David Rock "Racking Argentina" (Part 1)

hydrarchist writes: "This article provides a much needed analysis of the economic and social background to the social crisis and revolting that has emerged in Argentina in the last twelve months. It was published in the New Left Review 17, September-October 2002."

Meltdown and pauperization in what was once Latin America’s wealthiest economy. David Rock analyses the social and political longue durée of the largest sovereign default in history, and worst casualty of doctrinal neoliberalism to date.

Racking Argentina

By David Rock

Popular phrotest erupted on the streets of Argentina through the hot December nights of 2001. [1] Crowds from the shanty towns attacked stores and supermarkets; banging their pots and pans, huge demonstrations of mainly middle-class women— cacerolazos—marched on the city centre; the piqueteros, organized groups of the unemployed, threw up road-blocks on highways and bridges. Twenty-seven demonstrators died, including five shot down by the police beneath the grand baroque façades of Buenos Aires’ Plaza de Mayo. The trigger for the fury had been the IMF’s suspension of loans to Argentina, on the grounds that President Fernando De la Rúa’s government had failed to meet its conditions on public-spending cuts. There was a run on the banks, as depositors rushed to get their money out and their pesos converted into dollars. De la Rúa’s Economy Minister Domingo Cavallo slapped on a corralito, a ‘little fence’, to limit the amount of cash that could be withdrawn—leaving many people’s savings trapped in failing banks. On December 20, as the protests intensified, De la Rúa resigned, his helicopter roaring up over the Rosada palace and the clouds of tear gas below.

The fall of the De la Rúa administration—unlike so many unscheduled changes of government in Argentina’s history—did not result in a military coup. Although the country went through five nominal heads of state in ten days, the transitions observed legal norms. At the end of December, the three-day-long Rodríguez Saá administration abandoned the fixed exchange rate of one peso to the dollar, to which Cavallo had clung—the currency collapsing to 4 pesos to the dollar, before stabilizing around 3.60—and formally repudiated the country’s debt, totalling over $130 billion. It was the largest default in history. [2] The economy contracted steeply, with GDP falling by a record 16.3 per cent in the first quarter of 2002, and manufacturing output by almost 20 per cent.

Of Argentina’s population of 37 million, 52 per cent—some 19 million people—now fell below the official poverty line, while 20 per cent, 7.5 million, could no longer afford sufficient food. There were reports of children starving in the impoverished rural province of Tucumán. Unemployment soared to 23 per cent of the workforce, with a further 22 per cent ‘under-employed’—in part-time jobs and seeking further work. Public services disintegrated: hospitals could no longer treat the sick; schools closed, or gave up any attempt to teach. State pensions and public-sector workers’ salaries went unpaid. The construction industry came to a halt. Faced with declining revenues, the federal government had started to issue ‘Lecop’ bonds in lieu of wages. The provinces followed suit, led by Buenos Aires with its patacones, and by early 2002 there were some 4 billion pesos’ worth of local bonds in circulation.

On January 1, Congress appointed Senator Eduardo Duhalde of Buenos Aires to serve the remainder of De la Rúa’s term. Rule thus passed back to the Peronist Justicialista party, which had been in power throughout the 1990s under the double presidency of Carlos Menem. Opinion polls gave Duhalde only 10 per cent of popular support. His reputation as an old-time provincial boss—allegedly tied to crime, graft and drug trafficking in the sprawling slum-belt of Gran Buenos Aires—did him no favours. The electorate had already rejected him when he ran against De la Rúa two years before. As caretaker president, Duhalde was now faced with the task of steering the country through an unparalleled economic depression, grappling with the demands of the IMF and heading off widespread revolt.

