[stop-imf] WPost: Argentina doubts the "free" market

[Robert Weissman]

First of several posts on evolving crisis in Argentina. Though it fails to
elaborate the role of the IMF in this crisis, this is an excellent piece.
The subsequent articles talk about the IMF.

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Robert Weissman=09<rob@essential.org>
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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."

=A9 2001 The Washington Post Company

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