ARTICLE NR 1
The country that said no: Argentina’s path out of austerity
On a daily basis, we are bombarded with messages in the corporate media that any European Union country defaulting on its debt would constitute armageddon. Greece/Ireland/Spain/choose your country must pay back the banks in full, no matter the social cost, we are told ad infinitum.
I would ask readers to contemplate the unthinkable, except for the fact that not sacrificing entire countries for the sake of investment bankers’ bonuses, speculators’ profits and corporate windfalls is not really unthinkable. Countries have done it. One that did, a decade ago, was Argentina. I hope I will not induce any sudden heart attacks, but armageddon was not the result. No fire fell from the sky.
Quite the contrary, Argentines soon were far better off by saying no to the pitiless austerity that had been imposed on them.
There are lessons to be learned, with the usual caveats that every country is different. Other countries might not do as well as did Argentina, and Argentines did suffer considerable short-term pain. But, as people in other countries today ask: Could anything have been worse than endless austerity?
As with the current economic crisis that has reached dramatic points, Argentina’s crisis had a long buildup. The military dictatorship of 1976 to 1983 laid waste to the Argentine economy while killing, torturing, “disappearing” or forcing into exile hundreds of thousands. The military had been given a free hand to launch its “dirty war,” a campaign of terror against opponents of neoliberalism augmented by two fascist groups that operated with impunity. Upon seizing power, the military handed control of the economy to a prominent industrialist and landowner, who heavily favored the largest enterprises, outlawed strikes and banned the union federation. Real wages fell by 50 percent and gross domestic product fell by double digits. The result was a dramatic increase in income inequality and a fivefold increase in foreign debt. The restoration of civilian rule and nominal democracy put an end to government terror, but not to economic policy.
Banks underwriting Argentine government bonds earned an estimated US$1 billion in fees between 1991 and 2001, profiting from public debt.* During the same years, foreign debt continued to grow, speculators inflated a stock-market bubble, social benefits were reduced, and credit cut for small and midsize businesses. Wages were cut further, first by inflation and then by a wage freeze. Argentine exports steadily became less competitive because the peso was fixed at a one-to-one rate with the U.S. dollar; Argentina could not give a boost to its exports because the fixed exchanged rate did not allow the devaluation that capitalist competition had demanded.
In conjunction with the austerity programs, Carlos Menem, who was president for most of the 1990s, sold off state enterprises at below-market prices. This fire sale yielded US$23 billion, but the proceeds went to pay foreign debt mostly accumulated by the military dictatorship — after completing these sales, Argentina’s foreign debt had actually grown. The newly privatized companies then imposed massive layoffs and raised consumer prices.
By 1997, about 85 percent of Argentines were unable to meet their basic needs with their income; the average income was less than one-half of what was necessary to meet basic needs for a family of four and the percentage of workers who were unemployed or underemployed was about 30 percent.** Because these austerity programs were implemented by a Peronist president — traditionally seen as protectors of labor and social services — working people became ideologically confused and therefore were slow to fight back or coalesce behind anti-austerity political movements. The military junta had also physically wiped out a generation of experienced activists.
An upsurge of unrest finally brought an end to the punishment of Argentines. In December 2001, the government ordered bank accounts frozen and limited the payment of wages and pensions so that the money could be diverted to making interest payments on foreign debt; the government would have defaulted otherwise. A ferocious and broad protest movement mushroomed as Argentines refused to cooperate, and the country went through five presidents in two weeks.
The people had no choice but to find solutions themselves, and did: They set up barter clubs and created a system of popular assemblies, creating dual government structures at the local level. Workers in factories that had been shut down simply took them over, restarting production and converting them into cooperatives. A new president, Néstor Kirchner, suspended debt payments.
These developments soon reduced unemployment from 50 percent to 17 percent and created a budget surplus. The outstanding debt, however, remained — had Argentina resumed scheduled payments in 2005, interest payment alone on the debt would have consumed 35 percent of total government spending, according to an analysis by Alan Cibils published in Z Magazine. Kirchner announced that Argentina intended to pay only 25 percent of what was owed and any group that refused negotiations would get nothing; in the end, Argentina paid 30 percent.
Those moves did not constitute a magic wand, and recovery was slow for many. But over the longer term, Argentina has done well — its gross domestic product nearly doubled from 2002 to 2011, representing the fastest growth in the Western Hemisphere, according to a report published in October 2011 by the Center for Economic and Policy Research.