In the end, the violent protests that had rocked the country in December diminished after the fall of De la Rúa; but discontent has simmered on. In Buenos Aires, the cacerolazos evolved into asambleas populares—open meetings, often held on Sunday afternoons, to organize local services, schools and food co-operatives. The Bloque Piquetero Nacional co-ordinates highway blockades in different parts of the country, working with other groups including the radical trade unions of the Confederación de Trabajadores Argentinos. In May 2002, trade unions called a one-day general strike. In late June, the provincial police killed two piqueteros in Avellaneda, one of the old industrial centres of Gran Buenos Aires. The administration there tried to head off the protests that erupted with the promise of emergency cash. Similarly, the federal government granted an emergency loan of 12 million pesos—some $3.5 million—to the small western province of San Juan: 25 per cent of the working population was unemployed, and public funds supported 30 per cent of those still clinging to some sort of job. In May 2002, it instituted an emergency dole for the poor—150 pesos per month (by now worth less than $50), paid in federal bonds to unemployed heads of household. Within two months, over 3 million people had applied for the grant and 1.75 million were receiving it. Frequently the government allowed local piquetero organizations to take charge of the funds, in an effort to blunt their activities. [3]

Duhalde’s pleas to the IMF for financial support and a bail-out for the banking system met with stern rebuff. The Fund insisted that his government had first to end subsidies to the provinces; to protect private businesses from the allegedly corrupt judiciary; and to repeal the Economic Subversion Law—under which senior bank officials were being prosecuted for smuggling dollars abroad—and other emergency legislation, which obstructed the sale of bankrupt Argentine firms to foreigners. When Duhalde succeeded in pushing these measures through Congress, the IMF tightened the conditions. It now demanded the compulsory conversion of blocked bank accounts into long-term bonds—a plan which met with almost total opposition from the Argentine middle class, since it effectively deprived account holders of access to their money. Still further cuts had to be made in government spending—entailing even higher levels of unemployment.

Belle-époque fortunes

Yet as late as 1997, the Economist could write that the country’s prosperity ‘reminds some of the golden era, a century ago, when the pampas supplied imperial Britain with wheat, beef and wool, and Argentina was one of the ten richest countries’. [4] In subsequent, less successful periods, Argentines have never forgotten that they once stood high above the rest of Latin America as creators and consumers of wealth. In the half-century before the First World War some three million emigrants from Mediterranean Europe settled in Argentina as farmers, urban labourers and shopkeepers. Investors, bankers and railway engineers, mainly from Britain, helped to fund and build the infrastructure of an extraordinarily wealthy agrarian-export economy. For decades, Argentina emulated the prosperity of Canada and Australia; Buenos Aires became one of the richest cities of the Americas. The country seemed destined to fulfil the dreams of mid-nineteenth-century liberal visionaries such as Domingo Sarmiento, whose campaigns for development, education and European immigration sought to forge Argentina into a second United States. Liberalism, both political and economic, enjoyed an influence here as strong as anywhere in the world—apparent in the near-consensus on free trade and support for federal representative institutions. Argentina, as historian Tulio Halperín Donghi once declared, was ‘born liberal’.

Political and social change accompanied economic development. The caudillaje system of regional warlords that had emerged from the 1810 revolution against Spanish rule began to decline with the adoption of the federal constitution of 1853 and the emergence of a new national government in 1862. From the start, the country was marked by strong regional disparities—the province of Buenos Aires outshining all the rest in wealth and population, due to its access to the Atlantic economy. In 1880, a coalition of governors and gentry from the provinces, united in the Partido Autonomista Nacional, finally succeeded in subordinating Buenos Aires to majority control. A central feature of the PAN compromise was the reciprocal relationship between the president and the provincial governors, in which the former disseminated patronage and the latter supplied political support. Typically, the presidents were provincianos—supplied by the interior provinces, led by Córdoba—while the vice-presidents would be from Buenos Aires: porteños, or bonaerenses. It was a formula that would be challenged by the two popular movements of the twentieth century, radicalismo and peronismo, both led by bonaerenses—Hipólito Yrigoyen and Juan Perón.

Only the Baring Crisis of 1890 disrupted the development of the export economy. Attracted by investment-friendly government policies, the London firm had funnelled vast sums to the Argentine Republic and guaranteed the return. When British interest rates rose, the situation proved unsustainable. The Bank of England organized a rescue package for Baring Brothers, but disinvestment brought about the collapse of the Argentine economy, a suspension of foreign-debt payments and severe depression. If the similarities to the crisis of 2002 are striking, the differences are perhaps more instructive. Three conditions facilitated the recovery of the 1890s: the Argentine government succeeded in negotiating a moratorium on the foreign debt with British creditors; a swiftly devalued peso restored the balance of payments, by stimulating exports and curbing imports; most important of all, external market conditions created a foreign demand for Argentine goods that quickly revived export-led growth. Finally, a non-convertible currency had prevailed.

