A crisis every ten years. Like a tango prophecy or an ancestral curse, many Argentines believe that on this side of the Río de la Plata we’re forever doomed to experience a periodic economic shock. As you grow older, you learn to collect, like trophies, the crises you’ve been through and compare them with those your elders have told you about since you were young.
The average Argentine is always waiting for the next crisis and bases economic reasoning on it, a useful method to quickly adapt to change. Argentines know a shock can cause them to lose everything and force them to start from scratch, that the flat they live in can both increase or decrease its value by five times within a couple of years, that even second and third-rate cheese can become a luxury item, that they may be unable to pay rent, or that their house, fridge, or car repayments may become unaffordable within the blink of an eye.
Crises also cast doubts on work, vocation, and the future. They put pressure on family ties, send divorce rates through the roof, and create that feeling of helplessness and uncertainty that brings together the unemployed, the informal labourer, and the survivor — the latter feeling the other two breathe down their neck, in an every-man-for-himself situation in which only few emerge better off.
But economic crises don’t happen by accident; they are not a weather phenomenon or natural event. They are, depending on who’s analysing them, a break in the equilibrium to which markets naturally gravitate when freed from their populist shackles, or a phase within the economic cycle, inevitable due to the characteristics inherent to capitalism and its need to destroy capital to re-value it. And they are also violent re-distributions of income and wealth. Essentially, they are the changing of hands. A little chaos but many changes of hands. Deposits are confiscated, savings disappear into thin air, and jobs are destroyed, but there are also large compensations and subsidies, capital flight, and debt reductions. At first sight it may seem like everyone is losing, but some are actually winning quietly, because they were able to prepare for it.
In Argentina, crises tend to be determined by three or four structural economic factors: an export-facing agricultural core that is highly concentrated and extraordinarily productive, an industrial manufacturing sector that exports little and – worse still – depends on imported capital goods, a technological matrix governed by the decisions of a handful of (mainly foreign) oligopolists, and finally a cyclical shortage of dollars caused by all of the above. Until these structural characteristics change, we can say from the off that the ‘ten-yearly crisis’ ritual will continue.
A spike in inflation and the dollar rate are symptoms that usually accompany the outbreak of each crisis, or at least have done in every crisis in the second half of the 20th century and especially so at the start of the 21st. And that is when, as now, fundamental questions begin to occupy the minds of everyone: Is this all going to hell? What does that mean? How deep can the country sink? How scarred will the post-crisis economy be?
But before we rush to answer these questions, let’s go over the last three major crises that are ingrained in the collective Argentine mind and were hurriedly brought back into the public debate at the end of last year: the ‘Rodrigazo’ of 1975, the hyperinflation of 1989, and the crash in 2001-2002.
The Rodrigazo (1975)
The economy had enjoyed 11 years of uninterrupted growth. Real salaries reached record highs, as did the participation of workers in total national income, to levels never seen again after the forced deindutrialisation of the military dictatorship. However, the 1973 ‘social pact’, engineered with some initial success by [economy minister] José Ber Gelbard to slow inflation, was falling apart. The death of Perón had unleashed a fierce struggle over wealth distribution, at a time of near full employment (3.7% unemployed) and with union leaders under pressure from a mobilised base. Investment thinned, but consumption still turned the wheels of production.
The shock came from abroad, with commodity prices plummeting after the global crisis that had hit in 1973. External debt was low, but the current account deficit was at 5.5% of GDP, and the general government deficit at 16% of GDP, figures far higher than today (1% and 4% of GDP, respectively). The Central Bank had only enough reserves to cover two months of imports (in March 2014, there was enough for four months) and they were in decline.
The battery of measures launched on 4th June, 1975 by new economy minister Celestino Rodrigo and his team included a brutal devaluation (the dollar rose by 134% in one month), a sharp hike in tariffs (60% for gas, 50% for electricity, 100% for public transport, and 160-180% for petrol), the end of Gelbard’s price controls, and the free-floating of interest rates.
The objective was to lower the “Argentine cost” to attract foreign investment and access external credit. The result was hyperinflation of 182% in 1975, two years of stagnant production, and a fall of 4.28% in GDP per capita. And then there was the social impact: an exponential growth of villas (slums), and the sudden impoverishment of a large swathe of people that had only just established themselves in the middle class.
