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world’s attention is riveted on the United States economy,
as the financial crisis in the global superpower promises
a depression within that country and threatens economic
growth everywhere else. But as crisis management in
the US comes into play with the huge proposed government
bailout of troubled banks, it is interesting to look
at how other financial crises in less powerful countries
have been managed. The details of the plan to contain
the financial turmoil in the US are still emerging,
but it is clear that it will involve a very large draft
on US taxpayers, both present and future, and rely on
resources from other countries, including developing
Asia.
But most other countries that have financial crises
are not so fortunate as to be able to make the rest
of the world pay for their problems. Especially in developing
countries, a financial crisis is usually a double whammy,
as internal bank failures and stock market collapses
are compounded by the external flight of capital and
associated collapse of the currency. And then (once
again unlike the US at present) the governments of these
countries in the throes of financial crisis have to
put up with (largely mistaken) advice from the IMF and
similar organisations, who insist on ramming down more
free market medicine on economies that have been destroyed
by reckless liberalisation.
Argentina was one such country in 2001, as one of the
most severe financial crises to hit any emerging market
caused a precipitate decline in output and employment,
doubled poverty rates within a year and caused huge
political instability such that no fewer than six governments
were installed over two years. The policies imposed
by the IMF only served to accelerate the economic decline
and push the country into an apparently endless downward
spiral. By 2002, half of the population was living below
the official poverty line.
Yet, after the government of Nestor Kirchner came to
power in 2003, there has been a remarkable recovery,
which made Argentina the fastest growing economy of
the developing world after China in the past four years,
with annual rates of real GDP growth in excess of 8
per cent. The recovery was all the more noteworthy because
it was based on very different economic principles from
the neoliberal model that had governed Argentine policy
making in the 1990s, and which continued to be supported
by the IMF and the major external creditors.
The IMF plan was for Argentina to go in for further
privatisation of public assets and more deregulation,
along with maintaining very high real interest rates,
in the hope of “restoring investor confidence” and once
more attracting foreign capital into Argentina. Instead,
the Kirchner government stopped bothering about placating
foreign investors, and directed its attention to domestic
producers. It used a stable and competitive exchange
rate regime to ensure that domestic production revived
and grew. It focussed on improving the consumption of
ordinary people and reducing poverty. It sought to provide
basic (but privatised) services at a more accessible
rates, often through renationalisation or controls on
pricing of utilities. Significantly, the government
also took a hard line – which ultimately proved very
effective – with Argentina’s external creditors, forcing
a majority of them in 2005 to accept a debt write-off
agreement that effectively cancelled 65 per cent of
the value of their outstanding debt.
The neo-liberal perception, widely touted in the international
press at the time, was that this would spell complete
doom for the economy in international markets. The new
policies – according to the proponents of the “Phoenix
Plan” group that emerged after the crisis - envisaged
a renewed role for the state in re-structuring the economy
in the direction of greater transparency and efficiency,
moving towards a welfare state even in the much more
difficult context of contemporary capitalism. Obviously
all this was anathema to those wedded to the neo-liberal
model, as well as to its beneficiaries in international
finance, who predicted continuing and even more devastating
economic collapse in Argentina as punishment for the
move away from economic orthodoxy.
Yet this did not happen, and if anything the economy
went from strength to strength. It is true that the
government could not borrow from international bond
markets, but it was able to find other investors (including
the Bolivarian Republic of Venezuela) to hold its public
debt. Foreign direct investment also started coming
back in as the economy grew, and amounted to about $4
billion a year, around the same level as in the market-friendly
1990s. And most important of all, the continued growth
in output was also associated with employment growth
and diversification.
How did this miracle come about? The conventional wisdom
is that this was all due to exports of agricultural
commodities, and that Argentina simply benefited from
the boom in global primary commodity prices. It is certainly
true that Argentina is a major exporter of wheat, beef
and now soya bean, and that these exports soared in
both quantity and value. But exports have accounted
for only around 13 per cent of the economic growth of
the past four years, and cannot be held solely responsible
for the recovery.
Rather, it was the government’s ability to manage the
boom to diversify the economy and direct investible
resources to other domestic sectors that was the key.
Throughout this period, the exchange rate was maintained
at a level that not only encouraged exports but – more
importantly – discouraged imports and allowed domestic
producers to sell in the home market. This produced
a revival of many labour-intensive traditional industries
that were badly affected by the earlier high currency
regime, such as textiles and metal machinery. It also
led to the emergence of newer activities, including
services such as tourism and Spanish software delivery,
which benefited from the cheaper peso.
Meanwhile, the government was able to gain at least
some part of the rents from the sharp increase in world
agricultural prices by imposing an agricultural export
tax of 25 per cent. This tax has to be seen in the specific
context of Argentine agriculture, which is dominated
by large farmers who are either themselves landholders
or corporate businesses who cultivate with the help
of hired labour on land taken on lease from small owners.
A tax on agriculture (which is otherwise untaxed) in
this context, in the form of the export tax, therefore
is a means of income redistribution. The revenues from
this tax in the period of high world prices allowed
the government to increase its own spending in important
areas such as education, health and anti-poverty programmes,
and still maintain a primary fiscal surplus.
This very heterodox economic approach paid rich dividends
until early this year. Cristina Fernandez, wife of Nestor
Kirchner and herself a noted Senator, easily won the
Presidential election on the basis of widespread public
support for these economic policies. And the impressive
success of this strategy was underlined by the fact
that the growth was accompanied also by relatively stable
inflation rates, rising employment rates and a dramatic
reduction of poverty.
Yet the recent past has been much more troubled. Two
major problems have emerged in the past few months,
creating some amount of political instability and resentment
against the government, despite all its other successes.
The first is the battle with farmers, as the government
attempted to introduce a variable export tax rather
than a flat rate. Since this unfortunately coincided
with the global decline in agricultural prices since
March, there was very vociferous protest from farmers
who are a strong and powerful lobby. Ultimately this
variable tax, which is otherwise a good policy in Argentina’s
specific economic context, had to be withdrawn.
The second problem is one that directly affects much
greater segments of the economy, including the ordinary
people who have been beneficiaries of the boom. Inflation
has been running high especially for the past year,
but the official rate of inflation has been suppressed
through statistical jugglery. Thus, while the official
rate is now about 9 per cent, unofficial estimates suggest
that in actual fact both wholesale and consumer prices
are rising at the very high annual rate of 25 per cent.
This attempt to conceal the actual rate of inflation
is both bizarre and wrong-headed, since it obviously
cannot succeed it preventing people from realising what
prices they are paying, and because it then distorts
all the other measures that the government itself uses
for its economic policies. Thus, those workers who are
able to negotiate on the basis of the higher perceived
rate are able to maintain their real wages, but public
sector workers whose wages are calculated on the basis
of the official consumer price index suffer declines
in real wages. The holders of inflation-indexed bonds
also suffer. Most of all, of course, such a strategy
reduces the credibility of the government not only in
the eyes of some possibly unreliable investors, but
for its own citizens.
But this is a problem that can be relatively easily
dealt with, if the government decides to recognise the
true inflation and then do something about it. It is
clear that subsequent inflation control will require
other measures, such as an incomes policy, but for this
is likely to be much political support among ordinary
people.
So the current problems in Argentina are tractable,
especially in the context of the still growing economy.
This is worth noting, because not only did the economy
recover fairly quickly from a very severe crisis, but
it did so by implementing heterodox measures that involved
controlling capital and improving the consumption of
the poor. This is likely to be an instructive contrast
to both the unfolding crisis in the US and the measures
that the Bush regime will take to deal with it.
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