From Economic Reform “Success Story” to “Failure Story” in Argentina

The purpose of this story is to know from those familiar with Uganda’s economic policy whether there are parallels with the situation in Argentina between 1990 and 2003. Like Argentina, NRM government adopted and implemented religiously the Washington Consensus conditionality with strong IMF backing from 1987 to 2009 when the Consensus was abandoned. This would help to have an idea about Uganda government’s plans to deal with the IMF following the launching in September 2009 of a new development plan along Keynesian model of state active intervention in the economy.

Countries like Argentina, Ghana and Uganda that followed the Washington Consensus conditionality religiously with strong external backing performed remarkably well initially. They were graded as ‘star pupils’ or ‘success stories’ to be emulated by others and their leaders were garlanded for their boldness and consistency through thick and thin. In the end they failed. As Uganda and Ghana cases have been covered already in my book titled Uganda’s Development Agenda in the 21st Century (2008) this story will focus on Argentina beginning with the government of Carlos Menem who was elected president at the end of 1989 and ending with the government of Nestor Kirchener who was elected president in 2003 and his initial thoughts on Argentina’s economic policies and external support.

Menem began the 1989 presidential campaign when the economy was already in trouble with a monthly inflation rate of 200 percent and high external debt. He promised to increase living standards of all Argentines if elected, implying that he might default on the external debt. Voters listened, heard and liked his message and he got a landslide election victory.

Upon election, Menem reversed his popular pledge, stressing pragmatism as the best policy for Argentina. His government would adopt World Bank and IMF policies or the Washington Consensus. Consequently he fully embraced the doctrines of free market and laissez-faire capitalism. To realize this goal he filled the cabinet with opponents of state intervention or the Keynesian development model. With a majority in both houses of Congress, he easily got emergency powers to formulate economic policy by decree. He swiftly called for economic liberalization by eliminating barriers to trade and capital flow; privatization of public enterprises; implementation of labor flexibility to allow employers to hire and fire and adjust wages as appropriate without interference of trade unions; reduction in social-welfare services and retrenchment of public servants to balance the budget. Like in other adjusting countries, Menem’s overall goal was to fight inflation at all costs including galloping unemployment.

The global recession of the early 1990s particularly in developed economies caused funds to flow to emerging markets including in Argentina. Menem’s policies stabilized government expenditures and brought down inflation making Argentina an attractive place to do business. She became the fourth largest recipient of foreign funds in the world by the early 1990s.

Foreign funds grew from $3.2 billion to $11 billion and to $10.7 billion in 1991, 1992 and 1993 respectively. National and regional polls endorsed his policy making Argentina a model of neo-liberalism and a confirmation that globalization works. The economy grew at 10 percent in the early 1990s and imports reached unprecedented records paid for by foreign funds which offset rising trade deficits although exports rose too. Menem’s government quit the non-aligned movement (NAM) of developing countries and moved into Western Europe and the United States camp.

Menem’s initial achievements won him the hearts of Bretton Woods Institutions especially the IMF, and non-state sectors on Wall Street. The managing director of the IMF praised the government for high GDP growth rate and inflation control. But there was no shift in the structure of the economy which remained essentially an exporter of raw materials particularly of beef and wheat.

The government’s decentralized strategy was praised by the World Bank. It reported in 1993 that provinces had assumed most responsibilities for social services including health, education, social security and housing. The delivery of services had improved paving the way for raising living standards. In a 1996 report, Goldman, Sachs & Co hailed Argentina for adhering to Washington Consensus prescriptions. Although pegging the peso to the dollar through thick and thin is not a Washington Consensus requirement, Argentina was congratulated for a job well done.

However, these remarkable achievements in GDP growth and inflation control were accompanied by great pain. Employment in privatized industries alone shrank in half by 1994. Ipso facto, poverty increased from 21.6 percent in 1994 to 29.4 in 1998. The benefits of economic growth were disproportionately distributed with the upper class gaining the most. Argentina that had hitherto boasted of having the least inequitable income distribution in the whole of Latin America had joined the club of countries with skewed income distribution. And by 1998, real monthly incomes of Argentines in the professional category were 53 percent higher than in 1990. On the other hand, the incomes of the working class category increased less rapidly while those in the unskilled categories had reversed by mid-1990s and stood at 2.7 percent lower in 1998 than in 1990. Economic growth was driven more by consumption than investment. And the few investments went to large-scale and labor-saving enterprises while small and medium industries that create jobs failed to grow for lack of access to credit, technology, skilled human power and markets – the latter because of imports of cheaper products.

Argentina pegged the peso to the dollar to encourage domestic savings, attract foreign investment and help to repatriate Argentine funds from abroad. Through this arrangement, there would be a durable credit supply which would encourage higher consumption spending and boosting manufacturing and other activities including construction. The overall result, it was argued, would be the taming of hyperinflation.

The peso convertibility encouraged the newly privatized enterprises to run up large foreign currency debts, confident that they would be repaid easily; middle-class citizens borrowed heavily and invested in real estate and automobiles. The poor joined the bandwagon with a focus on small-scale hire-purchases. As long as one peso equaled one US dollar, the Argentines had nothing to worry about. Any suggestion of devaluation would be extremely unpopular.

Carlos Menem’s re-election to a second term in 1994 coincided with a sharp increase in US interest rates forcing capital flow out of Argentina and thereby threatening banks and currency convertibility. The economy headed into a recession causing unemployment to rise from 12 to 18 percent in six months. The economy contracted by 7.6 percent between the last quarter of 1994 and the first quarter of 1996.