The Baring Crisis had a further effect. The debacle of the old political class provided the spur to campaigns for popular democracy, and led to the rise of radicalismo—an entirely new movement. [5] The economic expansion of the belle époque had created powerful middle- and working-class constituencies in Buenos Aires, among the largest in Latin America. The porteño middle class retained a strong rentier and state-dependent character, reflecting the underdevelopment of manufacturing and the salience of commercial, professional and bureaucratic occupations typical of peripheral societies. The working class, initially composed of migrants from Southern Europe, was also largely concentrated in transport and services rather than industry. Highly exploitative working conditions and poor housing fuelled frequent outbreaks of unrest—including the anarchist-led general strike of 1902—that were met with violent repression.

Emerging from the economic upheavals of the Baring Crisis, the nascent Radical party recruited strong middle-class support in its campaigns for popular democracy. Its leader, Yrigoyen, was swept into the presidency in the first broad-suffrage elections of 1916. The Radicals diverted the stream of state patronage that had hitherto flowed to the provincial governors towards their metropolitan base. Rising federal-government expenditure funded the expansion of university education and a massive growth of administrative jobs (for Radical supporters). Yrigoyen’s government also established a tradition of working with co-operative trade unions—repression giving way, in some degree, to co-optation, patronage and machine politics; although it retained a readiness to deploy state violence against less docile working-class movements, as in the strike wave of January 1919, broken in the course of the Semana Trágica. Overthrown by the military in 1930—subsequent to the shocks of the Wall Street Crash—Radicalism remained, down to the time of De la Rúa, synonymous with the defence of a large, heterogeneous Argentine middle class that has never fully shed its rentier antecedents.

During the liberal-export era capitalist agrarianism had largely displaced the traditional estancieros and gauchos on the pampas. Up until the First World War, thousands of Italians sailed to Argentina every year to work as harvest labourers, and the eastern province of Santa Fe had developed a rural middle class comparable to that of the US or Canada. European immigration also had a significant effect in western and southern areas such as Mendoza and Río Negro. In the interior, especially the northwest, conditions remained more typical of Latin America: enclaves such as the sugar province of Tucumán produced for the internal market, while the haciendas and campesino communities of the colonial era still survived elsewhere. As an agrarian society, Argentina developed a dual character, containing both the high-wage capitalist system of the pampas and the indigenous peasant structure of the interior.

Stagnation and instability

Export-led development came to an end with the 1930s. The fall in commodity prices during the Great Depression led to a steep decline in earnings, and the naval blockades of the Second World War shut off access to the traditional European markets—to the extent that Argentine railways started burning maize as fuel. In the postwar period, the protectionism, agricultural subsidies and soaring farm productivity of the Common Market effectively excluded Argentine imports. The once dynamic rural economy lapsed into decline; exports, the great engine of economic growth, stagnated. For decades Argentina had flourished as an informal component of the British Empire—smirkingly referred to as the ‘sixth dominion’ by British diplomats. United States predominance from the 1940s onwards had a disastrous impact on Argentina, which lacked the access to North American markets it had once enjoyed in Europe.

What was the solution to the decades-long stagnation that ensued? From the mid-1930s, an import-substitution programme created numerous light consumer-goods industries which exported to neighbouring Latin American markets during the War. After 1945, under Perón, the focus switched to the domestic market and to supplying wage goods to the rapidly expanding urban working class. For a brief period, Argentina appeared to have made a successful, painless transition from an agrarian to an industrial economy. Millions streamed from the land into the cities—above all to Buenos Aires, and thence Gran Buenos Aires, the great conurbation that surrounded and soon dwarfed the core city of the federal capital. The working class and trade unions emerged as major political actors, buttressed by urbanization and incipient industrialization. A vast layer—many of them internal migrants—saw substantial improvements in their living standards, as the high-wage economy of the export era expanded to include Peronist social benefits.

