Argentina: The demise of neoliberal economics?


The explosive events of mid December 2001 that toppled two presidents and left 30 dead in Argentina represent the culmination and logical outcome of almost 26 years of neoliberal economic policies. The common demand among the looters, the looted, and most of the middle classes was that the economic regime had to change.

People also said “Enough!” to politics as usual, corruption, and clientelism. Colorful chants peppered with plenty of insults were directed at finance minister Domingo Cavallo, then-president Fernando De la Rúa, ex-president Carlos Menem, the Supreme Court, and the entire political class.

Neoliberalism takes root in Argentina: 1976-1999

Absent from most media coverage, however, was the massive looting of Argentina’s wealth and assets, the product of 25 years of neoliberal policies.

The country’s neoliberal experiment began on March 24, 1976 when the most brutal dictatorship in Argentina’s 20th century history came to power through a military coup. The military’s economic policy reversed decades of protectionist development policies aimed at industrialization and developing the internal market.

The main contributions of the military government to neoliberalism were the partial opening of goods markets to trade, (causing many local enterprises to go bankrupt), the opening of capital markets giving rise to the prominence of international financial speculation in Argentina, and brutal repression of what was a militant and organized labor force, leaving 30,000 “disappeared” and wiping out a generation of activists.

The dictatorship ended in economic, social, and military disaster (remember the Falklands/Malvinas war?). The country’s industrial capacity had shrunk by 30 percent and capital flight had dramatically increased Argentina’s foreign debt. To make matters worse, income distribution had become highly unequal, leading to the disappearance of much of Argentina’s middle class.

Civilian Raúl Alfonsín came to power in 1983 and tried to reverse the military’s neoliberal policies. While initially successful, support for Alfonsín’s plan began to erode when both labor and capital found themselves with declining real income.

After several increasingly orthodox adjustments, the economic situation once again became unmanageable. Argentina’s foreign debt spiraled out of control, capital flight resumed, and increasing hostility from the international financial institutions created a chaotic domestic situation that forced Alfonsín to hold elections and leave office five months early.

Carlos Menem, the candidate of the historically pro-labor Peronist party, came to power in 1989. While he had campaigned on traditional populist themes, once in power he made a 180-degree turn towards neoliberal fundamentalism. After a year and a half of macroeconomic instability and two bouts of hyperinflation, Menem named Domingo Cavallo, a Harvard-trained economist, as finance minister.

With Menem’s full backing and under the guidance of the IMF, Cavallo implemented the most far-reaching structural adjustment program in Argentine history. He effected an immediate and radical opening of Argentina’s goods markets to trade, an opening of capital markets to unrestricted foreign capital inflows, and privatization of all state enterprises.

The cornerstone of Cavallo’s policy package was a currency board system that pegged the Argentine peso to the US dollar on a one to one exchange rate. While this initially helped to curb inflation, as the dollar strengthened vis-a-vis other currencies, Argentina became increasingly unable to export.

Menem’s ten years in office resulted in a radical restructuring of Argentina’s economy and society. Abrupt trade liberalization bankrupted much domestic industry and production, turning Argentina into a primary product and service economy.

Privatization of state enterprises was taken to ridiculous levels: mail services, airports, the rail system, social security, the national oil company, and all utilities were sold, often at laughable prices. State monopolies were transferred to the private sector, resulting in the remittance of extraordinary profits to company headquarters abroad.

Massive inflows of foreign capital to Argentina in the early 1990s fueled a boom in consumer credit, which in turn resulted in a large increase in consumer demand and positive growth rates from 1991 to 1994.

However, the December 1994 Mexican peso crisis resulted in massive capital outflows, which caused a strong recession in 1995 with unemployment reaching a record 18.4 percent. The tequila effect, as it came to be known, underscored the central structural flaw of Argentina’s neoliberal experiment: the economy’s dependence on foreign capital which could leave the country at vertiginous speeds.

The Asian, Russian, Brazilian and Turkish financial crisis of the late-1990s all had substantial repercussions in Argentina. Growth rates were erratic after 1994, and unemployment never dropped below 13 percent. Furthermore, inequality reached unprecedented levels, as did the number of Argentines living below the poverty line.

1999: Enter De la Rúa

Fernando De la Rúa, the conservative presidential candidate of the center-left Alianza coalition, won the 1999 election. He soon thereafter pulled a Menem: he deliberately and blatantly betrayed any progressive campaign promises and subserviently catered to the IMF and international financial capital establishment.

However, there was an important difference between De la Rúa and his predecessor: Menem had the smarts to channel enough cash to the indigent poor to hold their number more or less constant throughout his ten years in power (roughly 2.9 million). De la Rúa did no such thing, and by the time massive protests ejected him from office two years later, Argentina had 5.7 million indigent poor.

De la Rúa’s economic strategy was to administer the economy he inherited according to IMF austerity guidelines. According to the IMF, when Argentina brought its government expenditures under control (i.e. reduced already dangerously low social expenditures) and reduced its fiscal deficit to zero, foreign capital would flow back into the country.

As any student of introductory macroeconomics could predict, such fiscal austerity policies-worsened Argentina’s two-year recession. Argentina was thus caught in a downward spiral of falling growth and government income, larger deficits, more austerity, and so on.

When in March, 2001 it became obvious that the economic strategy was not working, De la Rúa brought back Menem’s finance minister, Cavallo, who made a last ditch effort to save Argentina from disaster.

Cavallo continued with the brutal austerity and adjustment policies of his predecessor. The recession progressively worsened with each of several adjustment packages in the second half of 2001. Domestic investors lost confidence in the economy, and began withdrawing bank deposits en masse. In order to halt the run on deposits, Cavallo issued a decree on December 1, 2001 known as the “corralito”, (or little corral) limiting cash bank withdrawals to $250 a week.

