July/August - VOLUME 10 - NUMBERS 7 AND 8
T H E U N I T E D N A T I O N S
Peronsim In a Troubled Economy
by William Steif
BUENOS AIRES, ARGENTINA -In 1945 Argentina and Canada had the same population and the same per capita income. Today, Argentina's population of 32 million is six million larger than Canada's, and Argentina's $2,400 per capita income is one-sixth of Canada's. According to Armando Ribas, a U.S.-trained, Argentine economist, "Argentina had the wisdom of inheriting the ideas that lost World War II. Those ideas were a folkloric fascism and a deep antagonism to the United States."
The victory of the Peronist Party's candidate, Carlos Saul Menem, in the Argentine presidential election on May 14, 1989 is evidence that these ideas live on. Menem, 58, governor of the small province of La Rioja, attracted nearly 48 percent of the vote; Cordoba governor, Eduardo Angeloz, 57, of President Raul Alfonsin's ruling Radical Civic Union, picked up just over 37 percent; and Alvaro Alsogaray of the Union of the Democratic Center received most of the remaining votes. In the Argentine Electoral College System, this was a clear-cut victory for Menem.
Alfonsin, recognizing the obstacles to effective rule during an extended transition, voluntarily stepped down at the end of June, well in advance of Menem's December inauguration. Nonetheless there were problems. In the month of May alone, inflation reached 70 percent, provoking widespread rioting and looting in the capital as well as the cities of Rosario, Mendoza and Corrientes.
The former president's ignominious departure stands in stark contrast to his inauguration in December of 1983 which was greeted with a sense of relief. He was championed then as a civilian ruler capable of replacing the military junta, disgraced by its costly defeat in the Falklands War (Las Malvinas in Argentina) and haunted by the excesses of the "dirty war" it had perpetrated for seven years. Alfonsin was expected to heal the wounds, put Argentina on a democratic footing and lead the country to prosperity. His administration did make headway in rectifying some of the military's abuses, but he achieved little success in the economic sector.
As the economy worsened, Alfonsin's support eroded. Public antipathy reached a peak during the 1988 presidential election campaign when graffiti in Buenos Aires was dominated by the slogan, "Alfonsin - falso y ladron" - "Alfonsin - liar and thief."
Ribas, who worked on Alsogaray's campaign, says that the country is coming to realize how inefficient the economy of the last 40 years has been. "In the 1960s, after Peron left, our economy grew 3 to 4 percent a year despite the inefficiencies." But then, in 1973, government expenditures increased from 37 to 47 percent of Argentina's $78 billion Gross Domestic Product (GDP).
"We managed to borrow a lot, overvalued our currency, and the economy collapsed in 1981 (with the world recession and oil crisis) and the lending abruptly stopped, says Ribas. "Now no one dares to reduce the level of government expenditures." The expenditures include a $2.5 billion annual loss from 300 state- owned enterprises and salaries for two million government workers, out of a labor force of just under 12 million. "At the end of the 19th century Argentina's GDP was bigger than that of all the rest of Latin America put together. Now we have Latin- Americanized Argentina," Ribas says.
An unusual feature of the Argentine economy is that despite the fact that its literate, trained labor force is nearly 90 percent urban, about four-fifths of the country's $8.5 billion worth of exports are still agricultural--mostly wheat, corn, soya and meat. General Motors and Chrysler both left the country years ago, though Ford, in a joint venture with Volkwagen, remains.
Argentina has enormous resources and none of the race problems of other Latin American nations. By the late nineteenth century, the few nomadic Indians who roamed the Argentine pampas were killed off, and Spanish, Italian and German immigrants transformed the land into a fertile powerhouse, producing huge quantities of wheat, corn and beef for export. British investment brought industrialization such as a nationwide rail system (now losing $2 million daily). The vestiges of this British activity remain although Argentina has not resumed diplomatic relations with the United Kingdom since they were severed during the Falkland's War.
