by Atilio A. Boron

Want to know the future of a country embarked on a full-scale neo-liberal experiment? Watch Argentina, because her economic and political collapse provides an unparalleled example of the consequences that can be expected to occur when a government decides to push, against all other considerations, the policies of the Washington Consensus.

It would be worthwhile to point out that Argentina is not only in the throes of a financial crisis but is also undergoing a painful and traumatic process of social disintegration and economic decline that will take years to reverse. What has happened in Argentina affects her very survival as a nation and as a civilised society.

How did a tragedy of these proportions come about? To point out, this is the final implosion of an economic orientation that the country has relentlessly pursued since the last military dictatorship. In 1976, the Minister of the Economy of the Military Junta, Mr. José A. Martínez de Hoz, proclaimed that the country had to abandon all vestiges of economic populism and interventionism. The major obstacle to the attainment of national prosperity, he argued, was the reluctance of successive governments since the mid-forties to let market forces perform the “creative destruction” so widely praised by Joseph Schumpeter.i A rapid process of deindustrialisation ensued, while financial speculation and the idea that a country could survive and prosper while betting on the “financial casino”ii became the overriding national economic policy – a policy conveniently disguised by reasserting the virtues of complete financial deregulation and liberalisation. While initially this new policy might produce certain undesirable consequences – for instance, the temporary abandonment of the ethic of hard-work in favour of a culture of unfettered financial speculation – at the end of the day it would open the country to unlimited amounts of foreign capital,and economic growth would consequently take place. As history has conclusively proved, capital came to Argentina, not for productive investment, but instead for short-term purely speculative purposes. The enshrinement of finance capital over long-term productive economic development as the guiding principle for each successive government following the defunct military dictatorship lies at the very heart of the current Argentine crisis.


The Price Paid

The consequences of this irresponsible and corrupt policy reorientation, which remained unchallenged by governments during almost twenty years of political democracy, was the financialisationiii of the economy, the inordinate increase in the foreign debt, the dismantling of the industrial apparatus, the regressive reconcentration of incomes and wealth, the transfer of various sectors of the national economy to foreign hands, and the inevitable decline and final collapse of the national state as an institution endowed with some minimal capacity for economic and social regulation.

In keeping with the financialisation of the economy, the government advocated that corporations, firms, and even individuals sell their productive assets and their personal patrimony to “invest” in short term financial schemes. It should be highlighted that these policies were supported by the so-called international financial community – another name for the huge corporate monopolies that control the world economy - with the blessings of the International Monetary Fund (IMF). The IMF was so taken with the unexpected neo-liberal convictions of the Junta that it paid no attention to the fact that its pioneering economic programme was carried out amidst the horrors of The Dirty War.


The Role of the Menem Government

But if the military regime of 1976-1983 laid the foundations of this economic paradigm, the government of Carlos S. Menem (July 1989-December 1999) took the decisive steps to bring Argentina to her current state of absolute crisis. During more than ten years in office as president, Menem continued implementation of the neo-liberal agenda with renewed vigour, which also involved privatisation of all state-owned enterprises. Public enterprises were sold at extremely low prices, allowing corporate conglomerates to gain the lion’s share of operations, while the interests of consumers and the general public remained unprotected. The President and his aides in the Executive branch, the Congress, the Judiciary, and the mass-media profited substantially from these sales. Menem continued to open up the economy through an irrational policy of commercial liberalisation and currency overvaluation that destroyed local producers, in the industrial sectors as well as in the countryside, and sent the unemployment figure to almost 25% of the economically active population – this, in a country with no memory of anything above 5-6% in more than a century.

Menem completed the financialisation of the economy by introducing, in collaboration with Finance Minister Domingo F. Cavallo (President of the Central Bank during the military junta), new norms and institutions that further liberalised financial markets, allowing speculation to run wild. Thanks to this policy, capital flight acquired legal status in Argentina, costing the country more than 125 billion dollars. If these sums had been channeled towards productive endeavours and re-development of the purchasing power of the poor, this money could have generated far greater long-term economic development.

These policies were adopted with the strong support of the international business community, the governments of the G-7, and the unqualified blessings of the major “guardian dog” of international capital: the IMF and its junior partner the World Bank. Thus, when today the IMF exonerates itself of any responsibility for the economic collapse of Argentina, Mr. Kohler conveniently ignores that at the fall 1998 Joint Assembly of the IMF and World Bank in Washington, his predecessor asked President Menem to be the Assembly’s keynote speaker along with President Bill Clinton. Menem was introduced to the audience as a president with the courage and vision to introduce Argentina to the road of unlimited progress by his total allegiance to free-market principles. People as diverse as Brazilian President Fernando H. Cardoso and the 2001 Nobel Prize winner of Economics Joseph Stiglitz have confirmed that Argentina, “did everything that Washington told her to do.” Of course, this does not exempt the corrupt Menem government of its crucial responsibilities in this tragedy, but places in perspective the no less crucial and corrupt role played by the IMF in Argentina’s collapse.


