The Politics of Argentina's Meltdown - Amherst College

14 Pages·2002·0.34 MB·English

Javier Corrales is assistant professor of political science at Amherst College. He is the author ofPresidents Without
Parties (Penn State Press, 2002).
The Politics of Argentina’s Meltdown
Javier Corrales
Argentina, the country that gave us the tion, a conservative Washington think tank,
tango, Evita, the Falklands War, soccer and ranked Argentina’s economy as among the
tennis legends, and some of the best red “freest” in the world. Politically, Argentina
wines from the Southern Hemisphere, has consolidated civilian control over the mili-
also given us the first economic depression tary and introduced stronger instruments of
of the twenty-first century. What began in accountability, such as added powers for the
late 1998 as a mild recession by mid-2002 legislature. Power was transferred peacefully,
had become one of the most harrowing eco- violent protests declined, and the leading
nomic crises in Argentina’s history. parties negotiated a major pact to reform
The features of this depression are the constitution in 1994, ending a long pe-
daunting: a default on government debts, riod of interparty animosity. Consequently,
a nearly 75 percent devaluation of the peso, Argentina between 1991 and 1998 achieved
an economic contraction that sent the GDP a long period of both political and economic
back to 1993 levels, an unemployment stability not seen in the country since the
rate of 22 percent, the collapse of the early 1920s. As Harvard political scientist
banking system despite a freeze on bank Steven Levitsky remarked, Argentina ap-
deposits, and the creation of more than one peared to have turned toward “normalized”
and a half million new poor in just six democratic politics.3
months. The stability of the 1990s was all the
The toll on politics has been no less more remarkable given the tumult of the
dramatic: between October 2000 and Au- previous 60 years. Argentina at the begin-
gust 2002, there were five cabinet crises, ning of the twentieth century was a country
two presidential resignations,1 one Senate not unlike the United States. It had vast,
crisis,2 and five ministers of the economy. rich agricultural lands, substantial foreign
The streets in downtown Buenos Aires are investment, and a relatively small popula-
now full of abandoned retail stores and tion, which permitted the absorption of Eu-
angry protesters. ¡Que se vayan todos! (Kick rope’s labor surpluses. But starting in the
everyone out!) reads the omnipresent 1930s, Argentina succumbed to cycles of
graffiti. political instability that more or less fol-
The current crisis is perplexing to many lowed a consistent pattern. A president
Argentines (and scholars abroad) because, would make crowd-pleasing promises on
for the first time ever, Argentina in the which he or she would fail to deliver. Pro-
1990s seemed to have finally gotten its poli- testers would take to the streets, scaring
tics and economics right. On the economic civilians and prompting the military to
front, Argentina introduced some of the take power. Eventually, the generals would
most far-reaching market-oriented reforms return power to civilians, in part because
in the world. In 1999, the Heritage Founda- they would also have failed to contain the
The Politics of Argentina’s Meltdown 29
popular discontent. Argentina had 24 presi- The first shock was caused by what I
dents between 1930 and 1958—one new call the state-without-a-party condition.
president every two years or so, on average. This occurs when the president of a given
This political instability hurt the economy. democracy is at odds with the leading mem-
Periods of growth were typically followed bers of the ruling party. Although it occurs
by longer periods of spectacular collapses. infrequently, the state-without-a-party con-
During these same years, there were 58 dition is not a rare political illness. And it
ministers of the economy. almost always results in economic misman-
Just when Argentines were beginning agement. In the 1990s, this problem crip-
to believe that they had left all of this be- pled the administrations of Carlos Andrés
hind them, the past came back with a Pérez in Venezuela, Juan Carlos Wasmosy in
vengeance. They had endured a decade of Paraguay, René Préval in Haiti, and Ernesto
painful reforms, only to be cruelly rewarded Samper in Colombia, to name a few, and is
with a brutal crash. This is why they now causing problems today for Vicente Fox in
find their plight so disconcerting. It is also Mexico.