The two most enduring legacies of Rodrigo’s 50 days in office were the fall in real salaries – a cut in half, which was resisted by unions initially but forced through the next year by the dictatorship – and the dollarisation of real estate transactions. These began to be conducted in hard currency to avoid the exchange rate jumps that could destroy the value of a house, ranch, or flat in a month.
The dictatorship left an unemployment rate double that which it inherited (it reached 7.6% by 1989) and external debt that added up to 70% of GDP. It also left inflation inertia, recreated after the mega-devaluation by Lorenzo Sigaut in 1981. Sigaut was the economy minister who in June of that year said “those who bet on the dollar will lose,” and within six months had allowed the dollar rate move from $8,800 to $100,000. President Raúl Alfonsín was not able to break this inertia until he launched a new currency – the austral – accompanied with a freezing of public tariffs and strict price controls that enabled a temporary reduction in inflation.
The greenback, however, continue to head skywards. Under Bernardo Grinspun, economy minister for the first two years of Alfonsín’s term, the dollar rose by 780%. And under Juan Vital Sourrouille, who replaced Grinspun in 1985 and brought in the austral, it surged another 4,500%. Meanwhile, the inflation rate remained above 100% in every year of Alfonsín’s mandate except 1986, when it dropped to 81%. And external debt continued to grow, going from 72% of GDP in 1983 to 118% in 1989.
The hyperinflation came with the failure of the ‘Plan Primavera‘ (Spring Plan), a final attempt by the Alfonsín administration to implement an “ordered” correction to guarantee interest payments on the debt. The government deficit, at around 2% of GDP, was covered by printing money. From the second quarter of 1988 there were nine consecutive quarters of negative growth.
By the start of 1990, now with Carlos Menem as president, the Argentine economy was in its worst ever state. Housewives would buy several jars of marmalade at a time to cover against price rises the next day. Workers received their fortnightly payments and ran to buy a few dollars to help them get through the month.
GDP shrunk by 12.5% compared to the previous year. This record would only be beaten during 2002, when society was ripped apart. With hyperinflation, poverty also soared to levels that would only be repeated in 2002, affecting 41.3% of the population. GDP per capita slumped by 14.9%, tripling the impact of the Rodrigazo.
The hammer blow was sufficiently damaging for society to later accept – without resistance and with disastrous consequences – the mass lay-offs from the tidal wave of privatisations and flexibilisation of the labour market that came next.
The Collapse of Convertibility (2001)
Although Argentina boasted the highest income per capita in dollars in Latin America during the 90s, poverty had settled at around 20% and inequality remained at the record levels set after the collapse of the austral. Domingo Cavallo’s neo-liberal stabilisation plan sent unemployment soaring to an unprecedented 11% by 1994, and it would creep up to 15% by the time Fernando de la Rúa took office as president (in 1999).
The cocktail of measures deepened the historic divides in Argentine society. The real economy was sustained on a new cycle of borrowing, but became increasingly vulnerable to the comings and goings of the global market. For this reason, it never recovered from the shock of the Russian crisis in 1998, which added pressure to a convertibility regime that was already politically and financially unviable. According to the consultancy Econométrica, in each year between 1991 and 2001, the private sector funnelled the equivalent of 1.9% of GDP (or 10% of national savings) out of the country.
By the late 90s, without any more state companies to sell, the outgoing Menem government and incoming ‘Alianza’ only resorted to applying new neo-liberal remedies to the crisis. First salaries and pension were slashed, alongside deep cuts in social spending. Then came the ‘corralito‘, the ‘corralón‘, the default, the devaluation, and the asymmetric pesification of debts and deposits.
It was the worst social crisis in modern Argentina, with poverty reaching 52% and unemployment touching 21%. There were 17 consecutive quarters of contraction, from the end of 1998 to end-2002. During those four years, the average Argentine became 22.7% poorer.
Today’s situation is tricky, but let’s be clear, the context is different to these previous crises.
The Central Bank lost US$21bn of its reserves (around 40% of its stock) in the two and a half years since currency controls were introduced (in October 2011). The bleeding of reserves accelerated in 2013, despite a failed government attempt to attract capital with a tax amnesty, after previously trying – and again failing – to convince the public to convert their savings into pesos.