By the 1950s, however, manufacturing followed the agrarian-export sector into stagnation. Although the population flow continued, migrants to the city no longer found work in the factories, but formed part of a rapidly expanding marginal population, mostly located in the shantytowns of Gran Buenos Aires. Periodic efforts to re-capture export markets through devaluation launched an inflationary spiral and led to a long-term social stalemate. Political trends reinforced the deadlock. Brought to power through an officers’ coup in 1943, Perón’s unique blend of authoritarian rule and plebeian support effected a more thorough-going social change than any other regime since the nineteenth century. Proclaiming the colonel’s ideals of ‘economic independence’ and ‘social justice’, the state took over foreign trade, strategic industries and public services, redistributing income to workers and the urban poor. Trade-union support was secured through wage rises and social expenditure. Perón consummated the (temporary) liquidation of both political and economic liberalism, creating a new form of ‘corporatist’ society based on membership of state-controlled associations—the ‘organized community’.

The near-totalitarian forms of this movement collapsed with Perón’s overthrow in 1955, but the system otherwise remained impervious to every attempt to supersede it. Corporatist institutions encompassed not only the relatively new proletariat, formed by import substitution, but also Argentina’s proliferating urban middle class. Peronism, backed by the trade unions, the military and a host of other associations, became more akin to an organic mass movement than a party. The Radicals, who had once commanded massive popular adherence, languished in decline.

Corporatist dictatorship

For two decades after the fall of Perón, short-lived military juntas alternated with weak constitutional governments, while competing Peronist factions continued to struggle for state power. Inflation and instability prevailed. The military’s aim was the depoliticization of the powerful trade unions, and an anti-inflation wage freeze as a prelude to growth. By the late 1960s its repressive policies, threatening middle and working classes alike, instead provoked a radicalized resistance. In May 1969, workers and students in Córdoba led the mass insurrection that became known as the cordobazo. Thereafter, popular mobilization escalated into armed struggle, led by the Peronist Montoneros and other guerrilla groups. Right-wing death squads targeted students and radical workers—paving the ground for the ‘Dirty War’.

In 1976, military dictatorship resumed in its most murderous form. The ‘Process of National Reorganization’ claimed thousands of desaparecidos as its victims, and developed into a prolonged assault on civil society. But if it succeeded in destroying the guerrillas, in economic terms the blood-soaked Process built nothing new. Dominated by hard-line reactionaries, organically linked to the corporatist complex, the junta blocked any reform attempts by Economy Minister Martínez de Hoz that contradicted their own interests. As a result, waste and corruption thrived. Unemployment remained low, but inflation rampant. The contrast with 1970s Chile was stark. The Pinochet regime shattered working-class resistance, forced through root-and-branch reform in every sphere and eventually succeeded in completely restructuring labour relations and the economy. The Argentine military signally failed to push through any such programme. Despite the battering they received, corporate institutions and practices survived intact. Hyperinflation of 344 per cent, de-industrialization, negative growth and a $45 billion foreign debt were the legacies of the seven-year tyranny when it finally collapsed, following defeat in the Malvinas War.

Such was the disastrous context in which Raúl Alfonsín, the new Radical President, proclaimed the rebirth of democracy in 1983. Initial attempts to prime-pump the economy—a return to Peronist methods, although now applied in the interests of the Radicals’ middle-class constituencies—produced a short-lived consumer boom, followed by spiralling inflation—up from 627 per cent in 1984 to 1,000 per cent in 1985. Changing tack, Alfonsín now imposed a stabilization package, the Austral Plan, combining conservative monetary policy with a price and wage freeze, which provoked a wave of general strikes from the Peronist trade unions. Within two years the Plan had collapsed under the burden of ballooning debt payments. Faced with rapidly falling revenues, exacerbated by widespread tax evasion, the government could only print money and devalue the currency. Hyperinflation loomed again.

Alfonsín also faced intractable political problems. The military threatened revolt against defence-budget cuts—force levels were reduced from 175,000 to 95,000 between 1983 and 1989—and against the trial of Process leaders for human-rights abuses. Alfonsín tried to trim, introducing a 1986 cut-off date for further prosecutions; the Mothers of the Plaza de Mayo responded with a mass campaign, producing documentary evidence of hundreds more murder and torture cases. In 1987 dissident commanders organized an Easter mutiny which Alfonsín succeeded in facing down. Meanwhile, the Peronist majority in Congress sabotaged the government’s legislative programme, while middle-class groups clamoured for greater economic security. In late 1988, the administration introduced a further stabilization plan, but it too collapsed. Another acute crisis ensued, with capital flight, the draining of foreign reserves and waves of hyperinflation.

