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1
Political Inequality, State, and Economic Elites in Argentina during the Convertibility 1
Nicolás JB Caputo 2
Paper to be presented to Workshop 25 “Inequality, Poverty and Democratic Governance
in Developing Societies” at the European Consortium for Political Research Joint
Sessions of Workshop, Helsinki, 712 May 2007.
Abstract
The aim of this paper is to analyze the political inequality in Argentina from 1991 to 2001. The
democratic theory has been centered in the first place in the processes of transition (Europe of the
south, Latin America and East Europe), soon in the consolidations and, later, the dilemma of the
“governability”. Nevertheless, a fundamental question of political science, power, has been
forgotten in these studies. On the other hand, the studies on the power in social sciences have
been centered in the search of a definition. The connection between democracy and power has not
been made. We can suppose that a fundamental difference between an authoritarian regime and
one democratic one is the distribution of power, more unequal in the first, and most egalitarian in
the second.
This work raises the necessity to introduce the analysis of the power from the capacities of the
different social groups in influencing the process of decision making in the State, an essential
aspect for the rule of the democratic regime and the citizen rights. The insertion of the rights in
1 Supported by the Program Alban, the European Union Program of High Level Scholarships for Latin
America, scholarship No. E06D101849AR. 2 PhD candidate in Polititical Sciences (Institut d’Études Politiques, Strasbourg), and PhD candidate in Social
Sciences (University of Buenos Aires). Comments and suggestions are welcome. Please email to
2
the legal apparatus and its real use is related with social conflict, and, therefore, of the distribution
power.
The central hypothesis is that the inequalities in the distribution of the social resources (coercion,
legality, administration these three controlled by the State in the modern societies information,
ideological and, mainly, economic) generating an inequality of political power (political
inequality). The way of interrelation of the possessors of the resources of the State (coercion,
legality and administration) and the possessors of the economic resources affects in the
organization of the power in the society, that is to say, of the democracy in the studied case.
Although the political inequality exists in all society, in Latin America has reached excessive
levels that affect the democratization process. This affects the State in three aspects: 1) access to
the formal power (electoral alliances versus government alliances), 2) exercise of the formal
power (captures of the State) and 3) promotion and use of the citizenship (inequality of rights).
In the Argentine case, between 1991 and 2001, we will be observe how certain groups will
concentrate the political power, generating an excessive unequal distribution of the social
resources affecting therefore the exercise of the rights of ample social sectors. The study of the
distribution of power will be done from three axes: 1) identification of the state personnel, 2)
process of decision making and 3) determination of the public agenda.
3
Introduction
Between 1995 and 2001, the global economy showed high levels of instability. The crisis
of 2001 in Argentina was not an exception. Nevertheless, unlike most of the cases, two
aspects are singular: its duration and its depth. (Chudnovsky et al, 2003).
On one hand, most of the cases were preceded by periods of economic growth. Argentina
is the case of greater amount of previous recessive quarters before the crisis (figure 1).
The authorities had the greater time to modify the economic policy.
Figure 1 - Number of consecutive quarters of negative growth of the real GDP
0 2 4 6 8 10 12 14 16 18
Argentina
Brazil
Russia
South Korea
Indonesia
Malaysia
Thailand
Mexico
Source: (Chudnovsky et al, 2003: 24)
On the other hand, the Argentine crisis stands out by its depth. First, it had the greater
economic cost (fall of more of 20% of the GDP). Second, there was a declaration of
cessation of payments of the external debt (bigger than Russia). Third, next to Indonesia,
they were the only cases in which the crisis implied the fall of the government. Finally,
the crisis finished with serious disturbances and tens of dead. The political tension was so
high that the idea of dissolution of the national State did not seem impossible 3 .
3 The Governor of the Province of Buenos Aires, the greatest district of the country, threatened at the
beginning of November 2001 to review the Pact of San José de Flores, signed in 1859 that allowed the
4
Why Argentina could not avoid such a crisis that it was so serious, and at the same time,
was exceptionally gradual? A prolific bibliography exists on the matter. On the one hand,
we have the economic explanations. They center its analysis on the vulnerability of
Argentina to the changing flows of capitals. On the other hand, other works have insisted
on the political aspects, like the weakness of coalition of political parties that supported
President De la Rúa.
