The Failure of New Liberalism – the Case of… Argentina!!!
Argentina was a great place to live. Yes it
was, until the mid-70s. Consider that up to the mid-60s, Argentina had almost
the same GDP x capita than Italy or Austria. This explains the wave of
migrations from Europe to the southernmost country in the world. Argentina was
the country to receive most immigrants in the American continent, after the US.
A European system including public healthcare
and public universities and education, how could a Nation that was amongst the
10 richest of the world in the beginning of the 1900s claim down the ladder so
steeply? The explanation is not easy at all. In the post-war period, the
country grew rapidly. A fantastic welfare system and good standard of living
attracted migration from all parts of Europe, mainly southern Europe but also
eastern and northern Europe. However, the country was even then caught between
the US and the USSR politically speaking. Each time socialist movements
appeared to claimed for the rights of the workers, right-wing governments took
the state establishing “de facto” governments with political and financial
support from the US. This governments usually “re-established the order”, until
a new democratic government was set in place. Dictatorships flourished not just
in Argentina, but Chile, Brasil, you name it. The goal was to secure that the
region would not convert to communism, which represented a threat to the America
way of living. Other than political instability, the impact of this
dictatorships was not so big until the period known as “the process of deindustrialization”,
which began with a dictatorship in the period 1976 – 1983, had some resistance
in the period 1983 – 1989, and continued with the infamous 90s decade led by
Carlos Menem and then Carlos Fernando de la Rua until 2001. To avoid political
argument and focus this blog solely on economic factors, I will begin the story
in 1989, with the assumption of Carlos Menem as president.
The reason that I insist so much in historical
factors and mention renowned economists and well as events developing in other
countries and regions, is that a country’s economy cannot be studied in
isolation. The events developing both in the US and in the USSR had huge impact
in the country’s history. As we have seen in a previous article, the US was
going in the 1980s through a period denominated “reaganomics”, which included “New
Liberal” economic politics in order to fight “stagflation” (unemployment +
inflation). Being politically and economically aligned to the US, Latinamerica did
not really dictate it’s own policy but followed political lines from
Washington. With many countries in Latinamerica going through hyperinflation
cycles, the solution was to reduce government burden and liberalize the
economy.
A wave of privatization began in the 1990s,
which brought problems to the Argentinian national industry. Oil, electricity,
gas, water, petrochemical, metallurgics… In record time the Argentinian government
sold almost all it’s national companies. The Railroad system was also dismantled, privatized in the hands of actors that never invested a dime in it. The liberals theory was that years of protectionism
and subsidies had generated a high level of inefficiency in the metallurgic sector.
To enter a new age of technological development, the state should step aside to
let the forces of the market do their work. The state took a step to the side,
but the forecasts did not come true. Everything was sold and at ridiculous
prices, claiming that these companies where a big burden on the government and,
according to reaganomics, a big government was the cause for inflation. Menem’s
government finished what the dictatorship in 1976 – 1983 started, by dismantling
the local industry. His “carnal relationships” with the US where very famous during
his presidency. The general population bought the scheme: government became a
bad word, the country “imaging” political economy from both Bush’s and Clinton’s
administration. International companies arrived at the country, paying high
salaries in USD. Inflation ceased, however, privatizations led to layoffs to
make the companies run more efficiently, which caused a mass of unemployment
which pressured the job market (and thus lowering the cost of labour). Unions participated
by becoming part of this corporations, defending them and not the workers.
While unemployment reached historicals peaks,
national industry agonized. The privatizations of the 90s deepened the
concentration of capital in the industrial sector. The big players in the local
industry got great benefits. Some took the opportunity and purchased public
companies. The most disastrous case was the sale of the local oil company YPF
to the Spanish group Repsol. Even if the state owned YPF was inefficient, it
provided work to thousands of people. When this was privatized, whole town
became ghost towns. There were no strong social or political forces who opposed
this sale. Me, a 16 years old at the time, thought everyone around me was
crazy. Oil, as well as transport, should never be left in the hands of the
private according to my own economic view. These 2 factors have an impact in
the whole economy as a whole, and should have government intervention.
But let’s continue. While millions of workers
became unemployed, the great economical groups had extraordinary earnings from
the privatized companies. Some even sold their stock and send all the money to
their home country, initiating the greatest capital exodus of the previous 25
years. The great economical players could move with a much greater margin of
action. Tax evasion became almost a norm, with the government looking the other
way so as to attract foreign investment. The corporations stepped on the well-earned
rights of the workers, which were forced to work overtime and could not risk
losing their jobs in a bad job market. Technological advances where introduced,
which actually led to more layoffs. They allowed to produce more with fewer
workers. Privatizations, the opening of the economy and the de-regulation of
the markets sunk the local industry even more. The stronger currency made It
easier to import, but more expensive to export. The local industry was not competitive,
entering a downward spiral which it never recovered from. In December 2001,
with unemployment reaching 25%, the people took the streets and president
Fernando De La Rua resigned. In 2002, with deficit both in it's comercial and fiscal balances, the country defaulted on it's debt in what is still today the largest sovereign debt default in the history of mankind. Due to this the country is still paying exorbitant interest rates, it's banking system never having normalized. It took at least 7 years for the industry to
return to the previous levels of activity. New Keynesian political economy was
applied generating millions of jobs. In 2007, unemployment went down to 10%
again, giving in my opinion an end to a crisis that started developing in 1976.
An entire generation was lost, doomed to live the darkest period of the country’s
history.
But let’s recap. The question was, WHY did
reaganomics not succeed in Argentina, but it did in the US. The problem, as
usual, is comparing the uncomparable. The US works as a common market between
states, in which each state specializes in a concrete industry. Automobile (Michigan),
Oil & Gas (Texas), Administrative Center (Washing DC), Movie Industry &
Tech (California). The US has a giant internal market, in which states exchange
with each other. Not to mention it is today a market of 300 million people,
with the largest middle class in the world (or so they say). US companies
become big inside the US, before going abroad to “conquer the world”. Although
US now waves the flag of the champion of freedom, it did not open is borders
commercially speaking until after the 2nd World War. And even so,
entry barriers are still high in some industries. For ex, agriculture is
subsidized and has high taxes for entry so it is almost impossible to sell
crops to the US (at least at a reasonable price/earning return).
The issue for Argentina was that the country
applied an extreme case of liberal theory that had not been seen since the
times of Adam Smith. Import barriers were lifted entirely, leaving the local
companies to compete in the “free-markets”. As we have seen before, no country
has really applied a 100% free-market model after the appearance of
Keynesianism. The local industry was simply not efficient and modern enough to
compete against the imported products with entered the country with no tax
restrictions. An example I remember from my childhood is the Toy industry. In
the 80s, toys were produced in Argentina. The quality was poor, but it gave
jobs to thousands of people. Imported toy where expensive. In the 1990s,
imported toys where cheap and high quality. The local toy industry was destroyed,
thousands of jobs lost. The creator of the “model of the 1990s”, Domingo
Cavallo, a Harvard graduate (who does not even speak good English), was in my
opinion a very big joke. Fernando De La Rua unfortunately did not change
direction in time, even calling Cavallo as Minister of Economy again in 2001.
The result was the country’s worst historical crisis.
That’s what you get when you import ECONOMIC
SYSTEMS!!! Every country must find their own way of doing things, having respect to
it’s own history and culture.
Your “friendly” economist,
Cristian “Nash” Bøhnsdalen.
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