A way, but no will

International | Argentina's politicians created their own problems, but they haven't shown the courage to solve them

Issue: "Illegal siblings project," Feb. 2, 2002

In Brazil they throw flowers at you," actress Marlene Dietrich once said of her adoring crowds. "In Argentina they throw themselves."

Lately Argentines have been throwing themselves with equal passion into protest. With the unemployment rate at 18 percent, the country's currency in free-fall, and the government freezing people's bank accounts to keep the nation's banking system from collapsing, demonstrations are erupting throughout the country.

The protests have often turned violent-as on Jan. 18, when riot police used rubber bullets and tear gas to disperse an angry crowd in Buenos Aires, injuring at least 17 people. Even the middle class is angry. About 500 merchants banged pots and pans as they marched on the central bank, demanding that the "thieves" and "rip-off artists" in the government ease banking restrictions. A country that a hundred years ago boasted a higher per-capita income than that of Germany and France is now teetering "on the edge of anarchy and a bloodbath," according to President Eduardo Duhalde.

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What happened? How did a country with vast natural resources and a highly educated population become bankrupt? The same way individuals do: Argentine politicians have built careers running up the governmental equivalent of a huge credit-card debt, and the bill is now coming due.

The roots of the government spending binge go back to military strongman Juan Peron, who held power from 1946 to 1955 and then again from 1973 to 1974. Peron succumbed to the age-old political temptation: Promise people something for nothing without regard for how to pay for it. He set up a massive social welfare state, lavished patronage on his supporters, and financed it all by printing extra money. His successors followed the same path, and the result was runaway inflation.

When Carlos Menem, a member of the Peronist Party, became president in 1989, hyperinflation was raging at an annual rate of 5,000 percent. For an idea of what this means, imagine having $5,000 at the beginning of a year. Twelve months later, that $5,000 would have the buying power of $100.

With food riots breaking out, and everyday Argentines desperate for a solution, Mr. Menem in 1991 did something that up to that point was unthinkable for a Peronist: He stopped printing money. Along with Economy Minister Domingo Cavallo, he introduced "convertibility," which kept the country's central bank from printing a new peso unless it had a dollar in reserve to back it up.

Convertibility stopped inflation in its tracks and Mr. Menem and Mr. Cavallo became heroes, but the government didn't change its spendthrift habits. The government payroll swelled from 280,000 to more than 400,000 in Buenos Aires province alone during Mr. Menem's watch, and these workers received top pay and benefits. Mr. Menem also fueled increases in Argentina's already-large social welfare state. "This is a country in which a worker can retire with full pension at 55," Jay Bryson, an economist at Wachovia Securities, pointed out in Investor's Business Daily.

Such goodies aren't free, and the government, unable to print extra money because of convertibility, decided to take on debt to pay for them. Foreign investors stepped up to loan the government money, and everything was fine-for awhile.

But the debt piled up, reaching $141 billion, and the private economy-hampered by the huge size and stifling rules of the state-couldn't grow.

By December of last year, it was clear that the government would devalue its currency and default on its debt. Frightened Argentines rushed to take their money out of bank accounts, until the government stepped in. Political unrest followed and the country went through four presidents in two weeks, until the fifth, Mr. Duhalde, took over on Jan. 2.

Where to go from here is pretty clear: Cut up the credit cards. "The government has to find a way to control spending and reform its social programs before it can sustain growth," said Mr. Bryson. President Bush has pledged U.S. aid, but only if Argentina comes up with a "sound and sustainable economic plan."

But so far Argentina's political class has been unwilling to stick to such a plan. Mr. Duhalde and his fellow leaders seem willing to try just about anything-except throwing away their credit cards and telling the country's interest groups that the days of receiving something for nothing are over.

Timothy Lamer
Timothy Lamer

Tim is editor of WORLD Magazine.


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