Workers must fight Argentine austerity
In the same week as the latest stage in the launch of international capital’s most important current monetary project, the Euro, came a rude reminder of the instability of global capitalism. The economic crisis in Argentina has now led to riots on the street, the resignation of two presidents and the most serious financial crisis in ‘emerging markets’ for the last three years.
Yet neo-liberal analysts have attempted to shrug off the wider implications of the Argentine crisis. They have argued that the main difference between what is happening now and what happened in Asia, Russia and Brazil in the late 1990s is that the international financial system is now much more stable and able to withstand problems in a particular country.
Currency and debt crises share one fundamental characteristic when looked at from a Marxist standpoint. They are essentially redistributive. They arise from struggles over the distribution of the surplus which has been created in production, through the exploitation of the working class. These struggles take place both between different national capitalist classes and between capital and labour in the countries affected.
This is fairly obvious in the case of debt or credit crises. But it is also true in the case of currency crises. If a currency such as the Argentine peso is devalued, this represents a redistribution to holders of other currencies. Other things being equal, national capitalist classes will want to keep the value of the currencies they hold, normally their ‘own’, as high as possible, to increase their purchasing power.
However, the instability of the system arises from the fact that such a strategy potentially undercuts the basis of profitability by making domestic production uncompetitive in international markets.
The last two decades have seen an intensification of the severity of both debt and currency crises affecting Asia, Africa and Latin America. In other words conflicts over the distribution of surplus profits between these countries and the imperialist heartlands have become sharper. The fundamental reason for this is the fall in profitability world-wide, which has led to large amounts of mobile money capital searching the globe increasingly desperately for investment opportunities. The phenomenon of ‘emerging markets’ is an expression of this.
But as the pool of money has grown more and more compared to potential profits, so conflicts over how the profits are to be distributed have increased. The way in which these problems have become apparent has differed from country to country. But two main kinds of crisis can be seen as increasingly typical.
One is a crisis of overconfidence, where capital streams into a country on the basis of an expectation of future profits, which then turns out to be exaggerated. The realisation of this leads to a financial panic and currency collapse. This is to a large degree what happened in Mexico in 1994 and in much of Asia in 1997.
The second kind of crisis is a prolonged struggle over distribution, where domestic and international capitalists cannot agree a common strategy for dividing the spoils. Incompatible approaches lead to capital being unable to impose a vision of how to resolve the crisis and consequently to a paralysis of policy-making. This is what is happening in Argentina at the moment.
The Argentine economy has suffered from very high levels of foreign debt (now valued at around $125 billion) for two decades. The fundamental cause of this is the underlying weakness of productive activity in the country, which has a small export sector mainly based on exploiting natural resources and primary commodities, and which has to a large degree failed to break into more profitable sectors and markets.
As a result the ‘terms of trade’ which measure the price of Argentine exports compared to Argentine imports have moved dramatically against the country in recent years. This productive weakness can be traced back to the history of imperialist domination of Argentina over the last century, and to the failed policies of the Argentine capitalist class both under military rule in the 1960s and 1970s and under both Radical and Peronist governments since 1982.
The high level of debt has led Argentina to be very vulnerable to conflicts over redistribution of the kind outlined above. The situation for the Argentine government has been made worse by two further factors. First, the Argentine capitalist class is exceptionally skilled in tax evasion, which has led to a constant problem both of declining government revenue and of flows of capital out of the country. Secondly, the nature of the Argentine constitution and the balance of parliamentary power has meant that the federal government cannot impose its will or spending plans on the powerful provinces.
In the 1980s the Radical government under Raul Alfonsin tried to solve these by extracting more from the working class through a series of austerity programmes. But at that time the Argentine trade union movement was relatively strong and confident, after the overthrow of military rule and with the support of the opposition Peronist movement. The austerity measures failed. Endemic inflation resulted as firms tried to safeguard profits through price rises and workers responded by demanding higher wages.
When the Peronists came to power in the 1990s they faced the possibility of hyperinflation which would seriously destabilise capitalism in Argentina. Their answer was to introduce a ‘currency board’. The central bank was only allowed by law to print money which was backed up by foreign exchange earnings.
The exchange rate was rigidly fixed against the dollar, enabling domestic capitalists and foreign creditors to be united around a common strategy. Fixed exchange rates would impose discipline on workers, who would realise, it was argued, that wage rises would price them out of jobs.
They would also safeguard the value of foreign investments in Argentina and thus attract inflows of capital, while ensuring that the debt could be repaid, since the peso would not be in danger of falling against the dollar in such a way that the burden of debt would rise.
