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 roll 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. These 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 “American way of living”. Other than political
instability, the impact of these 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 Rúa 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, metallurgic… 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. Carlos Menem[1], a 2nd
generation Syrian being descendant of two Syrian parents and nicknamed “the
Turkish”, was the most corrupt President in the history of the Nation. 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 these corporations, defending them and not the workers.
While
unemployment reached historical 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 towns became ghost towns. There were no
strong social or political forces who opposed this sale. Me, a 16-year 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 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 sent 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 Rúa resigned. In 2002, with deficit both in it's commercial 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. As unemployment sank to decent levels, and with a better job
market, I quit my slavery job to look for better horizons. The crisis, like a long nightmare, was OVER!
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 un-comparable. 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 it’s borders commercially speaking until after the
2nd World War. And even so, entry barriers are still high in
some industries. For example, 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 toys were 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 Rúa 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.
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