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Al-Ahram Weekly 4 -10 February 1999 Issue No. 415 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 4 -10 February 1999 Issue No. 415
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Book Fair Economy Opinion Culture Features Living Travel Sports People Time Out Chronicles Cartoons Letters It takes two to tango
By Hisham El-Naggar *A lame duck president who can't stand his own party's most favoured candidate to replace him in this year's elections, a central bank governor whose lack of vigilance is widely believed to be responsible for a couple of "unnecessary" bank failures, and an opposition which appears to be hopelessly hooked on the stable peso which is the current government's crowning achievement: this is the cast of characters who will have to shepherd Argentina through what seems increasingly like a year of living dangerously.
The country was already braced for a period of political uncertainty as it came to seem increasingly probable that Carlos Saśl Menem, president since 1989, would at last bid his post a reluctant -- albeit perhaps only temporary -- farewell. The country's constitution explicitly prohibits a president from holding power for more than two consecutive terms. What this means is that change -- a frightening concept for a country where it has usually spelt instability, violence, repression or a combination of all three -- is now virtually inevitable.
Menem has presided over the most radical economic transformation in Argentina's history. Once a by-word for hyperinflation and economic stagnation, Argentina now has one of the world's lowest inflation rates (about one per cent annually) and its economy has grown at an average annual rate of well over five per cent since the beginning of the nineties.
For the average Argentine, however, the picture is not quite so rosy. Unemployment has never been higher (it now stands at 13 per cent, after having peaked at 18 per cent) and, although wages are quite high in dollar terms (making the country's products uncompetitive in international markets), the purchasing power of the average worker's salary is still so low as to make him or her (almost) nostalgic for the bad old days.
Where did all the money go?
One of the key characteristics of "menemismo" has been an almost grotesquely unequal distribution of income, which is squeezing the middle class while swelling the ranks of the poor and the coffers of the rich. A particularly mordant (if apocryphal) remark was attributed to a millionairess not known for her social sensitivity: "I don't understand what the poor are complaining about. Why, their numbers are swelling even as we speak."
Rumours of corruption and cronyism are so rife that the government does not always bother to deny them (it does, however, insist that the opposition parties would be no less corrupt if they had the chance). Particularly troubling is the disproportionate market power wielded by the private (and mostly foreign-owned) monopolies created by the privatisation of public services, whose well-nigh extortionate charges encounter little resistance from government regulators.
The key to Argentina's success -- and also to many of the problems still plaguing its economy -- has been the government's policy of pegging the peso to the dollar. The policy (known as "convertibility") goes beyond a mere fixed exchange rate policy, for the convertibility law obliges the government to back all pesos in circulation 100 per cent with dollar reserves.
This amounts in effect to something like the gold standard, with dollar balances replacing gold ingots as the cornerstone of currency stability. As a result, every balance of payment deficit, which entails the loss of foreign reserves, inevitably leads to the destruction of the money supply and, consequently, recession.
This is alarming when one considers that Argentina has been suffering from chronic current account deficits (the result of its overvalued peso and the massive burden of servicing its mounting foreign debt). Up till now, these deficits have been easily offset, as international lenders, impressed by the country's relative fiscal discipline and its investor-friendly business environment, have been ready to extend loans to the country on fairly favourable terms.
But now Argentina has woken up to an unpleasant New Year surprise: Brazil, its neighbour and major trading partner, is in dire straits. The exact impact of this caipirinha hangover (named after the powerful cocktail that is Brazil's answer to Mexico's tequila slammer), which has seen the Brazilian real plummet faster than anyone expected, remains to be seen. For Argentina, however, it is likely to mean trouble.
The steep devaluation of the currency of a country's major trading partner inevitably puts pressure on the country's own currency. Argentina had come to depend on its giant neighbour's voracious appetite which, coupled with an equally or even more overvalued currency, made it an ideal market for Argentine exports. Now, overnight, it appears the Brazilian bonanza is over. Indeed, given the (relatively) free flow of goods within Mercosur, the trading bloc to which Argentina and Brazil belong, many Argentine producers can expect serious competition from cheaper Brazilian imports.
Nor is that all. In a superficially globalised world, where top financial decision-makers cannot be expected to remember that one country's set-up can be quite different from another's, it is hard for mighty -- and highly visible -- Brazil to sneeze without grounding Argentina with pneumonia. The capital flight which condemned Brazil to devaluation could well be carried south, and Argentina's once sanguine creditors may contract a bad case of cold feet simply through an unnecessary association of ideas.
The fact remains, however, that Argentina is not Brazil. A first key difference is that Argentina was traumatised by hyperinflation in a way Brazil (sheltered by 100 per cent indexation) never was. Whereas in Brazil there has always been a strong lobby in favour of devaluation so as to regain competitiveness in world markets (namely, the industrialists of Sao Paolo), the very idea provokes an almost universal fear in Argentina.
So strong is the conviction among Argentines that devaluation can only mean a return to hyperinflation, that even those who have fared rather poorly under Mr. Menem's economic regime (mainly the middle class) are determined to avoid such a step at all costs.
A second key difference has been the willingness of most voters to accept considerable sacrifices in order to avoid devaluation. Again and again, the Argentine Congress has swallowed the IMF recipe of anti-growth policies, often with the tacit support of the opposition, in order to avoid the loss of international confidence that could lead to pressure on the peso.
And now comes the most daring insurance of all against devaluation: a proposal by the Argentine governor of the Central Bank to ditch the peso altogether in favour of the US dollar.
The advantage of this proposal is that it will, ipso facto, lock in the convertibility plan and eliminate all possibility of a devaluation. Nor are the drawbacks -- in particular the total loss of control over monetary policy -- as unpalatable as they might seem at first sight. Despite a reputation (wholly undeserved, as any foreigner who knows Argentina and its people well can attest) for haughtiness, the Argentines have shown themselves extremely accommodating to the realities of globalisation, accepting their position as a not particularly big economy (in a system which has humbled several economic giants) with exemplary resignation.
But the costs do not stem only from the possible damage to national pride. Being part of the dollar zone could bring benefits to Argentina as long as potential competitors, in Latin America and elsewhere, follow its example and join up too. If they do not, Argentina could find itself one of that select band of countries which have voluntarily deprived themselves of the option of shielding their economy from international crises through an adjustment of the exchange rate.
This means that crises which might bring inflation to other lands could sentence Argentina to lengthy and deep recession. It also means that key decisions affecting Argentina's economy would be made in Washington, with little or no input from Buenos Aires.
Of course Argentina, that most European of Latin American countries, may be hoping to remodel the continent by following the example of "Euroland". But, without adequate guarantees from a US government which is not used to having to accommodate the internal problems of its southern neighbours, it could well end up in a situation more akin to that of those less than enviable African countries, which abandoned their own currencies for no greater prize than the CFA franc.
* The writer is an economist residing in Buenos Aires.
