Democracy Lab

Crying for Argentina

From populism to liberalism and back again: Argentina's economic policy makers are still looking for a formula that works.

In 1913, Argentina's per capita income was among the five highest in the world. In the interim, it has slipped to 69th place, behind most of Eastern Europe and just ahead of Botswana, Gabon and Lebanon. It's safe to say that no other modern economy with a democratic government has made so little from so much. 

This relative decline has proceeded in cyclical fashion. Policies have ricocheted between extremes, reflecting conflicts between economic interests that were all too often resolved by military coups. However, the military has stayed in the barracks since its humiliation in the Falklands/Malvinas in 1982. Nonetheless, Argentina has since been beset by out-of-control budget deficits, hyperinflation and debt defaults, even as civil society has been battered by unprecedented poverty and inequality.

In a global economy that has consistently rewarded free-market policies, Argentines have increasingly opted for a greater state role, relying on trade protectionism to stimulate industrial expansion and blaming everyone but themselves for the consequences.  Actually, in recent decades, luck has largely made up for bad policy choices. During much of the husband-wife reigns of presidents Nestor and Cristina Kirchner, Argentina has had the good fortune to be a major commodities exporter in the midst of a global commodities boom.

Now, as commodity prices sag and the global economy seems poised on the edge of recession, Argentina has again chosen to go it alone. Imports are being tightly restricted and transactions in foreign currency are subject to rigid controls. President Cristina Kirchner's announcement last April of the nationalization of Repsol, the Spanish oil company, suggests more of the same to come. Indeed, the question du jour is whether the ritual squandering of Argentina's economic prospects in a show of incompetence and opportunism is about to be repeated.

Argentina became wealthy selling grain and meat to Europe after the revolutions in steamship and rail transportation in the late 19th century. Its economy grew at a blistering pace of seven percent annually between 1903 and 1913, only to be hammered by the collapse of global commodity markets in World War I. But it recovered briskly thereafter, averaging 6.4 percent growth from 1918 to 1929 on the strength of foreign direct investment and burgeoning global demand for farm commodities.

The Great Depression sent Argentina (and every other market economy) into the skids. It's worth noting, though, that fortune favored Argentina -- the 14 percent decline in GDP was modest by comparison to the 30-50 percent declines experienced by most heavily industrialized countries. And the recovery was faster: Argentina output regained its late 1920s level in 1935, and it was never forced to default on its debts.

The real divergence of the Argentine economy from other promising New World economies dates to the 1940s, to the rise of Juan Peron. Like Fascists and Stalinists, Peronists believed (and maybe still do) in top-down direction of the economy. Their single economic goal, though, was not growth but redistribution -- first from Argentina's rural oligarchy to the owners of highly concentrated urban industries protected against competition from imports, and then from industry to its heavily unionized labor force.

Peron was first elected in 1946, and then won a second term in 1951. But growth flagged over the interval and inflation mounted. Imports exceeded Argentina's largely agricultural exports. And foreign currency reserves accumulated during the wartime boom were used to nationalize the railways and other British-owned assets, and thus could no longer be used as a buffer against export volatility.

Military intervention ended this first experiment in Peronism in 1955 with a society increasingly at odds with itself -- as it continues to this day. The military ceded control (to anti-Peronist civilians) in 1958.  But in 1966 it returned to stay, save for a brief interlude, until the folly of the Falklands war forced an exit.     

Under the dictatorships, there were two separate efforts to change the climate that undermined growth. The first occurred in 1966 through 1969 under Adalbert Krieger Vasena, an economist who had the ear of the military-dominated government.

Initially, the effort was successful. Growth, spurred by the opening of the economy, exceeded five percent a year between 1967 and 1970, while fiscal performance improved and inflation fell below eight percent. Krieger Vasena left office after the Cordobazo, a popular uprising against the military dictatorship led by trade unions. The military hung onto power, but, as a sop to the unions, abandoned efforts to contain wages. Inflation inevitably re-emerged.

The second plan took shape under José Alfredo Martinez de Hoz, a conservative business executive who became economy minister after another military intervention in 1976 that deposed Peron's successor, his wife Isabel Martínez, who took power after her husband's death in his third term in 1974. Influenced by the Chilean experience with technocracy after the Pinochet coup, Martinez de Hoz served up a complicated plan designed to change inflationary expectations and to hitch Argentina more firmly to the global economy.   

