Malaysia in the Era of Globalization #28

ARCHIVES 2010

By admin-s On Aug 19, 2010

By M. Bakri Musa

Chapter 4: Modern Model States

Don’t Cry For Argentina (Cont’d)

I deliberately choose this Latin American country as a negative example, of how not to proceed; or how to mess things up royally. To see how far Argentina had fallen, a cursory review o f its history would suffice.

Argentineans today must be wondering where they had gone wrong. How could they mess up such a wonderful country? With such promising attributes and rich resources, it would take a real effort to screw things up. The Argentineans did not accidentally stumble their way down; they must have deliberately taken that path of self-destruction.

In the early 20th century Argentina enjoyed a standard of living much higher than that of Western Europe. Capital and labor poured in to tap the country’s wealth. United States too had a massive influx of European immigrants at that time. Unlike America however, Argentina did not have a dominant culture into which the immigrants wished to assimilate. Thus the Italians in Argentina pretty well maintained their own culture and value system, as did the Spaniards and other Europeans.

In contrast, America had the dominant Anglo-Saxon culture and ethos; all new immigrants were eager to join this cultural mainstream. They readily adopted Anglican ways, including changing their names to make them sound more English. They forced themselves and their children to learn English and to forget the old ways.

Today, America is a much more integrated society. Not so with Argentina. Argentina was spared the devastations of the two world wars. Thanks to its abundant food supply, it was also spared much of the horrors of the Great Depression. One would expect that with such a head start, it would have overtaken the world by now. Alas such is not the case.

Argentina may have been spared the devastation of wars but her series of military dictatorships created just as much destruction, if not more. At least in a war there would be an end point when one side is exhausted or defeated, and the process of healing and rebuilding could begin.

The military’s intervention in the affairs of state began in 1930 with the overthrow of the civilian government. The military up to that time had prided itself on its professionalism and autonomy, or more accurately, lack of political ambitions. Promotions and recruitment were done entirely by the officers themselves, with no favoritism or manipulation from politicians. Merit became the operative criterion and as a result, the military attracted the best and brightest.

These professional and highly disciplined officers looked disdainfully at the incompetence of the politicians and decided to act. One can certainly sympathize with that sentiment! The politicians were indeed helpless to solve the deepening polarization, especially between workers and members of the oligarchy.

Although that early military rule lasted only for two years and the subsequent election held on time, that was only a procedural change. The generals merely changed into civilian suits, stuffed the ballot boxes, and were duly elected. This trick of course has been copied umpteen times by military officers all over the Third World. Argentina however, must surely hold the record. Between 1930 and 1983, the country had been through 26 successful military coups, and hundreds of unsuccessful ones!

The generals may have thought they had the solutions but in reality they merely succeeded in substituting themselves for the landowners and capitalists as the enemy of the working class. But one of these officers, one Colonel Juan Peron, did develop a populist streak. Peron used his position as Secretary of Labor, a minor position in the political hierarchy, to cultivate a following among the workers. Having suitably anointed himself as a hero of the working class with the help of an actress later to become his wife, Eva, he easily won the 1946 election.

Peron, enamored with the labor movement and ways of the left, proceeded to pursue socialistic policies. Apart from the obligatory Five Year Plans, he nationalized major sectors of the economy. Initially he did succeed in shifting wealth to the workers. His plans appeared to work, with workers now getting a fair shake in the economy. The GDP expanded at a steady clip and emboldened, the state became even more involved in the economy. Costly and inefficient industries were thus created, not so much to produce goods and services, rather to alleviate unemployment. In the end they became nothing more than subsidized public works programs.

Agriculture, the backbone of the nation, was heavily taxed and ignored to subsidize urban industries. Farm products were priced ridiculously low to appease urban consumers. The end results were, despite vast fertile grasslands, a substantial decline in agricultural and meat production. To aggravate matters, Argentineans continued to live beyond their means, encouraged and subsidized by the state. The government too, was equally profligate.

Buoyed by his populist success, Peron even took on the Catholic Church. In the end his populist appeasement came back to haunt him. You cannot please all the people all the time; eventually someone has to pay the bill. When that time came, Peron could not find ready volunteers. Peron’s rule ended, not surprisingly, with a military coup in 1955. Alas, the subsequent military leaders proved equally inept.