In this work we will develop an interpretation of the distribution of political power and its
consequences. Structural aspects and actors decisions tended both to amplify the political
inequality in favor of financial operators in an increasing deficit of State’s inner
sovereignty. In the first part of this paper, we make some previous theoretical
explanations. In the second part, we study the economic reforms in Argentina during the
Convertibility.
1. Some theoretical considerations
In the central countries – main source of academic ideas the societies enjoy a relative
high level of wellbeing. In the absence of extreme inequalities, the idea of certain
equality in the power distribution predominates. However, Latin America is the most
unequal region of the world. The extrapolation of the hypothesis of certain relative
equality between groups to the analysis of undeveloped societies limits our understanding
of their political processes.
We will clarify a particular form of power, the political power. We will define it by the
weight of a group in a precise political equilibrium (Acemoglu and Robinson, 2006: 21).
According to John K. Galbraith (1985) the capacity of individual to group themselves and
to form organizations is the more important resource of power in our societies. Political
inequality increases when a particular group augments its weight. In some cases, a
incorporation of the province to the nation. La Nación, “Fuertes cruces entre el peronismo y el gobierno”,
10/10/01.
5
particular framework of power relationships can introduce a situation of political
domination. The idea of democracy supposes a relative equality between social groups,
that is to say, the absence of political domination. However, as Argentina’s democracy
shows, this is strongly related to the State characteristics.
Thus, in second place, we define the State (figure 2). A first focus of analysis resides in
the most objective aspect, the State’s structure 4 . We separate the analysis in two
dimensions. In one hand, the administrative organization:
• the bureaucracy (employees, technical capacities, public spending, etc.),
• the administrative decentralization between levels of government.
The second dimension is the political organization of State structure between:
• levels of government: the political centralization,
• three branch (executive, legislative and judicial): the political concentration,
• public official and private interests: the level of differentiation. We suppose
that more differentiations equals to more institutionalization of the State
structure 5 .
We develop a second focus of analysis, the level of State’s inner sovereignty in a given
territory. We consider three variables:
• military: monopoly of the legitimate violence 6 ,
• legal: administration of justice 7 ,
• financial: control of public resources throughout the time 8 .
4 O’Donnell (1984: 8) defines the State structure as the “institutional objectification” of social relationships. 5 Cf. Deloye (2003). 6 Cf. Weber (1971). 7 Cf. O’Donnell (2004). Some countries, like Colombia, are clear examples of high deficit of military and legal
State sovereignty. These problems have developed the theory of the “failed States”, particularly in the studies of
African state. Cf. Holsti (1995). 8 These three attributes are the essential aspects that do to the state sovereignty, as shown by the historical
process of the formation of the modern States.
6
Figure 2- State’s conceptualization
This last variable introduces the relation between State and market. It refers to the
possibilities of public financing. Modern economies base their growth on the
accumulation of capital, condition for the technological progress. This requires the
creation of a surplus not consumed by the society that allows investment. According to
Celso Furtado, “the forms of appropriation and use of this surplus are at the base of the
systems of social organization and power structure”. (1970: 99)
How are political and economic power articulated? Several works on Argentina’s 1990s
assume that the bigger corporations are in a position to play a high influential role in the
State through different mechanisms (i.e. corruption, campaign financing, lobby, etc.). So,
greater economic size = greater political power
If we see the 20 bigger corporations in Argentina at the end of the 1990s, we could say
that the absence of financial groups means that they do not have political power (table 1).
7
Table 1 – Sales of the 20 bigger corporations in Argentina in 1999
Corporation Sector Sales (millions of dollars)
1 YPF Petroleum 6.598,0
2 Telefónica de Argentina Telecommunications 3.399,0
3 Telecom Telecommunications 3183,0
4 Supermercados Norte Commerce 2.086,8
5 Cargill Food 2.058,7
6 Shell Petroleum 1.833,9
7 Disco Commerce 1.749,8
8 Carrefour Commerce 1.731,1
9 Esso Petroleum 1.675,0
10 Coca-Cola Drinks 1.500,0
11 Coto Commerce 1.323,9
12 Techint Holding 1.318,3
13 National Lottery Other services 1.273,0
14 Pérez Companc Petroleum 1.273,0
15 Arcor Food 1.150,0
16 Ford Automotive industry 1.144,0
17 Renault Automotive industry 1.139,2
18 Siderca Iron and steel industry 1.073,3
19 Volkswagen Automotive industry 1.020,3
20 Siderar Iron and steel industry 1.015,4
Source: Kulfas (2001: 81)
Without denying the benefits earned by privatized companies and their capacity of
influence during the 1990s, we think that the mechanisms of articulation of political and
economical power are different. Analyzing the political instability and economic chaos of
Argentina throughout the 20 th century, Jorge Sábato and Jorge Schvarzer wrote that
“good part of the Argentine economic process is originated in conditions that encourage
8
the capture of resources in the circuits of circulation, with preference on the circuits of
wealth production” (1991: 258).