The Center reports that:
• Poverty has fallen from almost half of the population in 2001 to approximately one-seventh of the population in early 2010.
• Income inequality significantly declined. In 2001, those in the 95th percentile had 32 times the income of those in the fifth percentile. By early 2010, that figure fell by nearly half, to 17.
• Unemployment has fallen by over half from its peak, to eight percent.
• Social spending rose from 10.3 to 14.2 percent of gross domestic product.
• In 2009, the government expanded the reach of its social programs, launching the “Universal Allocation per Child,” which resulted in significant reductions in infant and child mortality from 2001 to 2010, somewhat more than in similarly situated countries.
The Center’s report notes that “Argentina’s rapid growth has often been dismissed as a ‘commodity boom’ driven by high prices for its agricultural exports such as soybeans, but the data show that this is not true.” The value of Argentina’s manufacturing exports accounted for more than triple the value of its agricultural and forestry exports. Moreover, exports of agriculture, hunting, fishing and forestry products accounted for a steadily smaller percentage of Argentina’s economy during the past decade — those exports accounted for 5.0 percent of overall gross domestic product in 2002 as compared to 3.7 percent in 2010.
“The recovery is driven by consumption and investment (fixed capital formation),” which together accounted for more than 70 percent of Argentina’s growth during the past decade, the report states.
That success came despite Argentina still being shut out of international lending markets, having little direct foreign investment and continuing to be subject to hostility from the United States and the European Union. The E.U. this week filed suit in the World Trade Organization against Argentina over import restrictions, encouraged by the U.S. An arbitration board based in Washington has repeatedly awarded energy companies hundreds of millions of dollars because the enterprises suffered losses when the peso was devalued in 2002 and regulators refused them steep rate increases. Never mind that market forces were at work — it was the very same markets that these companies swear to live by that caused the fall in value of the peso while it was government intervention that had artificially propped up the peso’s value previously.
Economist Joseph Stiglitz, in a 2007 lecture, said of the arbitration rulings:
“It is clear that maintaining utility prices in dollars — while the rest of the economy was undergoing pesoification — would have been a huge windfall for the utilities. It would have represented a vast redistribution of wealth from the rest of the economy to the utilities — resulting in an unfair and inequitable outcome. It would have harmed the economy, depressing output even further.”
Critical for Argentina’s turnaround was defaulting on its debt, freeing money for investment and social services. Also a factor was eliminating the peso’s peg to the U.S. dollar. Valuing one peso as equal to one dollar was exactly as if Argentina used a common currency like the euro; Argentina’s currency was overvalued and all adjustments imposed by capitalist competition therefore had to be made internally — in other words, harsh austerity.
Once Argentina allowed the value of its peso to be set by market forces, the country not only saved the money that had been spent in foreign exchange markets to prop up the peso’s value (expensive market interventions maintain currency pegs, not government fiats), but the strong decline in the value of the peso made Argentina’s exports cheaper. It also made imports into the country much more expensive. From a consumer perspective that is a harsh burden but within the logic of capitalism in which Argentina had to operate it acted as a spur to internal production. If it is too expensive to buy from another country, the alternative is to make it yourself.
The need to restart production and put themselves back to work also induced workers in plants that had been shut down or were being asset-stripped to take them over. Community support enabled these workers to maintain their operations in the face of government hostility. The recovered enterprises became cooperatives that in turn were managed with community benefit in mind.
Argentina’s industry became more competitive and because many more Argentines were back to work, there was more domestic demand. Consumer demand is ultimately the driving force in a mature capitalist economy. According to the World Bank, household consumption accounted for 60 percent of Argentina’s gross domestic product, a typical figure. Under austerity, when unemployment sharply rises and those who retain their jobs are paid a lower wage, the economy contracts because people don’t have money to spend.
Working people also don’t pay as much taxes when their wages decline. Corporations and the rich are paying less taxes, too — because they refuse to pay them, much preferring to lend money at interest rather than shoulder responsibility for the society that enables them to accumulate vast wealth — so governments are forced to borrow. But as less revenue comes in, more must be borrowed, and the price extracted by the corporations and the wealthy who lend is to demand more austerity to ensure they will be repaid in full, with interest. Unemployment rises more, more debt is accumulated, the economy contracts further, and round and round it goes until working people rise up to force their government to stop.
That is what happened in Argentina in 2002. That is what is needed to happen in many more countries today.
