Argentina and the International Political Economy

Executive Summary

Throughout this study, we will focus on Argentina’s involvement in its activities of trade, investments, and financial flows as well as analyze the outcome of the economy’s role in each activity. We will make an assessment of the effects of each of these activities on Argentina’s economy through the three perspectives of liberalism, mercantilism, and radicalism. We will provide our own conclusions to whether or not Argentina should become an open or closed economy from our own separate analysis of each business activity. In viewing Argentina today, we will then make an analysis by assessing others views and perspectives on what factors have contributed to Argentina’s current economic state and what solutions economists believe will help Argentina today. We will then focus on our main goal to discover from these conclusions whether or not Argentina should become more or less involved in international business activity.

Argentina’s economic development in the early days

In the 19^th century, Argentina’s fertile land attracted a flood of British capital and European immigrants. For the three decades before 1913, Argentina grew at an annual rate of 5%. The main industry was agriculture as Argentina exported a lot of beef and grain to Britain. By 1913, Argentina was one of the ten richest countries in the world, ahead of France and Germany. However, the economic situation has been downhill ever since.[1]

What took place in history to change Argentina’s economic situation to the one it faces today? Argentina is a country that has been tumbling downwards since then into a state of financial collapse. We will first go over trade to discover what went wrong in Argentina and from that analysis, conclude what Argentina must face today in order to recover from its economic downfall.

Argentina: Trade – Open or Close?

Peron 1946-1955 and Import Substitution Industrialization

When Juan Peron came to power in 1946, he established a society based on the masses. He adopted a centralized government to ensure he had complete control over everything. There was a great deal of regulation in all industries. The Peronist regime theorized that by developing its own national economic and social identity, Argentina could realign itself more advantageously in the core-periphery structure of the world economy[2]. Therefore, Peron wanted to ensure that there was equality among people. Argentina was therefore, a rather closed economy. This was a huge contrast to the glory days of the early 1900s.

Peron’s policies were very protectionist. In order to achieve equality, he promoted a policy of Income Redistribution to the workers. This was the “heart” of Peronism. In the manufacturing industry, the real wage per worker and the relationship between wages and productivity increased by 72% and 25% respectively between 1950 and 1954[3]

To further increase workers’ purchasing power and to make sure urban businessmen (who would have otherwise been hurt by the redistribution policy) would also benefit, Peron provided subsidized credit through the Nationalized Banking System.

In addition to this, public expenditure was boosted, resulting in a fiscal deficit. These policies were aimed at achieving short-term recovery and not prolonged growth, so there was no attention paid to volatile prices and inflation that pursued.

With regards to trade, there were many protective tariffs in different industries. This allowed industries to produce non-saleable goods so that more workers could be employed, while the companies could still make profits. The tariffs, it would seem, were used to ensure that workers had jobs.

Clearly, Equality was top on Peron’s list. This was understandable because, the workers represented a huge proportion of Argentina. Winning their favour, would mean winning their votes in elections. Alternatively, Peron may have thought that low unemployment among workers would ensure peace in the country. Despite this, Raul Prebisch, (description), commented that, “The Peronist administration had brought about Argentina’s worst economic crisis ever”[4] Nevertheless, Argentina was able to achieve cumulative growth in GDP of 5% from 1953-1955.

When Peron was overthrown by a military coup, his successors began to loosen on the radical, equality approach, although the military and the workers remained strong forces in Argentine politics. They chose to adopt more Import Substitution Industrialization policies.

Initiated by Peron, low interest rates and high government spending did not change. However, because low interest rates were not sustainable, instability and volatile prices ensued. This had a very bad impact on agriculture, which constituted 70% of Argentina’s output[5]. Unstable prices, added to export taxes on agriculture and huge foreign competition made it difficult to complete.

At the same time, using Import Substitution policies, the Argentine government wanted to develop the non-agricultural sector, therefore incentives were given to people to direct their behaviour. In particular, the petroleum and natural gases, steel, coal and iron and the automobile industries were targeted.

As a direct result of these policies, demand for inputs for non-agriculture increased. Since imports were restricted and domestically produced inputs were too expensive, it became very hard to develop the non-agricultural industries. As a result, there were decreased technological advances and Argentina became inefficient in many sectors. Crop yields less than doubled in Argentina, when the rest of the world tripled their crop output.

There was lots of conflict between Agriculture and Industry because policies were not clear. Argentina’s economy was once described as, “Capitalist without markets or Socialist without plans”[6]

During the Import Substitution Period, (1965-1973), GDP growth was about 4.2% and as of March 1976, annual inflation rate was 2300% and government deficit was 12% of GDP[7]. In 1973, there was a trade surplus of USD721m[8]. However, this trade surplus fluctuated from surplus to deficit frequently during the import substitution period..

Export Orientation and Menem’s Open Economy (1991 onwards)

In the late 1980s, Argentina was already trying to move way from its previous Import Substitution policies. This might have been due to the IMF’s conditions in lending money to Argentina. It was absolutely necessary to negotiate with the IMF because in 1983, when Raul Alfonsin took office, Argentina’s foreign debt was 70% of GDP, while service of payments was only 8%[9]. Argentina’s large fiscal deficit did not help at all, partly gained through nationalizing some foreign private debt.

When Carlos Menem became president in 1989, he sought to reinsert Argentina into the world economy. His policies involved Deregulation measures, Privatization of State Owned Enterprises, Promotion of Market Rules and Free Convertibility of Argentine Peso through a Currency Board Arrangement. All of this was done very quickly, almost without thought, to gain the maximum benefits.

In terms of trade, taxes on agricultural exports were scrapped, import tariffs were reduced and Non-tariff barriers were eliminated. These were all done to increase competitiveness. However since, tariffs were substantially reduced, the government effectively lost a source of revenue. The tax system at the time was very inefficient, with a high percentage of evasion. Therefore Menem had to reform the tax system by imposing stricter penalties on tax evasion and increase transparency so that people know what tax money is being used for.

To further enhance trade in the Latin American region, Mercosur (the Common Market of the Southern Cone) was established in 1991, with Argentina, Brazil, Paraguay and Uruguay as the founding members. Mercosur aims to establish a single market among the four republics, based on the free movement of goods, services and factors of production; the establishment of common external tariff and trade policy; the harmonization of respective legislation and policies to strengthen the process of integration.[10]

Mercosur also aims to eliminate all tariffs and non-tariff restrictions to internal trade by 1994. This would be very beneficial for the Argentina because Brazil is its biggest trading partner. However, the 1994 target was not met because as of 1998, each member country of Mercosur still maintains a reserve list of products to which it is entitled to apply its own external tariffs, up to 32%[11]

There were even talks to further economic integration by introducing a single currency for Mercosur, because as Menem stated: “Since Mercosur has been built along the lines of the EU, it would be only natural for the South American trade bloc to move towards a similar single-currency arrangement.”[12]

By forming a trade bloc, Argentina will be able to increase its bargaining power when negotiating with other strong countries, such as the US and other established trading blocs. As of August 1998, Mercosur is in negotiations with the Andean Pact (Colombia, Peru, Ecuador, Venezuela and Bolivia) and the EU[13].

As a result of the export-oriented policies, Argentina was able to achieve average per capita GDP growth of 6.05% from 1991-1994[14] and current account deficit was USD5.4bn in 1994[15]. 1995 was an exceptional year, where Argentina’s GDP declined due to the Mexican Tequila Effect.

Viewpoints

Export-Oriented Strategies and increasing interaction with the World Economy by lowering trade barriers and allowing capital flows are essentially Liberal in nature. Menem, therefore, adopted a more liberal approach to development. On the other hand, Peron’s income redistribution policy and his successors’ Income Substitution Industrialization policies focused on closing the economy from the outside world. This approach would be considered more Mercantilist, or even Radicalist (especially in the case of Peron).

In today’s world, liberalism is widely preached and it seems to be the model of success in many countries. However, in Argentina’s case, both approaches – Open Economy and Close Economy led to failures and crises. Therefore the question is, “Which approach is better?”

Open Economy – Liberalism

Liberalist arguments are already very well documented in the works of Adam Smith and David Ricardo. Smith’s line of argument against Mercantilism is that the wealth of all nations is assured through Free Trade, which increases productivity and ensures efficient production.

According to the World Bank, export-led growth and free markets are the best way for a country to develop. By cutting back on state involvement and implementing liberal policies – Market oriented policies: Free Trade and Deregulation, corruption can be avoided and resources can be allocated more efficiently[16].

A study was conducted by the United Nations to compare the economic performances by region during the period 1980-1990[17].

	Real GDP (average annual growth rate)	Inflation (average annual rate)	Gross Domestic Investment (average annual change)	GDP per capita (Average annual change)
Latin America and Caribbean	1.6%	192.1%	-2.0%	-0.5%
East Asia and Pacific	7.8%	6.0%	10.6%	6.2%
OECD countries	3.1%	4.2%	4.3%	2.5%

It can be seen that from past results, the OECD countries that have adopted more liberal, free market policies, have grown more than Latin American countries, who have practised more protectionist policies in the same period. It should also be noted that the East Asian and Pacific countries have growth rates more than triple the OECD countries. This would be because of their Developmentalist policies, which were export-oriented, but at the same time had some degree of protectionism. Nevertheless it is some evidence that liberalism results in more growth.