why the political climate in the country is The second political shock to which
so volatile. Today, Argentines exhibit a Argentina was subjected was caused by in-
combination of ire, which has driven many ternational actors: the technocrats who came
of them to join the angry street protesters, to the U.S. Treasury Department and the
and acute cynicism, which has driven International Monetary Fund (IMF) in the
many others to disengage from politics late 1990s with new ideas about how to
altogether. deal with economic crises. These techno-
A few years ago, Buenos Aires was a crats are hesitant to offer rescue packages
bustling city, famous for its vibrant night- for economies in trouble for fear of elimin-
life. Nowadays, Buenos Aires’s evenings are ating incentives for self-reform (the “moral
somber. People choose to stay home, not hazard” problem). The best way to help
just because they cannot afford to go out, governments facing an economic crisis, they
but because they want to avoid the “express believe, is to offer limited help, and only
kidnappings” (secuestros exprés) in which a after these governments meet conditionali-
victim is typically held for a few hours, un- ties that are deliberately made tougher the
til a ransom is paid. In many neighbor- deeper the crisis gets. This toughen-as-
hoods, the only people out at night are the you-sink approach is a policy fraught with
new poor, who wander through the streets risks, and it is particularly dangerous for
sifting through the garbage left outside for weak democracies. It caused havoc in
collection. Argentina.
The question of what went wrong in The combination of this international
Argentina has become the subject of debate. political shock with the domestic political
Most analysts look only at the economic pic- shock of the state-without-a-party condition
ture for answers, blaming the crash on two is the reason that Argentina’s mild recession
factors: external shocks and fixed exchange of 1999 turned into a depression in 2002.
rates. Yet this focus on economics overlooks The lesson of the Argentine crisis is that no
what is perhaps the most important expla- political or economic reform, however en-
nation for Argentina’s collapse: political lightened, can withstand such shocks. These
shocks. The Argentine depression is an shocks impaired the capacity of Argentine
example of the serious consequences of authorities to end the recession. Investors
two types of political shocks to which all spent most of the 1999–2001 period sitting
weak democracies, not just Argentina, are on their hands, waiting for signs of decisive-
susceptible. ness from the government. However, with-
30 WORLDPOLICYJOURNAL(cid:127)FALL2002
out the support of its own ruling party, or with the exchange rate, such as announcing
from Washington, the government could surprise devaluations) at the expense of com-
not solve the credibility problem. petitiveness (the price of Argentine goods
would become expensive relative to the
Economic Issues prices of Argentina’s trading partners). Sec-
The debate about the causes of Argentina’s ond, it injected predictable rules (a non-
depression has mostly focused on two eco- changing exchange rate) at the expense of
nomic issues: the susceptibility of open flexibility in fiscal and monetary policy.7
economies to external shocks and the merits Most trade economists agreed that Argenti-
of different exchange rate regimes. The first na’s economy, in terms of its size and trad-
issue is predicated on the idea that exter- ing structure, was not ideal for such a strait-
nal vulnerability is the curse of globalized jacket. What justified its adoption in 1991
states.4 Openness to trade and financial was Argentina’s hyperinflation of 1989–91,
flows expose emerging markets to the “flus” which called for drastic measures.8
of other countries.5 Since the mid-1990s, The debate about exchange rates centers
there have been plenty of powerful economic on whether the currency regime should have
viruses around the globe: the Mexican crisis been relaxed after stabilization.9 Such well-
of 1994–95, the Asian crisis of 1997, the known economists as Paul Krugman, and
Russian devaluation of 1998, the Brazilian even some staff members of the IMF, insisted
devaluation of 1999, the rise of interest that the costs to competitiveness and flexi-
rates in the United States in 2000, the bility were too onerous once inflation had
Turkish devaluation and the global reces- been tamed.10 Exports would stagnate, and
sion of 2001, the drop in non-oil commodi- faced with external shocks, authorities
ty prices between 1998 and 2001, the dry- would be left without monetary policy
ing up of foreign direct investment in tools—no gain, just pain. Some observers
emerging markets after 1998. Sooner or lat- think that to stay afloat following the “sud-
er, it is argued, Argentina, with its open den stop” of foreign capital after 1998, Ar-
economy, was bound to be infected.6 gentina needed to depreciate its currency by
The problem with the external-shock as much as 46 percent.11
hypothesis is that it invokes a systemic vari- Others argue that in an economy with
able to explain a singularity. External shocks such a long history of arbitrary handling of
should have hurt many countries, and yet the exchange rate and intense rent-seeking
only Argentina (and Indonesia) sank into a (when economic agents lobby the govern-
depression. Thus, something else must have ment for favors and protection), keeping
made Argentina susceptible. This is where the straitjacket on was necessary to avoid
the debates about exchange rates apply. currency speculation.12 Yet others say that
Among the market reformers of the the problem was political: once a fixed-
1990s, Argentina adopted the most inflexi- exchange-rate regime in which people bor-
ble exchange rate possible under the Con- rowed in dollars was established, it was hard
vertibility Law of 1991. While the use of to persuade politicians to change the sys-
inflexible exchange rates to stabilize prices tem or to agree on an exit mechanism.13
is common, Argentina’s approach was ex- As Argentina entered into a recession in
treme. It obliged officials to uphold a fixed 1998, two opposing trends developed. More
exchange rate vis-à-vis the U.S. dollar and and more economists began to turn against
banned the central government from print- convertibility, whereas most Argentines be-
ing money. This system came with two come more and more in favor of keeping the
tradeoffs. First, it purchased credibility (the dollar-peso peg as the only anchor in an
government would not play dirty tricks otherwise erratic economy.
