Argentina's Economic Crisis

by Major Thomas J. Seelig

The current economic crisis in Argentina has led many here at home to ask introspectively, Who Lost Argentina? Like China in 1949 and Cuba in 1959, politicians and pundits routinely assign blame for foreign failures to some element of the US government. The Boston Globe recently printed an article directly faulting the US government for the economic collapse in Argentina, alluding to the "one size fits all model that the US tries to impose on developing countries." The largest newspaper in Argentina, La Nacion, recently insinuated that the US government was negligent in this case.

The truth of the matter is that Argentina is to blame for the economic debacle which recently culminated in a suspension of payments on their crushing $142 billion foreign debt. Like a normal creditor who over-extends himself financially and lives above his means, Argentina's reckless borrowing has bankrupted the country.

Critics of the US government and the International Monetary Fund's involvement in Argentina would have you believe that this debt was all generated during the wild 90's, as the end of the Soviet Union and the communist block brought about a surge of countries willing to embark on the neoliberal economic model. Argentina's debt problems, however, began way before President Menem's administration took office in 1989. Practically half of the current $142 billion debt had already been assumed by 1991.

A serious question that should be asked to those who blame the US for Argentina's crisis is whether the US should be duly commended for the economic successes seen in other countries where neoliberal policies have improved productivity, employment, and standards of living? The answer is no. Countries like South Korea, Indonesia, Ireland, and Mexico that have benefited from free trade and open markets have done so by making their exports attractive and their countries fertile for foreign investment. Argentina's refusal to de-peg the peso from the dollar (until the train had already wrecked) effectively made their export products too expensive, and between the burgeoning debt, and political and civil instability the country became a risky place to park foreign investment.

The critics should also be asked how Chile, Argentina's western neighbor, could be so successful following a neoliberal economic model now for almost 30 years? What has Chile been doing that Argentina did not? For starters they have been balancing the budget in Chile, making possible a respectable 2-4 percent annual inflation rate. Chile has made its exports attractive and affordable, proven by selling 25% of its GDP to the exterior; Argentina sends only 8% to the exterior. Chile has kept its borrowing to a minimum, having never taken an IMF loan and currently holding a manageable $3 billion in foreign debt; Argentina's an unmanageable $142 billion.

After reviewing the facts one must begin to look internally for the causes of the Argentine crisis. Simply put, Argentina was trying to do too much with too little for too long. Most economists agree that controlled deficit spending can be advantageous at the personal or macro level, for short periods of time, in order to acquire or invest in productive resources. Deficit spending, however, becomes dangerous when the purpose of the borrowing is to pay-off other loans and make up for budget shortfalls. This is the quagmire in which Argentina has found itself. Argentines fancy themselves at the personal and macro levels as Europeans, with practically the same culture, norms and expectations as those on the east side of the Atlantic. This has obliged them to offer first class medical care and national universities at little or no cost to its citizens, and costly social subsidies that weigh heavy on the budget. The problems begin when the economy stops generating enough money to pay for it all, the politicians try to reduce some services (even salaries) to balance the budget but the people revolt, very loudly and sometimes violently. This is the heart of Argentina's problem right now.

Adding to the fragile fiscal situation is the fact that Argentines are averse to paying taxes. Recent newspaper articles have stated that 40% of the populous does not pay taxes. I know from living there that vendors often will offer you a choice between two receipts for large purchases: one that gets reported to the government and another that does not. The latter saves you the buyer approximately 20%. Which would you choose? The aversion to paying taxes in Argentina is directly attributable to the disdain and contempt the average citizen has for the political class. When they talk about corruption in Argentina, they are not simply talking about politicians giving government contracts to buddies and family members instead of the lowest bidder. Rather, they usually are referring to blatant robbery whereby politicians devise schemes to put government funds into theirs and their cronies' pockets.

Neither the US, the IMF, nor the neoliberal economic model that some love to berate can be blamed for Argentina's financial mess. With respect to world finance, the IMF is much like a fire company, responding to calls for help once the fire has begun. History has shown that some fires are extinguishable while others simply must burn out themselves. Personally I am not a proponent of the infamous IMF "cookie-cutter" solutions fed to every patient and agree with former World Bank economist Joseph Stiglitz that the IMF is in need of serious reform. The IMF may be considered guilty of prolonging the crisis by pouring in extra billions of dollars even as many knew the situation was futile, but they cannot be considered guilty of causing it.

Argentines and fellow Americans should understand that the US government did not abandon Argentina. On the contrary, for at least the last 3 years the Clinton administration supported, to the tune of $40 billion in 2000, and then another $8 billion this past August ($5 billion immediately and $3 billion contingent on a successful debt swap) by the Bush administration. This can hardly be considered abandonment. After all, how long can anyone stand by a friend who consistently mismanages his finances even after you and others have loaned him several large sums? Eventually the need for tough love becomes stronger, and more prudent, than the need for more money. A few more billion in loans would have only delayed the train-wreck articles until approximately the summer of 2002. Tough love was the right call.

2001, Foreign Area Officer Association
Springfield, Virginia
Maintained by LTC Steve Gotowicki.
http://www.faoa.org