On Sunday, October 14, Argentines went to the polls to culminate what must surely have been the most ideological, hard-fought, and potentially decisive legislative election in their country’s history. At stake were all seventy-two seats in Argentina’s senate (chosen for the first time by popular vote[1]) and half of those in the Chamber of Deputies. What made the exercise particularly fraught with political significance was the fact that—coming as it did in the third year of a deep recession—the outcome was bound to be unfavorable to President Fernando de la Rúa, now midway through his four-year term. Given the parlous economic indicators—a near record 16 percent unemployment, laggard or negative economic growth for many months, drastic cuts in social spending with apparently more to come—the fact that the opposition Peronist Party won control of the senate and a plurality in the lower house can hardly be considered a surprise. But more serious still was the fact that, with few exceptions, candidates from the president’s own Radical Civic Union (and its coalition partner) ran against him with equal, if not greater, zeal. To the extent that the election was a plebiscite on de la Rúa’s stewardship, the vast majority voted “no.” What it voted for, however, is far from clear.

Roots of the Crisis

In Argentina, as in many countries, including our own, nothing is ever as simple as it seems. In many ways Fernando de la Rúa is ideally suited to lead his country in difficult times. A man of vast political experience—as a congressman, senator, and mayor of Buenos Aires—he is known for his integrity, solid convictions, and civilized treatment of opponents. His cabinet includes people who are arguably among the best to have ever held ministerial portfolios. His relations with his neighbors, with the European Union, and with the United States are excellent. He is not, to be sure, charismatic, as so many of his predecessors have been, though during the 1999 presidential campaign his bland exterior proved a political advantage. After ten years of the flamboyant, free-wheeling, sometimes inspired President Carlos Menem, many Argentines thought it was time for a leader who resembled a prime minister of one of the midsized European countries.

Two years ago de la Rúa seemed like the right man at the right time. The apparent collapse of his political base is due to one fact and one alone—the Argentine economy has not revived since he took office. The president’s standing in opinion polls has dropped to single digits, raising questions about his capacity to govern for the next two years. It also invites some speculation on the future of the country’s broad economic policies, its role in the world economy, its relations with its most important neighbor, Brazil, and its capacity to meet its international obligations.

How did Argentina come to such a pass—and so quickly? Five to seven years ago it was held up as one of the models of a reforming Latin American economy, and in fact under economy minister Domingo Cavallo the country went from triple-digit inflation to solid economic growth. For a time Argentina was flooded with foreign investment, recuperated at least $5 billion in overseas assets, and offloaded money-losing state enterprises like the national airline, the national telephone company, and the national oil company to private investors. With no need to support these white elephants, it was relatively easy for the country to remain within the parameters of a strict monetary regime, in which the peso and the U.S. dollar were maintained in strict convertibility.[2]

Commendable and necessary as were these reforms, whose favorable results were felt almost immediately, they took the country only part of the way down the road it needed to travel. Rigid labor laws originally copied from Fascist Italy or Franco’s Spain discouraged employers from hiring new staff. An oversized (and unproductive) bureaucracy made it difficult for government to be effective even in the areas that it could not delegate to private endeavor—education and health services. Decades of neglect of the country’s infrastructure could not be made up overnight, nor could an industrial sector accustomed to fifty years or more of protection against foreign imports survive a drastic liberalization of trade policies. Above all, a reduction in the size of the state cut adrift a large portion of the middle class that had come to depend disproportionately on government employment.

Argentina is also the victim of unfavorable geopolitical developments. Having lost its principal market for cereal exports after the collapse of the Soviet Union, its powerful neighbor Brazil has become its most important client for foodstuffs. But Brazil’s monetary regime has always been looser than Argentina’s; although the real, like the Argentine peso, is supposedly pegged to the U.S. dollar, the Brazilians reserve the right to devalue whenever they see fit. They have done so several times recently. (The real has lost nearly a quarter of its value against the dollar since the beginning of this year.) As a result, Argentine exports to that country have periodically slumped; at the same time, operating costs in Brazil have dropped to the point where some Argentine factories have actually moved across the border. The collapse of the Mexican economy in early 1995 was felt in Argentina as well as elsewhere in Latin America; to overcome the so-called “tequila effect,” the country was forced to borrow furiously (and perhaps even somewhat recklessly) to support its currency and to meet some large approaching maturities.

Argentina is a wealthy country, whether from the point of view of natural resources or human capital. It can probably easily service its foreign debt of more than $140 billion if its economy is steadily growing. Failing to make those payments, however, it not only risks default, but cannot meet its domestic social costs. With a demographic age profile somewhat similar to that of the G7 countries, it has a large population of retired people. In an effort to eliminate the country’s deficits, President de la Rúa has already reduced pensions by 13 percent, and the salaries of government employees have suffered a similar reduction. Although the political backlash of these measures was strongly felt on October 14, a drop in revenues in recent weeks suggests that they may have to be repeated if the administration is to achieve its proclaimed goal—paradoxically, supported by most Argentines in many surveys—of balancing the national budget.