The World Bank stresses that the following must be done to achieve long-term growth:

1) Trade Reform by removing anti-export biases, reducing import quotas and tariffs and adopting more realistic exchange rates.

2) Sound Macroeconomic Policies to reduce fiscal deficits and increase savings to ensure positive real interest rates and low inflation. Increasing savings is especially important for Latin America to avoid future foreign indebtedness.

3) Competitive National Environment by removing price controls, easing investment regulations, reforming labour laws and defining strict intellectual property rules.

After all this, there will be increased capital inflows and thus, growth.

On the other hand, with government running industries, everything becomes very bureaucratic. This raises the cost of doing business, which acts as a disincentive. However, the World Bank does agree that if the private sector is not ready to do so, government could provide minimal regulations and standards to develop industries. Excessive involvement is counterproductive.

Closed Economy – Mercantilist/Structuralism

Mercantilism is the ideology that security is most important – security both in terms of national security and economic security. Therefore, protectionism will be adopted to ensure that security is preserved.

One frequently argued reason for protectionism is to enable an infant industry to mature to be able to compete with well-established industries of stronger economies. “A firm producing a similar product in less a developed country would not have the same production technology available to it… and would most likely produce the product less efficiently.”[18] This was exactly the case in Argentina. Agriculture production was not as efficient as developed nations and also Industry development attempts were abysmal.

In order to grow and develop its economy for the betterment and security of its people, it was necessary to adopt protectionist measures. As a result, a closed economy, in terms of protection for domestic industries, while still participating regulated trade is the best alternative.

Structuralism, on the other hand, actually originated in the work of Raul Prebisch in the United Nations Economic Commission for Latin America in the 1950s. Prebisch believed that the principals of comparative advantage only existed in static situations. In dynamic situations, the periphery countries will always remain underdeveloped because they will never be able to compete against the increasingly oligopolized conditions in industrialized countries[19].

In fact, advanced countries will ensure that any value created in productivity will be retained by setting high prices, instead of transferring it to less advanced countries through low prices. After all, it is a very well known phenomenon that firms are profit maximizers.

Theotonio Dos Santos furthers this concept through the Dependency Theory: “By dependence we mean a situation in which the economy of certain countries is conditioned by the development and expansion of another country to which the former is subjected.”[20]

The Dependency School of Thought, feel that international capitalism is increasingly falling into the hands of multinationals, governments and supranational organizations, who seek to dominate weaker economies. These smaller economies are forced to buy all the management skills, financing, entrepreneurship and technological skills from the core countries. As a result, the weaker economies will never “learn” to develop own skills and the technological gap between the strong and weak economies will widen. In other words, the small economies are increasingly becoming more dependent on the core countries.

Some extreme dependency writers even believe that the dominant capitalist countries purposely seek to exploit weaker countries to increase their own wealth, leaving the exploited country underdeveloped.

Most writers of the Dependency school will agree that underdevelopment of a country is not a temporary phenomenon. As long as the underdeveloped country remains open the international trade, it will always be exploited by developed countries. The only solution is to be closed from international trade.

Therefore, it can be easily seen that the Structuralists believe that International Trade is evil. A closed economy would allow all countries to develop their own industrial systems and grow – the exact approach initiated by Peron and furthered by his successors until Menem.

Conclusion: Which is better?

Both line of arguments are very strong and are backed with ample evidence – most of which can be seen in Argentina’s case. The above question is not easy to answer. If it were, there would not be so many problems in Argentina today. However, I will attempt to do so by proposing another line of argument – Is Liberalism actually Mercantilist behaviour?

On paper, liberalism leads to growth in developing countries. GDP growth rates in Argentina from 1991-1994 prove this. However, liberalism leads to current accounts deficits because imports of advanced countries are always more attractive than domestic products – they are inefficient. Cui bono?

Deep down, the advanced economies are gaining at the expense of the developing countries. The Dependency Theory is very true. Once the foreign advanced countries feel threatened, their investments will leave the area, leaving behind an underdeveloped country.

It is also important to note that although advanced countries do follow the free market model, these countries achieved industrialization, once upon a time, by adopting state centered policies[21]. It would, without doubt, be mercantilist behaviour if advanced economies do not allow developing countries develop in a similar manner.

However, some might argue about liberalization in East Asian economies, mentioned above. Before the Asian Financial Crisis, they have grown very quickly by opening their economies to trade. However, there are many arguments that East Asian was able to achieve this because of state’s role in promoting exports while controlling imports.

Also, despite all the talk of liberalism, realistically as Harry Magdoff found, 50% of world trade is managed trade and that tariffs are actually rising[22] (1992) and we do not have to look further than the well documented US-Japan Semiconductor trade dispute, and the more recent US Steel dispute.

Nevertheless, this does not mean that Prebisch and his structuralist views are the way forward for Argentina, because there are drawbacks to such an approach, as witnessed in Argentina in the 1980s.

Looking forward, Mercosur is definitely a good start. Although, many economists have questioned the rationale of pursuing monetary union[23] because they feel that Latin American economies are too diverse. Focusing on securing a Free Trade Pact with other members is more important.

By strengthening ties with its neighbours, Argentina should adopt some degree of protectionist measures with a view to benefit from actual transfer of knowledge and technology. In the future together with Mercosur, Argentina can take a step-by-step approach to reopening to the world. In the mean time, it has to give confidence to its people and sacrificing the world will be necessary.

Besides trade, foreign influence on Argentina’s Foreign Direct Investment (FDI) is also prevalent.

Multinational Corporations

The opening up of the economy in Argentina in 1991 and the massive privatization project by the government have attracted a huge inflow of Foreign Direct Investment (FDI). Many multinational corporations have established their operation in Argentina. For example, about 90% of its banks and 40% of its industry are in the hands of international capital. The impacts of this flood of multinationals are wide-ranging. Liberals, mercantilists and radicals are, again, debating on whether the overall impact on the Argentina economy is positive or negative.

Liberalism:

Liberals argued that since the free-market reforms in 1991, much improvement was shown over the Argentina economy. Between 1991 and 1997, Argentina’s economy grew at an annual average rate of 6.1%, the highest in the region. (Chart 1: Economist article). The period of hyperinflation, which had reached nearly 5000% by 1989, ended with the operation of the currency board, prices of commodities stopped rising.

The increased FDI brought in competition, thereby, forcing the uncompetitive local businesses out of the market. This boosted overall efficiency and lowered the cost of production. In particular, the privatization of state-owned enterprises resulted in massive downsizing and the shedding of surplus labor, ending the most corrupt strategy of the so-called “Phantom Employees” – who simply turned up at work once a week to collect a paycheck. Therefore, the privatization enabled capital to flow from inefficient activities to value-adding activities driven by the market. It also reduced the government’s burden of subsidizing public services.[24] It was also argued that the privatization of banks in Argentina had led to the development of a more stable banking system. This was essential to the growth of the economy.

Mercantilism

From the mercantilist’s point of view, the international capital is culpable for making the economy unstable. Whenever there is indication of political or economic crisis, the multinationals will just remove their capital out of Argentina, causing a capital flight. For example, in 1989 alone, US$4.3 billion in private capital left Argentina.[25]

Mercantilists also blamed the multinationals for making key decisions for Argentina, subjecting the economy to foreign control. The Argentina government simply lost sovereignty over the economy because of its dependency on the IMF for its huge foreign debt. The IMF is, undeniably, more interested in protecting the interests of multinationals than solving the problems of the country. Moreover, the politicians, who “had been living in luxury for 25 years on the payroll of the big banks, multinationals and global power centers” are giving preference to multinationals[26]. This subjects the national decisions to manipulations by multinationals.

Some critics accused the MNCs for riding roughshod over Argentine law.[27] For example, bowing to U.S. pressure, the Argentina government pushed ahead with a new patent law in 1995 to make it more acceptable to the multinationals even though this would triple the drug prices[28].

The huge public debt problem of Argentina can also be attributed to the multinational corporations. Tom Gill accused the subsidiaries of western multinationals for borrowing billions from western banks[29]. Bowing to these western pressures, the government then conveniently nationalized these debts, pushing the public debt to a rocket high level.

Tom Gill also viewed the peso-dollar convertibility plan with disapproval, condemning it of effectively handing control of the government debt to foreign creditor banks. The rising foreign debt level, from $65bn in 1991 to $160.2bn in 2000, clearly outweighed the benefit of curbing hyperinflation.

In response to the liberal’s argument, the mercantilist, rather than praising the foreign banks for building a stable banking system, condemned the foreign-owned banks for depriving the small-and medium-sized firms of adequate finance.[30] It put these SMEs in a difficult cash position, forcing them out of the market. The writer argued that economic growth required financial institutions that would lend to domestic firms. However, the sale of local banks to foreign investors without adequate safeguards may hinder growth and stability. This was the case for Argentina. The government simply did not attend to the needs of the SMEs when deciding whether to sell the banks to MNCs, who did not really care about the local businesses.

