Argentina Doubts Market Wisdom
Crisis Weakens Region's Embrace of Capitalism, Many Say
By Anthony Faiola
Washington Post Foreign Service
Monday, August 6, 2001; Page A01
BUENOS AIRES -- Rusting hulks of abandoned factories line the barren
industrial landscape of this metropolis. On one desolate stretch of
highway, a few lights still shine in the sparse office of Pablo Siano,
the mustachioed, stocky director of the La Candeuse mattress factory,
who is trying to keep his company afloat as Argentina faces a roiling
financial crisis.
"Look outside my window and you can see all the reasons we have lost
faith in the free market," said Siano, motioning to the roadway where
jobless workers warmed their hands over a fire in the Southern
Hemisphere winter air. "Here we all are now, back struggling to
survive."
The bleak tableau offers a glimpse of a powerful sentiment now running
through Latin America. After a decade of free market reforms, many
workers, politicians and business leaders are deeply discouraged by
the outcome, and doubting the very wisdom of the capitalist model they
once embraced.
The backlash is especially acute here in Argentina, which is teetering
on the edge of default on its $128 billion debt, threatening a global
financial crisis that could shake neighboring Brazil and other such
emerging markets as Russia and Turkey. On Friday, the managing
director of the International Monetary Fund, hoping to bolster
investor confidence, announced the lender was preparing to grant a $15
billion emergency line of credit to Brazil and accelerate a $1.2
billion loan installment to Argentina that is part of a $13.7 billion
package already approved. But some analysts say Argentina may need
billions of dollars more in fresh loans to climb out of its
difficulties.
The disillusionment with free markets in Argentina and elsewhere could
influence how the United States and international financial
organizations respond to the latest crisis. It could also deal a blow
to the Bush administration's proposal for an expansion of market
principles in a massive initiative called the Free Trade Area of the
Americas, stretching from Tierra del Fuego to the Arctic Circle, to be
put in place no later than 2005.
Leading economists and political analysts now say that if Argentina
defaults on its debt or is forced to devalue its currency -- which
would plunge the country and perhaps the region into a deeper
crisis -- the anger and disappointment with market reforms could
spread.
"If Argentina collapses, we're not talking about just an economic
contagion in emerging markets, but a political one," said Daniel
Artana, chief economist at FIEL, a Buenos Aires-based research
organization. "The real danger is that rather than see it as just one
nation's failure, restless left wingers will point to Argentina, a
country that went full thrust with the free market, and say it is
evidence that capitalist reforms simply don't work."
Free Trade Protests
Today, Latin America is battling its highest unemployment rate in
almost two decades, and its third major economic slowdown in six
years. Many countries in the region are coping with ailing industries
and, in some cases, soaring poverty rates.
The current troubles stem in part from the faulty implementation of
free market policies, many economists say, including runaway public
spending and pervasive corruption. They say it will take more time for
Argentina and other countries to recover from decades of inefficiency
and the big-state model that drove their economies into the ground
before reforms were embraced.
But with globalization linking emerging markets as never before,
countries such as Argentina have also faced severe setbacks from
crises in Asia, Russia and other Latin American nations.
That has also soured political moods on capitalism. A public opinion
poll by Equis Consultants shows opposition to a further reduction in
trade barriers in Argentina is now running at 70 percent, the highest
in a decade. Meanwhile, another survey, by the Ipsos-Mora y Araujo
firm, showed that public support for the privatization of state-run
companies had sunk to 50 percent, down from more than 70 percent only
four years ago. Across Argentina, anti-free market demonstrations,
general strikes, and transit roadblocks set up by the jobless are
happening more often and producing more violence, with three people
killed and dozens wounded over the past three months.
Domingo Cavallo was once hailed as a free market champion who, as
economy minister, orchestrated the opening under former president
Carlos Menem. Cavallo was brought back to the same post in March to
help rescue the country, but now has become the target of biting
satire in editorial cartoons and on television. One cartoonist
recently depicted the pudgy economist clad only in the U.S. flag.
The backlash to reform has surfaced in novels, television plots and
plays. One Buenos Aires theater is now showing "Los Albornoz," a black
comedy about a middle class Argentine family sunk into poverty during
the reform era, and whose unemployed father finally turns his children
into prostitutes to make ends meet.
