Argentina, towards another kind of country 2 2 DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 Roberto Lavagna DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 3 Argentina, towards another kind of country 4 4 DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 Roberto Lavagna Argentina, towards another kind of country Roberto Lavagna * A s 2001 ended and 2002 began, the Republic of Argentina dramatically hit rock bottom. This was not the result of yet another failure in the succession of disasters stretching back 27 years but of a failure so resounding that it devastated Argentine society. The utter collapse of the economy was the outcome of long years of misguided policies generating sporadic mirages of prosperity, known in economic jargon as bubbles, on the heels of which dire crises invariably ensued. By December 2001, Argentine society was crippled. Asphyxia took hold on several fronts: economic, following four years of recession; financial, as all the international markets closed their doors to the country, which was no longer able to fulfil its external commitments; institutional, with the fall of the Government and a string of presidents coming and going in a single week; and social, since more than half the population fell below the poverty line. ∗ Minister of Economy and Production of the Argentine Republic [email protected] DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 5 Argentina, towards another kind of country The consequences of the nineties are common knowledge: dismantling of the production system, disruption of the job market, an accrued current account deficit of 90 billion dollars, a trade deficit amounting to 23 billion dollars, and outright doubling of Argentina’s foreign debt. By April 2002, Argentina had defaulted on almost 110 million dollars (of a total debt of 144 billion, of which 35 billion were owed to international organizations), its economy had ground to a halt, employment had sunk to an all-time low, forecasts of hyperinflation were virtually unanimous, and the population’s money was trapped in the corralito and the corralón (government- imposed freezes on financial assets) with no less than 14 different currencies in circulation. Argentine society was engulfed by a sense of despair and distrust in the country’s rulers. The only possible way out of the crisis was to react and set about instilling a state of normality. At that point the State had to take upon itself the ineluctable task of apportioning losses. The Government immediately set about its task, endeavouring: • to resist corporate demands to transfer the brunt of the crisis to the State and society as a whole; • to propose “voluntary” solutions to the urgent problem of the corralito and the corralón when the domestic and international finance systems were pressing for compulsory measures; and • to draw up new agreements firstly with international financial organizations and then private creditors, focusing negotiations on the un-negotiable need to secure social recovery, economic growth and the country’s real capacity to repay its debt. Then alone could Argentine society begin to administer itself the one advisable, effective medicine for curing the ills that beset it: growth. Otherwise, it faced certain collapse. A firm “no” was thus given to requests that it: (at that juncture) unjustifiably raise public service tariffs; adjust balance sheets by the rate of inflation and thus reduce tax payable on profits; eliminate retentions on exports until the crisis was contained; maintain in dollars payment by a convergence factor (a benefit granted 6 6 DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 Roberto Lavagna to exporters in 2001); implement an exchange insurance scheme to assist companies that had run up debts abroad. Likewise, the government refused to pay installments on the debt that might throw the recovery process into reverse, to allow one sector of the finance system to resume loans in dollars to clients earning in pesos, to compensate financial institutions for measures decreed by the Courts that were not yet definitive, and to make fiscal adjustments that might jeopardize rapid headway being made in reaching an agreement with the IMF. Had the government accepted all or some of those “demands,” it would have repeated the mistakes made as Argentina emerged from the 1982 and 1989-90 crises, when the State played the “fool’s part” and ended up carrying losses that ran to billions of dollars. Restoring normality and growth Three years and a few months have elapsed since the collapse of the Argentine economy, and the results of the “Plan to Restore Normality and Growth” are already visible: in the interim, Gross Product has recovered 26%, following more than twelve consecutive quarters of growth, strongly driven by industrial output, which has increased 38.5% in the same period. These figures, it goes without saying, are an all-time historical record in Argentina. Other macroeconomic indicators also display record figures: investment at current prices reached 21% of GDP in the fourth quarter of 2004; exports attained US$ 35 billions; a 5% fiscal surplus has been achieved (including accounts for the provincial administrations). Domestic consumption grew 9.4% last year. A process of reindustrialization is under way in Argentina with the active participation of many companies, especially small and medium-size firms in the industrial and agro-industrial sectors, almost entirely responsible for the up-turn in employment figures. Throughout this period, 2.5 million new jobs have been created, not only as a result of sustained economic growth but also because the new pattern of inclusive development with social justice is generating more jobs per unit of GDP. This is the result of greater attention being afforded to small and medium-size businesses and to regional economies, the expansion of the domestic market, and the competitive performance of Argentine exports. This turn of events has enabled 5.2 million Argentines to rise above the breadline. DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 7 Argentina, towards another kind of country This year, following long, hard negotiations, an agreement has finally been reached on restructuring Argentina’s external debt. The difficulties encountered were hardly surprising given the characteristics of the debt, scattered over 152 different bonds, 6 currencies and 8 distinct jurisdictions. In this context, Argentina’s argument that without growth combined with social inclusion, the country will not be able to sustain its repayment capacity for any length of time is beginning to win acceptance in international circles. This is perhaps the most important contribution our country has made to stability in international finance markets. Time to consolidate Argentine society is now in a position (though conditions may not yet be ideal) to consolidate the current growth trends and avert the classic “stop and go” dynamics that have beset its economy over the past three decades. The prime objective now is to consolidate sustainable growth and ensure equitable distribution. Investment and domestic consumption must serve as the economy’s dynamo, since consumption is the variable of aggregate demand that can most swiftly lever the narrowing of the gap between Argentina’s potential product and real product. Indeed, consumption would not have been able to expand over the past three years had the wage mass not increased as it has due to increases awarded for greater productivity in the economy, both by decree and through sectorial collective bargaining agreements or direct negotiations between companies and their workforces. Likewise, the State has allocated resources to the necessary social plans, which in time must be reconverted into job creation schemes. None of what has been accomplished hitherto can be consolidated, however, unless the discipline behind fiscal surpluses is maintained. This has afforded the Government the necessary independence to set its own policies, including the policy that has underpinned its vigorous negotiation of foreign debt. That holds true as much for the Nation as for the Provinces, which have made a strenuous effort over this period to reorder their finances and contribute to the national surplus. Clearly, federalism is little more than a mockery of federalism if the provincial administrations have to fall back on the national exchequer to settle their debts and cover regular expenses. Today, on the contrary, they can not only fund their ordinary expenses but also plan and develop their own infrastructure projects. 8 8 DIPLOMACY, STRATEGY & POLITICS - APRIL/JUNE 2005 Roberto Lavagna In terms of foreign trade, too, Argentina is implementing structural changes which are due to be consolidated. Positive growth in both exports and imports is producing trade surpluses that plough substantial foreign currency earnings into the country’s renewed industrialization while also covering the Nation’s external commitments as the State firmly moves to reduce the debt-to-equity ratio. This new pattern of behaviour is visible in the burgeoning diversification of export products and markets and in the growing proportion of capital goods, components and replacement parts for equipment comprising Argentina’s imports. This reflects the investments associated with Argentine businesses’ need to re-equip or modernise their plant to meet the gathering demand in their domestic and export markets. In this respect, over the last three years the Government has worked to provide the right conditions