Radicalism

The radicals accused the multinational corporations of the massive layoffs, leading to high unemployment rate, currently stood at more than 20%. It also aggravated the poverty problem, leaving 14 million out of a population of 37 million living below the poverty line.[31] Some people even described the multinationals as the “net job destroyers”.[32] For example, Argentina’s state petroleum company has reduced its workforce from 52,000 to 6.000 people after privatization, whereas, the railroad companies employed only 5,230 people in 1995, compared with a peak of 87,000 in 1991.[33] Therefore, the multinationals are reaping monopoly profits from the operation of the former SOE, at the expense of the Argentina citizens.

Moreover, many small entrepreneurs were driven out of business by the competition brought about by the multinationals.[34] In 1995, nearly 900 companies filed for bankruptcy, a record number in Argentina.[35] This further demonstrated the fact that while Argentina was experiencing high economic growth at that time, most revenue generated went into the pocket of multinationals.

The massive privatization in 1991 was criticized as “bargain sale of grandmother’s jewelry”[36]. Most SOE were sold to multinationals at very cheap prices in a rush to privatize them in a short time without regard to regulation, competition or loss of service[37] .

Therefore, this created social unrest and national-wide suffrages. However, “The multinationals and the big banks are not concerned with Argentina’s social fabrics. So long as Argentina follows monetarist orthodoxy the effect on the poor is no concern of theirs.”[38]

Analysis:

Certainly, the increased level of FDI had been complemented by economic success in early 1990s. It is also arguable that the overall efficiency in Argentine companies were boosted as a result of the increased competition and improved management. However, if the liberal model truly suited the Argentina economy, why did we see the recent collapse and chaos?

Perhaps the Argentina government was too obsessed with the liberal’s arguments.

Firstly, liberals regarded the sales of SOEs to multinationals favorably. They claimed that it resulted in an increase in efficiency. However, how is the efficiency being measured? Who gained most from this rise in efficiency?

The SOEs are sold to the multinationals at a very cheap price because of the aggressive plan set by the government. The low initial acquisition cost, coupled with the huge monopoly profits, allowed the MNCs to reap enormous profits.

The massive layoffs significantly cut down the cost of production. However, is downsizing necessarily equate to efficiency? Perhaps, it is true for the MNCs. Is it also true for Argentina?

The aggressive layoff plan resulted in a gigantic increase in unemployment rate. This meant that useful resources, labor, are left idle. The economy is not producing at its full employment rate. Productive resources are wasted. Do the liberals view that as efficient?

Moreover, the gains from privatization are not enjoyed by the Argentineans. The MNCs exploited the gains at the expense of the local community.

Besides unemployment and bankruptcies, there exists ample evidence to show that the MNCs were not concerned with the local economy. For example, the government initiated an agreement on good pricing practices between commerce enterprises and suppliers, designed to prevent retail shops from selling below purchase costs. However, the giant American chain, Walmart, store refused to join the agreement, leading to a breakdown. Carlos Gabetta[39], who criticized the MNCs for taking advantage of Argentineans’ desperate plight, cited a more recent example. The banks charged 40% on credit card transactions, 29% on any dollar transaction. This had the effect of depriving the middle class in Argentina of any resources.

Is the liberal approach truly for the benefits of Argentina? Or, is it only for the benefits of the MNCs?

The government indeed played a very important role in this liberalization of economy. However, it is extremely doubtful whether there is pure liberalization.

The government had showed favoritism towards the MNCs in various aspects. This bets the question: why would the government be willing to give priority to the MNCs?

Our analysis consolidates into three main grounds.

Corruption

Since the ruling party had been relying on corruptions from multinationals, they are vulnerable to influences by these international investors. In making decisions, the government officials would give favor to the MNC’s interest even if it is at the expense of the economy and citizens.

Lack of investment capital

Lack of entrepreneurial and investment capital throughout the 1980s had extremely negative effects on the government’s ability to develop infrastructural projects, to maintain a stable economy, and to tackle the issue of uneven regional development.[40] Therefore, in view of these negative impacts, the government had been very anxious in attracting foreign direct investments. However, this aggressiveness had not been accompanied by any thorough planning, resulting in a very generous attitude towards the MNCs.

Public Debt

The huge public debt also made Argentina vulnerable to outside pressures. Argentina had to rely on the International Monetary Fund (IMF) for loan so that it could meet its foreign debts. As argued by Tom Gill[41], Argentina had been IMF’s best pupil. Since the IMF is controlled by the core economies, notably the U.S., it will act to the best interests of its members and the MNCs.

The above reasons explained why the government was willing to lend support to the MNCs.

Corruption works hand-in-hand with MNCs. To the MNCs, the benefits of corrupting the politicians far outweighed the costs. With corruption, how can one expect the market to operate freely? Is the “free market” only a window-dressing technique to disguise the corruption practice across Argentina?

Furthermore, corruption was extended to the legal system, with the supreme court allowing the most illegal deals. Without a healthy legal system, can liberalism still survive?

The lessons from Argentina

The recent chaos in Argentina neatly demonstrated the devastating side of liberalization. What went wrong in Argentina, particularly with regards to the extraordinary growth in MNCs?

One of the problems lay in the lack of planning of privatization. The whole plan was a rush, without proper regard to the sufferings of the people and local enterprises. Liberalization should be a step-by-step process. Excessive aggressiveness without internal support would just lead to disasters.

There are a lot of benefits and costs associated with the opening up of the market for the MNCs. Different countries have different ways to deal with MNCs. However, giving priority to the MNCs at the expense of local enterprises is definitely not a preferred route. This would lead to subordination of national-wide decision to the hands to the MNCs, who do not have any affections to the local economy.

Our suggestion is that Argentina should lower the level of MNC involvement in the most important industries, e.g. utilities, banking. This would have the effect of transferring power back to the government.

To sustain long term economic growth, the government should encourage the development of local enterprises so as to reduce the level of reliance on MNCs. This would allow Argentina to build up its own economy, not one that the MNCs dictate.

On the other hand, Argentina also faced a tremendous challenge in its international financial flows. The recent devaluation of its currency could be traced back to the Mexican contagious effect in 1995, which later brought the entire country into bankruptcy.

Mexican Crisis 1995: Contagious effect on Argentina

In wake of the 1982 debt crisis, Mexico, with active support from the IMF, implemented several macroeconomics stabilization policies. These policies included use of foreign exchange rate as a nominal anchor; comprehensive structural reforms, including waves of privatization and trade liberalization; and external debts restructuring. These measures gained remarkable results, including reduction in fiscal deficit and inflation rate while gaining positive economic growth.

The major factor of the Mexican crisis lied in the weaknesses of the economics position. Current account deficit running at 6.5% of GDP in 1993 was very large by most standards, and was mainly financed by short-term capital inflows. Meanwhile, a steep appreciation of the peso and substantial rise in world interest rates even worsened the current account deficit. Besides, political hiatus was also slashing investor’s interest and confidence in the country. The new administration allowed the peso to depreciate and replaced peso-denominated government debts by Tesobonos, instruments indexed to the US Dollar. All these factors contributed to the collapse of Mexican Peso in December 1994 and international financial markets started questioning Mexico’s ability to service its debts.

The world worried that the Mexican crisis would spill over to the other economies in the region, and in fact, it did. Argentina, Mexico’s neighbour on the south, was hit hard when nervous investors started to yank their money from the region. Argentina’s GDP dwindled by 4% in 1995 and a number of banks collapsed.[42] The government reacted nimbly by encouraging foreign banks to take over failed domestic counterparts, which led to dominance of foreign banks in Argentina.

Chronology of the Currency Crisis

Many stabilisation programmes, focusing on the exchange rate were launched, with the belief that domestic inflation rate would converge to world level quickly.

In the late 70s and 90s, declines in interest rates in the industrialised countries fueled capital flows to the developing countries. While these flows were generally regarded positively, the free capital flows would also mark currency crises such as real exchange rate appreciations as well as current account deficits.

Fragilities in the domestic financial system were also a potential cause of runs on Argentina Peso.

Between1967 and 1991, Argentina implemented 8 stabilization programmes and all, but the last one, ended with devaluation of the Peso. The steepest devaluation of 387% was recorded in 1988. [43]

The stabilization programmes centred on the fixed exchange rate regime. In most cases, the inflation rates initially declined, but rarely converged to the world level, and this inevitably led to real appreciation of the Peso and current account deterioration. Besides, the programmes also caused enormous losses in the foreign reserves.

After the military coup in 1976, the new government dismantled controls over various economy sectors and financial liberalization led to gradual removal of capital account restrictions. Full convertibility was introduced in late 1978. As a result, fiscal accounts improved sharply. Massive capital inflows, channeled through the banking system, resulted in rapid monetary expansion.

Dual Exchange Rate and Capital Control

A banking crisis in 1980 raised doubts about the sustainability of the peg. Dual exchange rates were adopted; the financial exchange rate was floated and it instantly depreciated more than 70%. This prompted those companies, which were heavily indebted to urge the government to assure an exchange rate guarantee programme.