In Brazil, Latin America's largest country, which is also going
through a slowdown, 40,000 anti-free market demonstrators marched on
the capital in June. Luiz Inacio "Lula" da Silva, a longtime populist
from Brazil's Workers' Party, has jumped to a strong lead in opinion
polls for next year's presidential race.
During a national radio broadcast this weekend, Venezuela's populist
leader, Hugo Chavez, attacked the upper classes and stingingly berated
the free market. "The voice of the people is the voice of God; the
market is not God," Chavez said. "That is what they have tried to
convince us of here."
"Where is the progress we were promised?" said Gladys Waimar, 35, a
teacher from Buenos Aires who joined a demonstration against a severe
government austerity package passed last week.
This month, the measures will slash her $520 monthly salary at a time
when she is already supporting her unemployed husband and a daughter,
13. All I see is a never-ending cycle of things getting worse," she
said.
State-Run Sell-Off
Argentina's massive privatization effort was launched by Menem, who
had his roots in the pro-union and left-leaning Peronist Party. He did
a political about-face and embraced the free market, in large measure
because he needed to end the hyperinflation that was draining the
government and threatening severe social unrest.
Desperate for cash, Menem sold off state-owned companies, often
through presidential decrees and backroom deals. In a number of
infamous cases, the sales were greased with bribes and other forms of
official corruption. Today, dozens of Menem's relatives and former
ministers are under arrest or investigation. Menem, whose term ended
in 1999, was placed under house arrest in June on arms trafficking
charges.
During the privatization project, little was asked of buyers in terms
of long-term investment. In one case still winding through the
Argentine courts, the contractor who was awarded the privatized
Argentine Post Office in 1997 took over operations, then promptly
refused to pay the $80 million yearly fee.
Perhaps the most notorious example, however, is that of Aerolineas
Argentinas, the national airline.
According to government and corporate records, in 1991 the company had
28 airplanes, the largest pilot training center in Latin America and
luxury offices from New York's Rockefeller Center to Rome's Via
Veneto. The airline was valued at $636 million and had an operating
profit of 5.6 percent. It was sold through a presidential decree to
Iberia Airlines, then owned by the Spanish government, for $260
million in cash and $1 billion in bonds. Sources familiar with the
deal say the Menem government allowed Iberia to use the planned sale
of one of Aerolineas Argentinas' own Boeing 747s as part of its down
payment.
The company, once one of the region's largest carriers with numerous
routes to Europe, the United States and Australia, was then picked
apart. Iberia executives -- several of whom have since been charged
with corruption and dismissed from the company -- sold off the
Argentine carrier's flight center, its prime retail offices around the
globe and all but one of its jets. In Europe, most Aerolineas
Argentinas routes were eliminated, essentially turning the carrier
into a South American feeder for Iberia's hub in Madrid. Today, the
shell of what is left of Aerolineas Argentinas is on the verge of
liquidation, saddled with $950 million in debt.
"Iberia sucked out most of the assets for their own purposes," said
Andres Ricover, a Buenos Aires-based air transport specialist. "There
was deliberate mismanagement, funneling out Aerolineas Argentinas
resources until the company was done in."
Even so, there is plenty of evidence that privatization also helped
modernize Argentina.
Before reforms, for instance, it took two or three years to get a
telephone installed in Buenos Aires. It now takes a few hours. In
1990, this teeming metropolitan area of 13 million had 3.1 million
phone lines, compared with 7.7 million in 2000. Spain's Telefonica and
France Telecom, the two main phone companies operating here, have
invested $17 billion over the past decade in desperately needed
upgrades to a dilapidated, state-subsidized system. Additionally, the
sale of the electric company -- one of the few done through a bidding
process -- improved service dramatically, ending severe power
shortages that plagued the country during the late 1980s.
In selling off monopolies, Argentina imposed little government
oversight on prices or service. For instance, during its three-year
recession, Argentina has been in a period of deflation, with salaries
and prices both falling. But phone company rates have continued to
rise, and consumer studies have shown that the lack of competition in
the international long-distance market has kept prices in Argentina
relatively higher than those in the United States, Europe and many
Latin American neighbors.