Between 1981 and 1988, GDP had shrunk by over 5 per cent, or 15 per cent per capita. Efforts to control inflation by borrowing and temporary freezes had ceased to be viable. Neo-conservative policymakers—soon to be relabelled neoliberals—called for permanent reductions in government spending and the privatization of state-run corporations. Alfonsín’s government did attempt to sell off ENTel, the phone company, and Aerolíneas Argentinas, only to suffer defeat at the hands of the Peronist unions and Congress. In May 1989, desperate for basic provisions, crowds of poor people sacked supermarkets throughout Gran Buenos Aires. Elections the same month saw the Radicals swept from office; under the leadership of Carlos Menem, the Peronists were back in power.

Following Menem

Menem’s origins lay in the petty merchant class of La Rioja, a small western province on the Chilean border. [6] Like many of its members, he was descended from Ottoman immigrants, locally known as turcos. Although his wife was a Muslim, Menem renounced Islam, apparently in order to pursue a political career as a Peronist. He became a leading figure in La Rioja, serving several terms as governor during the 1970s and 1980s, and was well known in Buenos Aires—although lacking close connexions with the so-called vertebral column of Peronism among the metropolitan trade unions. Like many of his colleagues, he was interned and ill-treated under the military dictatorship. As a governor in the 1980s Menem posed as a latterday caudillo, wielding paternalistic authority over his large local constituency and exploiting Alfonsín’s weak authority over the provinces to boost his own standing by expanding public employment. His populist reputation won him the nomination as Peronist candidate to fight the 1989 presidential election.

Despite the collapsing economy and monthly inflation rate of 200 per cent, Menem’s campaign pledge was for a salariazo—a major increase in living standards. He courted the electorate with the slogan, ‘Follow Me!’, hinting he might default on the foreign debt. At the news of his landslide election victory, however, Menem’s views underwent a dramatic conversion. ‘We’re pragmatists,’ he declared. ‘State enterprises will be privatized to the extent that such action meets the government’s interests’. [7] Elsewhere he spoke of the need for a ‘shock of hyper-credibility’. World Bank and IMF policies would be adopted. Menem forged close links with the local elite, staffing his first cabinet with executive members of the powerful Bunge y Born conglomerate, with much power resting in the hands of its president, Jorge Born III. He embraced the ultra-conservative liberales who, as doctrinaire supporters of the free market and opponents of state interventionism, had always been arch-enemies of the Peronists. Congress—Menem had majorities in both houses—was persuaded to grant him emergency powers to conduct economic policy by decree.

This was, of course, the moment of the Washington Consensus: the removal of tariffs and barriers to capital flow, privatization of nationalized industries, flexibilization of the labour market, cutbacks on social-welfare provision and all the rest were proclaimed as the new global programme for Latin America. In Argentina, these goals were presented as the only way to save the country from hyperinflationary chaos. [8] For the first two years of his presidency, however, Menem’s attempts to implement the programme met with little success. There was another bout of hyperinflation in early 1990, opposition from radical trade-union leaders and problems with the military. His government was accused of corruption, and harshly criticized for granting early remission to the imprisoned junta leaders. The president’s popularity ratings sank low.

The apparently magical transition occurred in 1991, when the United States lapsed into recession and funds flew outwards to the ‘emerging markets’; the foreign capital needed to carry out the neoliberal revolution in Argentina now miraculously appeared. US interest rates remained low until late 1994—demarcating exactly the duration of the Menem boom. [9] The inflow of foreign investment coincided with the stabilization of government expenditures and the resultant quashing of inflation. In the early 1990s, Argentina became the fourth largest recipient of foreign funds throughout the world. The influx climbed from $3.2 billion in 1991 to $11 billion in 1992, and to $10.7 billion in 1993. As the economy turned, Menem’s standing in the country underwent a decisive shift. There was now ‘an overwhelming acceptance by the public of his drastic reform measures’; in addition, ‘public opinion seems convinced there is no alternative.’ [10] Congressional and provincial elections reflected the same trend.