However, the exchange rate system was unified again in 1981, and the guarantee system was suspended while domestic credit was tightened. Nevertheless, the Malvinas war in 1982 created massive military expenses to be financed by the government. This event coincided with global recession, decrease in global commodity prices and world debt crisis. The dual exchange rate system was reintroduced and capital controls were tightly enforced.

Inflation kept spiraling upwards, reaching 6000 percent in 1985. The government implemented the Austral Plan to counter hyperinflation; however, the annual inflation rate remained around 100% by mid-1986, prompted the government to abandon the peg.

On 1/12/01, the government regulated capital control and capped US$ 1000 withdrawal per month to prevent bank run. (Argentines withdrew US$1.3bn on 30/11/01.[44]

Liberals would think that total capital mobility was essential for free international finance flows. Capital control restrained foreign investors’ flexibility to adjust their investment in Argentina. This could undermine Argentina’s attractiveness to foreign investors to a large extend.

Mercantilists regarded capital control as a means to constraint overheated short-term financial flows—hot money. A mercantilist would say that these flows would cause instability in the capital supply and demand. Capital controls would allow Argentinean government to adjust both interest rates and economic forces to meet domestic political ends without undermining international economics agreement.[45] In the mean time, capital control was essential to reduce currency speculation, increase fiscal and monetary autonomy. This also served as a tool to counter controversial hegemonic control over Argentina’s sovereignty in national economic decision-making.[46]

Radicals did not favour international flows at all and firmly believed it would more likely to bring harms than benefits to the economy. Besides, monthly restriction on the people withdrawal from the bank was not acceptable by this school of thought; “It’s relentless to ‘steal’ the people’s money!” The people had trusted the government and deposited their savings in the banks but the government was stopping them from getting the money back. Moreover, the government was not paying the civil servants for months, which led to further exacerbation on the already chaotic economy.

Convertibility Plan—Currency Board (April 1991-January 2002)

A currency board was set up to enforce a 1-to-1 peg of the peso to the dollar. The money supply was restricted to the level of hard-currency reserves. On one hand, the peg was said to prevent hyperinflation as a result of imports; however, the IMF-backed policy was also said to be purely in the Multinationals’ (MNCs) interest. The core economies, which invested in Argentina, wanted to secure their investment in the country, and the peg would at least minimize the foreign exchange risks.

Besides, a series of privatization and deregulation measures were implemented. In the same period, Argentina witnessed a massive inflow of capital triggered by the decline in the US interest rates and the Brady Plan Agreement for Mexico signed in 1989. These favorable factors contributed to the economy expansion. Consumption, real estate and stock markets boomed. However, this also led to real exchange rate appreciation and current account deterioration.

In 1994, US reinforced tight monetary policy and interest rates surged. These caused tremendous capital outflows from Argentina and the banks were on run. As investors converted their pesos into dollars, the central bank lost 41% of its foreign reserves in the first quarter of 1995.[47]

Appreciation of USD also made Argentina “expensive” and deterring foreign investment. In 1996, the peso was overvalued for more than 30% against the US$, making its exports less competitive in the world market. Unable to devalue the peso, Argentina relied heavily on lowering price to compete with its neighbouring countries, including Brazil, which devalued its own currency.

The liberals believed that the market forces understood the market best and therefore might less favour a fixed exchange regime. They maintained that the market could correct the surpluses and deficits automatically and restore market equilibrium. The state should refrain itself from intervening and let the market mechanism to determine the price of the currency.

The mercantilists, on the other hand, might regard a fixed exchange rate regime positively. This is especially true when an economy tries to tie its soft currency with a hard currency, like the US Dollar. Argentina hoped that a fixed exchange rate could restore both domestic and external confidence in the country. With the peg, Argentineans could have cheaper imports like medicine and capital goods for industrialization etc. However, having opted for a currency board, the Argentina government was virtually left with very little tool to respond to external changes. The interest rates were, in effect, those set by the US’s Federal Reserves plus whatever risk-margin lenders assigned to Argentina.[48]

The radicals would likely opt to keep their sovereignty on their own exchange rate. They did not want to expose their own countries to external risks, which were usually out of their own control.

Argentina Debt Defaults 2002

Argentina Economics Indicators 1980-2000[49]

	1980	1990	1999	2000
Total debt outstanding and disbursed	27,157	62,232	145,994	146,395
Total debt service	4,182	6,158	27,900	26,500
Reserve including gold	…	10,814	27,831	26,465
Changes in reserve	-1,878	-2,993	-1,201	439
Current account balance	-4,898	-1,641	-11,945	-8,909
Conversion rate (Peso/US$)	…	0.5	1	1

Argentina’s debts crisis was of the core economies’ particular concern because they were the main source of loans to the country. To illustrate, in 2001, British’s Big Four Banks were forced to write of pounds of loans in Argentina. HSBC, had £3.5bn of loans and 225 branches, Lloyds TSB had £1.4bn of loans and 40 branches while Barclays had £500m of loans in Argentina respectively. Royal Bank of Scotland, on the other hand, was closely linked to Spanish BSCH, which had lent some £1.7bn to the Argentinean’s government and £4bn to individual and companies.[50]

Argentina debts default in December 2001 was the biggest ever in history—US$ 141bn, a result of Peso’s devaluation.[51] On 6/12/01, Argentina government transformed private pension funds into treasury bonds to service debts. The government also forced the banks swap their holdings of government bonds in return for low interest loans. The government was under the IMF’s pressure to take such steps in order to make the loan repayments to the core economies’ sources.

From a radical’s perspective, such steps greatly deprived of equalities. The people lost their money, ironically to their own government. Besides, restriction on the people’s monthly cash withdrawal of their deposit with the banks was also publicly condemned. Eventually, the high court of Argentina instructed the banks to ignore the government’s order and pay the people their money.

World Bank

The Bank helped the Argentina government to address the underlying bottlenecks and constraints that impede Argentina’s productivity, economics growth and social development. Efforts were put in improving public sector efficiency; reduce tax system inequities and combat fraud and corruption in the country that deterred foreign investment. These reforms were also aiming at cutting fiscal deficit, both at the federal and provincial levels and reaching fiscal balance by 2005.

Four areas of World Bank support in Argentina[52]:

a) Reforms of the state: focus on revamping public procurement, budgeting and management of the key agencies like the Federal Tax and Customs Agency (AFIP), the National Pension and Social Security Agency (ANSES), and the Ministry of Education.

b) Reform of the social sectors: focus on effective implementation of recent liberalization of health insurance, and the transformation of social programmes.

c) Reform of the federal-provincial fiscal relations: focus on seeking fiscal stabilization for the provinces, tax reform, debt regulation, and pensions under aegis of an agreement between the federal government and provincial governors.

d) Support the Public Employment Programme: to address temporary unemployment related to economics conditions.

These new programmes complement the series of loans to provincial governments to support fiscal reform and improvements to social services. All loans are contingent on approval by the Bank’s Executive Board and agreement with the Argentina government on the reforms and subsequent satisfactory implementation.

Argentina: Financial Flows

The International Monetary Fund (IMF)

Since 1983, the IMF has introduced a total of nine IMF stabilization programmes in Argentina, which ended up with the largest sovereign debt default in history.[53] With a national savings at only above 10% of GDP, Argentina is highly dependent on foreign savings to keep its economy growing. And with that come the hard hand of the IMF, and loss of independence.[54]

1991- 1998: IMF’s Star Pupil

Under President Menum in 1991, Mr. Domingo Cavallo introduced the ‘convertibility law’ to congress, which established that each peso in circulation must be backed by a dollar in reserve. The policy killed the four-digit hyperinflation immediately and gave the Argentine economy stability.[55] However, the plan also effectively handed control of the government debt to foreign creditor banks. The foreign debt burden surged from $65 billion in 1991 to $160.2 billion in 2000.[56]

Investment poured in and Argentina boomed. Argentina had the second fastest growth rate for several years in the early 1990’s, following China. The IMF had originally advised Mr. Cavallo against the convertibility policy but later it supported it. International investors lent a lot of money to this emerging market, resulting in huge capital inflow.

The government of Carlos Menem also sold off the government’s vast network of creaking state enterprises and threw open its markets to foreign goods and companies. Foreign multinationals made billions from an accompanying privatization programme and repatriated profits on a huge scale.

1998-2001: Recession

By 1998, the inward investment boon that drove strong economic growth for five years had turned to a capital flight. The government had run out of state enterprises to sell and the global capital dried up for emerging markets after the Asian Financial Crisis. The appreciation of the dollar also priced Argentine goods out of the world markets. Argentina fell into recession.

However, Argentina was unable to respond to that by lowering interest rates (a normal practice in other countries) because it had given up control over monetary policy to achieve stability. Argentina could not play with fiscal stimulus neither due to a growing fiscal deficit and no international credit. The result was a vicious cycle. Argentina was forced to cut spending in a recession, depressing the economy, hurting tax receipts and squeezing government coffers further.[57]

2002: IMF’s Delinquent Pupil

Now, Argentina has taken an increasingly critical stance towards neo-liberal policies. The new president Mr. Duhalde has adopted a radical alternative by freezing the prices charged by the foreign-owned electricity, gas and telephone companies and tax the exports of foreign-owned oil companies.[58] He is also promising public money to cut the jobless queens and a dual exchange rate to protect local industry.