The fight for Las Malvinas remains a salient feature of the Argentine political landscape. In the heat of his campaign in February, Menem remarked, "I don't know how much blood we will have to shed, but our territory will return to the Argentine people." Menem qualified his bravado the following day with a statement that he was only speaking "metaphorically." The Falklands defeat was a high price for the Argentine people to pay, but it did bring an end to the seven year military rule. The destructive legacy of the junta, however, persists; there are weekly demonstrations at the Plaza de Mayo, where each Thursday afternoon the "mothers of the disappeared" march, reminding onlookers that somewhere between 9,500 and 30,000 people "disappeared" during the rule of the latest military junta. Pro-government people use the smaller figure, anti- government people the larger, but no one disputes that the military seized and murdered thousands during the 1976-83 "dirty war."
The military still insists that those who were killed "were all Communists," but many surviving friends and relatives say this is not true. Those who opposed the junta simply "disappeared."
The desaparecidos proved to be a sticky issue for the civilian rulers after 1983. Alfonsin had to walk a fine line between seeking justice and not provoking the cornered military establishment into attempting to overthrow him.
In 1987-88 there were three military uprisings against the Alfonsin government. The military has since gained public favor by crushing a leftist revolt at La Tablada military barracks, in January. Some in Buenos Aires fear Menem will be ousted if he does not handle the economic crisis, the crux of which is the $59 billion foreign debt.
During his campaign, Menem said he would limit payment on foreign debt to 10 percent of total exports, much as the now- beleaguered president of Peru, Alan Garcia, promised in his campaign. That would limit Argentina to around $850 million in annual payments but by the end of 1988, Argentina had accumulated nearly $3 billion in interest arrears to commercial banks alone.
Finding sources of new investment poses an even greater challenge to Menem's effort to revive the economy. "The proportion of new investment in our economy has fallen from about 25 percent of GDP to 10 percent, due to Alfonsin's policies," says Pascual Santiago Palazzo, managing director of the Argentina office of a Paris-based multinational. "Therefore, there's been no growth.... The middle class lost 40 percent of its purchasing power between 1983 and the start of 1989--and it's much worse this year."
His charge that there's been "no growth" is mostly supported by the latest government figures: GDP grew 5.5 percent in 1986, 2 percent in 1987, 1.5 percent in 1988. This year, most economists agree, there will be no growth and there may even be negative growth.
"Over the past 40 years our average per capita income has gone down 11 times," says Francisco Mezzadri a Stanford-trained economist who used to work for the Organization of American States. "We lack flexibility in both our labor and financial systems. Our whole investment process has to go through a bottleneck, we can't grow because of our rigidities," he continues.
Santiago Palazzo blames government corruption for some of the problems. For example, he says, "there was supposed to be $1 billion in low-interest, long-term housing loans for the poor. But $300 million of that went to Alfonsin supporters, the politicians and their families."
According to Mezzadri, Argentina "is a country where investors face a very high uncertainty--therefore, there ought to be a higher premium for investment."
But Mezzadri says that instead, Menem seeks "an economic status quo. He wants to enforce a cooperative system where everyone keeps his share." Mezzadri believes this is unrealistic. He notes that Argentina's infrastructure is crumbling and needs increased input, not stable maintenance. "Hospitals, schools, communications, transport, shipping, they're all getting half the new investment they got five years ago." All major business here is done in dollars, but U.S. investment has tended to dry up over the past decade or two.
Instituting free market principles and ending corruption are the common solutions offered by economists and politicians here. But such posturing has done little to alleviate the crisis brought on by the austral's (Argentine currency) downward plunge in value early last February. The plunge led to a run on the banks; bank customers changed their australes to dollars, yen, Swiss francs and other "hard" currencies; then either deposited them in Uruguayan banks, a 55-minute hydrofoil ride across the River Plate estuary, or horded them.
This panic serves to illustrate one of this rich nation's worst problems, capital flight. The World Bank has estimated that private deposits outside of Argentina amount to $21 billion, and banks in Switzerland and New York have put the figure between $23 billion and $35 billion, excluding stocks, bonds, and real estate holdings abroad.
Capital flight is a vote of "no confidence" in the government and there is no World Bank or International Monetary Fund prescription that can change that fact, just as there seems to be no prescription to deal with the country's large "informal" or "underground" economy. Some estimate the worth of that "black" economy as equivalent to a third of the official GDP, all untaxed. Perhaps that's why tax collections in 1988 ran 8.8 percent below those of 1987, according to government figures.
Menem may have to look beyond the confines of his Peronist platform if he is going to lead his country out of its current economic morass. In the meantime the army bides its time.
U.S. Fortune 500 Companies Operating in Argentina