The “corralito” affected the whole social spectrum. Given Argentina’s recession and high unemployment (currently estimated to be at least 20 percent), informal sector and “under the table” employment is substantial. All of this operates exclusively with cash. Furthermore, most middle class people pay for rent, condo fees, domestic help, and children’s schooling with cash. Bank lines grew long and people’s frustration mounted.

The December Crisis

The first sign that Argentina was about to explode came on Wednesday, December 12 with an ill-publicized call for a “cacerolazo” (a form of protest where people take to the streets banging pots and pans, or “cacerolas”) by a small merchants association. What was supposed to last 15 minutes turned into a deafening half hour long cacerolazo. Everyone involved was surprised at the extent of the protest, although those in power barely acknowledged it.

A second dramatic indication of people’s discontent came on December 14-17, when the Frente Nacional Contra la Pobreza (FRENAPO, National Front Against Poverty, a broad coalition of groups of unemployed, progressive labor, human rights, and small business organizations) held a national consultation, run exclusively by volunteers, on whether the government should implement a subsidy to all unemployed heads of household.

More than 3 million people voted “Yes” to the proposal— more votes than the Peronists, the most successful party, got in the October 14 midterm election.

When poor residents of the city of Rosario started looting supermarkets on December 18, many analysts remembered the looting (in the exact same neighborhood) that eventually led to the fall of Alfonsín in 1989.

Throughout the night of December 18th and on December 19th looting spread to other cities and many Buenos Aires suburbs. Images of poor people looting supermarkets and durable goods stores filled Argentine TV and made their way around the world.

At 10:45 p.m. on December 19, President De la Rúa went on national TV. In his short speech he declared a national state of siege, and condemned opportunistic and violent looting (real but minor), showing a profound lack of understanding for the very real needs of millions of Argentines.

The president’s speech hadn’t ended when clanging saucepans were heard throughout the city. By midnight there were thousands of people in the streets banging pots and pans, shouting colorful chants and insults at Cavallo, the economic model, De la Rúa, and Menem, in that order.

Spontaneously people started marching to four congregating points: the finance minister’s private residence on swanky Libertador Avenue, the president’s residence in Olivos (a suburb on the northern side of the capital), Plaza de Mayo (the meeting place of many historically significant demonstrations), and Congress.

Crowds swelled, calmly if noisily demanding an end to neoliberalism and political corruption. By 1:20 a.m. on December 20th, the finance minister had resigned.

Peaceful protests continued through the night and the following day in spite of the most brutal police repression in decades, which left five dead downtown. By 7:30 p.m., when it became clear that the Peronists would not come to De la Rúa’s rescue, the president resigned. Argentines were ecstatic. Spontaneous, massive mobilizations had caused a hated regime to fall.

De la Rúa’s resignation caught the splintered opposition off guard. The Peronists had at least six presidential aspirants, none of whom were willing to set personal political aspirations aside for the national good.

Furthermore, initially Peronists grossly misunderstood the popular mood and the message of the popular uprising and “cacerolazo”. This became clear with the way the first interim president, Adolfo Rodríguez Saá, conducted office and by his appointment of several corrupt Menem-era officials as cabinet members.

Argentines again poured into the streets, this time protesting corruption and the banking restrictions still in place. The old popular belief about Peronists, “roban pero hacen” (they steal, but at least they do something) appeared to no longer hold. When the most important Peronist governors failed to support him, Rodríguez Saá was forced to resign after only a week in office.

What next?

After much internal party wrangling, Peronists nominated Eduardo Duhalde, then senator for Buenos Aires province, to complete the term of De la Rúa, who soundly defeated in the 1999 presidential elections. He had also been Menem’s first vice-president and governor of Buenos Aires province after that, with many allegations of corruption and drug trafficking. Still, according to Peronist congressmen, he was the best they had to offer.

Duhalde declared that the old marriage of government and finance capital was over, he upheld the default on foreign debt, and chose to break the decade-long peg of the peso to the dollar, first converting rent contracts, utility fees, and some dollar debts, to pesos.

Has neoliberalism died in Argentina? While it has clearly been given a crippling blow, and a change of economic model is badly needed, there are still worrisome signs.

First, the government continues to maintain the politics-business alliance as the main force behind economic policymaking. This is precisely what people in the street were clamoring against. As long as foreign banks, privatized utilities, and oil conglomerates have direct access to government, it will be politics as usual at the expense of the basic needs of the poor and indigent Argentines.

While it is true that the Duhalde government is structurally weak due to its transitory nature, it might benefit from changing the power axis to politicians-people, leaving the business lobbies out and really changing the economic model.

Second, a currency devaluation does not constitute a break with neoliberalism. Income redistribution and domestic market reactivation policies are fundamental to address the high level of concentration and inequality which have resulted from ten years of neoliberalism.

Furthermore, some form of capital control should also be implemented as a way of preventing the massive capital flight, mostly by banks, large corporations, and wealthy individuals, which has taken place over the last year.

Finally, while the government has explicitly stated that it upholds the public debt default declared by Rodríguez Saá, it still looks for IMF approval. Since the IMF is to blame for Argentina’s current disaster, it is hard to visualize how it could be a part of the solution to the country’s problems.

However, there are signs of hope. People have become aware of their power and it is unlikely that they will passively put up with more hardships. Furthermore, in many towns and cities people are holding neighborhood councils to discuss the situation, make proposals, and hold local politicians accountable.

There is also a growing, progressive opposition, which did very well in the October mid-term elections. They could become a real contender in the 2003 elections, or if the Duhalde administration falls and early elections result. In a very real sense, history is still being written.

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