He ran the economy a full five years, long enough to see his free-market elixir curdle in Argentina's economic culture. He was eventually forced to devalue the badly overvalued currency, which reignited inflation even as the economy dipped into a deep recession. The military was driven from power in 1983 after it was discredited both by defeat in the war with Britain and impotence in the face of economic crisis. No sleight of hand, it seems, could finesse the struggle between unions, industrialists and land barons for bigger shares of the pie.

In December, 1983 Raul Alfonsin became the first democratically elected president since Peron. And though Argentina had run out of dictators, it was still well supplied with economists bearing magical reform plans. Alfonsin's Austral Plan, instituted in 1985, featured wage and price controls, fiscal and monetary austerity -- and a change in the name of the currency. (Goodbye peso, welcome austral.)

But the Austral Plan languished and died, as the government was unable to sustain budget discipline in the face of the wars of distribution. Alfonsin resigned in 1989, with inflation headed for the ionosphere.    

His elected successor, Carlos Menem, was a Peronist, though not a member of the party's ward-heeling inner circle. He announced far-reaching privatization, fiscal reform and tariff reduction, and was subsequently granted authority by Congress to rule by decree. But Menem faced the traditional Peronist problem of needing to promise more to his core constituents than the economy could deliver without rapid growth. Inflation soared again in 1990 and the beginning of 1991.

Menem, too, had an economist up his sleeve -- and a very smart one at that. Domingo Cavallo boldly locked Argentina's currency to the U.S. dollar. And he added credibility to the commitment by putting the central bank on autopilot, legally tying Argentina's money supply to the central bank's reserves of foreign currency. Meanwhile, the government's extensive business holdings, ranging from public utilities to heavy industry to petroleum, were sold, with foreigners welcome to buy in.

Menem and Cavallo also forced through another round of tariff cuts, exposing Argentine industry to greater competition. Levies on exports were eliminated, giving agriculture a level playing field in global markets. Total trade tripled as a percentage of GDP in the 1990s with the end of Argentina's long, disastrous experiment with by-the-bootstraps industrialization that benefitted nobody but industrialists, politicians on the take and their union allies.

The economy came out of its torpor, with high sustained growth rates. Unemployment rose -- it had to in order to make the transition from protectionism to competition. But the fact that Menem was a Peronist and controlled the patronage that fed the party machine, limited labor opposition.

But the dramatic reforms of the 1990s did not fundamentally change the political and economic cultures that stood in the way of flexibility in wages and prices, needed to keep the economy competitive. Cavallo was forced out in 1996, and thereafter the strains on the economy slowly built. Locked into an ultra-tight monetary policy dictated by the currency straitjacket, Argentina entered what amounted to a depression. With unemployment and poverty at record levels, the system finally snapped; the currency lock was broken.   

Devaluation worked to turn around the economy -- and better than anybody had a right to expect.  Imports declined radically, creating an unprecedented trade surplus. Moreover, local industries got a big boost, as consumer demand was deflected from imports.   

The fly in the ointment was foreign debt, which, post-devaluation, represented an even more daunting liability because it was denominated in U.S. dollars. But Nestor Kirchner, a relative unknown who'd been elected in 2003, made lemonade out of lemons, converting the external debt to a political asset. The IMF became the enemy, a convenient target for Argentines to rally ‘round. (The photo above shows a protestor tagging a door with a slogan condemning the IMF.)

One might conclude that Kirchner's rejection of austerity had, indeed, saved Argentina. Between 2003 and 2011, GDP grew more than seven percent annually, while unemployment dropped by more than 20 percentage points. Moreover, thanks to devaluation, Argentine manufactures suddenly were competitive in Brazil and other Latin American markets.

But the success of Kircher's Peronism also depended on luck. The trade surpluses created by the big devaluation were augmented by the global boom in commodity prices that fattened receipts from Argentina's agricultural sector. 

This made it possible for Kirchner to repay the IMF debt. Most of Argentina's dollar-denominated debts were private, however. And here, Kirchner demanded that the creditors accept a lot less than face value. Most accepted a deal in 2005 rather than take their chances on international debt collection.

Nestor Kirchner lacked constitutional authority to run again in 2007. But in an echo of Juan Peron, he was able to usher his photogenic wife, Cristina Kirchner, into the office on a promise of domestic tranquility. 

That was not to be. First, to keep to Peronists in the fold, the government sought additional taxes on agriculture. Second, inflation began to erode domestic industry's post-devaluation competitiveness. Third, the global recession reduced demand for Argentine exports. But Cristina proved a skillful politician, playing the nationalist card well for a solid win in the 2011 election.

