Punished by years of high inflation,
Argentines enthusiastically supported
Menem’s anti-inflationary
Convertibility Plan. The government,
however, utilized the success of the
Plan to peddle a larger neoliberal
shock program that has enriched few
and impoverished the majority of
Argentines.
EDUARDO M. BASUALDO AND HUGO J. NOCHTEFF
n April 1991, after 15 years of high inflation that
included two bouts of hyperinflation in 1989 and
1990 which ravaged the national currency and
destroyed internal credit, Argentina was presented with
a “last-best hope” in the form of a new monetary policy.
Dubbed the Convertibility Plan, the new policy estab-
lished a fixed peso-dollar exchange rate-one
Argentine peso for one U.S. dollar-and mandated that
the country’s money supply (all the bills and coins in
circulation) should at all times equal the reserves (hard
currency and precious metals) held by the Central
Bank. The Central Bank would now buy or sell all the
pesos and dollars offered and demanded by the public at
the fixed exchange rate. Reserves, measured in dollars, could be held, up to a certain percentage, in public-debt
bonds in stable foreign-currency denominations.
The Convertibility Plan quickly restored both cur-
rency and credit, and in less than three years brought
about general price stability, reducing inflation to levels
lower than those of many developed countries. The
government can issue no more or no less currency than
Daniel Azpiazu, Eduardo M. Basualdo and Hugo J. Nochteff are researchers at the National Science and Technology Council (CONICET) and at the Economy and Technology Department of the Latin American Social Science Faculty (FLACSO) in Buenos Aires. Translated from the Spanish by Fred Rosen.
the public buys at the fixed rate. The Plan ensured that
there would be no nominal devaluations-or revalua-
tions–of the peso, and that the country’s money supply
would be determined solely by the demand for pesos by
economic actors doing business in Argentina. Because
of the abundant international cash flow, the steep rise of
the local demand for money was satisfied by what the
government and the public perceived as a practically
infinite supply of money.
Argentine citizens, punished by years of high inflation,
enthusiastically supported this new anti-inflationary pol-
icy. But, in what constitutes one of the great ideological
swindles of Argentine history, the government of Carlos
Menem used the success of the Convertibility Plan to
peddle a larger neoliberal shock program, which its
neoliberal technocrats presented as part and parcel of
the Convertibility Plan. Powerful foreign and domestic
investors, as well as foreign creditors such as the
16 NACIA REPORT ON THE AMERICASREPORT ON ARGENTINA
As jobs disap-
peared, thou-
sands of
Argentines
found them-
selves scram-
bling for a
source of
income.
Pictured here is
a man who
makes his living
refilling dispos-
able lighters.
International Monetary Fund and the World Bank, had
long been promoting a neoliberal structural-adjustment
program in Argentina. Behind the veil of the popular
monetary policy, the neoliberal technocrats and the
international and domestic prosperity peddlers acceler-
ated and consolidated the shock program, which con-
sisted of massive privatizations, the deregulation of eco-
nomic activities and the “flexibilization” of the labor
market, and the liberalization of commodity and money
markets. The whole package of neoliberal reforms–
known in neoliberal terms as “institutional cleansing”
-is now referred to as the Convertibility Plan.
he past decade of economic and social turmoil in
Argentina has its historical roots in the military
regime that ruled the country between 1976 and
1983. During the country’s infamous dirty war, in
which thousands of Argentine citizens were tortured,
disappeared and murdered, the military dictatorship
repressed and eliminated the social forces that were
demanding change. But the officers in the Casa Rosada
had a more ambitious plan-to recreate Argentine soci-
ety on the basis of new socio-economic relationships.
The structural transformations introduced by the dicta-
torship succeeded in destroying the old economic
model of import-substitution industrialization (ISI), set-
ting the stage for the implementation of neoliberal eco-
VOL XXXI, No 6 MAY/JUNE 1998
nomic policies. From 1981 through 1989, investment
descended to unprecedented levels, lower than those
required for the simple replacement of fixed capital.
Even after the stabilization, during the peak of the
upswing phase of the cycle in 1994, the estimated aver-
age age of the capital stock was still higher than in
1972.1
Over the past decade, the power of the economic
groups created during the military period has been con-
solidated, as has the exclusionary socio-economic
model put in place during the dictatorship. The regres-
sive model deepened between 1983 and 1989 during
the government of Radical Ratil Alfonsfn and was con-
solidated with Menem’s neoliberal reforms. Financial
speculation and newly privatized services have become
the chief sources of private profit under this neoliberal
model, and its main beneficiaries have been the large
economic groups-both domestic and foreign-doing
business in the country. Monopolistic domestic capital,
through its powerful influence on the state, largely
determined the specific nature of the policies adopted
through 1991, and is now the driving force behind eco-
nomic policy making in Argentina.
The relation between domestic capital and foreign
creditors has been complex and often contradictory.
