Economic Meltdown in Argentina (just capitalism functioning normally)

Argentina, the one time darling of the IMF, held up as an example of how a country should stringently adhere to structural adjustment programmes, is presently standing as a shining example of how the capitalist system can not be made to work in the interest of the majority. Economists are mostly in agreement that the cause of economic meltdown in Argentina and the consequent protests and rioting were the result of three distinctive and converging economic crises.

When Economy Minister Domingo Cavallo pegged the Argentinean peso to the dollar ten years ago – on a one to one basis – he envisaged that this would end hyperinflation. Three years ago, when Brazil devalued its real, foreign investors and speculators discovered their dollars brought them bigger returns in Brazil than in Argentina. This seriously began to upset Argentina’s foreign investments and exports, as buyers of Argentina products found they could get the same next door and far cheaper.

Argentina is now in debt to the tune of $132 billion – attributable largely to far-reaching borrowing carried out during the second term of the Carlos Menem government, prior to the election of President Fernando de la Rue. The effect of the domestic and foreign borrowing was to send domestic interest rates spiralling upwards. As the debt increased, so did the interest rates, which had a knock on effect for many businesses reliant upon credit.

In the 1990s, Menem further introduced mass privatisation. This resulted in many workers being made redundant, they being surplus to requirements now that profit was higher up the agenda for the utilities and, moreover, the cost of basic services (electricity, gas, telephones) began to rise.

So, back in 1999, the Argentinean recession began, increasing in ferocity as domestic demand declined and companies began to close and unemployment increased and, because the government’s tax revenues began shrinking, Argentina’s burden of debt became all the more heavier.

In November all of Argentina’s economic woes came to a head when people, fearful their pesos would be devalued, began hurrying to the banks to exchange them for dollars whilst the one-to-one rate was still in existence. Cavallo, fearful the banks would be drained of money, issued a decree which limited withdrawals to $1000 per person per month. The effect of this was to create mistrust in the government and widespread uncertainty with people rioting and protesting on the streets, with looting reported in many cities.

One week before Christmas the riots had spread to Buenos Aries. The president declared a state of emergency and brought troops onto the streets. But his government offered no remedy for the economic crisis and this only brought larger numbers of protestors back on to the streets within 24 hours, the unemployed being joined by ‘middle class’ professionals – all taking part in the looting. When thousands of protestors congregated in Congress Square, banging pots and pans, the resignation of the president, his economic minister and the entire cabinet was almost immediate. De la Rua was determined to make one impassioned speech before he left, but with an angry crowd having none of it, he was instantly whisked to safety by a helicopter.

Tensions rose. People poured in from outlying districts, blockading motorways and erecting barricades, destroying banks and multinationals, looting supermarkets and fighting with almost 40,000 police who had been drafted into the city. When the violence had subdued, 26 had been killed.

Argentineans blame de la Rua for the crisis, citing the fact that he was the president when the crisis was deteriorating more alarmingly – as if he could control the economy! As the economy was controlling him, he had no option but to cut public spending to service debt repayments, though not as much as the IMF insisted. De la Rua, however, did enter office foolishly promising to kick-start the economy and end high level corruption. By early 2000 he had introduced £650 million worth of spending cuts and forced through eight unpopular austerity plans, which included a 13% cut in state workers’ wages. Just prior to the unrest, the government planned to further cut public spending from £34 billion to £27 billion in a further attempt to service the crushing loan repayments.

The current president is one Eduardo Duhalde, a former ‘left-wing’ senator and once upon a time investigated for the corruption his predecessor promised to stamp out. At present he plans to freeze the prices charged by foreign-owned utilities companies and put a tax on foreign owned oil companies. To protect the ‘middle class’ from currency devaluation he has offered to convert dollar loans under $100,000 into pesos, at the one-to-one rate – placing a hefty burden on banks, not borrowers - and he has further promised that cash will be set aside for the unemployed. All of which amounts to a timely game plan to placate the more volatile sections of Argentinean society.

Meanwhile, IMF top brass are in Argentina demanding, on behalf of the US and Europe, that the country does not default on its loan obligations. Outside markets are watching events carefully aware of the fact that economic crisis have tended in the past to lead to military coups and all their implications and are now mindful of granting further loans to the region.

There has been much analysis of recent events in Argentina. The general mood is that the IMF is to blame, that its structural austerity programmes are socially and politically unsustainable and that its rule book needs tearing up. What has not been said is that, like the Argentinean government, the IMF is simply a body trying to make capitalism work. And in this regard they cannot really be faulted, because as events in Argentina have revealed, capitalism is working perfectly well, for this is the only way it can work in an anarchic and chaotic manner, negligent and oblivious to the misery and suffering it creates. If a few get rich while millions lose out big style, then this is capitalism working as it only can work and as the workers – from their years of experience of living within the system - voted for it to work. If there is recession and boom and recession, then capitalism is working healthily. In Argentina, therefore, capitalism is functioning normally.

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