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Let's Explain Argentina
Perhaps a separate thread is needed to kick around ideas as to what caused argentina's current crises
note: i didn't write this, but i do in general concur with the analysis
========
First let's look at why the peso-dollar peg was introduced in the first place. The dollar is strong, currently is among the strongest most widely circulated currencies in the globe. By pegging the peso to the dollar there was a greater flow of capital (notably from Wall St. and Europe) into the country as debt (most often in the form of bonds) was backed. Taking out debt with payment terms in "pesos" was just as safe as taking it out in "dollars". So the risk for investing was decreased.
What went wrong:
The dollar did too well. The US economy went on a massive upswing which began to strengthen vis a vis Argentina's largest trade partners (largely Brazil and Europe). So Argentina developed trade deficits, further it maintained large costly social services further increasing the debt. Corruption was also a problem under Menem.
Why is this a problem:
Because Argentina began using debt monies to "pay for the groceries". Taking out bonds (be they against Argentine corporations or the Argentine government) is a measure of the confidence you have of being repaid plus interest in a reasonable amount of time. The greater chance of default - they higher the premium. As Argentina was running a deficit the only hope of paying back bond holders was to rollover the debt, taking out new bonds at higher premiums. This furthered the deficit and caused foreign capital to come less readily into the Argentine economy.
Why doesn't this happening normally for people who deficit spend: well first most governments issue debt in their own currency, so they can just print lots of currency and pay off debt in this manner if worse comes to worse. This was not possible with the peso pegged to the dollar. Second the worst "debt rollers" tend to be the ones we have the most conifidence in. Washington can amass massive debt and the bankers are willing to buy debt for the forseeable future. If the US government is forced to devalue or default they are likely screwed anywheys - the confidence in US government debt is very high.
Argentina had less confindence, and a less robust economy. Further having its monetary policy dictated by the US means it is less able to respond to its specific needs. So now as the chance of default increases the amount the debt becomes worse and worse.
Why austerity?
Because you can't spend into oblivion (as in the US) if you can't roll over your debt or print new money. Spending more money requires either rolling over your debt (which Argentina *did* do for years) or printing new money (which is devaluation). Rolling over debt and incurring new debt without investing in capital (paying for the groceries with debt) only lasts until confidence and premiums are prohibitive.
Why not devaluation?
Devaluation is not a pleasant experience. Devalueing is a *serious* step. Do you honestly want see another Mexico crisis where the cash loses 50% of its value do to morons not trusting it? Its a *gamble* that investors will not expect *further* devaluation.
All in all the problem (IMO) is this:
1. Argentina wanted to bank off confidence in the US dollar.
2. It wanted to maintain a budgetary deficit and rollover debt.
3. It wanted to have free flowing capital.
1. removes Argentina's ability to control its own monetary policy. While the US and Argentine economies ran in parrallele it was great, investors bought in *because* Argentina lacked the ability to pull monetary tricks which would devalue their investments.
2. means that debt was everincreasing and the world began to fear default. Premiums began to rise and eventually the flow of capital slowed.
3. meant that once capital began to leave Argentina could do little to stop it.
This was no more made in Washington than in Buenos Aires. Argentina could have released the Argentino at any time (and even now there *will* be massive transitional difficulties). They could have defaulted or dropped the peso-dollar peg - that would have had serious investment reprocussions. They could have not run up debt, or adopted a stringet enough debt to restore investor confidence and if nothing else lower bond premium.
No one held a gun to Argentina's head and said, "Peg your currency to the dollar for all time." They chose to and reaped the short term benifit.
No one held a gun to Argentina's head and said, "Rack up debt and roll it over till the debt market collapses."
No one held a gun to Argentina's head and said, "Don't default or devalue."
Countries are responsible for their actions. Thus Argentina has decided to issue a new currency, the Argentino, which will de facto de value the currency. They made their decision, and they will suffer the consequences. Free trade, IMF, debt sale, etc. are all voluntary - if you don't like using them - don't. Just don't whine when the reaction doesn't suit you.
========
First let's look at why the peso-dollar peg was introduced in the first place. The dollar is strong, currently is among the strongest most widely circulated currencies in the globe. By pegging the peso to the dollar there was a greater flow of capital (notably from Wall St. and Europe) into the country as debt (most often in the form of bonds) was backed. Taking out debt with payment terms in "pesos" was just as safe as taking it out in "dollars". So the risk for investing was decreased.
What went wrong:
The dollar did too well. The US economy went on a massive upswing which began to strengthen vis a vis Argentina's largest trade partners (largely Brazil and Europe). So Argentina developed trade deficits, further it maintained large costly social services further increasing the debt. Corruption was also a problem under Menem.
