Global Policy Forum

By Anthony de Palma

On the day he was designated Argentina's fifth president in two weeks, Eduardo Duhalde cautioned his countrymen not to try to fix blame for the country's chaos. Then he did just that.

"It's time to tell the truth," he told the Argentine Congress last week. "Argentina is bankrupt. Argentina is destroyed. This model has destroyed everything."

Many Argentines had expected him to announce the end of their unique decade-old plan that pegged their peso to the dollar — a plan that shrank Argentina's hyperinflation to single digits before turning into a drag on the economy during the last four years of recession.

Mr. Duhalde still is expected to dump the peso peg. But his speech could also be read as a condemnation of a much broader economic model, the one sold by Washington all over Latin America that consists of deregulated markets, privatized state businesses and liberalized trade rules for once-closed economies.

Regardless of how long he lasts in office, Mr. Duhalde has already raised questions sure to complicate American relations with Argentina and, perhaps, other Latin countries: What is the responsibility of the United States for the economic meltdown and the shadow it casts on Argentina's political future? And what responsibility does it have for getting the problems fixed before they spread to other Latin countries?

Many developing countries bought Washington's economic model in the 1990's, but none more wholeheartedly than Argentina, which for a few years became a symbol of the model's success. Certainly, no other country went so far as to adopt its exchange rate plan.

President Bush sent Mr. Duhalde an encouraging note last week, but his underlying message was the same one he gave all the players in Argentina's recent game of presidential musical chairs: "You got yourselves into this mess, so get yourselves out. Then we'll talk about help."

In fact, the Bush administration has been distancing itself from Argentina for a year, calculating that the country's financial troubles will not spill over to other countries, as happened when Mexico's currency collapsed in 1994-1995. In that case, President Clinton hammered together a $50 billion rescue plan — the kind of bailout that the Bush administration now rules out.

There is an important distinction to be made between the United States's closest and most distant Latin neighbors. "Historically, in the south, the most important relationship has been with the United Kingdom," rather than with the United States, said Guillermo O'Donnell, a professor of government at the University of Notre Dame. This is true even for resentments. Professor O'Donnell, an Argentine, said Mexicans still pine for Texas and California the way Argentines gaze at Britain's Falkland Islands. Mexico sends 85 percent of its exports to the United States, but less than 12 percent of Argentina's trade is with the United States.

But that is not to say that the United States, as the hemisphere's dominant power, has exerted no influence on Argentina. President Jimmy Carter's focus on human rights put pressure on Argentina's military regimes in the 70's. Later, Argentina's generals were gravely disappointed when the Reagan administration opposed their disastrous effort to seize the Falklands, then backed the country's return to democracy.

What followed was something of a honeymoon. Argentina freed itself of economic chaos by hitching its future to Washington's broad economic vision of free, competitive global markets. Under Carlos Menem and Fernando de la Rua, it drew close enough to the United States to be accused by Fidel Castro of "licking the Yankee boot." The crowning touch, the currency peg, was adopted in 1991 as the brainchild not of Washington, but of Economics Minister Domingo Cavallo.

"It's true that the United States didn't cause Argentina's problems in the direct sense of imposing a particular mechanism," said Manuel Pastor, professor of Latin American and Latino studies at the University of California, Santa Cruz, referring to the currency peg. "But we have been going through most of Latin America offering advice and pushing people toward liberalization and privatization." So, he says, Washington does share responsibility for the current chaos. "Having prescribed the tonic for all these countries," he said, "we should be willing to help when the tonic proves toxic."

Others insist that it is not the economic model that is at fault in Argentina but the specific mechanism of the currency peg. "It is an absolutely fundamental error for someone to conclude that Argentina is in a mess because it embraced market economics," said John O'Leary, a former ambassador to Chile from 1998 to 2001. If market economics were at fault, he said, Chile could not have achieved the solid economic base it now has.

Chile can place its debt on the international markets at competitive rates. It has lowered tariffs and may sign a free trade deal with the United States this year. Most important, it has shown a restraint unknown in Argentina. Its public debt is about $5 billion. Argentina's, with twice the population, exceeds $130 billion.

But the arguments for the United States taking greater responsibility in the Argentine crisis go beyond mere economics. Argentina is a big player in the neighborhood that the Bush administration insists is closely linked to the United States' future. The democracies Washington has supported in the region are fragile to some degree. As the open market model has sputtered from country to country, democracy itself has become less popular, paving the way for populists like Venezuela's Hugo Chávez to hoard power.

Given his early comments, and his history as a free- spending, crowd-pleasing governor, Mr. Duhalde worries those who feel him capable of a similar course.

Latin America as a whole remains plagued by deep inequality and unemployment, and with few exceptions — Mexico and Chile are the major ones — free-market reform plans have disappointed those who expected them to solve those deeper problems. An overt repudiation of the open market in a frantic Argentina would reverberate across the region, challenging uncertain democracies like those in Ecuador and Peru, while fanning the embers of anti-Americanism.

And then there is the fact that a default on its debt by Argentina would be the largest in history. Outsiders have had the chance to safeguard savings, but these are somewhat uncharted waters. Some of the economic analysts who have confidently predicted there will be no contagion effect on other countries are the same ones who denied that Mexico was in trouble in 1994.

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