economic policy. The Menem regime's point of reference for developing the liberal agenda was, first and foremost, the dominant classes in Argentina who had investments overseas, were tightly linked to overseas banks via joint investments in privatized banks and via foreign loans, and who demanded a peso easily convertible into dollar equivalence. Liberalization to the maximum allowed this 'transnational' Argentine bourgeoisie to buy public banks and enterprises on the cheap and sell them to foreign capital. Deregulation of the banks allowed massive transfers of funds out of the country and the laundering of illicit gains. Cheap imports, easy loans and fast exits of funds were the Argentine elite's definition of liberalization.
For obvious reasons the G-7 countries and the IFls were wildly enthusiastic: They gained control over banks and deposits, lucrative telecommunications, airlines, oil and other money-earning public enterprises. They encouraged the regime to proceed full speed ahead with reckless abandon.As the domestic economy, particularly in the provinces, collapsed, the provincial governments ran up huge debts-partly to finance corrupt political machines to sustain the national government, and partly to avoid provincial popular revolts. Unlike South Korea, China, and Japan, large-scale corruption did not grease the wheels of national production:
Bribes greased the hands that sold off lucrative public enterprises to foreign investors who stripped assets and reduced local production in favor of large-scale speculative activity. There was an inverse relation: As corruption grew, industry declined, tax receipts were negligible and competitiveness became an empty slogan.
Meanwhile, foreign investors moved in on the agro-industrial sectors, retail trade (mega malls), real estate and hotels, in association with a small nucleus of the Argentine economic elite and sectors of the kleptocratic political class, headed by the extended Menem family and its political entourage.
The first major adverse effect was the slashing of employees in the process of preparing public enterprises for privatization. The state fired hundreds of thousands of workers in the telephone, railroad, and waterworks sectors, assuming the economic costs and taking responsibility for repressing the ensuing protests. Many cities in the interior, like the petroleum city of Neuquen, were turned from prosperous cities to ghost towns, with 30-40% unemployment rates. Promises of "alternative employment" were never kept, as provincial and local officials linked to the central government either stole the funds outright or used them to finance their political machines, through expansion of unproductive "administrative" jobs.
The "centralization" of legislative and executive powers in the presidency-in his very person-and the dictatorial methods Menem used to legislate (most industries and banks were privatized via presidential decrees) facilitated rapid and extensive liberalization.DISINTEGRATION & DESTITUTION
U.S. Secretary of the Treasury Paul O'Neill weighed in on the side of the IMF's "final squeeze," endorsing the IMF bailout of the bankers and the takeover of the remaining sectors of the economy. But he demanded, in typical euphemistic language, "a political solution." He called for a strong authoritarian regime capable of ramming the mass job firings, budget cuts and abolition of local currencies policy down the throats of the impoverished Argentines. O'Neill questioned "the leadership capacity" of the Duhalde government. According to an interview, O'Neill said Argentina's problem boiled down to a single question: Will the Argentine government do what it has to do, namely, implement the IMF policies? What O'Neill and others in the IFls and G7 mean by "political will" is precisely to override the interests and survival of thirty-three million Argentines, elected congressional officials, governors, and mayors, and force upon them further bankruptcies and unemployment-to push beyond the 53% poverty level to satisfy overseas bankers and investors.
Probably the most obscene remarks came from Anne Krueger, second in command at the IMF, a U.S. appointee and a former Stanford professor. In an interview in the Financial Times, she claimed that "the Argentine authorities are not sufficiently realistic as they should be." Realism, according to Krueger, means that in the midst of a depression, cut public spending, lower living standards and increase unemployment. The "realism" referred to is the world of finance capital and its voracious appetite to squeeze even more interest payments from bankrupt provinces, businesses and public treasuries; to withdraw more savings from Argentina with impunity.
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