Foreign creditors have, for the most part, been margin-
alized from the dramatic redistribution of wealth in
17REPORT ON ARGENTINA
Argentina. The government even suspended payments
on its foreign obligations for a short period between
1988 and 1990. These contradictions were central to the
explosion of the economic crisis in 1989-the result of
a run on the peso initiated by the foreign banks which
set in motion the hyperinflationary process that ended
with the fall of the Alfonsin government and Menem’s
early assumption of power.
At the same time, however, foreign creditors and
domestic entrepreneurs agreed that accentuating the
concentration of wealth and privatizing public compa-
nies was the only way to overcome the economic crisis.
Privatization-and the capitalization of the foreign debt
through foreign debt-equity swaps-was
absolutely necessary for foreign creditors
as a way of recovering a good part of their
debt capital. It was also fundamental for
domestic entrepreneurs because it allowed
big domestic firms to gain access to valu-
able assets with great potential for prof-
itability, including telecommunications,
utilities such as electricity, gas and
potable water, and the country’s largest
oil company.
oday, in alliance with transnational
corporations and foreign financial
sectors, those who impoverished
and decapitalized the country have pre-
sented themselves as its saviors with the
Convertibility Plan. An example of this
public-relations fraud is the liberalization
of capital flows. Not only was financial
liberalization unnecessary to obtain price
stability, but it was counterproductive. It prompted a
massive entry of short-term capital, which raised the
country’s foreign indebtedness. This new debt, owed to
short-term speculators, has heightened economic insta- bility. This is clearly seen in the turbulence of capital
markets, the decline in productive economic activity and the extremely negative impact of the Mexican and Asian crises.
Nor is it true that commercial liberalization-the
reduction in the protection of productive industry–
lowered inflation. Here, the lowering of protective tar- iffs yielded a “once and for all” reduction in the price of many internationally tradable goods, but was com-
pletely unnecessary for reducing the inflation rate. In
fact, the shock of commercial liberalization created a
heightened vulnerability to fluctuations in the interna-
tional economy while contributing to an increase in
domestic bankruptcies and the subsequent rise in unem-
ployment, a drop in real wages, and declining prof-
itability in the production of tradable industrial goods.
The result was the disappearance of sectors with the
greatest technological content and/or skilled labor, like
the producers of capital goods such as electronics, machinery for agriculture and the dairy industry, ATM machines, telecommunications equipment, and data-
processing equipment. IBM, for example, shut down
factories in Argentina which produced high-speed print-
ers for export to Japan, Asian-Pacific countries, Latin
America and Africa.
The shocks of deregulation-especially price dereg-
ulation-had similar effects. The argument that dereg- ulation and privatization raised foreign-investor confi-
dence and thereby contributed to the defeat of inflation
The Buenos Aires Stock Exchange.
is fallacious. The inflow of capital to bolster the money
supply depended less on investor “confidence” than on
the recovery of the demand for money associated with
the Convertibility Plan. It also depended on abundant
international liquidity and the taming of the hyperinfla-
tion of 1990, which quickly produced greater returns
for investors. In fact, one of the problems in
Argentina-as in other newly liberalized “emerging
markets”-is the excessive inflow of short-term specu-
lative capital. Portfolio investors, looking for quick
killings rather than long-term returns on investment,
pour money into a variety of financial schemes, only to
pull it out at the first hints of impending trouble,
thereby popping the speculative financial bubbles that
they themselves create.
In sum, if the Convertibility Plan had been applied
without the rest of the neoliberal shock package, the
only cost would have been smaller growth of consump-
tion and imports in the program’s first years. At the
18NACLA REPORT ON THE AMERICAS
0
18 NACIA REPORT ON THE AMERICASREPORT ON ARGENTINA
same time, the formation of financial bubbles would
have been avoided, along with the fall in employment
in the export and import sectors, the disappearance of a
good part of the technology-intensive sector of the
economy, the regressive redistribution of income, and
the growth of the foreign public debt to $100 billion by
1996. Finally, had there been no neoliberal shock, the
enormous transfer of income to big domestic firms
would have been avoided, and with it, the ability of
these groups to dominate the economy.
he distribution of profits among the elite sector of
the business community now has three character-
istics. First, the production of nontradable goods
and services is more profitable than that of tradable
goods and services. Second, the production of primary
exports, especially those based on nonrenewable natural
During the nine-year rule of Menerr
and his Convertibility Plan, the new
relations of exploitation and dominati
that were born of the military
dictatorship came to maturity.
resources, is more profitable than that of other
importable and exportable goods. Finally, the produc-
tion of services is more profitable than manufacturing.
Because of this new intra-elite distribution, there has
been a concentration of investment in the economy’s
less technology-intensive sectors and in sectors that
have less growth potential in world markets. The result
is a reduction of the long-term growth capacity of the
Argentine economy.
