The Root Cause of the Argentinean Crisis


by Andrew Reding

Pacific News Service
January 2, 2002
Secure in the belief that Argentina's economic collapse will not spill over to the rest of the hemisphere, the Bush administration has chosen to stand aside. That may be a fair assessment of the immediate economic risk to other countries. But there is a lot more to Argentina's free fall than economics.

Underlying the economic crisis is a social crisis that afflicts virtually all of Latin America. If not addressed soon, this crisis will undermine attempts to integrate the economies of the Americas, and become a serious drag on the U.S. economy.

Argentina epitomizes the problems that plague Latin America: inequality, populism and corruption. The root problem is inequality. Latin America has by far the most unequal distribution of income of any region of the world. In Argentina, almost half the population lives below the poverty line.

Yet because Latin American countries are democracies, extreme inequality translates into populism. The easy way to win elections is to offer handouts to the have-nots, either in the form of subsidies or government jobs.

The big Latin American political machines were built on patronage. In Mexico it was the Institutional Revolutionary Party (PRI); in Argentina, the National Movement for Justice, more commonly known as the Peronist Party. The party was the means by which Col. Juan Peron attained the presidency in 1946, then secured his hold on power. By nationalizing banks, railways, and telephones, Peron vastly expanded the realm of patronage.

Government subsidies and patronage may help redistribute income, but they do not create new wealth. Thus, the Argentinean economy -- once among the world's most prosperous -- stagnated. The government turned to printing money to keep paying its employees, but that only caused hyperinflation of 5,000 percent per year.

In the 1990s, Carlos Menem, another Peronist president, came up with a quick fix. He pegged the peso to the dollar. That eliminated inflation, and the economy began growing again. But to keep the party machinery well oiled, he had to maintain patronage. He did this by borrowing. But as government debt rose to a staggering 40 percent of GDP, investors got jittery.

President Fernando de la Rua was unfortunate enough to inherit this mess, and it put him in a no-win situation: either pare back patronage and set off social unrest, or try desperate but futile economic measures. Ironically, his resignation returns the presidency to the Justicialists, who have no intention of solving the problem.

Similar dynamics underlie the chronic instability of other Latin American countries. In Colombia, the quick fix for elites and peasants in a country torn by class warfare has been cocaine cultivation and trafficking.

In Venezuela, the quick fix is oil. Populist President Hugo Chavez is squandering oil reserves on subsidies and patronage that do little to foster economic growth, and do not address the root causes of the poverty that afflicts half the population.

In Mexico, where oil alone is no longer enough, President Vicente Fox is facing budget shortfalls. Yet, like de la Rua in Argentina, he is hesitant to trim the federal bureaucracy built by the PRI, because the PRI still has enough votes to block his legislative initiatives.

None of this bodes well for the United States, whose economy is tied to Mexico through NAFTA, and which seeks a hemispheric free trade zone.

Shortsighted U.S. policies are themselves part of the problem. Washington attacks the symptoms, but never the causes, of the Latin American malady. It spends billions of dollars on military efforts to crush left-wing guerrillas, but will not invest in large-scale development assistance.

Europe is showing how it could be done. The EU is spending billions of dollars a year on new transportation, energy, and tourism projects in the former communist countries of Eastern Europe. In return for this modern-day Marshall plan, it is requiring an overhaul of the administrative structures of government in those countries, to ensure wise use of development funds.

That investment is taking a temporary toll on the economy of Western Europe, as reflected in part by the weakness of the euro against the dollar. But as further economic and social tragedies unfold in the Americas, it won't be too long before the wisdom of the EU's long-range strategy is appreciated on this side of the Atlantic.

More Information on Inequality of Wealth and Income Distribution

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