RESEARCH Business Economy

ARGENTINA
Scholar: Longstanding political conflict threatens Argentine economy

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

12/1/2001

CHAMPAIGN, Ill. — Undergirding Argentina’s economic crisis, which threatens to plunge the country into devaluation or default, is a political conflict that makes reaching a national consensus difficult, a University of Illinois economist says.

Argentina has long suffered from a schism between the urban working classes and the rural cattle barons and farmers, according to Werner Baer, a UI professor of economics. This conflict has played out in the political arena with periodic pendulum swings between right-wing pro-business parties and the populist Peronist Party.

After suffering from disastrous hyperinflation in the 1980s, Argentina undertook a reform policy under President Carlos Menem that pegged the Argentine peso to the U.S. dollar and underwent "the world’s most rapid privatization program," selling off state-owned industries such as airlines, electricity, railways, highways, insurance and oil companies.

These policies resulted in a great inflow of international capital and a remarkable improvement in price stability and economic output in the middle 1990s. But along with the positive accomplishments of the Menem plan, "there were some important negative side effects on such socially critical variables as unemployment, income distribution, poverty levels and wage rates," Baer wrote in a just-completed working paper.

For a number of reasons, including the reduction of public-sector jobs, unemployment increased sharply, and the wages of unskilled workers dropped throughout the decade. These trends exacerbated the political fault-lines that had long plagued the country, Baer noted.

The political system mirrored these problems with a split between the national government (following a pro-privatization, pro-market policy) and provincial governments (oriented to high-cost social programs). Because the provincial governors have direct control over national legislators, the Menem regime used revenues gathered from privatization and foreign investment to shower the provinces with money to win their support for the national program.

But in 1999, following the shock of Brazil’s currency devaluation that slashed Argentina’s export trade, tax revenues plunged. Political turmoil has ensued. "The fight for shares, which was inherited from previous regimes, was never resolved," Baer wrote.

The key to lasting economic stability is to find a way to turn the social conflict into a workable consensus. "This does not mean the fight [between classes] would disappear, but it would mean a society in which those in charge of a democratically elected government will have the authority to resolve such a conflict without resorting to inflationary finance or foreign borrowing."

The paper, co-written by UI economics graduate students Pedro Elosegui and Andres Gallo, is titled "The Achievements and Failures of Argentina’s Neo-Liberal Economic Policies."