Why is this a problem:
Because Argentina began using debt monies to "pay for the groceries". Taking out bonds (be they against Argentine corporations or the Argentine government) is a measure of the confidence you have of being repaid plus interest in a reasonable amount of time. The greater chance of default - they higher the premium. As Argentina was running a deficit the only hope of paying back bond holders was to rollover the debt, taking out new bonds at higher premiums. This furthered the deficit and caused foreign capital to come less readily into the Argentine economy.
Why doesn't this happening normally for people who deficit spend: well first most governments issue debt in their own currency, so they can just print lots of currency and pay off debt in this manner if worse comes to worse. This was not possible with the peso pegged to the dollar. Second the worst "debt rollers" tend to be the ones we have the most conifidence in. Washington can amass massive debt and the bankers are willing to buy debt for the forseeable future. If the US government is forced to devalue or default they are likely screwed anywheys - the confidence in US government debt is very high.
Argentina had less confindence, and a less robust economy. Further having its monetary policy dictated by the US means it is less able to respond to its specific needs. So now as the chance of default increases the amount the debt becomes worse and worse.
Why austerity?
Because you can't spend into oblivion (as in the US) if you can't roll over your debt or print new money. Spending more money requires either rolling over your debt (which Argentina *did* do for years) or printing new money (which is devaluation). Rolling over debt and incurring new debt without investing in capital (paying for the groceries with debt) only lasts until confidence and premiums are prohibitive.
Why not devaluation?
Devaluation is not a pleasant experience. Devalueing is a *serious* step. Do you honestly want see another Mexico crisis where the cash loses 50% of its value do to morons not trusting it? Its a *gamble* that investors will not expect *further* devaluation.
All in all the problem (IMO) is this:
1. Argentina wanted to bank off confidence in the US dollar.
2. It wanted to maintain a budgetary deficit and rollover debt.
3. It wanted to have free flowing capital.
1. removes Argentina's ability to control its own monetary policy. While the US and Argentine economies ran in parrallele it was great, investors bought in *because* Argentina lacked the ability to pull monetary tricks which would devalue their investments.
2. means that debt was everincreasing and the world began to fear default. Premiums began to rise and eventually the flow of capital slowed.
3. meant that once capital began to leave Argentina could do little to stop it.
This was no more made in Washington than in Buenos Aires. Argentina could have released the Argentino at any time (and even now there *will* be massive transitional difficulties). They could have defaulted or dropped the peso-dollar peg - that would have had serious investment reprocussions. They could have not run up debt, or adopted a stringet enough debt to restore investor confidence and if nothing else lower bond premium.
No one held a gun to Argentina's head and said, "Peg your currency to the dollar for all time." They chose to and reaped the short term benifit.
No one held a gun to Argentina's head and said, "Rack up debt and roll it over till the debt market collapses."
No one held a gun to Argentina's head and said, "Don't default or devalue."
Countries are responsible for their actions. Thus Argentina has decided to issue a new currency, the Argentino, which will de facto de value the currency. They made their decision, and they will suffer the consequences. Free trade, IMF, debt sale, etc. are all voluntary - if you don't like using them - don't. Just don't whine when the reaction doesn't suit you.
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When it says, "no one held a gun to their head..." it doesnt mean the people of Argentina. It means the government there which is propped up by the US-based Corporate Empire.
In fact, the people of Argentina DID have guns held to their heads to enforce "austerity" and this doomed-to-fail debt-based market economy ... the most recent pictures are here and throughout the internet. Notice the men with guns pointing them at Argentine people and tell me that "Argentina" does not have a gun to its head.
Until you figure this part out, you will never understand.
while yes, any given decision is ultimately made by individuals, it's a specious argument, the one that says, "countries are all just free to do whatever we want, like say yes or no to the IMF or washington consensus."
it's called pressure, and the US and the rest of the so-called first world puts a lot of it on the so-called third world, mostly to open themselves up for exploitation by ruthless, profits-at-all-costs multinational corporations.
first off, who's really in pain in argentina? it's certainly not the politicians and economic elites, but rather the working people and what's left of the middle class.
and who really racked up the massive debt? average argentinians don't decide the country's macroeconomic policies. sure, they spend and rack up probably a lot of personal debt, but the economic and political elites sign for billions in loans from the IMF. they're all looking just to fatten their own bottom lines, while throwing enough crumbs to the larger population so it won't do what it did, i.e. fight back. whether rioting and looting is actually effective is one thing, but whether argentinians recognize that their government and those who control the majority of the country's wealth and resources are to blame is hardly up for debate. goaded on by international investors, the opulent minority is all to happy to concede to demands for austerity (again, at whose expense?) if their relative positions remain intact.
that economic and political wealth and power should accumulate further in the hands of those that control much of it already is a natural phenomenon. it's also called capitalism.
so here are some facts, thoughts and resources to keep in mind when talking about who's to blame for the current crisis in argentina...