The Politics of Argentina’s Meltdown 31
Now that the convertibility regime has alone) is half the answer. Although the
crashed, critics of the fixed exchange rate macroeconomic deterioration of 1997–98
feel vindicated. And yet, there are still some was real, it was not particularly severe.
problems with blaming the exchange rate Brazil was arguably in worse shape, and yet
regime alone. First, the system worked prior it survived its 1999 currency crisis. This
to 1998. Argentina’s exports almost doubled raises a more fundamental question: why
during the convertibility era (from $12.3 did the same administration that handled
billion in 1990 to $23.8 billion in 1999), Argentina’s macroeconomic problems and
contradicting the argument that fixed ex- gained credibility with investors in the early
change rates hamper exports. Furthermore, 1990s fail on both counts in the late 1990s?
Argentina had weathered previous external The answer is that since 1997 adminis-
shocks, surviving the European currency cri- trations have often been at loggerheads with
sis of 1992, recovering from the Mexican their ruling parties. In 1997–99, the con-
peso crisis of 1995, and hardly feeling the flict resulted from the emergence of “impe-
effects of the Asian crisis of 1997. In addi- rious tendencies” on the part of the execu-
tion, it is hard to imagine that the gains in tive. In 1999–2001, it occurred because the
competitiveness resulting from devaluation new governing coalition was made up of
would have been significant given the small parties that had failed to modernize. These
size of Argentina’s trading sector (which two issues—imperious presidents and un-
accounted for less than 10 percent of GDP, adapted parties—are recurrent problems in
and was a third of the size of Mexico’s or weak democracies. In Argentina they be-
Chile’s). Increasing the competitiveness of came acute.
this sector of the economy would not have
constituted a sufficient boost to growth. Imperious Presidents
This is why the 75 percent devaluation of Presidents in every kind of regime are often
the Argentine peso in the first half of 2002 tempted to extend their stay in office indefi-
has done nothing to spark a recovery. nitely. In strong democracies, institutions
The main problem with the converti- deter them from doing so. But in weak
bility regime was not that it was fixed, democracies, institutions are not always
but that it was unaccompanied by sound powerful enough to act as deterrents. The
macroeconomic management, especially result is that in weak democracies presidents
after 1997. Fixed-exchange-rate regimes often conclude that, with some clever poli-
require impeccable fiscal accounts—very tical maneuvering and the use of public
low deficits and low debt levels.14 Starting funds, they can manipulate institutions
in 1997, Argentina failed in this regard. to their advantage. Weak democracies are
Rather than take advantage of the economic thus susceptible to a clash between hard-to-
boom of that year to pay down the national restrain presidents and weak institutions
debt and lower deficits (as Mexico and Peru that do the best they can to stop them. Such
did), Argentina went on a spending and clashes can wreck an economy.