In order to study power distribution in Argentina between 1991 and 2001, we will use
three variables. First, we will observe what officials were selected in the Ministry of
Economy. For the analysis, we have taken the positions from minister to secretaries 9 . We
will obtain two types of information: the time in office (stability) and their profile. We
will be able to observe what type of alliances implies each designation, considering its
academic and professional career, and its degree of differentiation of private actors 10 .
Second, we will examine the decisions taken in the State 11 . The process will be analyzed
as a result of conflicts and cooperation between groups that will be able to modify
economic policy 12 . Thirdly, we will use the concept of political agenda 13 . We defined it
as the range of possible of the decisions according to the level of State’s inner
sovereignty. The political agenda limits the State’s capacity to promote citizen rights. We
consider the three variables are affected mutually.
We distinguished three stages. The first one studies the arrival of Domingo Cavallo to the
Ministry of Economy under Menem’s presidency (PJ peronist) 14 and his principal
decisions (19911996). In the second stage (19961999), the principal positions in the
9 The sources to collect data on the public officials are varied as newspaper (Clarín, La Nación, Página/12,
Ámbito Financiero, El Día, The New York Times), officials curriculum vitae, Dalbosco (2003) and the Boletín Oficial
(government reporter). 10 Great part of “elitist” sociology at the beginning of 20 th century in the United States studied the economic,
political and social leaders, as Mills (2000). In Argentina, a similar work has been done by De Imaz (1964). 11 Cf. Dahl (1958). 12 Data is obtained through the existing literature and official statistic, primarily the Ministry of Economy, the
Instituto Nacional de Estadística y Censo (INEC - National institute of Statistic and Census) and the Central Bank
of Argentina. 13 Cf. Bachrach y Baratz (1963). 14 The main parties of the period are the the Partido Justicialista (PJ – peronists) and the Unión Cívica Radical
(UCR). In the 1990s, a sector of the PJ opposed to the economic policy formed, with other left-wing groups,
the Frente por un País Solidario (Front for a Solidary Country - Frepaso).
9
State are controlled by a particular think tank formed by University of Chicago’s
graduates. Their selection is related to an increasing political inequality due to the
growing importance of financial operators in the State’s financing structure (less
differentiation). Finally, the last stage (19992001) under De la Rúa’s presidency (UCR
Frepaso) is characterized by instability in the Ministry of Economy with increasing
deficit in State’s inner sovereignty.
2. Argentina under the Convertibility Plan (19912001)
a) The first stage: stabilization, growth, and crisis (19911996)
From 1989, the local economy was instable, under crisis of hyperinflation and a growing
external debt. Elected in 1989, President Carlos Menem tried to lead a deep
transformation through a process of privatization. The aim of this policy was to attract
foreign capitals and the reduce debt’s level. Several states companies were sold to foreign
creditors (manly commercial banks) in exchange of sovereign debt. But two successive
economic staff failed to stabilize the local economy.
In 1991, the new economic team took office. It was shaped around the Minister,
Domingo Cavallo. In the previous staff, the Peronist’s origin was bound to the party
membership. In this case, it was related to the relationship between Cavallo and the
peronism of the Córdoba’s Province. Cavallo came from that province. After his studies
in Harvard, he created the Fundación Mediterránea (Mediterranean Foundation FM).
Most of his team came from the FM 15 . Juan Manuel De la Sota, leader of the Peronism of
Córdoba (in 1999 he was elected Governor), played a fundamental role in the articulation
between the PJ and the liberal technocrats of the FM. Cavallo was elected National
Deputy in 1985 through the list of the PJ – Córdoba.
15 Of the Fundación Mediterránea I practically incorporated all the people who were with me” (Cavallo, 2001:
160). Juan Llach y Carlos Sánchez came from there.