The economy barely avoided recession last year, expanding by 5% according to INDEC and between 2-3% according to private estimates. The devaluation in January – a 23% hike in the dollar, which reached 30% if you include the final two months of 2013 and 60% over a whole year – exacerbated the price increases that had been held back by then-Domestic Trade Secretary Guillermo Moreno last year. This sent inflation soaring to 3.7% in the first month of 2014, an intolerable rate that remained high throughout the first quarter.
The evolution of the official peso-US dollar exchange rate
Inflation began to accelerate in 2007, a result of the struggle over wealth distribution between businesses and workers. Inflation inertia, monetary emission to finance the public deficit, the rise of the dollar, and the global increase in food prices added to price pressures. The general increase in prices made Argentina appear ‘expensive’ in dollar terms, and so both imports and the currency itself looked relatively cheap, as they did in the 90s. Capital flight soon followed, draining the Central Bank of its reserves.
After the introduction of currency controls, the shortage of dollars hit the real estate market particularly hard. The buying and selling of property fell by 70% due to a lack of dollars and the unprecedented gap between average wages and house prices, itself fuelled by the ‘bricks and mortar’ investments of the super rich. Construction activity did not suffer quite as much due to the government’s $4bn in loans for new houses under the ProCreAr plan, aimed at young couples and the lower-middle class. But by December, even INDEC acknowledged a 13% fall in construction by surface area in the country’s most populous cities, and a similar decline in the number of workers employed in the sector.
After a speedy recovery in the ‘golden years’ of Kirchnerism (2003-2008), and a smaller upswing in 2010-2011, the average real salary stagnated in 2012 at levels just 20% higher than in 2001. This included a markedly heterogeneous working class, within which approximately one third remain in the informal sector. Emphasising this point: even though the real wage in 2001 was paltry, and recovered during the Néstor Kirchner government, that was the low point for all the 90s, during which time many benefits were cut and contracts made more flexible. In other words, what was “recovered”, in terms of purchasing power, was merely what was lost during the last few years of convertibility and the peak in inflation in 2002.
On the other hand, a key figure in this crisis is unemployment, which has remained at the lowest levels in the decade and moved below the ‘floor’ set during the neo-liberal era. In contrast with inflation and growth figures, official unemployment data is not questioned by experts and show a rate of 6.8%. Even though youth (up to 29 years) unemployment is almost double this headline rate and one in three jobs is ‘informal’ (and therefore unstable), the absence of a “industrial reserve army” like that which existed during the 2001 crash, acts as a shield against the implementation of a traditional recessionary exit to the crisis, or even a package of orthodox measures to stop inflation by anchoring salaries.
In this context, the last 18 months of this government promises an increase in social conflicts. There are more and more disputes with unions, whose methods have matured since the 1990s and the December 2001 meltdown.
If in 2013, companies contracted for public works were the first to lay-off workers as the pace of state spending slowed in line with the need to reduce the fiscal deficit, the start of 2014 has seen a ‘trickle’ of dismissals from larger companies. Smaller industrial and commercial companies, meanwhile, hire a part of their workforce informally and use these to adjust to signs of falling demand. There are suspensions and cancelled contracts in the auto sector, as well as in those sectors reliant on imported materials and subsidies, like the assembly of electrical appliances in Tierra del Fuego. The manufacturing industry closed 2013 with a fall of 4%, and has started 2014 in the same vein.
There is, however, some good news. Thanks to two restructurings in 2005 and 2010, as well as payments made with reserves and years of trade surpluses, the burden of external debt has fallen from 166% in 2001 to 42% in 2012. External credit markets have been effectively closed off since the government began fudging official statistics, but it has not needed them to cover interest and debt repayments. This crisis, then, is not a debt crisis, like those of 1981, 89, 95 (in the wake of the Mexican ‘Tequila Crisis’) and 2001.
After the January devaluation, the Central Bank continued to lose reserves for another two weeks until it forced all banks to sell part of their dollar holdings, providing the breathing room needed to wait for soy exporters to begin selling their harvest. Aware that the exchange rate pressures will return once this seasonal influx of dollars ends, the new economic team hurried to open up the path to external credit.