borrowing spree. The ratio of foreign debt This is precisely what happened in Ar-
to exports in Argentina surged from 385.5 gentina in 1997. That year, President Carlos
percent in 1996 to 452 percent in 1998, Saúl Menem (1989–99) decided to seek re-
whereas in Mexico and Peru, the ratios de- election to a third term, even though he had
clined from 147 percent to 125 percent, already modified the constitution in 1994 to
and from 462 percent to 393 percent, be able to seek a second term in 1995. Un-
respectively.15 til that point, Menem was still a relatively
And yet, blaming everything on macro- popular president, having won reelection in
economics (rather than on the exchange rate 1995 by a comfortable margin. Although
32 WORLDPOLICYJOURNAL(cid:127)FALL2002
his administration was marred by serious Menem’s quest for reelection against all
allegations of corruption, Argentines toler- institutional odds unleashed a spending race
ated him because he was responsible for between the president and the leading Pero-
wiping out inflation and restoring economic nist governors. With an executive in desper-
growth, something no other president had ate need of allies, and a group of party lead-
accomplished. Furthermore, he had moder- ers desperate to contain him, fiscal prudence
ated the demagogic populism of his own went by the wayside. Everyone lost interest
Peronist Judicialist Party, or PJ, even if this in fiscal austerity and in pushing for such
meant fueling clientelism by distributing needed reforms as revamping the tax bu-
favors to political actors who went along reaucracy, liberalizing labor markets, and
with the reforms. Menem may not have reforming the revenue-sharing system be-
given Argentines first-world politics, but tween the federal government and the
he certainly gave them first-world econom- provinces. In a recent interview (with the
ics, and many Argentines accepted this author), a top-ranking officer in the Min-
compromise. istry of the Economy said: “Menem told us:
But when Menem became obsessed ‘I will not reject your proposals, but I will
with election to a constitutionally prohib- not promote them.’” This was in sharp con-
ited third term, he turned reckless, not trast with Menem’s unwavering support of
just politically, but also economically, thus his economic ministers before 1997.
destroying his only remaining political The other side of this intra-party fight
capital. At first, Menem’s bid for a third responded in kind. The governor of the
term seemed dead on arrival. There were province of Buenos Aires and today presi-
formidable institutional and political obsta- dent of Argentina, Eduardo Duhalde,
cles: the 1994 constitution explicitly pro- launched a massive public-spending cam-
hibited reelection beyond a second term, paign as a way to compete against Menem
and the public was adamantly opposed to within the PJ. The province went from hav-
the idea (approximately 80 percent disap- ing a low, below-average fiscal deficit in
proved). Yet, Menem thought that if he 1996 (7 percent of current revenues) to a
could obtain the backing of his own party, huge and significantly above-average deficit
he would generate sufficient political pres- in 1999 (25 percent of current revenues).
sure to compel the Supreme Court to inter- Most of these expenditures were related to
pret the constitution in his favor (essentially, increases in personnel to reward Dulhalde’s
that his first term should not count), or to political friends. The growth of spending
force a referendum. and deficits in the most economically
Menem thought that with a good dose weighty province significantly undermined
of populism—which meant increasing the country’s overall economic performance.
spending and slowing down reforms—he Another economic consequence of these
could manipulate political institutions to internal struggles within the PJ was the fail-
his advantage. But he was proven wrong. ure to contain the rising national debt. Eco-
Institutions resisted, none more so than the nomic officials recommended increasing
ruling party itself. Many PJ leaders, espe- taxes, decreasing expenditures, and using
cially provincial governors such as Eduardo privatization proceeds to make payments on
Duhalde, Adolfo Rodríguez Saá, and Néstor the rising debt. But no one at the top—nei-
Kirchner, objected to Menem’s reelection ther the president nor his detractors within
drive because it blocked their own move up the PJ—cared. Rather than decrease spend-
the party ladder. For the first time since ing, Menem actually proposed increases in
1991, Argentina had a president completely his 1998 budget. In 1998, Congress rejected
at odds with the majority in his party. Minister of the Economy Roque Fernández’s
The Politics of Argentina’s Meltdown 33
watered-down proposal to increase corporate problem became evident in Argentina dur-
taxes and expand the value-added tax to ex- ing the truncated administration of Presi-
empted sectors. The only recourse left to dent Fernando de la Rúa (1999–2001), cre-
economic officials was to increase the al- ating a wedge between the president and his
ready high levels of public debt and to delay ruling coalition.