Fortunately, with sufficient foreign currency reserves and a slight lowering of US interest rate the country weathered the storm. But the cost of financing budget deficit increased from $1.3 billion in 1995 to $5.6 billion in 1996 marking the beginning of external debt spiral that culminated in a massive default of December 2001.

Furthermore, revenues from privatization of public enterprises got exhausted at a time when provincial leaders were demanding more resources to help address the challenges of rising unemployment and declining standards in healthcare and education. Foreign investments stagnated and were made worse by a further increase in US interest rates which, in turn, increased debt service costs. Despite these developments, government would not devalue the peso because of political pressure from the middle class that did not want its savings depleted. This position was supported by the IMF and US Treasury wishing to uphold Argentina’s economic reform performance that won international support. IMF which did not want the peso convertibility altered provided funds for its survival. In spite of the IMF support, the Economy Minister Cavallo resigned in mid-1996. He was replaced by Roque Fernandez.

Meanwhile domestic support for the Washington Consensus and Menem’s government began to drop. The president’s attempt to make constitutional changes to enable him run for a third term in 1999 was frustrated by charges of corruption in his government. There were allegations that government officials were taking bribes, siphoning government funds for private use and even selling illegal arms and overall abuse of power.

Meanwhile, as he prepared to run for a third term, Menem pumped a lot of money into circulation raising the federal deficit to a tune of $7.1 billion in 1999 alone while the nation’s deficit rose to $11.8 billion. The total public debt rose to 47 percent of GDP, up from 41 percent in 1998.

Sensing political troubles for Menem and his party, Radicals, the oldest party in the nation, formed a coalition (the Alianza) with Fepaso, the youngest party, to wrestle power from Menem. Disgusted with the rot in Menem’s regime, voters handed victory to Alianza and Fernando de la Rua became president in October 1999.

Surprisingly, like his predecessor, de la Rua adopted free market policies and maintained convertibility of the peso. With IMF’s backing, the new president announced that he would cut budget deficits. He pledged to raise $2.0 billion through a tax increase and $1.4 billion through budget cuts. These actions worsened unemployment that rose above 14 percent, triggered social unrest and labor strife. Disappointed, many Argentines applied for visas to leave the country. GDP fell for a second consecutive year in 2000, tax revenue continued to stagnate and government’s interest on debts continued to rise topping 50 percent of GDP by the end of 2000.

Meanwhile the government continued to borrow on international markets. From January to September of 2000, it borrowed nearly $6 billion by selling dollar-denominated bonds at annual interest rates of between 11 and 12 percent. It also borrowed another $4 billion by selling euro-denominated bonds mostly to Europeans at an annual interest rate of between 8 and 10 percent.

This borrowing afforded Argentina a breathing space by allowing the government to fund its deficits. Meanwhile a stagnant economy raised fears of an impending recession.

As a precautionary measure, the government approached IMF for assistance and got $14 billion. The World Bank pledged another $6 billion. However, the rescue package did not improve economic performance and social services. Congress therefore rejected proposals for further budget cuts forcing the Economy Minister to resign. The new minister pushed a program to end free university education hoping Congress would go along since free education benefited the students mostly from well-off families. The minister underestimated badly because the proposal turned out to be very unpopular forcing him to resign in less than three weeks on the job.

The economy continued to deteriorate and on December 19, 2001 thousands of demonstrators poured into the streets of Buenos Aires destroyed property including the municipal building. The demonstrations are believed to have been triggered by IMF’s decision to suspended loans because the government had failed to meet its conditions on public spending cuts. President de la Rua vowed to re-establish order. He declared martial law which had the opposite effect. Demonstrations spread to all parts of the country forcing Cavallo who had been reappointed Economy Minister to resign a second time because Congress had refused him to cut government budget as required by the IMF. The president resigned shortly after.

He was replaced by Ramon Puerta who did not stay long. He was replaced by Rodriguez Saa on December 23, 2001. He suspended payment on the government’s debt reasoning that the problem was that priority had been given to foreign debt at the expense of the people of Argentina. This action did not end demonstrations and he was forced to resign after one week in the presidency. Edwardo Camano became the next president. Feeling much political heat, he quickly convened a special session of Congress to elect a new president. On January 1, 2002 Eduardo Duhalde was elected.

On January 6, 2002 Congress passed legislation ending the convertibility system and fixing the peso at a rate of 1.4 peso per US dollar with an allowance to let the peso float when appropriate.

In response to these dramatic changes, the new Economy Minister Jorge Remes declared, “We are in collapse. We are broke”. In July 2002, the political, economic and social situation had not improved. The president believed that the country needed an elected rather an appointed president. He scheduled elections for March 2003. Menem tried to contest but his luck had run out and he retired from politics altogether. Thus, within a very short period Argentina had witnessed the unprecedented coming and going of five nominal heads of state. The governor of Santa Fe who had an interest in contesting the presidency declined to declare his candidacy unless he obtained IMF’s endorsement. Nestor Kirchener won the presidential election in 2003.

To conclude, Argentina moved from IMF “success story” in the early 1990s to IMF “failure story” in the early 2000s. Many commentators believe that IMF inflexible conditions and preferences for external creditors contributed to Argentina’s problems and eventual default in 2002.

Nestor Kirchener upon becoming president commented that IMF conditions were too onerous. Besides tight fiscal and monetary policies, IMF was seen to favor external creditors over developing countries and the welfare of their peoples. “What is interesting in the case of Argentina is that it was willing to pay a price for refusing to deal further with the IMF – the new loans it is getting from Venezuela must be repaid at higher interest rate than the rate on its IMF loans… Whether its advice was good or bad, the arrogant, high-handed way the IMF has interacted with debtor countries has been atrocious and so it was resented” (NPQ Spring 2006).

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