January 26th 2002

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Articles from this issue:

Cover Story: The magic of Middle Earth

Editorial: Argentina - from role model to basket case

Al Qaeda network must be destroyed

Policy not structure the problem for National Party

Industry policy behind Celtic Tiger's success

Straws in the Wind: Great Helmsmen: past and present / A tale of two branches

Anti-war protests leave Melbourne cold

Media: When the Left calls for time-out

Letter: Exports and imports

Letter: Alcohol abuse

Trade: APEC’s demise paves the way for China’s free trade pact

United States: Year of the Right?

Japan: a nation in search of a role

History: Roosevelt’s timeless wisdom

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Editorial: Argentina - from role model to basket case

by Peter Westmore

News Weekly, January 26, 2002

The economy of Argentina, a nation which in the 1990s embarked on deregulation of its economy, the sell-off of public assets and downsizing of its public sector, has collapsed, leading to massive riots in the capital, Buenos Aires; the resignation of two interim Presidents; and a government decision to renege on payment of the country’s $US155 billion foreign debt and impose a massive depreciation of the Argentinean peso, previously pegged to the US dollar.

Argentina is a country in some ways comparable to Australia. Like Australia, its economic "reforms" have been applauded by free marketeers.

It has a population of about 38 million, is rich in natural resources; its people are well-educated; and it has a diversified industrial base, including food processing, motor vehicles, consumer durables, textiles, chemicals and petrochemicals, printing, metallurgy, and steel; and an export-oriented agricultural sector.

Politically, however, it suffered from the consequences of a succession of left-wing populist and right-wing military juntas until the 1980s.

When President Carlos Menem took office in 1989, the country had piled up huge external debts, inflation had reached 200 per cent per month, and output was plummeting.

To combat the economic crisis, the government embarked on a path of trade liberalisation, deregulation and privatisation.

In 1991, it implemented radical monetary reforms which pegged the peso to the US dollar and limited the growth in the monetary base by law to the growth in reserves. Inflation fell sharply in subsequent years.

But from 1995, the situation deteriorated. Conditions worsened in 1999 with GDP falling by 3 per cent. President Fernando de la Rua, who took office in December that year, followed an IMF austerity plan of tax increases and spending cuts to reduce the deficit.
Argentina’s economic policies had ‘made in Washington’ stamped all over them.

In exchange, the IMF promised a multi-billion dollar rescue package.

This failed when massive opposition to the tax increases and cuts in government services led to riots, causing foreign investor panic, a flight of capital and the collapse of the economy late last year.

As the prominent US economist, Paul Krugman, wrote recently, "Most people may think that this is just another run-of-the-mill Latin American crisis - hey, those people have them all the time, don’t they? - but in the eyes of much of the world, Argentina’s economic policies had ‘made in Washington’ stamped all over them.

"The catastrophic failure of those policies is first and foremost a disaster for Argentines, but it is also a disaster for US foreign policy.

"Here’s how the story looks to Latin Americans: Argentina, more than any other developing country, bought into the promises of US-promoted "neoliberalism" (that’s liberal as in free markets, not as in Ted Kennedy).

"Tariffs were slashed, state enterprises were privatised, multinational corporations were welcomed, and the peso was pegged to the dollar. Wall Street cheered, and money poured in; for a while, free-market economics seemed vindicated, and its advocates weren’t shy about claiming credit. Then things began to fall apart."

Krugman added, "I could explain at length the causes of Argentina’s slump: it had more to do with monetary policy than with free markets. But Argentines, understandably, can’t be bothered with such fine distinctions - especially because Wall Street and Washington told them that free markets and hard money were inseparable.

"Moreover, when the economy went sour, the International Monetary Fund - which much of the world, with considerable justification, views as a branch of the US Treasury Department - was utterly unhelpful.

"IMF staffers have known for months, perhaps years, that the one-peso-one-dollar policy could not be sustained. And the IMF could have offered Argentina guidance on how to escape from its monetary trap, as well as political cover for Argentina’s leaders as they did what had to be done.

"Instead," he said, "IMF officials - like medieval doctors who insisted on bleeding their patients, and repeated the procedure when the bleeding made them sicker - prescribed austerity and still more austerity, right to the end."

Australia’s foreign debt, now over $300 billion, is comparable with Argentina’s, and is increasing at a rate of about $20 billion a year.

If - or when - the lenders lose confidence in Australia’s ability to repay the debt, what has happened to Argentina could well happen to us, surrendering this country to the tender mercies of the IMF.

For this reason alone, it is imperative that Australia reverse the policies which have caused the blow-out in the foreign debt, principally the collapse of domestic manufacturing and abandonment of any semblance of industry policy, the rural decline, and lack of national infrastructure projects for water, electricity, road, rail and telecommunications.

In the 20th century, Australians built a single nation on these foundations, until they were abandoned 20 years ago. There is still time to address these issues.

  • Peter Westmore is President of the National Civic Council

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