[ from http://penpress.org/Facts.asp?Category=TradeFinance&offset=0 ]
Foreign direct investment (FDI) reached $400 billion in 1997, but 58% of it went to industrialized countries. Of the FDI that went to developing and transition countries in the 1990s, more than 80% went to just 20 countries, mainly to China.
[from http://www.epinet.org/webfeatures/snapshots.html]
Shortchanging Argentina's workers
A common theme among editorialists and others who have commented on the
Argentine economic crisis is that the country is uncompetitive because of inefficient unionized workers spoiled by a high standard of living that they have not earned.
But the data tell us another story. Since 1991, when the peso was permanently fixed at parity to the dollar, both real GDP and labor productivity in Argentina have risen while real wages have fallen and the share of the population in “extreme” poverty almost doubled. As a report from the Instituto de Estudios y Formacion in Buenas Aires shows, labor productivity among Argentina’s 500 largest firms – which dominate international trade – rose 50% from 1993 to 1998, while real wages rose only 20%. So where did the benefits of increased efficiency go?
The figure below (from the same report) shows that, within those firms the share of income going to labor dropped from 35% to 28% in five years, while capital’s share rose from 65% to 72%. The numbers suggest that the Argentine economic problem may not be so much labor inefficiency as paycheck insufficiency.
[from http://www.gpn.org 's argentina country report]
The restructuring initiated by the military dictatorship in the mid-1970s profoundly altered the economic and social conditions in Argentina. After more than 20 years of neoliberalism, investment represents a smaller share of gross domestic product today than it did in 1975. Per capita GDP has been stagnant throughout the period, unemployment and job instability have reached unprecedented levels, and workers’ incomes have fallen. “Trickle down” fiscal policy was supposed to lead eventually to broad improvements in living standards, but it has actually contributed to a marked deterioration in the level and distribution of income. In 1975, salaried workers received 43% of total income generated, while today their participation does not exceed 20%. In 1974, the poorest 10% of the population earned 4.4% of total national income; in 1999, this segment earned only 1.5%. In contrast, the richest 10% of the population went from receiving 23.6% of total income in 1974 to 36.1% today.
[Argentina's Crisis, IMF's Fingerprints]
http://www.cepr.net/columns/weisbrot/argentina's_crisis_imf's_fingerprints.htm
However, Washington does not equate to the IMF. If the Feds have pressured Argentina, tell us where and how and we may surely convict them right here in the court of public opinion, and speak out against their evil. If Britain or others have likewise participated, bring forth the evidence and let's hang the lot of them from rope of their own manufacture.
Until then, we don't *know* that the IMF did anything genuinely evil to Argentina. Making a self-interested offer may be greedy, but if the Argentine officials accepted (while holding rifles to the heads of their countrymen), then only those officials have exceeded their *rights* and thus committed crimes. They are the men you want, not the IMF.
If the US officials likewise introduced or threatened force exceeding any right to do so, then the same economic blood drips from their hands. I'll accept that.
However, neither of these places the guilt of transgression on the shoulders of the IMF. Greedy, maniacal self-interest? Certainly. But unless you're bucking for a position under Ridge as captain of the new Morality Police, this is not a crime and you still cannot blame the IMF for the crimes of Argentine and American politicians.
*Sj
as to the relationship between the IMF and the US ruling class -- while the IMF is nominally a multilateral agency it is understood by observors of almost all political persuasions to be chiefly directed by the US. I made a quick look for information delineating the IMF's formal make-up (for what that's worth!), but to no avail.... In today's SF Chron editorial section neo-liberal economist Paul Krugman (hardly a critic of capitalism) writes that the IMF is viewed by "much of the world, with considerable justification, as a branch of the US Treasury Department..."
ibm alludes to personal debt, and I think this aspect is often overlooked. As real wages are ratcheted down, we see personal debt increasing. To some degree this has allayed the immediate impact of the recession in the US, but it doesn't auger well for the future. In 1990, for instance, average household debt was $3,000. In mid 2001, this figure had risen to $8,100, and continues to climb. The average US household spends 14% of its disposable income on debt finance. As a general rule, capital is being taxed less and less and workers are accruing more and more debt and interest payments.
argentina is a strong and vibrant democracy (ranks high in freedom house's country report). in such a situation the people ultimately bear responsible for national policy. the people elect political elites who are then delegated decision-making power. when these elites fuck up everyone bears the price.
if you don't believe this is right then you don't believe in republics or large state organization. if so we have nothing to talk about. any talk of international economics implies a belief in the states system and republic-democracies. under this system (which is independant of capitalism mind you) it is just for the people to pay the price of poor decision making.