payments to public-sector suppliers. This De la Rúa was elected by an alliance
only served to restore the “credibility of two center-left parties, the old Radical
deficit” that had plagued the state in the Civic Union (UCR) and the new urban-based
1980s. Once again, the government was in FREPASO. The Alianza was formed in 1997
the business of cheating private agents, re- for the explicit purpose of taking Argentina
peating its predatory behavior of the previ- through “post-adjustment” politics—i.e.,
ous decade. When the aftershocks of the increasing transparency, fighting institu-
Russian financial crisis hit Argentina in tional corruption, investing resources in so-
mid-1998, the “concern” of skeptical busi- cial sectors.19 And yet, Menem’s legacy was
ness leaders turned into panic. Bank de- to throw Argentina back to a pre-adjust-
posits declined, and Argentina entered into ment stage. Alianza leaders had spent most
a recession. of their time debating—and agreeing on—
Fortunately for Argentina’s democracy, how to invest state resources, but not
institutions prevailed in 1999. The resist- enough time debating what to do in the
ance within the ruling party killed Menem’s event of revenue shortfalls.
reelection drive, and Duhalde was chosen as Programmatic adaptation was difficult
its presidential candidate. But defending in part because the UCR had a hard time re-
democracy against the political shock of tiring old leaders. The leader of the party
presidential imperiousness was costly. The in 2000 was the same as in the late 1970s
fight undid the reforms of the previous —Raúl Alfonsín, who had also been presi-
eight years, as well as the coalition of busi- dent of Argentina from 1983 to 1989. The
ness leaders, regional PJ bosses, and the overextended political life of Alfonsín is all
party’s rank-and-file that Menem had skill- the more unjustifiable in light of his disas-
fully built after 1991,16 increasing the econ- trous leadership: in 1989, he resigned as
omy’s vulnerability to the external shock president because he could not prevent hy-
of 1998. perinflation, and in the 1990s, he led the
UCR through three catastrophic electoral
The Nonadaptation of the Center-Left defeats.
The second source of the state-without-a- The Alianza was not only ideologically
party problem in Argentina was the non- behind and partly hijacked by a strongman,
adaptation of the parties of the left. Eroding it was also technocratically unprepared to
legitimacy, nontransparent finances, and govern. This reflects yet another problem of
platforms that promise but do not deliver Latin American parties: their difficulty in
are only some of the ills afflicting Argentine incorporating people trained in public poli-
political parties. The non-Peronist parties cy. Here, the UCR was in far worse shape
are at another disadvantage because they than the PJ. At the beginning of the 1990s,
control neither the major labor unions nor 44 percent of UCR deputies in the lower
many of the provincial governments.17 A less chamber were lawyers; most PJ deputies at
discussed problem, not just in Argentina, this time were either lawyers or labor repre-
but in many new democracies, is the failure sentatives (17 percent and 25 percent, re-
of political parties to renew their leadership spectively). The presence of economists was
and, more important, to incorporate special- marginal (2 percent in the UCR and 1 per-
ized talent into the top echelons.18 This cent in the PJ). By 1997, the UCR remained
34 WORLDPOLICYJOURNAL(cid:127)FALL2002
undiversified: 50 percent of its deputies “gravest episode in economic affairs of this
were lawyers, 3 percent were economists. century.”20 When De la Rúa replaced Ma-
The PJ, on the other hand, had become more chinea with the no-nonsense UCR economist
diversified, and more important, open to Ricardo López Murphy in March 2001, the
technical experts: 12 percent of its deputies party was the first to demand that he be
were economists. fired; two weeks later he was.21 Until the
The junior partner in the Alianza, last days of the De la Rúa administration,
FREPASO (Frente del País en Solidario), had the most relentless critic of the govern-
similar problems. FREPASO was hastily ment’s economic policy was the ruling
formed in the 1990s to occupy the political coalition itself.