* This and the following paragraph based on Pablo Pozzi, “Popular Upheaval and Capitalist Transformation in Argentina,” Latin American Perspectives, September 2000, pages 65-70; Colin M. MacLachlan, Argentina: What Went Wrong, pages 169-171 [Praeger, 2006]
** This paragraph based on Pozzi, “Popular Upheaval,” pages 75-80
ARTICLE NR 2
Argentina’s Model, an Alternative to Austerity
Argentina’s record levels of employment and massive reductions in poverty have little to do with exports
One of the great myths about the Argentine economy that is repeated nearly every day is that the rapid growth of the Argentine economy during the past decade has been a “commodity export boom”. For example, the New York Times reported last week:
“Riding an export boom for commodities like soybeans, Argentina’s economy grew at an average rate of 7.7% from 2004 to 2010, almost twice the average annual growth of 4.3% in Chile, a country often cited as a model for economic policies, over the same period.”
Michael Shifter, the president of the inter-American dialogue and probably the most quoted source on Latin America in the US press, wrote in a disparaging article about Argentina this week that “If the sales and price of soybean, Argentina’s principal export (mainly to China), remain high, then the country may be able to continue its path of economic growth.”
I haven’t seen any economists make the claim that Argentina’s remarkable economic growth over the past nine years – which has brought record levels of employment and a two-thirds reduction in poverty – has been driven by soybeans or a commodities export boom. Maybe that is because it is not true.
I know what you’re thinking: “Who cares?” Well, try to keep reading, because this does have implications beyond the sprawling soybean farms in the Argentine province of Cordoba.
What does it mean to have a “commodities boom”, or growth driven by the export of commodities? One possibility would be based on quantity: the production and export of these commodities grows so fast that it makes up a large part of the country’s real growth in output. Thus, as a matter of accounting, we could look at real GDP growth for 2002-2010, the last year for which we have complete data on exports, and ask, how much of this real, inflation-adjusted, growth is due to exports of commodities?
It turns out that only 12% of Argentina’s real GDP growth during this period was due to any kind of exports at all. And just a fraction of this 12% was due to commodity exports, including soybeans. So Argentina’s economic growth from 2002-2010 was not an export-led growth experience, by any stretch of the imagination, still less, a “commodities boom”.
The other possibility is based on prices: the price of soybeans and other commodity exports also rose during part of this period. This can boost the economy in various ways, even if the physical amount of exports does not increase as rapidly as the economy. If this were driving Argentina’s growth, we would expect the dollar value of these exports to have grown faster than the rest of the economy. But this did not happen either. The value of agricultural exports, including of course soybeans, as a percent of Argentina’s GDP didn’t rise during the expansion. It was about 5% of GDP when the economy started growing in 2002, and 3.7% of GDP in 2010.
In other words, there is no plausible story that anyone can tell from the data to support the idea that Argentina’s growth over the past nine years was driven by a “commodities boom.” Why does this matter? Well, as economist Paul Krugman noted yesterday, “articles about Argentina are almost always very negative in tone ― they are irresponsible, they are renationalizing some industries, they talk populist, so they must be going very badly.” Which, he points out, “doesn’t speak well for the state of economics reporting.” It sure doesn’t.
The myth of the “commodities export boom” is one way that Argentina’s detractors dismiss Argentina’s economic growth as just dumb luck. But the reality is that the economic expansion has been led by domestic consumption and investment. And it happened because the Argentine government changed its most important macroeconomic choices: on fiscal, monetary, and exchange rate policies. That is what took Argentina out of its 1998-2002 depression and turned it into the fastest-growing economy in the Americas.
Now for the world-wide significance of how Argentina’s recovery actually happened: as I and many other economists have written, the policies currently being imposed on the eurozone economies – especially the weaker ones – are similar to what Argentina went through during the depression that led to its default and devaluation. These policies were pro-cyclical, meaning that they amplified the impact of the downturn. Together with a fixed, overvalued exchange rate, they made the economy worse. By defaulting on its debt and devaluing its currency, Argentina was freed to change its most important macroeconomic policies.
If the European authorities (the European Commission, the European Central Bank, and the IMF) continue to block the eurozone’s economic recovery with senseless austerity measures, individual countries will want to consider more rational alternatives in order to restore full employment. The people of Greece, Spain, Portugal, Ireland, and other countries are told every day that they must swallow this bitter medicine, and that there is no alternative to the prolonged suffering and high unemployment that they are going through. But the Argentine experience – in reality rather than in mythical portrayals – indicates that this is not true. There are definitely better alternatives – and they have nothing to do with soybeans or commodity export booms.
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