Henceforth, Argentina became a model of neoliberalism and a showpiece of globalization. In the early 1990s, annual growth rates that brushed 10 per cent appeared to dissipate the stagnation and instability of previous decades (see Figure 1 below).

Imports reached unprecedented levels, financed by the inflow of foreign funds which offset a rising trade deficit. Exports grew, too. Through Mercosur, the government sought closer links with Brazil; the lower tariffs established under the 1991 Treaty of Asunción soon made this Argentina’s largest foreign market. By 1994 exports to Mercosur, led by automobiles, had risen by 70 per cent; they totalled 30 per cent of all exports. [11] The administration also pursued closer links with the leading western powers, shelving the dispute with Britain over the Malvinas in order to smooth relations with the European Union (during his election campaign, Menem had bragged about reinvading the islands). Foreign Minister Guido Di Tella pledged ‘carnal relations’ with the US, bluntly explaining as he quit the Non-Aligned Movement in 1991: ‘Our government’s exclusive centre of interest is the United States. As a complement to that interest we will maintain relations with Western Europe. The rest of the world does not exist.’

Decentralizing the state

Buoyed by economic growth and foreign investment, Menem embarked on his decade-long dominance of Argentine politics. Close relations with the mainly Peronist provincial governors enabled the president to cultivate support throughout the country, while giving him an easy ride in Congress. Menem’s diffusion of patronage from the centre to the provinces bore a strong resemblance to the political system of the liberal era under the PAN; the term ‘league of governors’, coined in the 1870s, returned to vogue. As in the late nineteenth century, the governors exercised a growing influence on Congress, through personal—and sometimes nepotistic—links. If Perón had once talked of creating an ‘Argentina Nueva’, ‘Old Argentina’ better characterized the aspirations of Menem.

The role of federal government was transformed. Instead of operating as an ‘interventionist state’, its main function now consisted of raising revenues and passing them on to the provinces through the system known as coparticipación. Responsibility for health and education was also decentralized—the reforms placed more than 180,000 teachers under provincial jurisdiction. In the process, the federal government shed more than 200,000 jobs between 1990 and 1992—although around 40 per cent of these were transferred to the provinces. Decentralization attracted little criticism at the time; the provinces had plentiful access to coparticipación funds and rediscounts from provincial banks. As a World Bank study reported in 1993: ‘Provinces now have most responsibility for . . . such social services as education, health, security and housing. Improving the efficiency of the delivery of these provincial social services could be one of the most effective ways to improve the standard of living in Argentina.’ [12]

Oligopoly buy-outs

Privatization dominated Menem’s agenda. Since the Perón era, the federal government had operated a broad range of nationalized corporations and state utilities. Pressure to distribute these to private capital had begun under Martínez de Hoz but progressively increased under Alfonsín, strengthened by the claim that subsidies to state companies amounted to $4 billion in 1989. Proponents claimed that privatization would lead to higher levels of investment, access to new technology and improved efficiency. In reducing the need for state subsidies, it would eliminate the main cause of inflationary fiscal deficits. A booming private sector would generate new sources of employment, as economic growth surged. Opponents, including right-wing nationalist remnants of the junta, stressed the need to protect Argentine assets from acquisition by foreigners, and the deleterious effects on jobs. But the instability, stagnation and hyperinflation of the 1980s had been so acute that Menem initially faced little opposition. He had the support of the Radicals and was, in any case, equipped with his emergency powers. The trade unions were mollified by early retirement schemes, generous by the standards of a developing country, and equity stakes in privatized companies.

Largely pushed through during Menem’s first three years in office, the programme acquired vast scope, affecting the most basic sectors of the economy: oil, communications, power, utilities and the media. Between 1990 and 1994, it hugely stimulated the inflow of foreign investment, including the repatriation of some of the billions of dollars deposited abroad by Argentines. Many small savers, too, became stockholders in newly privatized enterprises. Pension reform, which introduced the option of a private or state social-security plan, also increased the number of micro-investors—while making a significant hole in state finances. Menem was garlanded with praise by the IMF and World Bank, who gave him much hands-on assistance. Privatizations eventually raised some $31 billion, almost all of it before 1995. [13] The revenue was largely used to buy down the foreign debt and to eliminate the fiscal deficit; although both would prove only temporary achievements.