space left vacant by the PJ’s shift from the The internal bickering between the gov-
left to the center. Its founders, and its first ernment and the ruling coalition impaired
presidential candidate in 1995, were dissi- the government’s efforts to regain the trust
dent PJ leaders. But as the party continued of domestic investors that Menem had de-
to grow in the late 1990s, mostly in Buenos stroyed in 1998–99. The government basi-
Aires, it remained driven by charisma rather cally had two policy choices to restore busi-
than policy competence. Its two main lead- ness confidence: produce a bold set of poli-
ers in 1999, Chacho Álvarez and Graciela cies22 or create a cohesive cabinet.23 Both
Fernández Meijide were better known for were impossible in the context of a state-
their principled politics (they were advo- without-a-party. Policies had to be watered
cates of corruption fighting and human down. The cabinet was fragmented because
rights) than for any real achievements in the president had to use the posts as bar-
public administration. Thinking perhaps gaining chips to appease the various factions
that governance was only a matter of partic- within the Alianza. Some ministries were
ipation, and not necessarily skill accumula- even split in half, with the post of minister
tion, FREPASO focused mostly on mobilizing going to one faction, and the post of deputy
grass-roots organizations rather than incor- minister going to another. When Machinea
porating trained professionals. resigned in March 2001, he lamented, “I
The nonadaptation of the UCR and don’t have any room left.”24
FREPASO, both programmatically and with
respect to diversification at the top, was a The Rise of Imprudence-Fighting
major reason that the De la Rúa administra- The second major political shock to hit Ar-
tion stumbled. When De la Rúa began to gentina came from abroad. It consisted of a
generate policy responses to the economic reversal in the priorities of the International
crisis, he shocked the members of his ruling Monetary Fund and U.S. Treasury officials,
coalition. The Alianza wanted more spend- starting in February 2001. The IMF has tra-
ing on social programs, but the exigencies ditionally seen itself as the world’s economic
of the situation (recession and high debt) “firefighter,” ready to extinguish any finan-
meant the government could not deliver. cial crisis that might erupt.25 In the 1990s,
Alianza leaders, both inside the cabinet and this goal became problematic. The fund be-
in the legislature, did not hesitate to voice gan to confront a dilemma: how to act as a
their displeasure almost from day one. Al- firefighter without creating incentives for
fonsín turned against the minister of the reckless economic behavior (the moral haz-
economy, José Luis Machinea, who had ard problem). In the words of IMF deputy
been central bank president in his own ad- managing director Anne O. Krueger, “Pri-
ministration. In 2001, Alfonsín attacked vate institutions will be tempted to lend
Machinea for, among other things, defend- and invest imprudently if they believe that
ing convertibility, declaring it to be the the Fund is standing by....”26
The Politics of Argentina’s Meltdown 35
In the 1990s, the IMF and Treasury offi- Consequently, both the IMF and the Treasury
cials had privileged fire fighting over im- began to openly express doubts about con-
prudence-fighting. They responded to the vertibility. O’Neill himself became even
various capital account crises of the decade more disparaging of Argentina.27 Both the
(stemming mostly from abrupt changes in IMF and the Treasury began to increase the
capital flows rather than from the lack of degree of conditionality—disbursements
funds to pay for imports, as in the past) by would be contingent on Argentina deliver-
providing generous bailouts to Mexico in ing amazing, rather than just reasonable, fis-
1995, Asia in 1997, Brazil in 1998 and cal results. Argentina became the ideal
1999, and even Argentina in 2000. Put the guinea pig for testing this toughen-as-you-
fire out first and worry about moral hazard sink policy.
later, was the mantra of the 1990s. In picking Argentina, incidentally, the
But in 2001, the Treasury and the IMF, Treasury was not geopolitically blind. If Ar-
under new management, reversed their pri- gentina had been a NAFTA country (like
orities. The new secretary of the treasury, Mexico), a NATO member (like Turkey), a
Paul O’Neill, the newly appointed manag- major exporter to the United States (like
ing director of the IMF, Horst Köhler, and South Korea), or an important military
his deputy, Anne Krueger, are strong believ- power (like Russia), then perhaps the Trea-
ers in the paramount importance of impru- sury might have found another test candi-
dence-fighting. In this new thinking, so date. But Argentina is geopolitically in-
long as there are assurances that a particular nocuous—a country surrounded by pen-
fire will not spread, rather than provide guins, as the Argentine ambassador to the
quick relief the idea is to become tougher. United States is fond of saying—and hence,
Since the goal is to teach the target country ideal for the experiment.