The fall in the Central Bank’s reserves (in US$mn)
This includes a deal with companies that sued the state in the International Centre for Settlement of Investment Disputes [ICSID], a new deal with the Paris Club, the reopening of negotiations with vulture funds, the compensation to Repsol for the expropriation of YPF, and the normalisation of INDEC figures. Current economy minister, Axel Kicillof, has evidently scrapped the policy of debt reduction and convinced President Cristina Fernández de Kirchner that a fresh injection of dollars would prevent a deeper correction.
Getting to the heart of the matter, what keeps the ‘ten-yearly crisis’ going is an economic structure that is imbalanced, concentrated, and dependent. These characteristics did not disappear during the commodity boom of the last decade, which for many observers had put an end to the recurring ‘stop-go’ that characterised the second half of the 20th century. This boom, combined with an unprecedented expansion of soy production and the debt restructurings, only served to delay the arrival of a new crisis.
But the “soy revolution” also brought inflationary pressures (due to the displacement of other crops that were for internal consumption), socio-demographic tensions (due to the rising price of land and expulsion of people), and exchange rate concerns (as improved technologies have enabled farmers to store grains and delay export sales). Moreover, the commodity fever, which turned Latin America into the hottest region of early 21st century, is now under threat from slower growth in China and the dollar appreciation brought about by the US Federal Reserve’s monetary expansion.
Let’s look at how these three economic characteristics – imbalanced, concentrated, and dependent – have changed, or not, under Kirchnerism.
1) Imbalanced: As economist Marcelo Diamand showed in 1972, Argentina’s agriculture sector is disproportionately more productive than its industry. The economic ‘model’, as defined by Kicillof in an article for Pagina 12 on 19th December 2010, shortly before he joined the government “is fundamentally a mix of strong currency and export taxes.” As such, according to the incumbent economy minister: “it is a system of protection for industry based on the transfer of part of the agricultural surplus.” This is what led to ‘Chinese-level’ growth until the conflict over export tax hikes with the campo (agricultural sector) in 2008, which the government lost.
This transfer between sectors allowed the industrial sector to grow 149% compared to its nadir in 2002, creating more than 400,000 jobs with an average wage that jumped from $1,087 in 2002 to $6,452 in 2011. Manufactured industrial exports grew 284% over the same period, while manufactured agricultural goods expanded by 244%. Across Latin America, Argentina was the only country not to become more dependent on the primary sector. But it did not become less dependent either.
What was needed to alter this imbalance? More investment in productive areas. Businesses did not do it because they chose to place their extraordinary profits in farmland, real estate, or simply send them abroad. But the state did not do it either. In the words of professor and economist Claudio Katz, the government “gave up industrialising the country and just took a greater share of the income from soy.” More forgiving observers say there was a lack of political support to make these advances.
What’s left is an industrial sector running a trade deficit of around US$25bn a year. Leading this are the two segments at the heart of the Kirchnerist “industrialisation” strategy: the auto sector, which in 2013 imported US$9bn, including vehicle parts and components, and the assembly of electrical goods in Tierra del Fuego, which imported another US$7bn.
2) Concentrated: The limited transformation of the economic structure during the last decade is also evident in the fact that just 20 companies account for nearly half of all Argentine exports, and the top 200, nearly 64%. Taking just the agricultural sector, the 10 largest companies control 80% of overseas sales. The production of grains is somewhat less concentrated, though remains dominated by few hands: according to the Agrarian Federation, 80% of oilseed crops (including soybeans) are harvested in around 8% of the largest establishments. And the turnover of the largest 500 firms in the country represents 26.5% of value added in national income, less than in 2006, when economic concentration hit its peak, but more than any point during the convertibility era.
During the seven years in which Guillermo Moreno was de facto economy minister, official policy was to negotiate economic conditions with the most concentrated groups. Far from having their dominance challenged, these groups were favoured by deals that put large companies at an advantage and forced smaller ones to close. This was a general process, most evident in the milling, refrigeration, milking, private medicine, and industrial pharmaceutical sectors.
