December 21, 2001

Tangled Roots — Argentina's Economic Crisis Runs Deep

by Marcelo Ballve

The once-elegant El Molino coffee shop in Buenos Aires, now a bankrupt ruin filled with cobwebs, is an apt symbol for Argentina, a proud country that has gone from enjoying some of the highest standards of living in Latin America to becoming the world's economic basket case.

Most analysts blame the decline on rampant government overspending in the 1980s and '90s. But Argentina's graceless plunge into the poorhouse goes far deeper than economics or politics. It may be that the nation's history and cultural stumbling blocks weigh as heavily as its crushing $132 billion public sector debt that has pushed it to the edge of default.

With a wealthy past and background of heavy Spanish and Italian immigration, Argentina has always haughtily looked down on its historically poorer Latin American neighbors of mixed Indian and European ethnicity, a self-concept and nationalist streak that now undermines South America's integration efforts. And motivated partly by anti-communist paranoia, undemocratic governments long sought to isolate the country economically, so industry never learned to compete in a world arena.

Four years ago the windows of the belle epoque El Molino cafe were shuttered for the last time. No longer could Argentines afford to pay nearly two dollars for a cortado, an espresso with milk. A few months later, Argentina slipped into the recession that has led to an 18 percent unemployment rate. The crime rate has soared. The walls of the café are sprayed with anti-government invective.

Argentines prone to nostalgic reveries about past greatness often remark that things weren't always this bad. When the coffee shop opened in 1905 across from the National Congress, its chandelier-hung ceilings, brass fixtures and tux-edoed waiters were evidence of Argentina's booming export economy in farm goods.

Until the 1930s, the country was on track to become another Canada or Australia. But after the war, Argentina began to turn inward. Farm exports continued, but General Juan Domingo Peron's dictatorship in the 1940s and 1950s coddled workers and unions, developing the industrial sector by protecting it with sky-high tariffs that insured its future lack of competitiveness.

"Basically, Argentina closed its economy with respect to industry," says Carlos H. Waisman, a University of California at San Diego sociologist. "The state took control of the society and isolated it from the rest of the world. Policy makers believed this would isolate Argentina from the communist threat."

Peron also ushered in an era of institutionalized violence into Argentine politics. Outside El Molino's windows in Dec. 1946, police opened fire on an anti-Peron rally, killing four and injuring 35 people.

By the 1970s, a reactionary military junta was killing thousands of presumed leftists — often kidnapping them in public from cafes and sidewalks. The junta's nationalistic vision of Argentina led it to play power politics: there was a ballistic missile program, a nuclear weapons program and near-war over a Patagonian border dispute with Chile. Democracy and trade liberalization only came after the junta's defeat against Britain in the 1982 Falkland Islands War.

In the 1980s and '90s, Argentina's industrial sector buckled as it was finally forced to compete globally by free market reforms. Revenues plunged. Tax evasion and corruption grew dramatically, and public debt ballooned.

By then, Argentina was also "the butt of jokes all over Latin America, for our arrogance and our illusions of grandeur," writes Carlos Escude, a former government adviser and university lecturer. Perhaps unsurprisingly, given its history of isolation and xenophobia, Argentina has also had a hard time finding its way in the Southern Cone Common Market, or Mercosur, a 1991 trade pact that also includes Brazil, Uruguay and Paraguay.

No one debates that Argentina desperately needs to export if it is to promote economic growth, increase revenue and meet debt payments. But currently, less than 10 percent of economic output is from exports.

And a backlash against integration is threatening even that.

"Decades of protectionism have left a mark that moments of crisis tend to deepen," wrote analyst Alberto Carmona in a report for the government's National Foreign Service Institute.

Brazil is being used as a scapegoat. Argentine Economy Minister Domingo Cavallo publicly blamed Brasilia's 1999 currency devaluation for Argentina's problems and issued a veiled threat to pull out of Mercosur. Union-led protests against integration have flared up. In November truckers blocked border crossings with Brazil and Chile, claiming competition with foreign truckers had become impossible. Recently Argentina had its eighth general strike in two years.

Meanwhile, the government is under enormous pressure to dollarize or to devalue the peso. Dollarization would replace all pesos in Argentina's bank accounts with U.S. currency. Opponents say it might temporarily shore up investor confidence, but would not get at the root of the problem: the high costs that make Argentine goods — from wine to steel rods — noncompetitive.

Dollarization would also quash plans announced earlier this year for a common currency uniting Mercosur's economies, which together are worth 1 trillion and form the world's third-largest trade bloc.

Some economists believe devaluation would boost exports by making Argentine goods cheaper and put the economy on a growth track. But since much private debt is owed in dollars, it would also likely cause a wave of bankruptcies. Another fear is the government is not strong enough to withstand the political costs of devaluating the currency, and could collapse or lose control of the situation and watch the country fall into chaos.

Sounding an ominous tone, the respected Buenos Aires daily La Nacion recently pleaded with Argentines to respect the constitution and democratic institutions.

Meanwhile, the El Molino cafe is still is boarded up. The Argentine Congress has proposed buying the historic property to turn it into a museum, but the project stalled long ago. There just isn't enough money.

Marcelo Ballve (ballve@ is an editor and freelance writer based in San Juan, Puerto Rico. He grew up in Buenos Aires.

Return to the Frontpage