In 1982 the military took the country to a disastrous war with Britain over the Falklands. Humiliated, the generals ceded power, and 1983 saw the election of Raul Alfonsin. But uncontrolled inflation and declining production continued. Argentineans and their governments still lived beyond their means and borrowed heavily. There was no social consensus over budget cuts and other austerity measures. Hyperinflation set in with rates in the range of 400% per month. By the time he was succeeded in 1989 by the colorful and flamboyant Carlos Menem, Argentina’s foreign debt was a staggering US $69 billion. (By 2002, it doubled to over US$140B.)

Menem immediately normalized relations with Britain and put the war behind. He committed himself and the nation to free enterprise by opening its markets and privatizing state industries. Tariffs, which hitherto covered over 90% of imports, were drastically dismantled.

The seminal restructuring event was the sale of its massive state telephone company, and Menem used the hard currency thus earned to pare down the debt. Most significantly, Menem made a radical move by fixing the pesos to the dollar, the convertibility plan. In so doing he not only tamed Argentina’s hyperinflation but also facilitated trade with America, the world’s largest and most lucrative market. Argentina, which until then had experienced capital flight, began to get foreign investments again, including money its citizens had stashed abroad.

To give the proper credit, many of the economic initiatives of Menem were in reality the brainchild of his Economic Minister, the Harvard PhD Domingo Cavillo. He rightly targeted that the root of the Argentineans’ hyperinflation was not monetary (too much money chasing too few goods), rather the fiscal indiscipline of its political leaders. Cavillo knew that hyperinflation, in contrast to the garden-variety inflation, was more than a mere economic phenomenon; it represented the people’s utter and total lack of confidence in the government. Curing it meant going beyond taking simple economic measures.

Thus he dramatically curtailed the grandiose illusions and pretensions of the country’s leaders instead of just clamping on the money supply (the traditional remedy). Unbelievably, it worked! For Cavillo to rein in those wily Latin politicians must take some doing!

Menem’s first term was indeed a remarkable turnaround for Argentina. Constrained by law to succeed himself, he, like South Korea’s Park, pushed through constitutional amendments to enable him to run for a second term, which he won handily. In his second term he reverted to the stereotype Latin leader. It was marred by administrative sclerosis, increasing corruption, and high-profile financial scandals. Precluded by law from running for the third time, he was succeeded in 1999 by a man who was his exact opposite, Fernando de la Rua.

Among Rua’s first moves was to sell the luxurious presidential jet, a Boeing 757, which had cost a fortune to maintain and operate. That luxurious jet epitomized the profligate ways of the government and its leaders. Cavillo was successful, but not completely!

Under the standard “one rule fits all” IMF tutelage, Rua increased taxes and cut social spending, which prompted a series of citizens’ protests and labor unrests. At the time of my writing, Argentina is again threatening to default on its massive foreign debt, a move that would send ugly repercussions worldwide. It is to be noted that a significant portion of that debt was not for investments but routine operating expenses, including the servicing of earlier loans.

Under Menem’s first term Argentina was the poster child of free market advocates. His reforms won plaudits, in particular from Washington, DC. But by the end of his second term, with the strengthening of the US dollar, Argentina’s competitiveness vis a vis its neighbors declined considerably, hurting its exports. Convertibility, which was an economic lifesaver a decade earlier, is now a significant drag, with Brazil and other neighboring countries gaining significant competitive advantage with their devalued currencies. While only a few years earlier Argentina was talking bravely about dollarizing its economy, by 2001 Argentina was hedging its bets. But by January 2002 the dollar link was severed and the peso devalued. That was more than just a monetary decision; it shattered what little credibility the government had with its people and the financial markets.

With the economic crisis came widespread social discontent and political upheaval. In early 2002, within the space of a few weeks Argentina changed presidents no less than five times. The public’s faith in the government waned with widespread graft and breach of faith. Transparency International’s Corruption Perception Index for example ranked the country at 52nd (highly corrupt). At the dawn of the 21st Century, Argentina is a far different country than it was a century earlier.

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