The devaluation in January, without compensating measures, will deepen this concentration. Assuming exports this year remain the same as in 2013, this implies a transfer of around $10bn from society as a whole to exporting companies, a figure that almost equates to the total amount of energy and transport subsidies the state will pay this year.
3) Dependent: The cyclical shortage of dollars that affects the Argentine economy due to an industry still addicted to dollars and imported materials is exacerbated by a dependency on foreign capital. Between 2003 and the currency controls of 2011, foreign multinationals constantly repatriated earnings and dividends to headquarters overseas, with the annual figure rising from US$633m to US$7.33bn over the period. In the first decade of the 21st century, in contrast to the government’s official line, these transfers were double those sent during the Menem years, rising from an average 1% of GDP to nearly 2%.
Hit by the worst global crisis since 1930, multinationals with headquarters in Europe or the US went on the defensive. The first savings were made in overseas subsidiaries, which became lifesavers on shrinking balance sheets. This explains the sharp jump in repatriated earnings between 2008 and 2010. When currency controls were implemented, the multinationals tried to maintain the flow with tricks such as ‘paying’ loans to headquarters, buying patents, parts, and materials from their home countries, or simply under-reporting exports.
Until the expropriation of YPF, government talk of ‘going Argentine’ or increasing state control was pure rhetoric. Even after YPF, the foreign dominance of other sectors remains intact. Within the largest 500 companies, those with foreign shareholders increased from 219 in 1993 to 340 in 2003, and only fell slightly to 322 in 2011. Only one in three leading companies belong to the so-called “national bourgeoisie” that Kirchnerists had wrongly bet on.
After the devaluation, the competitiveness of Argentine exports returned to 2010 levels, when the twin surpluses in the trade and fiscal accounts were still intact. There are no more real reasons to devaluate further, but there are strong financial pressures to do so, and these will return once the influx of dollars from this year’s record soy harvest is over. Wealthy Argentines with money abroad and their international partners are hoping for the local currency to get even cheaper, so as to augment their profits further. The dominant exporting firms are also seeking greater profit margins. Even worse, the debt repayments due in 2015 are far greater than this year’s, and before next year’s elections they will put further strain on the balance of payments.
In his 2010 article, Kicillof argued that faced with rising inflation and after the 2008 campo crisis, the ability to sustain the “strong currency + export taxes” model was weakening. He also said that it would be impossible to rely on foreign investment during a global crisis. It was therefore necessary for the state to take the lead with investment, and change the imbalanced, concentrated, and dependent economic structure. Kicillof himself started to do this in 2011, with the government obtaining shares in 42 of the largest companies after nationalising pension fund AFJP. But perhaps this came too late, and wasn’t enough.
In the same article, Kicillof rejected both an appreciation and devaluation of the peso. “Currency appreciation is big business for financials, and maybe has a neutral effect on exporters that import a large share of their raw materials, but it is recessionary, as it was in the 90s. The bad thing is that using devaluation as a way out would also probably be ineffective as a way to protect local exporters now that, in contrast to 2002, they will pass the costs onto prices and from there, while the employment rate remains high, to wages and costs. Therein lies the dilemma: an appreciation is recessionary, and a devaluation – without variable taxes – is inflationary.”
His diagnosis was not wrong; but the government’s policies were. Instead of the ‘fine tuning’ promised in 2011, President Fernández opted for [real] appreciation during 2012 and 2013 and triggered the recession that is now beginning to show, and is made all the worse by the imbalances generated by the crude and unclear currency controls. At the start of 2014, the run against the peso forced a devaluation, which – without variable taxes and with the same imbalanced and import-dependent economy – was inevitably inflationary.
The conservative opposition don’t offer any way out of the crisis except to complete the orthodox correction that the government has now begun. They demand an even sharper increase in interest rates and a brutal cut in state spending, which would put the burden of the crisis on public sector workers, the only ones who still earn less in real terms than during the Menem era. They also ask for “moderate” pay rises in the private sector, just as salaries are set to adjust to keep up with the price increases of the last few months. The leftist parties, meanwhile, seem to be spending more energy on making apocalyptic prophecies about a new Rodrigazo rather than seeking alternatives to avoid it.
The crisis has started. What remains to be seen – and will be decided in the months to come – is how deep it will be. And who is going to pay for it.
Translated by Marc Rogers