10
Table 2 - First economic staff (1991-1996)
Ministry CAVALLO
Sec. of Coordination LIENDO
Sec. of Economy SÁNCHEZ
Sec. of Treasury GUTIÉRREZ
Sec. of Industry and Commerce SCHIARETTI – MAGARIÑOS
Sec. of Agriculture REGUNAGA – SOLÁ
Sec. of Economic Planning LLACH
Sec. of Public Income TACCHI
Sec. of Finances MACCARONE
Source: Own elaboration. Data from Boletín Oficial and Dalbosco (2003).
The new staff knew that the previous policies had been insufficient. The attraction of the
external capital required to stabilize the prices, to improve the public accounts and to
resume the payments of the external debt, stopped in 1988. Argentina, in addition, had to
make a promise: the rules would not be broken in the future. The pillars of this policy
were the Convertibility Plan, a tax reform and the Brady plan’s negotiations.
After an inflationary tip in January 1991, the new economic staff decided to
institutionalize an Argentine routine: the use of the dollar as a way to protect their
savings. In March, the Law 23,928 was voted. It declared the convertibility of the local
currency to a relation of 10,000 australes per dollar. The later presidential decree 2128/91
determined the change of denomination and value of the local currency to the peso (1
peso, 1 dollar). The fixed exchange rate and the convertibility of the currency prohibited
any monetary emission by the Central Bank without the necessary endorsement in
dollars. This transformed the Bank in a Currency Board. The government anchored the
exchange rate. The inflation fell down progressively after the plan (figure 3). The
government amputated the monetary emission as a financing source, lost one of his
regulating policies, the exchange one, and established strong restrictions on the fiscal
policy. This was a double signal to the foreign capitals. On the one hand, there would be
economic stability. By the other, the government could not affect it in the future.
11
Figure 3 – Monthly inflation in Argentina, January 1991 to December 1992, (% var. of same
month of previous year)
0.0 5.0 10.0 15.0 20.0 25.0 30.0
January
Mars
May
July
September
November
January
Mars
May
July
September
November
Source: INDEC
The new model had two pillars: the free convertibility of the peso in dollars and the free
mobility of capitals. The only governmental discretion was in the fiscal policy. This
policy looked for the elimination of the deficit to close an attractive model for the
external investors. With the tax reform of 1992, the tax collecting structure was based on
the Value Added Tax (VAT) and income tax. These explain the growth of the public
income between 1992 and 2001 (figure 4). The stabilization of prices (elimination of the
OliveraTanzi effect) and the economic growth (particularly in a tax structure based on
VAT and income) allowed an increase of the income, and finally, the elimination of the
fiscal deficit in 19921993. From 1992, the collection was strongly tied to the economic
cycle.
12
Figure 4 – Tax collection and Social Security Contribution, 1992-2001 (billons of dollars)
0
10
20
30
40
50
60
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Others Domestic Sales
Foreign Trade Income VAT Social Security Contribution
Source: AFIP, Secretary of Treasury of Argentina, Under-secretary's Office of Tax Policy.
In April 1993, the Argentine government obtained an agreement for 25 billons dollars of
his external debt through the Brady Plan. The commercial banks exchanged the non
recoverable credits for bonds that were sold later. (Dal Ding y López Isnardi, 1998: 10).
Through this agreement, the commercial bank managed to diminish their part in the
Argentine national debt. Most of the banking debt was transformed into bonds (figure 5).
13
Figure 5 – Argentine Government External Debt Stock Composition, 1990- 1997 (billons of
dollars) 16
0
10
20
30
40
50
60
70
80
1990 1991 1992 1993 1994 1995 1996 1997
Bonds International Organizations
Bilateral Commercial Banks Others
Source: Ministry of Economy
These three policies fortified the State’s solvency. They reduced the amounts of the debt,
the coefficient debt/GDP and the fiscal deficit. The flow of capital, growing from 1990
by the privatizations, was accelerated from the convertibility plan (figure 6).