Mr. Duhalde would like to centered on producing the local market and withdraw from international economic relationships. It was supported by rising purchasing power of Argentine workers who, organized in power trade unions, pushed up wages and won higher benefits and welfare.[59] The IMF, who advocates free trade, also opposes such policy.

Instead of letting the peso to float freely, the government introduced a dual-exchange-rate system, which establishes a fixed rate of 1.4 pesos to the dollar for export-related and official transactions but allows the peso to fluctuate for all other exchange operations.[60] This system was criticized by the IMF.

IMF’s role as a creditor, economic adviser and bankruptcy arbiter

Loans

As a lender of last resort, two international rescue packages worth 48 billion US Dollars in 2001, which leads to the largest sovereign debt default history and eventual devaluation of the peso. The US and Europe are demanding that Argentina “honours its international commitments” through the IMF. On the other hand, public sector workers, who have been getting paid in hastily printed provincial currencies, won’t get paid at all if the provinces agree to stop printing the money, as the IMF is demanding.[61]

Advice

IMF loans are subject to stringent conditions. A typical IMF debt package includes a number of politically unpopular policies designed to restore a government budget surplus:[62]

1. Currency Devaluation

Currency should depreciate so the exports can become more competitive while imports become more expensive. Thus, the current account deficit can be reduced.

2. Price Stability

The inflation rate must be brought down so as to restore the confidence of foreign investors or lenders and to improve the investment climate. This is often achieved by adopting restrictive policies.

3. Fiscal Austerity

The government should cut public spending and raise taxes, and ‘privatize’ publicly owned enterprises. The aim is to reduce the government budget deficit and to ensure that the IMF loans can be repaid. In Argentina’s case, IMF demands a cut in public spending, which would lead to more suffering for the unemployed workers (30% of the population).

4. Tariff Liberalization

Free trade is achieved by reducing or eliminating tariff or import quotas so both imports and exports can be promoted.

5. Social Safety Net

Since many of the measures reduce living standard of the people and the poor was hit the hardest, sound social programs should be constructed to alleviate the negative impacts of the above measures.

In the short run, the logic of these policies is to reduce the current account deficit by increasing exports and reducing imports. Capital flight is stemmed and new borrowing needs are limited.

In the long run, the aim is to encourage economic growth, make the nation better able to pay its old debts and less dependent on credit in the future.

However, these “austerity” policies do impose hardship on the people and are never popular. Hence, the government is under a lot of political pressures. As mentioned, these “austerity” programmes often hit the poor far harder than the rich.

Orderly Sovereign Bankruptcy

In November 2001, the IMF proposed an international bankruptcy process to move away from a strategy of bailouts to a strategy of orderly sovereign bankruptcies.[63] To the developing countries, it was quite disappointing because this reform proposal has nothing to do with pro-growth initiative.

Evaluation through the three lenses

Liberalism

For the liberals, the ultimate goal is to maximize wealth by enhancing efficiency. Globalization is good because global specialization can increase efficiency and results in positive gains from trade. The IMF’s emphasis on free trade and free financial flows fit into this model.

For example, a pair of MIT economists claimed that the necessary precondition to the real work of saving the country involves prying open markets, introducing deeper spending cuts and a massive privatization campaign.[64]

Mercantilism

For the mercantilists, safety and national security is the most important. State intervention is a must to achieve that.

To them, IMF sees Argentina’s crisis as an opportunity. The country is so desperate for cash that it will do whatever the IMF wants. The IMF wants to lend again because it wants to avoid a default on its existing credits. The austerity programmes contributed to the collapse of tax receipts, sky-high interest rates to compensate for currency uncertainty, an investment standstill, deadly riots and the fall of the government.

IMF is not going to clean up Argentina’s culture of payola and impunity, especially since one of the conditions the lender has placed on new finds is that Argentina’s courts stop prosecuting the bankers who illegally pulled their money out of the country, drastically deepening the crisis.

The open economy is the reason for the ease of capital flees since the crisis began. Also, the IMF’s insist in cutting public spending is disastrous. Now, 1/3 of Argentina’ public spending goes to servicing the external debt, 1/3 goes to pension funds; and for the remaining 1/3, only some of which goes to healthcare, education and social assistance, which has been far behind population growth.

As for the advice of further privatization, it is virtually unsound. Many of Argentina’s services, from trains to phones, have already been sold off due to national greed and corruption. The only assets left are the country’s ports and custom offices![65]

Radicalism

The essence of radicalism is fairness. Equality is the most important despite the cost is ‘less wealth’. From this point of view, the IMF is frequently criticized for ignoring political priorities, putting too much emphasis on economic balance rather than social justice and the need of the poor. Globalization and liberalism would lead to inequalities among countries, for example, the currency speculative attacks and the spread of multinational corporations.

To them, radical alternatives should be adopted. For example, freeing the prices charged by the foreign-owned electricity, gas and telephone companies. A dual exchange system should be introduced to protect local industry.

Conclusion: should Argentina follow IMF’s advice?

As we can see, a revival of radical policies would be strongly opposed by the US and Europe, which want to expand free trade on the terms most advantageous to multinationals. It is extremely doubtful whether the IMF is a genuine liberalist.

If IMF really adopts liberalism, why did it allow Argentina to have currency peg in 1991? Why didn’t they insist to let peso float? On the surface, the reason seems to be the hyperinflation. But the ultimate motive was to guarantee the return of investments of the multinational corporations. Hence, the IMF being dominated by the developed countries, it represents the core economies’ interests. Rather than helping Argentina to grow, the IMF was trying to open up new markets and business opportunities for the core economies.

According to Mr. Michael Mussa, former IMF chief economist, the IMF recognized Argentina’s destructive spending patterns in the years of 1996-1998 but it cannot do anything about it. He also attributed the failure of Argentina to the government’s failure to maintain fiscal probity’.[66] From his comments, we can see that the IMF actually knew very little about Argentina. It failed to notice that both the government and legal system was corrupt, which means that all the IMF’s fascination with fiscal balance may be just a wrong measure.

On the other hand, some people are more critical over the IMF. They said that the IMF gives countries bad economic advice, then lends heavily to them, allows them to waste the new funds, and watches as the Government’s popularity plummets. David Malpass, the chief economist at Bear Stearns, even says the IMF continues to support economic policies that “would never be tolerated in the US”.[67]

It seems that IMF’s advice is more concerned with the long-run economic development rather than short-term remedies. In fact, the situation would even be worsened if IMF’s advice is followed strictly. The IMF should make growth its mission, not austerity or balanced budgets. Leading the IMF to seek growth would break it from the bad habit of prescribing weak currencies, high tax rates, massive bailouts and now bankruptcy.[68]

In our opinion, it may be beneficial for Argentina to adopt the radical measures in the short-run to avoid further destruction of the economy. However, to achieve long-run economic success, Argentina should adopt the IMF advice selectively. For example, it should not open its economy immediately. It should let some of its local industries grow so it can generate national income without the inflow of foreign capital, which is unreliable and unpredictable. In the long run, IB involvement can be a catalyst for economic growth if it is used strategically. But Argentina must make sure that it is internally healthy before doing so. For example, they should have a mature system of corporate governance, adequate measures to regulate the capital flow and have developed its own industries. Developmentalism together with IB involvement can general growth in a responsible manner and lead to long-term success.

So far we have covered and analyzed Argentina in trade, foreign direct investment, and financial flow activities that partake in the international political economy. From our analysis, we have determined whether or not Argentina should remain open or closed in each of these activities in order to best benefit its economic/political/social situation. Our analysis in each area was based on the perspectives of liberalism, mercantilism, and radicalism of Argentina’s involvement in international business. We will now focus on present day Argentina and apply what we have discussed throughout this case about whether or not Argentina should become more or less involved in international business by opening or closing its economy.

Argentina’s current economic situation (present day 2002)

Argentina is going through an economic crisis with its financial system on the verge of collapsing. Argentina is currently seeking US$9 billion to stabilize its finances and at the moment, the International Monetary Fund is refusing them financial assistance. International Monetary Fund managing director Horst Koehler states support will come only after what he calls a “sustainable approach to Argentina’s economic problems.” The IMF suspended a US$22 billion bailout package in December after Argentina missed its fiscal deficit target, defaulted on it US$141 billion debt, and devalued its currency. Argentina is now in its 46th month of recession and its banking system is facing a serious drainage of deposits. Thus, the central bank suspended bank and foreign exchange operations as of April 22, 2002, which led to further exacerbation of the amount of social unrest already caused by the government’s fiscal policies. Today, 22 per cent of the workforce is jobless and angry protestors are continuing to demonstrate to protest the shutdown of Argentine’s banks. On Tuesday, May 14^th, 2002, the Argentine government will face its first general strike since Duhalde took office on January 1^st. General Labor Federation (CGT), the country’s largest trade organization, is calling the strike and strike organizer Hugo Moyano reports that the labor movement is demanding a wage hike to compensate for the effects of the ‘hefty’ devaluation over the recent months. The protests will also demand Duhalde’s resignation, that the government change its economic policies, and that the congress reject the changes proposed by the IMF.[69]

Amidst this crisis, Prime Minister Jorge Remes Lenicov resigned his position on April 23^rd this year. Reports indicate that Roberto Lavanga, the country’s ambassador to the European Union will be the most likely candidate to replace Lenicov. Lavanga, a former commerce secretary, is said to have good ties to both of Argentina’s main political parties.