so, argentina isn't a dictatorship, so the citizens should bear responsibility. also, argentina's economic policies were not forced upon them. so they received "pressure". boo hoo. everything in life is effected by external pressure. i am not going to go crying to my mother b/c someone pressured me into making a wrong decision. a murderer doesn't go free b/c he felt "pressured" to do a drive-by shooting.
at the end of the day it was up to argentina to decide its own economic policy, and they made great decision until a few years ago when they lacked the political will to take necessary steps.
quite frankly if argentina had devalued its currency 2 or 3 years ago none of this would be happening. however, out of an intense fear of public outcry the politicians decided not to do so. unfortunately, they chose to sacrifice long-term success for short-term gains.
your first link is irrelevant to the argentina discussion.
your second link is interesting as it brings up the divide b/w productivity and income gains. however, it errs on a few points. for one thing, i have yet to hear a commetator say that argentina's financial crises was caused by labor unions or overpaid laborers. on the contrary, authortative sources like the financial times, the economic, foreign affairs, etc. have all placed the blame largely on monetary policy.
but that aside, the fact that productivity rose higher then wages in no way explains the current crises. i mean geez, think about it. how will more output hurt an economy, even if not all of the gains are given to the workers?
as for the last link: no. argentina living standards have risen for decades, especially in the early 90's.
as for the decreasing share of income held by the poor relative to the rich. that's called inequality and seems to be a function of globalization. however, that does not mean that people are getting poorer. people can get vastly different slices of the pie if the pie is continually growing. this same thing is happening in the world today, inequality is rising, however so are incomes since the global GDP is increasing so spectacularly. same with argentina
aaron:
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As real wages are ratcheted down
=====
ibm just said that argentina's real wages had increased.
as for debt, in and of itself it is not too worrisome. after all, the 30 year mortgage for example has been a tremendous blessing to americans of all walks of life. sure, it locks people into a 30 year debt, however it also allows them to own their own home, one of the best ways to guarantee financial security.
Your worship of trade misses the fact that lives are robbed so things may flow.
"Since 1991, when the peso was permanently fixed at parity with the dollar, both real GDP and labor productivity in Argentina have risen while real wages have fallen and the share of the population in "extreme" poverty almost doubled". He goes on to say that among the top Argentine companies between 93-98 real wages went up 20% while labor productivity went up 50%, so I guess that's what your referring to -- wages (i don't get the 'real' part) went up for those companies while, overall, real wages declined.
It's been reported that in Argentina people have been racking up big credit card bills to make up for loss in real wages. No-one questions that real wages have massively declined in Argentina the last 5 years.
In America, real wages have declined since 1973. The inflation figures that the talking heads regal us with no longer count housing costs, which have shot up crazily in the past decade and constitute the single largest expense for virtually all working class people. And it should go without saying that millions of waged-workers don't "own" their homes and thus don't benefit from the mortgage dynamic (massively subsidized as it is) that you refer to.
In the US, credit card debt almost tripled in the 90's. There have been a million bankruptcy filings a year in America of late, and consumer credit card debt reached a record $7.5 trillion in the third quarter of 2001.
On January 2, the Wall Street Journal had a long piece on consumer debt in which it fretted that massive credit card debt could hinder a recovery. Unlike past recessions in which creditors reduced credit, in this one they've "left the tap wide open" despite the fact that credit card defaults and payment delinquencies are as high as since the early 90's recession.
The report went on to say consumer debt "has exposed a potential new economic fault-line" and that "many economists agree, the current amount of consumer debt is likely to mean trouble".
See also footnote 25 of chapter 1 of _Necessary Illusions_:
http://www.zmag.org/chomsky/ni/ni-c01-s04.html#FN25
Paul Treanor on "The racist liars of Freedom House":
http://web.inter.nl.net/users/Paul.Treanor/freedomhouse.html
Anyway, Argentina pegged the peso to avoid continuation of historicly huge inflation. The inflation comes from governments spending too much. If the Argentinan people voted for politicians that promised to reduce spending, this wouldn't have happened.
Instead, to keep funding their spending spree, the Argentinan government went to the IMF etc. and got hooked on the drug of easy loans. I'm pro globalization, but I'll be the first one to agree that the IMF is bullshit. If you need a loan, and are credit worthy, go to Wall Street, not Washington, DC.
Thus, the inevitable happened, in a democratic republic that is Argentina. I hope the voters realize their mistake in the future.
Now mind you, there was one other option for Argentina, they could have dollarized at one peso=one dollar. El Salvador, Equador, and Panama all have dollarized now.
If you don't think your country has the balls to have good monetary policy, maybe you should just give it up, and go with the dollar, where Alan Greenspan is always keeping things stable.