and others a few lessons, aid comes with In order to meet these new expectations,
reprimands and harsh requirements. Argentina came up with the most extreme
This new policy began to be applied to fiscal measure imaginable: committing itself
Argentina gradually in 2001. The first sign by law to zero deficits. Few countries in the
of hard-line posturing came when Secretary region have ever delivered zero deficits con-
of the Treasury O’Neill, shortly after taking sistently. Even in its best years, Argentina
office in 2001, chided Argentina publicly only achieved this once (in 1993). Further-
for getting in trouble because it never did more, it is not clear that a zero-deficit pre-
its homework, essentially ignoring Argenti- scription is good for a country in a reces-
na’s reform record of the past decade and the sion. Yet, the IMF welcomed the passage of
role of external crises. By mid-year, the IMF the zero-deficit law in the Senate, and ap-
and the Treasury had reached three conclu- proved another $16 billion loan, condi-
sions. First, they had lent too much to Ar- tioned on Argentina fulfilling its require-
gentina. Second, the fire in Argentina would ments.28 Thus Argentina was asked to take a
not spread, mostly because bondholders had test of commitment to reform that it could
protected themselves (more specifically, never pass.
most major U.S. bondholders had already The IMF/Treasury policy consisted of a
sold much of their Argentine debt). And willingness to provide “economic help” but
third, based on the examples of Mexico, an unwillingness—and this is the crucial
South Korea, and Brazil, which had recov- point—to provide political backing. Wash-
ered quickly from financial crises as soon as ington offered the Argentine governments
they switched to flexible exchange rates, the no assurances of support. The United States
IMF and the Treasury became convinced that did not say that it would never allow Ar-
Argentina’s fixed exchange rates had to go. gentina to collapse (as it said of Mexico
36 WORLDPOLICYJOURNAL(cid:127)FALL2002
when the latter was about to implode in for governments to embark on serious ad-
January 1995). It never even proposed justment efforts, it also carries a high risk of
granting Argentina special market access failure for two reasons. First, it sends mixed
and trade credits. Rather than take the lead, signals to the market. Bondholders are less
the United States decided to simply watch inclined to trust the Argentine government
other actors handle the crisis. In an inter- because there are no assurances that the IMF
view with the Financial Times this past July, or the U.S. Treasury will come to its aid.
O’Neill was asked to explain what kind of That is one reason why Argentina’s country
support he was providing Argentina “be- risk, which had been high but relatively
yond the time you spent on the phone [with stable during much of Argentina’s recession,
Minister of the Economy Domingo F. Caval- skyrocketed after April 2001. Second, the
lo].” O’Neill replied: “We’ve been support- policy is particularly tough on weak democ-
ive through the instrument of choice which racies. To understand this, one must under-
is the IMF.”29 This at a time when the fund stand how weak democracies respond to
was becoming risk-averse. financial crises. Rather than rallying behind
In essence, the IMF said to Argentina, the flag, their citizens become more polar-
We are offering help, even though we do ized. Tired of seeing their past sacrifices
not trust you, your chosen policies, and the wasted, they take to the streets, calling for
path that you are on, and we will not take less austerity and more compensation, ex-
any risks because there is no one to under- hibit mistrust in their officials because
write them. So, when Thomas W. Dawson, they think that the crisis was mostly the
the fund’s director of external relations, says product of corruption, and adopt attitudes
somewhat cavalierly that “the IMF did help of defensive self-protection rather than
Argentina,” he is half right.30 Money came, solidarity. Antiestablishment sentiments
but without any show of confidence in the proliferate.