Argentina's economy and polity seem to be slipping into a familiar, though not happy, place. But virtually no one expects a total regression to the wretched performance that extended from the end of World War II until 1990. One reason: rising productivity stemming from greater exposure to global markets. Another: the worldwide boom commodity prices, which are subject to great volatility but likely to be sustained as the Asian economies grow.

It's also worth noting that economic policy has not been as unresponsive to market pressures as it was historically.  Argentina's reflexive response to problems is to blame foreigners and to back away from international engagement. But the forces of globalization have begun to erode the self-destructive aspects of Argentine particularism.

Consider, for example, the consequences of the re-nationalization of YPF, Argentina's oil monopoly. To restore energy exports as a source of growth, the newly nationalized YPF will have to develop significant offshore oil and gas deposits.

In another era, that might have been impossible since so much depends upon the willingness of foreign investors to commit advanced technology and tens of billions of dollars to the endeavor. But if the finds are substantial, Argentina will not have to rely on traditional sources of capital or expertise.

China will certainly be among those ready to commit resources, as they have already done in Venezuela and Brazil. Petrobras Argentina, the Argentine subsidiary of Brazil's monster oil company, will also be an active player. Thus Argentina may be able to thumb its nose at from America and Europe without denying itself the benefits of Argentine offshore oil and gas. More generally, thanks to the pronounced shift toward trade within emerging markets, the Argentina can better withstand the anti-American, anti-European impulses of its politicians.

None of this is to say that Argentina is about to be awarded a free pass from the consequences of its toxic political culture. Inflation, a symptom of its wars of distribution between agriculture and industry, and industry and labor, is already running to double digits. Argentina, alas, remains a land of great promise, largely unfulfilled. 

Photo by ALI BURAFI/AFP/Getty Images


A More Sacred Union

How two words -- forged nearly a century ago -- help explain France's military intervention in Mali.

Words, if not history, are repeating themselves in France. Following the French government's dispatch of planes and troops last week to Mali, whose government is besieged by Islamist rebels, a particular phrase -- l'union sacrée -- has been resurrected. Forged nearly a century ago, those two words nevertheless cast light on the future of France's current military intervention.

When President François Hollande announced last Friday that he had ordered the Mali operation, leading politicians quickly hailed his decision. "Sacred union" immediately became the phrase du jour of the French media. The conservative paper Le Figaro welcomed the "sacred union of the political class" -- a sentiment and wording echoed by the centrist Le Parisien and liberal Le Monde. One of the leaders of the main opposition party, the Union for a Popular Movement (UMP), declared that such a union was "not an option, but an absolute necessity and duty for us all." Even Marine Le Pen, leader of the extreme right-wing Front National, rallied to the government's decision.

This orgy of bonding among inveterate enemies happens to be taking place on the eve of the centennial anniversary of the phrase's birth. The occasion, predictably, was an earlier war -- the war, you may recall, meant to end all wars. On Aug. 3, 1914, President Raymond Poincaré declared that France was going to battle against Germany. "Heroically defended by all her sons," he affirmed, the nation's "sacred union will never be shattered in the face of the enemy."

The phrase lives on, in large measure, because the political, social, and ideological contexts that created it never truly died. Sacred Union 2.0, it turns out, looks a lot like Sacred Union 1.0.

Prior to World War I, France had been deeply divided over the question of national identity. Opposed to the abstract ideals of 1789, nationalist intellectuals like Maurice Barrès and Charles Maurras identified the nation with la terre et les morts -- the land and the dead. To be French meant belonging to a people shaped over the course of centuries. La patrie -- the motherland -- was the work of generations who had, since time immemorial, lived, worked, and died on French soil. Immigrants -- particularly if they practiced religions other than Christianity and hailed from places other than West Europe -- were fated to remain irredeemably alien. Too new and too different, these uprooted peoples were in effect an invasive species in the French ecosystem.

France was also a house divided over the empire it had acquired during the last decades of the 19th century. Moderate republicans supported France's gathering of great swaths of territory in northern and western Africa, as well as in Asia and the Pacific -- an activity they referred to as France's "civilizing mission." Yet many nationalists denounced this imperial undertaking as misguided. France's true interest, they argued, was in Europe: in particular, winning back Alsace and Lorraine from the Germans. Foreign adventures distracted the nation from its true calling.

