To most foreign observers, Argentina’s economy is an enigma. Rich in natural resources, with a well-educated populace and modern infrastructure, for most of seven decades it has lurched from crisis to crisis, with the notable exception of the stable, prosperous 1990s. In late 2001 it stunned the world and even many Argentines by defaulting on part of its US$141 billion foreign debt, triggering a political and economic meltdown comparable to the Great Depression of the 1930s. In the first quarter of 2002, the economy shrank 16.3 percent, marking 14 consecutive quarters of contraction.
Argentina actually emerged from World War II in an enviable position, but the government of the charismatic General Juan Domingo Perón and its successors squandered enormous budget surpluses from agricultural exports on bloated state enterprises that, in collusion with corrupt labor leaders, became industrial dinosaurs impossible to reform. Then, during the 1970s and 1980s, large loans destined for massive public works projects filled the pockets—or Swiss bank accounts—of the nefarious generals and their civilian collaborators who ruled the country.
Corruption and deficit spending resulted in hyperinflation that reached levels of 30 percent or more per month. Shortly after taking power in 1989, President Carlos Menem’s administration became the first Argentine government in recent memory to tackle the inflation problem through Economy Minister Domingo Cavallo’s “convertibility” policy; this “currency basket” fixed the peso’s value at par with the U.S. dollar, and required the government to back every peso printed with a dollar or other hard currency.
Selling off unprofitable state enterprises such as Aerolíneas Argentinas, the state telecommunications enterprise Entel, and most of the extensive railroad networks made convertibility possible. Inflation dropped to zero, and after an initial glitch, there was steady economic growth, but the 1995 Mexican crisis and a subsequent Brazilian devaluation that reduced Argentine competitiveness led to increasing unemployment and recession. After a brief recovery, convertibility proved to be an economic straitjacket that, by the De la Rúa administration’s second year, was unsustainable.
In a desperation move, De la Rúa reappointed Cavallo to the Economy Ministry, but a run on bank deposits brought severe restrictions on withdrawals, known collectively as the corralito (literally, “little fence”), whose unpopularity triggered Cavallo’s resignation and De la Rúa’s downfall. De la Rúa’s successor, Eduardo Duhalde, made things even worse by eliminating convertibility, pesifying dollar savings accounts at a 1:1.4 rate, and floating the peso so that those accounts soon lost most of their value. At the same time, in a classic case of Argentine “crony capitalism,” the caretaker president pesified dollar debts at a rate of 1:1, benefiting the large industrialists who were his political base.
With devaluation, according to the Economist Intelligence Unit, in less than a year Buenos Aires went from the world’s 22nd most expensive city (of 131 surveyed) to the 120th. As the dollar-to-peso ratio plummeted from 1:1 to 1:3.5 in only a few months, citizens with the discipline to save saw their frozen wealth evaporate; those who had accumulated large debts saw their burdens reduced. Devaluation also meant the return of inflation—about 25 percent for 2002—though it failed to reach the nightmarish 1980s levels because banking restrictions limited cash in circulation. It dropped to about 4 percent in 2003, but exceeded 12 percent in 2005 and probably reached at least 15 percent in 2009 (though the government, which has intervened in the state statistics agency INDEC, claims it is only around eight percent).
In theory, a devalued peso should make Argentine exports more competitive, but it’s never quite that simple. The Duhalde administration, for instance, slapped an export tax on all profits over US$5 million. His populist successor Kirchner went so far as to prohibit beef exports to maintain low domestic prices, and his successor (and wife) Cristina Fernández de Kirchner slapped such high taxes on soybean exports as to discourage production in a time of record prices—thus, counterproductively, reducing government revenues.
In 2002 the Argentine GDP contracted by more than 11 percent, but after 2003 it has averaged 9 percent growth (from an admittedly low base) for several years. Despite the recovery, Kirchner tackled the country’s monstrous US$185 billion debt by unilaterally declaring a “haircut” of some 35 percent; he then used a third of Argentina’s foreign currency reserves to pay off its obligations to the International Monetary Fund and thus avoid the IMF’s stringent budgetary constraints. In 2008, meanwhile, Fernández de Kirchner confiscated private pension funds to compensate for revenue shortages, and in early 2010 she precipitated a political crisis by trying to fire independent Central Bank president Martín Redrado and use part of the bank’s reserves to pay foreign debt.
It’s not that Argentina doesn’t have money, but much of it is not in Argentina—by some estimates Argentines hold more than US$100 billion overseas, with another US$20 billion in the country but “beneath the mattress.” According to Uruguay’s Central Bank, Argentine citizens’ deposits in that country increased by more than 20 percent in 2009, and growth rates within Argentina slowed considerably.
In the long run, economists such as Arturo Porcezanski believe the only way to stabilize prices is to adopt the dollar as Argentina’s currency, as “any effort to convince Argentines that the peso is worth anything are in vain. They only have faith in the dollar.” In a similar vein, Cavallo remarked that “forcing Argentines to save in pesos would be as difficult as forcing them to learn to speak Chinese instead of Spanish.”
This, of course, has long been the case—for many decades, Argentines have speculated on the dollar in times of crisis. In the 1970s, when Montoneros guerrillas headed by Rodolfo Galimberti kidnapped impresario Jorge Born, they demanded and got a ransom of US$60 million—at a time when that was real money. In an only-in-Argentina scenario, the pardoned Galimberti later became the business partner of the man he abducted.
© Wayne Bernhardson from Moon Argentina, 3rd edition