policies the government was pursuing. The Under these conditions, politicians in
result was a pendular shift in the interna- weak democracies have fewer options than
tional political attitude toward Argentina, those in a dictatorship (which can always re-
from blank check, to no check. press) or those in a strong democracy (where
As the IMF’s managing director admits, this type of crisis, or for that matter, anti-
the fund was too lax when Menem was un- establishment sentiment, never reaches these
doing the reforms of the early 1990s: “Our levels). The IMF took the tensions in Ar-
mistake is not having said sufficiently and gentina in 2001 as evidence that “there was
firmly that, at the end of the 1990s, the dis- no political cohesion” to manage the situa-
integration of the institutions would have a tion, as if its (and the U.S. Treasury’s) new
high cost. We did not pay enough attention policy had had nothing to do with the polit-
to the drifting of Mr. Menem’s policies.”31 ical crisis. The IMF treated the the zero-
Arguably, these “low-intensity surveillance deficit law as Argentina’s last chance. But
activities” continued up to the first year of this was no chance at all, since Argentina
the De la Rúa administration.32 But in was being expected to take a test that few
2001, this came to an end, and the resulting weak democracies could pass.33
shift in the international political attitude There is no doubt that De la Rúa’s last
toward Argentina was as damaging to the minister of the economy, Domingo Cavallo
economy as any other external shock. (March-December 2001) made many policy
mistakes. But some were made in an effort
Killing Convertibility to save Argentina from the political shocks
The new toughen-as-you-sink policy is dan- that merged in 2001: the state-without-a-
gerous. Although it increases the incentives party condition and the toughen-as-you-sink
The Politics of Argentina’s Meltdown 37
approach of the U.S. Treasury and the IMF. Duhalde’s predecessors, in accordance with
These political shocks forced Cavallo to try the constitution. That Argentina turned in-
every possible gimmick. Since he was politi- to a quasi-parliamentary democracy for a
cally constrained to cut spending in the first brief moment in December 2001, rather
half of 2001, he tinkered with convertibil- than a military-brokered regime, attests to
ity and with industrial policy. When that the resilience of democracy in the country.36
failed, he tried to restore investor confidence Yet, this political transition introduced new
by courting the IMF. That’s when he prom- complications.
ised the zero deficit and redoubled his ef- First, because the legislature was con-
forts to negotiate a mega debt swap in the trolled by the opposition party, it naturally
second half of 2001. This too failed. The chose a president from its own ranks, effect-
ruling party continued to interfere with the ing a major political change—of ruling par-
minister’s efforts—blocking the use of tax ties, no less—without the consent of the
revenues to guarantee public debt and criti- electorate. Second, at the time of the transi-
cizing spending cuts.34 tion, the PJ was still divided between the
By October 2001, without the political Menem and Duhalde factions. The party
support of the ruling party or of Washing- first chose a governor, Adolfo Rodríguez
ton, the De la Rúa government seemed Saá, who was somewhat of an outsider, well
powerless. Voters punished the government known for his modern-sounding reforms in
in the October 2001 midterm elections by his home province of San Luis (and an infa-
voting for the opposition, abstaining, or de- mous sex scandal in 1993). But in less than
liberately spoiling their ballots to express a week, Rodríguez Saá proved unable to
their anger (the voto bronca). Now invigo- conciliate the different factions within the PJ
rated, the opposition had no reason to coop- and resigned. Next came the leader of the
erate with a government that everyone else largest faction in the PJ, Eduardo Duhalde.
had shunned. In November, the legislature As the PJ candidate for president in 1999,
became less cooperative than ever. In ex- Duhalde, running on a populist platform,
plaining the reasons for his resignation in had suffered a serious defeat. But in Decem-
December, De la Rúa was clear: “The Con- ber 2001, few other PJ leaders wanted the
gress left me without a budget...and tried to job of president, whereas Duhalde had been
take away from me the special powers that longing for it since the early 1990s. Argen-
it had just approved.”35 tines thus ended up with a president they
Consequently, investors continued to had rejected three years before.
desert Argentina, and smart savers respond- Upon taking office in January 2002,
ed as they should have—by emptying their Duhalde confronted two major problems:
bank accounts. In response to the November containing the rising unrest at home, and
2001 run on the banks, the government had regaining the confidence of the IMF. His
to impose a bank freeze (the corralito), which approach was schizophrenic. On the one
furthered angered Argentines and led to the hand, he embraced an anti-market rhetoric,
violent cacerolazos—public pot-banging pro- thinking that this would placate the citizen-
tests—of December 2001 that ultimately ry. In his acceptance speech, he lambasted
forced the government to resign. the old economic model and the new busi-
ness groups that had profited from privati-
Crash Survivors zation, ignoring the fact that it was his own
In the past, the power vacuum created by party that had pursued the market reforms
De la Rúa’s resignation would have been of the 1990s. He devalued the peso, thereby
filled by the military. This time, it was ending convertibility by presidential decree.
“handled” by the legislature, which selected By jettisoning the convertibility law, almost
38 WORLDPOLICYJOURNAL(cid:127)FALL2002