"We have adopted a free market, but not a fair market," said Carlos
Raimundi, a member of the Argentine congress.
Flood of Foreign Goods
The liberalization of trade was also difficult for Argentina. The
country was flooded by consumer goods, and hundreds of domestic
businesses were forced to close. Although economists say this is an
inevitable process of weeding out uncompetitive industry, the shock
waves for Argentina still linger -- and have contributed to the
backlash against market principles.
Only a few are suggesting a full reversal to the inefficient, heavily
subsidized economy of the 1980s, but many politicians and business
leaders in Argentina and other parts of Latin America are now calling
for a return of higher trade barriers. It is one of the most visible
signs of the backlash against free markets, although economists warn
that new restrictions will only bring more misery in the long run.
The move to liberalize trade was a serious blow to Alpargatas, a
textile and food conglomerate that had been a leader in the Argentine
clothing industry since 1885. A symbol of industrial pride during the
1940s era of Juan and Eva Peron, the firm, with nine factories and
11,000 employees, churned out everything from gaucho shoes to tango
suits, surviving military coups, war with Britain and hyperinflation.
But Alpargatas nearly went bankrupt after a barrage of cheaper imports
from poorer countries such as China and India. The company, like
hundreds of others here, fell into decline. In January, burdened by
debt and facing a painful third year of Argentina's recession, the
company was seized by its creditors.
Guillermo Gotelli, president of Alpargatas, insists companies here
were not given the conditions to compete. The government did not
control "dumping" of cheap imports from Asia and poorer nations in
Latin America, he said. Additionally, there was virtually no
protection from a surge of counterfeit goods that copied the
Alpargatas products. Nevertheless, he said the company tried to buckle
down, shedding almost half of its workforce and successfully setting
up export operations to Brazil and the United States.
Many economists say that Argentina, with a long history as having the
region's best-educated and best-paid workforce, needs to move beyond
aging textile factories to survive in today's global marketplace. It
needs new, competitive industries. Alpargatas is trying again with a
new business plan to do just that, launching a line of processed hake
from its foods unit rather than merely shipping raw fish for canning
abroad.
"It is the only way we will be able to evolve into countries such as
Italy and Spain . . . rather than see ourselves fall in our standard
of living to what you see in China or other parts of Latin America,"
Gotelli said.
One serious hurdle for exporters, however, has been Argentina's
currency, the peso. To defeat hyperinflation in 1991, Cavallo came up
with a plan, for which he is widely known, to link the peso to the
dollar on a one-for-one exchange rate. It worked: With confidence that
every peso was backed by a dollar, hyperinflation subsided.
But when economic turmoil hit East Asia and Latin America in 1997,
Argentina kept the dollar-peso rate constant, making its exports less
competitive. The exchange rate was rigorously defended in part because
many economists still said the peso-dollar peg was viable in the long
term if productivity and efficiency improved, while public debt was
reduced.
The political and social costs of devaluation were also considered too
high. A devaluation of the peso would have a devastating impact on the
middle class, which maintains much of its personal loans in dollars.
So the peso remained rigidly locked to the dollar.
Then, the devaluation in 1999 of the currency in Brazil, Argentina's
largest trading partner, further battered the economy. Dozens of
factories, considering the costs of being in Argentina too high, moved
across the border. It was easy to see why. Today, Gotelli said, the
cost of making a pair of sneakers in Argentina is almost twice the
cost in neighboring Brazil, where labor is cheaper and the currency
has plunged 75 percent over the past two years.
Argentina, a country that once enjoyed a standard of living akin to
parts of Mediterranean Europe, is now suffering a sustained increase
in poverty and a declining standard of living for millions. The
promise of prosperity from free markets and an open economy seems a
distant dream for many.
"Argentina now has to live up to its promise," said Artana, the
economist, "to focus on not only paying down its debt and emerging
from this crisis of confidence, but on making serious reforms of the
state, reducing costs and becoming globally competitive. We can't go
back in time and fix the mistakes of the past, but we can make sure we
don't repeat them in the future."