Figure 6 – Capital Flow in Argentina, 1986-1993 (billons of dollars)
4
2
0
2
4
6
8
10
12
14
1986 1987 1988 1989 1990 1991 1992 1993
Source: Ministry of Economy
16 Bilateral: Paris Club and others. International organizations: IMF, IBD and WB.
14
The changes in the international market of capitals, liberalized from the 1980s, were
fundamental for the success of the convertibility. Towards 19901991, the recessive
situation in central countries had generated a fall of the interest rates. The capitals looked
for new attractive markets (Gerchunoff and Torre, 1996: 747) 17 . Argentina offered an
interesting perspective, with its liberalization of the capital account and its convertible
currency. Also, the structural changes modified the nature of the actors. In 1970s, the
financing had been based on the commercial banks. In the 1990s, others financing
institutions appeared as pension plan or investment banks. The financial market became
more complex.
Towards 1994, most of the privatization of public companies had been made and the
growth became stabilized. The policy of capitals attraction had to be through other routes.
The policy of bond issuance, developed from the agreements of the Brady Plan, became
the main source of access to credit. It was particularly tempting given the impossibility of
monetary emission. The bond issuance increases considerably towards 1995 (figure 7).
17 According to Soros (1998-1999: 57), “at one point in 1994, more than half the total inflow of capital to U.S.
mutual funds went into emerging-market funds”.
15
Figure 7 – Issuance of medium and long term sovereign bond, Argentina, 1991-2001 (billons
of dollars) 18
0
2
4
6
8
10
12
14
16
18
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Ministry of Economy
The policy of bond issuance modified and diversified the property of the sovereign debt.
Nevertheless, the great variety of instruments and financial markets and the
diversification of Argentine sovereign debt owners do not mean political power
dispersion. The common notion is that the market act through decentralized mechanisms
unlike the State 19 . By multiple factors essentially related to the problems of asymmetric
information, the financial market does not operate like this. The investors tend to behave
as packs. This means that the capital flows are highly volatile. This is the origin of the
typical phenomena of the financial crises of boom and bust.
How the information that guides the action of the financial operators is produced?
Through institutions in charge of analyzing the countries situation and describe its
payment debts capacity. They establish therefore the spread of payment over the United
States Treasure bond (overrate). They set a credit rating. For that reason,
18 It excludes exchange operations. 19 For a comparison of the mechanisms of resources allocation in the market and the State see Przeworski
(2003).
16
“the organization of the contemporary financial markets depends to a great extent on the
functions carried out by the credit rating agencies, because the financial deregulation and the
globalization have made that a very important part of the international and national investors are
constituted by institutional investors. These made theirs decisions according their administrators,
considering precisely each risk levels position”. (Delgado Guzmán, 2006: 305)
The political power of the credit rating agencies is not limited to the survey of economic
policy. It has consequences in the political organization of the State. In the International
Country Risk Guide (ICRG), 50% of the analysis of the “country risk” is based on
politicalinstitutional variables (figure 8):
• political stability (governmental unity, legislative and popular support),
• socioeconomic conditions (source of restrictions to economic policy in case of
popular disapproval ),
• profile of the economy for the investments (possibility of expropriations and
utilities return to the outside)
• the external or internal conflicts that could affect the government 20
20 http://www.prsgroup.com/ICRG_Methodology.aspx#PolRiskRating
17
Figure 8 - Credit Rating Agency's Political Risk Definition
From these variables, a State structure with high centralization and concentration in the
executive authority favor the reduction of the "political risk”. In the countries with
weakly institutionalized State’s structure, like Argentina, this will have important
consequences at the end of the period.
Since 1994, the issuance of sovereign bonds becomes a fundamental source of financing
for the State. The movement of capitals showed a loss with beginning of the return of
profits of the privatized companies, the end of foreign investments for purchase of the
public assets, the gradual process of the capitals flight (Di Cola, 2005).
18
Figure 9 - Capital Flow in Argentina, 1986-1993 (billons of dollars)
20
15
10
5
0
5
10
15
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Ministry of Economy
While the negotiations of sovereign debt motivated a political concentration of the State
structure, the administrative reform favored a political centralization. In 1993 the
transference of administrative responsibilities (education and health) to the provinces had
been completed. The provincial employment was five times greater than national
(Oszlak, 2000: 3). The national State, with few employees and more resources thanks to a
centralized structure of tax collection, had an increasing influence on the dependent
provinces. The process of administrative decentralization generated political
centralization. In 1999, the share of the resources of national origin in the provincial and
municipal budgets reached 62%.