G7 ministers are urging Buenos Aires to reform fiscal and monetary policies as well as improve bankruptcy laws so as to restore investment and growth, lifting people’s living standards.[70] The G7 ministers also make it clear that in future agreements for emerging-market countries to borrow money; debt-restructuring provisions included should clarify what happens if payment problems arise.

President Eduardo Duhalde is holding meetings with the international community for the government to find a credible rescue plan. For a quick overview of Argentina’s economic state under President Eduardo and Jorge Lenicov (Peronist party members)--- the currency was devalued and floated after a decade in which the peso was fixed to the dollar, restrictions were made on withdrawals from account, imports dried up due to the Central bank being slow to authorize foreign transactions, and wages and spending were cut. President Eduardo Duhalde and most of the provincial governors have signed a 14-point plan that promises monetary discipline and respect for international accords but it was criticized for being short on details. The lower house on April 25^th, 2002, joined the Senate in approving a key economic bill aimed at propping up Argentina’s tottering financial system by tightening the 4-month-old banking freeze.[71] The freeze is put there to keep depositors from ‘yanking’ out their savings thereby causing a financial meltdown. In Washington, Treasury Secretary O’Neil seemed unconvinced that Argentina was on the right track and comments that “They have got to have an arrangement so that the national government is not at the mercy of whatever the provinces decide to do.”[72] Duhalde said that a strong peso was one of the main causes of Argentina’s four-year recession and it has been reported that he is now considering returning Argentina to a fixed exchange rate.

Perspectives on the source of Argentina’s current crisis

Economists question the cause and effect of what may have led to the financial crisis Argentina faces now after viewing its current economic state. After making an assessment of their analysis, the factors that have led to Argentina’s current economic state according to them includes the currency board, banking system, IMF, fiscal policy, and political mismanagement. We will be applying the different perspectives and activities previously discussed towards the factors that have influenced Argentina’s state to its current economic crisis.

Mercantilist perspective

According to the Mercantilist, these factors have inhibited Argentina’s economy from becoming efficient as well as secure in the global market.

·The Currency Board

For some economists, the answer to the cause of Argentina’s current crisis starts with the currency board, which can be traced back to the hyperinflation of the 1980s. “Anchoring” the currency to the dollar was meant to change expectations and slash inflation. The IMF had later encouraged this exchange rate system, which did lower inflation. However, the peg did not promote sustained growth and the rigidity of the currency board made it difficult for Argentina to withstand external shocks. Prices for Argentina’s commodities stopped rising, the cost of capital increased, the dollar depreciated against other currencies, and Brazil (Argentina’s main trading partner) devalued. Argentina, unable to devalue its currency, could only be competitive if prices fell. Deflation arose from recession, which caused unemployment and falling wages. Also, Tariffs increased along with American inflation and interest rates remained high despite falling prices.

Argentina suffered from the disadvantages of having such an exchange system by keeping a fixed peg. Argentina had ceded control of its monetary policy by the fixed peg. The criticism that lies behind the currency board is that Argentina should have fixed a more flexible exchange rate system relative to the country’s trading pattern

·Banking System

Argentina’s banking system is also under close scrutiny for the causes of its current economic situation. Argentina allowed a large foreign ownership of its banks and these foreign-owned banks are blamed for slowing growth after the hyperinflation because they failed to lend to small and medium sized firms. The criticism with the banking system is that Argentina over-relied on foreign banks.

·IMF

Critics blame IMF and its mismanagement for the ‘97 crisis of East Asia. The crisis led to high interest rates in Argentina’s market, which strained the country’s budget and Argentina’s debt to GDP ratio remained at around 45 percent. Moreover, unemployment skyrocketed and the crisis set the dollar to increase sharply in value. With 20 percent interest rates, 9 percent of the country’s GDP would be spent annually on financing its debt. The 2000/2001 global slowdown worsened Argentina’s situation when the IMF encouraged a contractionary fiscal policy that led to a slowdown and budget targets could not be met. The IMF has been working hard to shift the blame using allegations of corruption and the fact that Argentina did not pursue needed measures even though following the IMF’s advice regarding contractionary fiscal policies made matters worse. After two and half decades of IMF backed free market reforms and its “neo-liberal” policies, more than 40% of the 38 million in the population live below the poverty line and 100 children are being reported daily of dying from hunger and disease.

Liberal perspective

Liberals view the IMF to be a positive force in Argentina’s economic situation because IMF promotes free trade and financial flows. They believe that liberalism leads to growth in the long run even if there are problems in the economy to be dealt with in the short run due to the policies the government would have to undertake.

·IMF

Liberals are also criticizing the IMF for its involvement in Argentina’s economic affairs but largely, they blame Argentina for taking advantage of the IMF’s aid. Their view is that the IMF has been too tolerant for too long of Argentina’s combination of fixed exchange rates and fiscal laxity, since the IMF has had to “bail” out Argentina already 9 times since 1983. Analysts believe that on a long-term scale, only an intervention by the United States similar to Washington’s bailing out of Mexico in 1995 and Brazil in 1998 will solve Argentina’s problems once and for all.

Liberals usually advocate such programs to free trade and markets in the economy and tend to blame the government for the ‘closed’ economic environment that leads to economic crisis.

·Currency Board

Liberals argue that Argentina did not restructure its economy after the initial success of the currency board in taming inflation. Therefore, it was the government at fault for not providing the right economic environment for the currency board. For example, Giancarlo Perasso is a Central Europe economist at JPMorgan Chase in London and he says that the currency board is fully credible in serving countries well. However, Perasso says that having a currency board is not enough to guarantee a stable economy. He says a currency board seems to work best when the country has a very open economy—in other words, when it trades a lot with the outside world.[73] Moreover, Perasso comments that the currency board did not work in Argentina’s case because, “Argentina is not a very open economy. Exports are just above 15 percent of GDP, so it is difficult for Argentina to earn the foreign currency necessary to sustain the expansion of the monetary base because that is the basis of a currency board.

Radical perspective

Radicals believe that the government should promote equality within the economy rather than just focusing on wealth.

·Fiscal Policy

Economists blame loose fiscal policy as the result of Argentina’s financial crisis. The Government printed bonds to finance its fiscal debt while public debt rose due to Mr. Menem trying to buy political support for an unconstitutional third term. Much of government spending was inefficient, and involved corruption. Not only that, the tax system itself was inefficient and tax evasion was high.

·Political Mismanagement

Mr de la Rua, Mr Menem’s successor, was faced with cutting government spending in the midst of recession because of Mr Menem’s failure to balance the books. His alliance government was noted for being weak and indecisive. Mr. De la Rua also failed to back up Mr. Lopez when Mr. Lopez announced a plan to cut public spending. Economists write, “With Mr Lopez went the last serious chance of saving the currency board.”[74] Mr. De la Rua also drafted Mr. Cavallo who raised the idea of devaluation, which ‘spooked’ foreign investors, drove up interest rates, and deepened the recession. Cavallo is also criticized for “destroying” both the banking system and the central bank by easing the banks’ reserve requirements and raiding the financial system to pay for the government. Cavallo also strong-armed local pension funds into buying government paper and local banks into swapping their holdings of government bonds in return for low interest rates. This crisis is reported to have occurred because “fiscal weakness led to banking weakness, as the government ended up using the reserves of the whole banking system.”[75] In the Radical’s perspective, the government ‘stole’ the people’s money and broke their trust by not allowing their citizens to get their savings back. The government had deprived the people of their rights.

Analysts say that the current crisis is mainly due to politicians who continued to borrow on the international capital market to finance large and growing budget deficits. Critics blame politicians for their decision-making on Argentina’s free-market reforms by saying the problems were caused by the speed and extent of these reforms inspired by the so-called neo-liberalism, or Chicago-style economics.[76]

Summary of Lessons Learned

Mercantilist Perspective

1. In a world of volatile exchange rates, pegging a currency to one like the dollar is highly risky.
2. Globalization exposes a country to enormous shocks. Countries must cope with those shocks (such as adjustments in exchange rates).
3. Growth requires financial institutions that lend to domestic firms. Selling banks to foreign owners, without creating appropriate safeguards, may impede growth and stability.
4. One seldom requires economic strength—or confidence—with policies that force an economy into a deep recession. For insisting on contractionary policies, the IMF bears its great culpability.
5. Abolishing capital controls creates instability.
6. (IMF) Austerity plans during deflationary periods are disastrous
7. Bond markets are no more reliable than private banks in providing governments with long term financing.
8. The government should safeguard its financial system closely and should not allow the market forces to exercise their discipline. Argentina over-relied on foreign banks in the financial market but did not nurture any indigenous financial institutions. Operation termination of the foreign banks in Argentina could be extremely disastrous.[77]

Structuralist Perspective

1. Any government that follows policies that leave large fractions of the

population unemployed or underemployed is failing in its primary mission.