If the causes of Argentina’s slump are complex, then so, in all probability, are the solutions. These include a new law to free up labor markets, modernization of the educational system, some tests of efficiency imposed upon government services, and a new business-friendly environment to encourage foreign investment. A free-trade agreement with the United States would not hurt, either. These were not, however, the subject of discussion or debate during the most recent political campaign.

Rather, almost all of the country’s politicians treated that event as a plebiscite on the country’s economic “model,” which, they proclaimed almost without exception, needed to be replaced—with what, nobody bothered to say. Indeed, for an election in which economic problems were presumably the most important subject on the country’s mind, the rhetoric of the political class was remarkably short on concrete proposals. As economist Nestor Scibona wrote on the eve of the elections (La Nación, October 13), “The majority of campaign promises presuppose economic costs that almost nobody takes the trouble to quantify, much less explain who is going to pay them.” He pointed out for example that just to increase pensions $10 a month—a negligible amount, to say the least—would cost the treasury $400 million at a time when “the state is on the edge of economic collapse, with revenues in free fall and 40 percent of the population engaged in the underground economy.” And he concluded his tart remarks with an observation that rarely appears in the Argentine press: To talk about increasing the budget for education and health—the mantra particularly of Radical senator-elect Rodolfo Terragno—conveniently ignores the fact that “it is not the same to invest in bureaucracies as computers, nor subsidize phantom jobs (ñoquis[3]) as opposed to increasing the salaries of teachers and doctors who actually do work.”

A New Political Landscape

Without doubt the elections have altered the political landscape in Argentina. The most obvious and immediate effect has been to pulverize the governing coalition. President de la Rúa was elected two years ago on a joint ticket of his own Radical Party and a new political force known as FREPASO. The latter was cobbled together in the late 1990s from ex-Peronists and ex-Radicals who objected to President Menem’s economic reforms, together with various elements of Argentina’s free-floating Left. FREPASO provided de la Rúa with the margin of votes he needed to defeat the Peronists—Argentina’s largest single party. It also supplied his running mate, Carlos “Chacho” Alvarez.

Taken together both the Radical Party and FREPASO are greatly at variance ideologically with President de la Rúa—so much so, in fact, that in retrospect it seems remarkable that a personality so conservative could ever be their joint candidate. The Radicals like to think of themselves as akin to the French or Spanish socialist parties; FREPASO populates ideological provinces even farther to the Left. Presumably many Radical and FREPASO voters underestimated de la Rúa’s independence of mind two years ago; perhaps some thought that the presence of Vice President Alvarez would keep him—in their view—honest. Independent voters probably voted for de la Rúa in the hope that a change of administrations would be sufficient to improve the economy (a common misconception in Argentina, and not only there). As it happens, Vice President Alvarez resigned in protest early in de la Rúa’s term for reasons that are still unclear; then, even more mysteriously, he decided to give up politics altogether. Over time other frepasistas have followed him. The only important appointee from that force in the administration on the eve of these elections, social welfare secretary Juan Pablo Cafiero, has since resigned. The FREPASO parliamentary delegation is currently debating leaving the government benches altogether.

That de la Rúa might have lost his appeal for FREPASO was, on balance, probably to be expected. Far more serious is the fact that his own party is firmly opposed to most of his policies, starting with former president Raúl Alfonsín (1983–1989), who heads its national committee. Determined not to be dragged down by de la Rúa’s sagging numbers in public opinion polls, the entire Radical establishment campaigned for the last month or so as if their president belonged to some nonexistent Argentine conservative party rather than their own. This scorched-earth tactic has paid off in the very short run: Alfonsín squeezed through to a senate seat in the province of Buenos Aires, barely defeating a left-wing priest with no prior political experience, and Terragno was elected senator for the federal capital (Buenos Aires city), though in fact he ran behind blank ballots—the largest number of protest votes ever cast in an Argentine election.[4] The Radical campaign was largely organized around the notion that Menem’s economy minister Domingo Cavallo—recalled to office earlier this year by de la Rúa—was the first cause of Argentine ills and had to go. So far the president has stuck with him on the grounds that, with the country renegotiating its foreign debt, this is no time to change economic managers.