Industrial firms represented 55% of the country’s 200
largest firms in 1995, but their share of total sales was
only 33%, and they received only 17% of profits. At the
other extreme, privatized public services represented
19% of the biggest firms, with 23% of sales and 38% of
profits. Their average rate of profit on sales was almost
five times as great as that of industrial firms. If we add
in the profits from these firms’ diverse holdings, the
major producers of non-exportable goods and services
represent 21% of the top 200 firms, 27% of the sales
and 48% of the profits. 2
The other key component of the activity of big
domestic capital-due in large part to privatizations–
is oil. The companies dedicated to oil and its by-prod-
ucts make up 7.5% of the top 200 firms, 13% of sales
and 30% of aggregate profits. The crucial importance
of privatizations for domestic capital is thus undeni-
able. In 1995, 83% of the total profits of the top 200
firms was obtained by firms linked to privatizations. 3
Interestingly, the profits of these top 200 firms have
been relatively independent of the economic cycle.
During the latest recession in 1995, for example, while
GDP, investment and consumption all fell, the sales and
profits of Argentina’s 200 largest firms grew signifi-
cantly. One key reason for this is the inadequacy of
state regulation of privatized public services, allowing
providers to increase prices. In addition, the absence of
antitrust policies permitted monopolistic capital to dis-
place small and medium firms. 4
There have also been changes in labor markets. By
deepening the policies applied since the military coup
of 1976, the neoliberal shock of the 1990s has had dra-
matic negative effects on employment and
income distribution. Between 1975 and 1995,
real wages fell by 42%, and the unemployment
“rate increased 6.7 times. 5 While most jobs lost
in the 1990s were stable jobs in the formal sec-
tor, most of the newly created jobs are precari-
on ous, underpaid positions in low-productivity
sectors such as small-scale commerce and
small repair shops. In 1997, only 29.7% of the
entire population was employed in stable jobs
in the formal sector-the lowest percentage
since the 1940s with the exception of 1996.6
Since the mid-1970s, the richest 10% of the
population raised its share of income by 30.7%, at the
expense of the middle class, the traditional working
class and the very poor. 7 In 1993, the United Nations
Development Program estimated that Argentina ranked
fifteenth out of 155 countries in income received by the
richest 20% of the population. 8 Since then, the share of
the richest 20% has grown from 51% to over 57%, while
the share of the poorest 20% fell by 18.7%. Between
1974 and 1995, the percentage of Argentines below the
poverty line grew from 4% to 25.8% of all families. 9
Argentina, long known as a developing country with
one of the most equitable distributions of income and
wealth, is now an illustrative case of the growing socio-
economic fragmentation and marginalization caused by
neoliberal economic policies.
During the nine-year rule of Menem and his
Convertibility Plan, the new relations of exploitation
and domination that were born of the military dictator-
ship came to maturity. The economic, social and politi-
cal disparities between big domestic capital and small
competitive firms, as well as between the wealthy and
the popular sectors, is now comparable to the inequali-
ties of the mid-1940s-the period just preceding the
eruption of Peronism in Argentina.
Menem’s Great Swindle 1. Samuel Goldberg, Stock de capital y producto (Buenos Aires: Secretariat of Economic Planning, Ministry of the Economy, 1991). See also Hugo Nochteff and Martin Abeles, Neoliberalism in the Transition of Economic Systems. Lessons from the Argentine Experience (Buenos Aires: FLACSO, 1998), p. 119. 2. Daniel Azpiazu, “El nuevo perfil de la elite empresaria. Concentraci6n del poder econ6mico y beneficios extraordinarios,” Realidad Economica, No. 145 (Buenos Aires: Argentine Institute for Economic Development (IADE), February 1997), pp. 7-32. 3. Daniel Azpiazu, La concentraci6n en Ia industria argentina a medi- ados de los anos noventa (Buenos Aires: EUDEBA/FLACSO, 1998), p. 123. 4. Daniel Azpiazu, “La elite empresaria y el ciclo econ6mico. Centralizaci6n del capital, inserci6n estructural y beneficios extra- ordinarios,” in Hugo Nochteff, ed., La economia argentina a fin de siglo: Fragmentacidn presente y desarrollo ausente (Buenos Aires: EUDEBA/FLACSO, 1998), p. 57-93. 5.Authors’ elaboration based on the Annual Statistics of the
Argentine Republic (Buenos Aires: National Institute of Statistics and
Census, 1973-1996).
6. Fundaci6n de Investigaciones sobre el Desarrollo, Coyuntura y
Desarrollo, No. 225 (July 1997).
7. Hugo Nochteff, “The Argentine Experience: Development or a
Succession of Bubbles?” CEPAL Review, No. 59 (August 1996),
pp. 111-126.
8. UN Development Program, Report on Human Development (New
York: UNDP, 1994).
9. Hugo Nochteff and Martin Abeles, Neoliberalism in the Transition
of Economic Systems.
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