Equally divisive was the place of religion in politics and society. Ever since the Revolution, Catholics and republicans wrestled over the nation's soul. Republicans feared the reactionary and obscurantist worldview of the Church, while ardent Catholics were horrified by the Republic's secular ideals and faith in reason. At the end of the 19th century, this battle reached a crescendo with the Dreyfus Affair, the seismic event that pitted the Church against the Republic. Though the Republic carried the day -- a victory climaxing with the official separation of Church and State in 1905 -- this collision nevertheless revitalized the Church and mutual suspicion between the two camps endured.

As a result, when parties across the political spectrum joined in sacred union in 1914 -- Catholic and secularist, monarchist and socialist, union leaders and industrialists -- the impact was lasting. Contemporaries long recalled the moment as if it were a miracle. France has ever since been transfixed by this unique moment, when one and all put aside their differences on behalf of a nation endangered. Poincaré was right: The union never shattered, and France eventually won.

Yet, as historians have since revealed, the union was not all that it was cracked up to be. In fact, the union itself soon cracked under the pressure of a conflict no less unprecedented than the political truce that it heaved into existence. The public believed the war would be swift and decisive: The soldiers would be home by Christmas, carrying gifts from a defeated Germany. Likewise, France's military leadership expected a war of rapid movement and shifting fronts. Instead, the war soon froze along the muddy trenches and static lines of northern France, dragging on not for months but for years. Disillusioned Socialists and conservatives, workers and owners, Catholics and republicans who never dreamed the war would last so long, again began to quarrel, all while maintaining the façade of union.

The historian Jean-Jacques Becker once noted that ever since 1914, French political leaders have, at times of political crisis, called for a new union sacrée. Yet the call had never again been answered. Until now, it seems. Yet it pays to consider the unsettling parallels between these sets of events.

The "other," first of all, still haunts the imagination of the French right. Faces have since changed, but not the ways in which they are perceived. Replacing the Jew, the bête noire of the earlier nationalists, is the Muslim. This is the case not just with the xenophobic National Front, France's third-most powerful party, but also the UMP, whose leader, Jean-François Copé, has repeatedly stoked the fears of his electorate over French Muslims.

Second, influential politicians committed to that most nationalistic of ideologies, Gaullism, have criticized Hollande's decision. On Sunday, Dominique de Villepin, who served as prime minister under Jacques Chirac and, not coincidentally, has written widely on Napoleonic France, declined to join the union sacrée. Declaring that he was "worried" by the sudden engagement in Mali and unanimity of the "war mongerers," he wondered how "the neoconservative virus has infected everyone's thoughts." (Moreover, this brand of nationalism is not limited to the right. The firebrand of the French left, Jean-Luc Mélenchon, has also denounced the government's actions. Like his predecessor Jean Jaurès, Mélenchon believes the war is a welcomed distraction for a government unable to respond to legitimate demands of a struggling working class.)

A glance at the front page of a French paper reveals a third parallel: Stories about the French troops in the Malian desert compete with stories about French Catholics on the Paris boulevard. For several weeks, French politics have been convulsed over the issue of gay marriage. Demonstrations by supporters and opponents have been massive, recalling the same deep passions and divisions of the Dreyfus Affair. The leading role in the public protests against the government's effort to legalize gay marriage has been taken by the Church. This harkens back to its earlier prominence in fin-de-siècle France when it tried to prevent what it saw as the moral decadence that would ensue from secular values embodied by the Republic.

Finally, there are those troops in the Malian desert. The expectation that this would be a surgical affair, conducted by air attacks on the insurgent columns, has proved to be mirage. These soldiers, whose numbers have been increased to 2,500, will no more be home in time for Bastille Day than the French poilus were home in time for Christmas. And just as French propaganda portrayed the Germans as "huns" or boches, so too has the current government repeatedly referred to the Islamic insurgents, who have shown themselves to be an organized fighting force, as "terrorists." It is the Islamic "terrorist," it seems, who has supplanted the boche as the nation's ancestral foe.

Does this mean that the threat posed by the Islamist insurgency in Mali is illusory? Of course not: The menace to regional security is very real and deeply worrisome. As real, perhaps, as the threat to France and Europe of Wilhelmine Germany, unpredictable and volatile, foiled in the imperial land grab won by France and England, yet still insisting on its rightful place under the sun.

Yet France then, as now, had commitments to other nations. In 1914, it was to Tsarist Russia; in 2013, to its former colony in western Africa. Yet it happens that both one and the other were not only incapable of mustering an army to defend themselves, but were also less than sterling examples of democratic rule. And so it is, a mere century later, that France, once again distracted by its domestic problems and deluded over its military goals, has formed a sacred union. To what end is not yet clear.