17 - 23 January 2002
Issue No.569
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Al-Ahram Weekly Online 17 - 23 January 2002 Issue No.569 |
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Parrying with parity
Argentina has defeated hyper-inflation by adhering to parity with the dollar, but this was a double-edged sword. Salah El-Amrusi* blames neo-liberalism for the ordeal
Recent riots in Argentina must have seemed familiar to millions of viewers across the world -- just another instance of people clamouring against their government over economic trouble. But this is Argentina -- one of the richest middle- income nations on earth, a country that for decades has been a leading candidate for the economic fast lane. How did a potential success story turn so sour?
In 1960, real per capita income in Argentina, measured in 1985 dollars, was $4,500, compared to $900 in South Korea and $3,000 in Japan. Despite the political and economic turmoil of the 1980s, Argentina remained fairly prosperous. In 1997, the year preceding the onset of the current crisis, Argentina's per capita income, in current prices, was about $8,600, which put it credibly on the top rungs of middle- income countries.
Argentina achieved this relative prosperity because of its natural resources, particularly agriculture, and a highly developed market economy. It is one of the top five grain-exporting countries in the world, and agriculture is not even the country's main employer.
Only 12 per cent of Argentineans work in agriculture, compared to 32 per cent in industry and 56 per cent in services. Argentina has a highly qualified workforce and an impressive human development record. Adult literacy was above 96 per cent in the 1990s. Education enrolment stands at about 100 per cent in basic education, 77 per cent in high schools, and 38 per cent in university, according to UNESCO figures.
Unfortunately, Argentina's development has been marked by an uneven distribution of income. According to last year's UNDP Human Development Report, about 17.6 per cent of Argentineans live under the poverty line. A recent report in the London newspaper the Guardian claims that 14 million Argentineans, almost 40 per cent of the population, live under the poverty line, some making less than $4 a day.
With unemployment running at 18 per cent and the government so hard up for cash that it slashed 13 per cent off the salaries of its own employees, the crisis finally had not only the poor, but also the traditionally prosperous middle classes in its grip. One clue to Argentina's current travails lies in its monetary policies. Argentina followed the traditional path of economic reform advised by the IMF, the World Bank, and the WTO. It liberalised its foreign trade, removed restrictions on FDI, privatised its state-owned projects, and enforced a rigorous fiscal and monetary policy. Argentina even took the remarkable step of enforcing a one-to-one exchange rate for the peso in relation to the US dollar.
The liberalisation of trade began unilaterally in 1988 under pressure from the IMF and its patrons, chiefly the United States. Custom duties were slashed from 45 per cent to 29 per cent, then to 12 per cent by 1994. Import quotas were removed by 1991. This path of neo-liberalism was supposed to stimulate Argentina's export. It did the opposite. Argentineans, faced with less import barriers, went into a binge of shopping in foreign markets. And, as the dollar strengthened against other currencies, so did the peso, making Argentine's exports less attractive for foreign buyers.
Argentina has a historically strong export sector based on natural agricultural, mineral and oil resources. Prior to the reforms, industry accounted for one-third of the country's exports. Agriculture was a leading foreign currency earner, and it is a highly mechanised affair, with 190 tractors per 1,000 agricultural workers, compared to 10 in Egypt. All this should have provided Argentina with a favourable balance of trade, but it did not. Argentina suffered from increasing trade deficits throughout the 1990s.
If industrialisation refers to the growth of the share of the manufacturing industry in the economy, de-industrialisation must be the term referring to what happened in Argentina. Employment in the manufacturing sector dropped by 30 per cent, from 1.17 million in 1985 to 837,000 in 1996. It climbed again slightly to reach 0.9 million in 2000. Until recession became evident in mid-1998, the drop in employment was not coupled with a drop of production or productivity, but with widespread downsizing and increased application of sophisticated technology. The irony here is that while trying hard to remain competitive abroad, Argentina has actually pursued policies that took it to near bankruptcy. The formula that was supposed to work simply did not.
And matters got worse. For the past three and a half years, production as well as employment dropped. As the manufacturing industry went on slashing jobs, the local market shrank further, setting off a vicious cycle. Imports cornered an increasing segment of the domestic market, one that should have supported local industry. As exports faced pressure from the rising peso, the downturn turned into a full-fledged recession.
The strict parity between the peso and the dollar made it necessary to provide a strong dollar cover to national currency, something reminiscent of the long-discredited gold standard. This rigorous control of the money supply was first inspired by the hyper-inflation of the late 1980s, when prices sometimes rose twenty-fold a month. The dollar virtually substituted the peso on the domestic scene. Almost 70 per cent of bank deposits were in dollars.
Most loans were taken and business deals done in dollars. Three countries so far -- Hong Kong and Bulgaria being the other two -- are known to have tried this system of strict parity with the dollar. The system may be useful in stemming runaway inflation, at least for a while, but a completely inflexible exchange rate poses an obvious problem for the balance of payments. With timely devaluation out of the question, the competitiveness of Argentina's exports eroded continually. The system favoured excessive borrowing, yet made it harder to service the loans.
Argentina has a problem with foreign debts that dates back to the pro-US military coup that toppled the Peronists in the mid-1970s. In 1990, foreign debts stood at $62 billion. In 2001, foreign debts totalled $145 billion, a figure some claim was still in the safe zone, as it amounted to a mere 50 per cent of the GDP. The problem, however, was worsened by the recession and the fact that many of the debts were high-interest, short-term ones. Currently, Argentina needs about $28 billion a year to service its foreign debts. Of these, $18.4 billion go toward capital amortisation and 9.64 billion toward interest payments.
Concerned about Argentina's ability to service its loans, the IMF pressured the government of Fernando de la Rua to cut back its expenditure. On 3 July, the government slashed wages and pensions by 13 per cent. On 5 December, the IMF, claiming that the government was not doing enough, blocked $1.3 billion in an emergency package to Argentina. On 17 December, the government came up with the austerity plan that sparked off the recent unrest. The riots were not simply an affair of the dispossessed. The traditionally prosperous, notoriously smug, middle classes joined in, and with good reason. The government of President de la Rua, in order to stem a run on the banks by panicked depositors, limited weekly withdrawals to $250. Banging pots and pans, a signal of impending famine, demonstrators from across the social and political spectrum staged riots and brought down the government.
President Adolfo Rodrigues Saa, who succeeded de la Rua, promised to default on debts, create a million jobs, raise salaries, and launch a new currency, among other measures. He stopped short, however, of removing the $250 weekly ceiling on bank withdrawals. Public anger, coupled with US disapproval, helped the Peronists drive Saa out of office, only one week after he got in. The new president, Eduardo Dohalde, is not interested in debt defaults. Still, he promised to devalue the peso to a third or even a fourth of the dollar. The measure is bound to raise prices and make the payment of dollar-based loans even harder for the Argentineans. Whether this would help the economy is anybody's guess, but unless Dohalde succeeds in convincing the Argentineans that it will, his policies, indeed his presidency, will soon be a footnote to a worsening crisis.
* The writer is a researcher with the Cairo-based Arab Research Centre.
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