This became a springboard for a dramatic assault on the working class under Carlos Menem, with cuts in wages, deregulation and a wholesale privatisation of large parts of the economy. Investment boomed from 1991 to 1998. The economy grew by an average of 6.2 percent through the 1990s. Argentina became feted by the IMF and neo-liberal economists as a model economy.
But the fundamental contradictions of production in Argentina were not solved in any way by the policies of Menem and Domingo Cavallo during this period, and as a result the conflicts which had appeared to be solved were bound to recur.
This is what has happened over the last three years, during which Argentina has been in recession. The immediate cause of the difficulties has been the movement of exchange rates.
Argentina’s main trading partners are Brazil and Europe. Following the devaluation of the Brazilian real in January 1999 and the steady fall of the Euro, while the dollar remained strong, Argentine exports have become uncompetitive. But this has only acted to uncover deeper problems with the currency board strategy.
As the Argentine economy has weakened, foreign lenders have demanded higher and higher interest rates to compensate for the possibility of a debt default. This has both worsened the recession and led to a fiscal crisis for the Argentine state, which has found it increasingly hard to pay the interest on its debt. Slower growth and higher government deficits have in turn lowered the confidence of international investors in Argentina and led them to demand even higher rates.
The last eighteen months have seen a vicious downward spiral of confidence, with attempted IMF bailouts in November 2000 and August 2001 both failing. The government has desperately tried to shift the burden of debt repayment onto the working class through more austerity
These, and the effects of the recession, have led to the current unrest.
The severity of the crisis has broken the unity between the Argentine capitalist class and foreign investors, and led to sharp conflicts about how it might be resolved. Two main strategies have emerged.
One, favoured by observers like Wolf and Ricardo Hausmann of the Inter-American Development Bank, is to devalue the peso. The advantage of this for the capitalists is that it opens up the possibility of shifting at least part of the burden of solving the crisis onto the mass of the Argentine people. Their real wages and savings would fall in value, as happened in Mexico ten years ago and Asia five years ago.
If it allowed interest rates to fall, Wolf argues, a devaluation could stimulate growth and allow debt payments to continue with a relatively minor rescheduling. The interests of foreign creditors would be safeguarded, at least to some extent. Nearly all the Argentine ruling class now holds its wealth in the form of dollars, so it too could withstand this process.
But devaluation carries with it real problems. The international impact of the failure of the currency board strategy, supported by the IMF, to protect the value of the peso would be dramatic. It would indicate that developing economies would face a stark choice between letting their currencies float and giving up having a national currency at all, as in the ‘dollarisation’ option adopted by Ecuador and El Salvador.
More seriously, with foreign debt and much domestic debt denominated in dollars, a sharp fall in the exchange rate might well mean financial collapse in Argentina. Popular support for maintaining the exchange rate is still strong and devaluation might provoke further unrest. And productive investors in Argentina would see the value of their profits measured in dollars plummet.
The alternative is to default on the debt. But with 20 percent of publicly-traded emerging market debt accounted for by Argentina, this would have severe effects on international financial markets. It might spark off a crisis of confidence about the ability of other highly indebted countries to pay their debts.
Brazil, where foreign debt is over 300 percent of export earnings, and a higher percentage of GDP than in Argentina, could be affected. It would also raise questions about how the continuing Argentine balance of payments deficit is to be funded.
The Argentine government has vacillated up until now between each of these strategies. The project of introducing a ‘third currency’, announced in December, is designed to lay the basis for a controlled devaluation of the peso. At the same time they have announced a temporary suspension of debt payments. Yet, the government is itself divided and is also unable to agree a common strategy with international capital. In these circumstances it cannot present a clear way out of the crisis.
The result of this is a situation which in many ways is more problematic for global capitalism than that of 1997 or 1998. The USA, which played a crucial role in resolving crises in developing economies then, is now in recession. The Bush government is unwilling to help Argentina but even if they were willing and able to take action, there is no agreed way forward.
The argument used in Asia that the speculative crises were the result of too little financial deregulation and the close links between banks, industry and the state, cannot be applied to Argentina.
Argentina has adopted precisely the approach prescribed by the IMF and the US for a decade – and is still in crisis. And the Argentine crisis comes after three years of recession and social polarisation, not, as in countries like Indonesia, before the build up of economic discontent.
It also comes at a time when the class struggle has intensified in several neighbouring countries, such as Peru, Bolivia and Ecuador.
How the Argentine crisis is resolved will depend primarily on the Argentine working class, and on its ability to frustrate plans to make it pay for the crisis. But already enough has happened to make the example of Argentina a crucial one for socialists to use in exhibiting the fundamental injustice and instability of the capitalist world economy.