2. A single-minded focus on inflation-without the concern for unemployment or growth—is risky
3. It is inherently difficult to adjust a pegged exchange rate. The people lost confidence in the peg and the foreign exchange black market had undermined the peg sustainability enormously.
4. Refer to the dependency theory—substantial foreign borrowing in dollars is a very risky strategy, which is particularly more true for long term debt than short term debt.

Liberal Perspective

1. Large current account deficit is dangerous, especially when they are used to support domestic consumption and are being financed by short-term debts.
2. It is essential to maintain open markets to ensure a rapid recovery. “It is tempting to close the economy by taking protectionist measures, but this delays the recovery,” says Kuczynski.[78]
3. Infrastructure is a key to integration—physical integration, the building off infrastructure linking neighboring countries, may be a keystone for recovery in the economy.

Solutions from other’s views/perspectives

Mercantilist perspective

Mr Remes Lenicov, a natural Keynesian, believes that free markets do not offer solutions to every problem, and that governments can help spend an economy out of a crisis. His current policies for helping Argentina hold a Mercantilist perspective. According to Lenicov, this would be a more protectionist and domestic-oriented growth policy that could bring about a sustainable recovery. For example, in the 1940s, General Juan Peron’s economic model centered on producing for the local market and this state-led industrialization model was supported by rising purchasing power of workers, who organized powerful trade unions, pushed up wages, and won higher benefits and welfare. This domestic-growth oriented policy would not subject Argentina to external risks and it would focus on the sovereignty of the government to help Argentina’s economic state.

Liberal perspective

Steve Hanke, a professor of Applied Economics at John Hopkins University in Baltimore and a strong advocate of dollarisation, argues that linking to the dollar will eliminate exchange rate risk, with little risk of hurting competitiveness. “Take the exchange risk out of the system and interest rates will come down dramatically towards the rates paid on dollars, “ he said.[79] The government, purely for the Multinational’s interest, set up the currency board in Argentina. Liberals like Steve Hanke believe that this is a system that will promote economic recovery in Argentina.

Others believe that dollarisation could make exports less competitive, while devaluation could increase interest payments on dollar debts. HSBC’s emerging market analyst David Lubin suggests a mix of devaluation and dollarisation, which should in theory protect Argentina from the worst effect of either policy. “The government or central bank could dollarise at a rate other than one to one, which is the current exchange rate,” Lubin said.[80]

Economists say that the new Argentinean government is taking the right steps in the right direction with the devaluation of its currency by at least 30% and ending the fixed link with the dollar. They say that this will boost exports and help restore Argentina’s foreign currency earnings, which may help pay off its huge foreign debts. Devaluation would promote trade from Argentina on the international level.

However, the devaluation of the peg will hurt foreign businesses in Argentina by making their investments in the country less valuable and their profits smaller, which is another factor that liberals may have to take into account of multinationals in Argentina. Devaluation is also bad news for people in Argentina who have borrowed money in dollars and are paid in pesos. Debts will rise and as imported goods become more expensive, high inflation can occur.

Analysts believe that Argentina should get some more breathing space to cut taxes and to get the economy moving because if growth restarts (which is what investors are looking for), the pessimism will likely to fade away. So neither dollarisation nor devaluation are the real issues, says Richard Madigan, director of Latin American investments at Offibank. The debate on Argentina should now center on “the administration’s willingness to accept (well-earned and deserved) support—and breathing space (meaning to default)—from the multilaterals, to work itself out of its current economic malaise.”[81] Liberals believe all these measures should take place so that foreign companies may reinvest in Argentina once the economy picks up again.

Radical Perspective

Lawrence Harrison is a co-author of the book “Culture Matters” and he argues that any solution to that of Argentina’s problems will depend on new leadership. Harrison’s view is an example of what many radicals believe is the solution to Argentina’s problems of unequal distribution in the economy, especially at present. “The new leader should not present himself as capable of offering magical solutions, but rather be able to perceive and understand the country’s profound difficulties and communicate to the population the need for hard work and sacrifice over a prolonged period. This is the only way to rebuild politically and economically and restore the fabric of society,” he writes.[82]

Conclusion—Argentina as an open or closed economy?

In our conclusion, we would like to go over a quick recap of each perspective on Argentina and its involvement in business. Following, we will present our analysis that will formulate our answer to whether or not Argentina should exist as a closed or an open economy.

We found out that radicals would prefer to ‘fix’ Argentina’s economy by setting up new leadership to ‘erase’ the corruption that has been running rampant in the government. This new leadership would probably not be as easily persuaded to change its policies and reforms by outside forces like the IMF as well. In their perspective, the developed countries will always exploit Argentina as an underdeveloped country, if Argentina remains open to international trade. In addition, according to the radicalists, the IMF focuses more on economic balance rather than social justice. Radicals would favor a dual exchange rate to protect their local industry. Radicals also accuse the multinational companies for its massive layoffs creating a high unemployment rate as well as exploiting their workers.

However, Liberals say that Liberalism leads to growth and that corruption can be avoided as well as resources allocated more efficiently if free market policies such as free trade and deregulation are implemented. IMF promotes such policies and reforms. According to the Liberals, the free-market reforms in 1991 vastly improved Argentina’s economy even though an economic crisis resulted in the present. Efficiency was gained through the competition foreign direct investment brought in by forcing uncompetitive local businesses out of the market. They also argue that the banks were made more stable through privatization.

Mercantilists, on the other hand, feel that it is necessary to adopt protectionist measures to develop its economy and provide security for its people. Thus, they would be against Argentina opening up its market for globalization. IMF is a threat to Mercantilists because the IMF’s austerity programs have contributed to Argentina’s financial crisis. Examples include the collapse of tax receipts, high interest rates, an investment standstill, and deadly riots. Mercantilists also blame multinationals for subjecting the economy to foreign control through its key decisions as well as the IMF for the economy’s dependence on it for its foreign debt. They argue that the IMF is more interested in protecting the interests of the multinationals rather than helping Argentina solve its problems.

In following Argentina’s international and domestic business activities, we have seen Argentina revert from a tightly closed economy during a financial crisis to an extremely open economy, which is now again in a financial crisis. Argentina faced a financial crisis both times during Juan Peron’s rule and Menem’s rule. Therefore, Argentina faced a financial crisis under a mercantilist/radical structure as well as a liberal one.

Our analysis concludes that Argentina went to the extremes in the closing and opening of its economy, which led to its financial crisis in both cases. Argentina should have adopted IMF’s advice more selectively rather than opening its economy immediately. The government should have focused on its domestic affairs and take them into consideration before making decisions it was not ready to make. In the future, regular and timely publication of the latest economic indicators (like information on foreign reserves) would help generate corresponding market expectations, which could be used to avoid market shocks. We agree that at this time, Argentina may not be ready to become a totally free-market economy. Argentina may want to look more into protectionist measures for its domestic activities and let its local industries generate national income instead of letting its industries be controlled by foreign capital, which may prove unreliable from Argentina’s experiences beforehand with foreign investment. We have agreed before that in terms of foreign direct investment, Argentina should regulate the amount of involvement multinationals have in its industries. Argentina should neither completely close its borders to international trade but regulate its economy so that it keeps some sovereignty over its economic decisions rather than allowing itself to be dictated by hegemonic decisions. In order to make the economic decisions best fit for its economy, the government will need to clean up its act and change some of its reforms. The government indeed faces a serious need to regain trust with its citizens. Would a government based on popular elections, meaning a democratic government, maintain public support if its policies increased inequality and neglected poverty? From a recent study conducted by Nancy R. Powers on Argentina’s democratic government viewed by its people, she concluded that “while citizens were dismayed by the poor quality of democracy in Argentina, their contextual reference points and their understanding of democracy in largely procedural terms led most to wish to improve the current regime rather than to replace it.”[83] We agree with this statement that the government may not need to be replaced but improved.

Mercosur is one way that Argentina may be able to adopt some degree of protectionist measures while at the same time benefiting from trade with its neighbors. In globalization and in fully liberalizing its markets, Argentina should take a step-by-step approach so that it may protect its economy domestically at the same time. In conclusion, our answer to whether or not Argentina should open or close its economy is neither. Argentina should work its way from a half closed and half open economy with protectionist and domestic-oriented growth policies to an open economy, which will allow Argentina to integrate itself into the international business world at a safe pace fit for its current economic situation. Thus, Argentina can best benefit by working with the mercantilist/structuralist perspective of protectionism, security, and somewhat interdependence as the means of a beginning to a liberal end, where the economy will eventually gain wealth through efficiency.

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[1] “Special report: Argentina’s collapse- A decline without parallel”. The Economist. Mar 2nd, 2002.

[2] Keeling, D. (1997). Contemporary Argentina – A Geographical Perspective. Westview Press: Colorado p44

[3] Gerchunoff, P. (1989). “Peronist Economic Policies”. The Political Economy of Argentina 1946-83. MacMillan Press: London. p64-65.