The Collapse of Neo-Liberalism in Argentina

What triggered the collapse of the neo-liberal experiment in Argentina? Of course, there is not only one factor - the whole model was unsustainable for many reasons. The perverse dynamics of endless fiscal adjustments led to the failure of public services and state regulatory capacities, a skyrocketing in the numbers of poor (today, roughly a half of the total population, for a country with no memories of mass poverty ever!), the shrinking of the domestic market, the deepening of the recessive tendencies of the economy, the de-legitimisation of government, and the growing dependence on – and vulnerability to – market forces, both national and international. But what tipped this extremely unstable situation in the wrong direction was the inability of the state to collect taxes from the rich, the large corporations, and the monopolies that owned the former state-owned enterprises. To uphold the supremacy of finance capital and to sustain a highly speculative economy that depended on a constant inflow of foreign money, the government had to obtain new loans at higher interest rates and shorter terms for repayment thereby creating an unbearable budgetary burden. The national tax base was reduced dramatically because of the recession, and yet the traditional tax privileges of the rich were maintained.

Menem’s government and his Finance Minister Domingo F. Cavallo had planted a time-bomb by rescheduling the foreign debt, something which the incredible ineptitude of the De la Rúa government (1999-2001) only worsened. De la Rúa not only discarded his electoral promise to abandon the economic policies of the Menem government but continued them with even more stubborn persistence: there were new cuts to the federal budget, the nominal salaries of all public employees (including teachers, nurses, and administrative workers) were reduced by 13 %, and a regressive tax reform was enacted that augmented the burden on the impoverished middle classes to collect funds required to pay the debt.

In the 2001 budget, the cost of servicing the debt reached almost 25 % of all public expenditure, a scandalous figure representing four times the total budget earmarked for public health, nine times the budget of the Ministry of Social Development, six times the budget of the entire university system, and 50 times the budget allocated to Plan Trabajar, a special programme to assist the poorest people with a minimal monthly wage in exchange for manual work. In the meantime, generous subsidies and transfers to large corporations and the rich continued, undisturbed by signs of the approaching storm. Former IMF official, Vito Tanzi, observed horrified that taxes on corporate profits in Argentina barely amounted to one fifth of what they were, in percentage terms, in the United States, and to one sixth in Europe. His concerns did nothing to change the IMF’s strategy in Argentina.

During the Menem years, the largest corporation in the country, the oil firm YPF - which had been privatised and sold at a particularly low price to a group of local tycoons - was resold at its market price, close to 15 billion dollars, to the Spanish Repsol conglomerate. Thanks to Argentina’s enlightened “market friendly” tax system, this massive transaction failed to generate even one penny in tax revenues. Argentines were then told that the country had to send these kinds of signals to attract the favour of the markets. Yet, if a poor person living on the outskirts of Buenos Aires were to sell a run-down car for 300 dollars, he or she would have to pay a 3-7 % tax on the total value of the transaction.

De la Rúa and Cavallo reached the end of their stint in power as relations with their foreign partners soured. Argentina’s “country risk” index skyrocketed, the money pipeline carried only complaints and demands instead of fresh cash, and the Alianza coalition government decided, one more time, to hit the middle classes by freezing their term deposits and chequing accounts, a policy disparagingly referred to as “corralito” (little crib). By the time this policy was adopted, all the big capitalists and speculators privy to inside information provided by their friends in the upper echelons of government had taken their funds out of the banks. The small savers, however, remained locked in.

There were massive protests and demonstrations in December 2001, when the middle classes came to understand that the struggles of the poor and unemployed - the “piqueteros” (picketers) who had been blocking routes for two years demanding an end to the suicidal neoliberal experiment – were the same as theirs. When both the popular sectors and the middle classes realised that the government had abandoned them, they decided to take to the streets - and so they did. On December 19th, millions went out to protest, bringing down the De la Rúa government and expelling Minister Cavallo from office.

i Schumpeter referred to capitalism as a process of “creative destruction”, with its boom and bust cycles, inherent instability, and on-going introduction of new methods of production and goods and services.

ii Strange, Susan, Casino Capitalism, Manchester University Press (1986).

iii predominant characteristic of the financialisation of an economy is the conversion of growing sectors of the economy into financial assets, and the resulting growth of financial businesses and financial markets instead of long-term productive industrial endeavours.

Dr. Atilio A. Boron is Executive Secretary of the Latin American Council of Social Sciences (CLACSO) in Buenos Aires, Argentina. His email is: aaboron@clacso.edu.ar

If the Argentine government continues with its policy of not taxing big capital and chooses to overtax the basic needs of the poor (the Value Added Tax is an exorbitant 21%, more than twice the rate applied in the OECD countries!) and overburdening the middle classes and the small firms; and if public expenditure cannot be cut indefinitely without threatening the very essentials of a civilised society – such as education, health care, justice, basic public works, defense, and security – then the only option is more external indebtedness.