The relationship of the administration with the Peronists is even more complicated. Historically this party has maintained an indecently close relationship with the labor movement. Among other things, this made it impossible for Alfonsín to get his (admittedly rather timid) proposals for privatization through congress during his presidency. In the subsequent administration of Peronist Carlos Menem (1989–1999), the party did a dramatic about-face, going many miles farther along the road of economic reform than Alfonsín (or any Radical) had ever contemplated. One consequence has been the estrangement of many elements of the labor movement from the Peronist Party, indeed from “bourgeois” politics in general. On the other hand, labor’s new penchant for street protests, marches, and blockage of main roads and highways has probably hurt it more than the government.

Meanwhile, the political culture of the Peronist Party has changed so drastically that it is very nearly true to say that these past two years de la Rúa has found at least as much support among his (ostensible) opponents in congress as from the (official) government benches. However, as the Peronists themselves have said, de la Rúa cannot govern with the support—however tacit—of the opposition alone. Nor do the Peronists wish to carry water for an administration of a different party complexion, however much they may agree with individual measures.

Unless the economic situation in Argentina improves dramatically over the next twenty-four months, it is almost certain that the next president of Argentina will be a Peronist. To be sure, Senator-Elect Terragno has illusions of wresting the Radical Party nomination from his president and riding to power on an ultra populist platform in which even he cannot believe. But without the votes of FREPASO or some other force of comparable size, the Radicals—with Terragno or anyone else as their standard-bearer—cannot hope to win a national election.

Moreover, the Peronists have not one but three attractive candidates—former governor of the Buenos Aires province Eduardo Duhalde, who on October 14 ran a full twenty points ahead of Alfonsín in the race for the senate[5]; Governor José Manuel de la Sota of Córdoba, who has turned his province’s bureaucracy on its head; and Governor Carlos Reutemann of Santa Fe, a popular, charismatic politician, formerly a celebrity in the sporting world. None of these men want to be seen as provoking economic collapse, all the more so since one of them is soon likely to have the ultimate responsibility for the country’s welfare. But neither do they wish to assume the responsibility for unpopular measures that de la Rúa may be forced to take in that time. As it is, both Radical and Peronist congressional delegations have been talking about revoking some of the extraordinary powers it awarded to Cavallo earlier this year; if they cannot force de la Rúa to get rid of his finance minister, they seem determined to make his work more difficult. A more interesting question is what critics will do if Cavallo finally leaves. Who will serve as their target and scapegoat?

Can Uncle Sam Help?

As this Outlook was being written, President de la Rúa was reported to be willing change his economic policies only at the margins.[6] Indeed, if anything he seems to be moving in an even more orthodox direction. For example, one government measure reportedly under study would allow the government to accept dollars as tax payments and to pay employees with dollars. This suggests that the government is seriously contemplating moving to the U.S. dollar as its official unit of currency—following the example of Panama, Ecuador, and El Salvador. As the New York Times explained, this would “reduce the perception that the country will eventually devalue its currency, thereby reducing interest rates as confidence increases.” To formally dollarize would open an entirely new chapter in Argentine economic history. It would also introduce intolerable strains in the relationship with Brazil and probably bring an end to the Mercosur—a project intended to create a huge economic zone in southern South America.[7] Dollarization alone may not be sufficient to restore the confidence of the international financial markets, but at a minimum it offers a greater chance of success than either devaluation or an abrupt unilateral moratorium on the foreign debt.

Perhaps the one thing these elections have shown is that Argentina needs—more than anything else—a fuller and more candid discussion of the economic alternatives than her political class has so far been willing to undertake. It could also use more unambiguous support from Washington, even in the form of some dramatic gesture. Argentina has proven a loyal and helpful ally these past ten years, and its government is making a serious effort to confront enormous problems. Whatever the costs of helping out Argentina now, they are bound to be smaller than those that will be required two years, four years, or six years out.

Notes

1. Before 1994, when a new constitution was approved, Argentine senators were elected by provincial legislatures, just as in the United States during the nineteenth century. The senators whose terms are now ending were elected under the old system.

2. Under Cavallo’s convertibility law, the Argentine treasury can print pesos only in the amount of dollars held by the central bank.

3. Ñoquis are an Italian delicacy normally served once a month in Argentine homes. Figuratively they refer to a job in which the worker—typically, a government bureaucrat—appears at the office only once a month to collect his or her wage.

4. Voting in Argentina is obligatory. Those who are dissatisfied with their choices are allowed to cast blank ballots.

5. One of the changes enacted in the new 1994 constitution awards each province three senators rather than two, with the third seat reserved for the candidate of the first minority. Thus in the province of Buenos Aires the first two senators elected were Peronist; since Alfonsín beat out Father Farinello (just barely), the third seat went to him.

6. Clifford Krauss, “Subsidies for Poor Proposed to Aid Argentine Economy,” New York Times, October 22, 2001.

7. See “Mercosur: A Precursor to the FTAA—or an Alternative?” Latin American Outlook, August 2001.

Mark Falcoff is a resident scholar at the American Enterprise Institute.