[4] Prebisch, R. quoted from Gerchunoff, P. (1989). “Peronist Economic Policies”. The Political Economy of Argentina 1946-83. MacMillan Press: London. p 61.

[5] Cavallo, D. (1992). Argentina’s Recent Economic Reform in the Light of Mundlak’s Sectorial Growth Model. International Food Policy Research Institute: Washington DC. p5

[6] Ibid p7

[7] Corbo, V., J. de Melo and J. Tybout. “What Went Wrong with the Recent Reforms in the Southern Cone”. Economic Devolopment and Cultural Change. Vol 34, Iss 3 Apr 1986. p610-612

[8] Argentina – Insolvency to Growth. A World Bank Country Study

[9] di Tella,G. (1989). The Political Economy of Argentina, 1946-83. MacMillan Press: London p320

[10] Perez del Castillo, S. “Mercosur: History and Aims”. International Labour Review. Vol 132 No.5-6 1993. International Labour Organization. p639

[11] “Trade Restrictions: Political Support and Opposition”. Political Risk Services. IBC Licensing: USA March 1 1998.

[12] “Argentine president addresses Brazilian Senate on importance of Mercosur” BBC Summary of World Broadcasts. BBC: London. Nov 13, 1997.

[13] “The History of Mercosur”. Website: http://www.mac.doc.gov/ola/mercosur/mgi/history.htm

[14] Ugarteche, O. (2000). The False Dilemma – Globalization: Opportunity or Threat?. Zed Books: London. p120

[15] Argentina – Insolvency to Growth. A World Bank Country Study

[16] World Bank Doctrine 1987 quoted from Ugarteche, O. (2000) The False Dilemma – Globalization: Opportunity or Theat?. Zeb Books: London. p103

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[18] Suranovic, S. The Infant Industry Argument and Dynamic Comparative Advantage. URL: http://internationalecon.com/v1.0/ch100c050.html

[19] Street, J. and D. James. “Institutionalism, Structuralism and Dependency in Latin America”. Journal of Economic Issues. Vol 15 No.3 Sept 1982

[20] Dos Santos, T quoted in Street, J. “The Institutionalist Theory of Economic Development”. Journal of Economic Issues. Vol 21 No.4 Dec 1987

[21] Penrose, E. in Ugarteche, O. (2000). The False Dilemma – Globalization: Opportunity or Threat?. Zed Books: London. P106

[22] Magdoff, H. in Ugarteche, O. (2000). The False Dilemma – Globalization: Opportunity or Threat?. Zed Books: London. P109

[23] Holland, T. “Latin Lesson”. Far Eastern Economic Review. Vol 163 Iss 52 Dec 28, 2000

[24] Keeling D. (1997). Contemporary Argentina – A Geographical Perspective. Westview Press: Colorado p110

[25] Ibid

[26] Carlos Gabetta, Argentina: IMF show state revolts, Le Monde Diplomatique January 2002

[27] The PRS Group/International Country Risk Guide 1 May 2000

[28] Editorial, Multinational Monitor Vol 16 No 11 November 1995

[29] Tom Gill, The IMF’s delinquent pupil, Guardian Unlimited 15 January 2002

[30] Joseph Stiglitz, Lessons from Argentina’s debacle, Straits Time (Singapore) 10 January 2002

[31] Carlos Gabetta, Argentina: IMF show state revolts, Le Monde diplomatique January 2002

[32] Bob Djurdjevic, Don’t Cry For Me, Argentina, New World Order 21 December 1999

[33] n1

[34] Bob Djurdjevic, Don’t’ Cry For Me, Argentina, New World Order 21 December 1999

[35] n1 p112

[36] n1

[37] n1 p111

[38] Diane Abbott MP, Argentina shows the reality of globalization, www.poptel.org.uk/scgn/articles/0201/page5.htm

[39] Carlos Gabetta, Argentina: IMF show state revolts, Le Monde diplomatique January 2002

[40] n1 p104

[41] Tom Gill, The IMF’s delinquent pupil, Guardian Unlimited 15 January 2002

[42] Special Report Argentina’s Collapse, The Economist, March 2^nd 2002.

[43] Stabilization programs and the severity of the Crises, World Bank.

[44] Special Report Argentina’s Collapse, The Economist, March 2^nd 2002.

[45] International Political Economy, 2^nd Edition, David Balaam and Michael Veseth.

[46] http://www.web.net/~halifax/Tobin/tobinindex.htm

[47] World Bank: Report on Argentina’s Financial Crisis

[48] Special Report Argentina’s Collapse, The Economist, March 2^nd 2002.

[49] World Bank: Argentina at a Glance

[50] http://www.thisismoney.com/20011228/nm42239.html

[51] http://europe.cnn.com/2001/BUSINESS/12/20/crisis/index.html

[52] Quoted from World Bank website. www.worldbank.org

[53] Gill, Tom. “The IMF’s delinquent pupil”. The Guardian, Jan 15^th, 2002.

[54] Lim, Say Boon. “Economic self-sufficiency at the cost of independence”. The Straits Times (Singapore), Feb 11^th, 2002.

[55] Catan, T. and Mulligan M. “ End of era for IMF’s star pupil: Convertibility: Cavallo system proved a Faustian bargain”. The Financial Times (London) Jan 5^th 2002.

[56] Ibid, note 2.

[57] Ibid, note 4.

[58] Gill, Tom. “The IMF’s delinquent pupil”. The Guardian, Jan 15^th, 2002.

[59] Ibid, note 7.

[60] Karp, J and Wallin, M. “ Argentina to Float Peso ‘Soon’—Central-Bank President Plans to Implement System of Inflation Targets--- IMF Begins Emergency Aid Talks”. Asian Wall Street Journal, New York. Feb 1^st, 2002.

[61] Klein, N. “Revolt of the wronged: Argentina was a model IMF student. And it’s still suffering as a result”. The Guardian (London) March 28^th, 2002.

[62] Balaam D. and Veseth M. International Political Economy. New Jersey: Prentice-Hall, Inc, 2001.

[63] Malpass, D. “A Radical Idea: The IMF should promote growth”. Asian Wall Street Journal; New York. Dec 31^st, 2001.

[64] Klein, N. “Revolt of the wronged: Argentina was a model IMF student. And it’s still suffering as a result”. The Guardian (London) March 28^th, 2002

[65] Ibid, note 13

[66] O’Grady, M. A. “Monster Government: A Bill for IMF Profligacy Comes Due”. Asian Wall Street Journal; New York. Apr 9^th, 2002.

[67] Kaur, H. “IMF- creditor, economic advisor and bankruptcy arbiter”. Business Times; Kuala Lumper. Jan 7^th, 2002.

[68] Malpass, D. “A Radical Idea: The IMF should promote growth”. Asian Wall Street Journal; New York. Dec 31^st, 2001

[69] EFE News Service, “Argentina-Crisis (Scheduled) Argentina, with strike looming, debates IMF conditions”, May 12, 2002.

[70] Agencies in Washington. “Powers pus Argentina”. The South China Morning Post. April 22 2002.

[71] Norman, Laurence. “Argentine Senate Oks Bank Plan,” wwww.argentinaglobe.com/- April 25, 2002.

[72] Norman, Laurence. “Argentine Senate Oks Bank Plan,” wwww.argentinaglobe.com/- April 25, 2002.

[73] Knox, Kathleen. “Central Europe: What Lessons Can Be Learned from Argentina’s Economic Crisis?” www.rferl.org/nca/features/2001/12/21122001092618.asp

[74] “A Decline without Parallel.” The Economist. March 2^nd, 2002. P. 27, column 1.

[75] “A Decline without Parallel.” The Economist. March 2^nd, 2002. P. 27, column3.

[76] Becker, Gary. “Deficit Spending Got Argentina into This Mess,” Business Week, February 11, 2002. www.businessweek.com/magazine/content/02_06/b3769031.htm

[77] Croisset, Charles. “HSBC may withdraw from Argentina if the country’s crisis continues.” www.thismoney.com/20022402/nm46392.html

[78] “The Argentine Crisis: Prospects For Recovery and Lessons Learned.” www.iadb.org/exr/am/2002/TODAYsnew/eng/MARCH10e.HTM

[79] BBC, Analysis: Argentina’s Woes explained. Monday, Dec 3^rd, 2002. news.bbc.co.uk/hi/English/business/newsid_1689000/1689554.stm

[80] BBC, Analysis: Argentina’s Woes explained. Monday, Dec 3^rd, 2002. news.bbc.co.uk/hi/English/business/newsid_1689000/1689554.stm

[81] Catan, Thomas. “DEBT: Breathing space may be the answer,” Financial Times Survey. Specials.ft.com/In/ftsurveys/country/sc237c2.htm

[82] BBC, Analysis: Argentina’s Woes explained. Monday, Dec 3^rd, 2002. news.bbc.co.uk/hi/English/business/newsid_1689000/1689554.stm

[83] Powers, Nancy R. Grassroots Expectations of Democracy and Economy; Argentina in Comparative Perspective, University of Pittsburgh Press, 2001. Pg. 209.