The euphoria suddenly finished by the end of 1994. The Mexican crisis struck strongly to
the economy, so dependent of external capitals. The deposits began to fall and in 1995
the process of flight of capitals, initiated in 1993, accelerated 21 . In order to go through the
crisis and to maintain the convertibility, a fund financed by multilateral organisms of
credit was created. In 1995, the capitals returned to the country.
21 According to the Investigating Special Committee of the House of Representatives on Argentina Currency Flight in 2001, in
1995 12 billion dollars escaped. Cf. Di Cola, (2005: 22).
19
The financing of this second expansive phase was different from first one. In 19911994,
the growth of the economy had been impelled by the entrance of capitals by the
privatizations. The balance of payments of the private sector was positive. In the second
phase, the private sector will have mainly negative balance of payments. The
indispensable dollars would essentially enter thanks to the public sector debt issuance
policy, which demanded more currencies than the required ones to balance its accounts.
This policy of indebtedness was fundamental to maintain the convertibility. (Damill et al,
2003: 25).
b) The second stage: recovery, orthodoxy, and recession (19961999)
The recovery of the growth in 1996 had a paradoxical effect. The local crisis – deeper the
neighboring countries – was seen as a proof of the convertibility’s solidity. Instead of
putting in doubt the model, the decision was to deepen it. After the presidential elections
of 1995 and with the sight in 1999, Minister Cavallo and President Menem became
possible competitors 22 . The crisis of the Tequila and the necessity to narrow rows had
calmed transitorily the conflict. After the evident beginning of recovery in 1996, the
conflict returned with its logical resolution.
The new Minister, Roque Fernandez, was the ideal person to assure the financial
market’s confidence. The economic staff was mainly composed by liberal technocrats,
CEMA members, the argentine think tank that gathered the University of Chicago’s
graduate 23 . With a strong academic formation 24 in the papers, the best of the period
they were not members of any political party. They had narrow relations with the IMF
22 As it were seen later, Menem sought a new re-election. His popularity fall turned nonviable. 23 Minister Fernandez and Secretaries Guidotti, Pendas, Rodriguez and Rodriguez Use were members of
CEMA. 24 The great majority of the staff had doctorates. A significant portion had studied in the University of Chicago,
like Fernandez, Guidotti and Carlos Rodriguez. Guadagni had a doctorate in economy of the University of
Berkley.
20
and international financial groups 25 . The new Central Bank president, Pedro Pou, as
many board directors, was also a CEMA member 26 . Thus, this think tank controlled both
de Minister of Economy and the Central Bank. The increasing weight of financial
operators encouraged a lesser degree of differentiation in public official’s selection.
Table 3 - Second economic staff (1996 - 1999)
Ministry FERNÁNDEZ
Sec. of Coordination CÁCERES
Sec. of Industry, Commerce and Mining GUADAGNI
Sec. of Treasury GUIDOTTI
Sec. of Agriculture ALONSO
Sec. of Economic Planning PENDAS – RODRÍGUEZ – FRIGERIO
Under-sec. of Tax Policy RODRÍGUEZ USE Source: Own elaboration. Data from Boletín Oficial and Dalbosco (2003).
According to Central Bank’s President, the government’s policy short range was
beneficial. He said that “the cost that many attribute to the convertibility is the loss of
capacity to apply monetary policy. One assumes that the decisions of monetary policy are
taken rationally, but it is enough to be sent to our recent history to find sufficient
examples”. The Argentine financial liberalization had the advantage of “the permanent
monitoring of the international markets” 27 .
External factors increased the political inequality. Successive financial crises, in
Southeast Asia (1997) and Russia (1998), stopped the capital flow that throughout the
1990s had gone from the center to the periphery. This was serious for the local economy,
25 Between 1976 and 1978, Fernandez had been economist of the IMF. Guidotti, had worked like adviser of
Capital Moore Strategy Group and the Bank of Galicia‘s board. He had also been economist of the IMF
Research Department (1987-1992). Guadagni had been director of the financial company Macro and the
financial consultant, Econométrica S.A.. 26 The president, Pedro Pou, as well as other directors like Martín Lagos, Javier Bolzico, Guillermo Lesniewier
were members of CEMA. In 1998, this think tank had more than half of the positions in Central Bank’s board.
See La Nación, “El CEMA se hace fuerte en el Banco Central”, 03/09/98. 27 La Nación, “Pou se manifestó contrario a controlar el ingreso de capitales”, 21/05/98.
21
so dependent on capital’s entry. Argentina transformed into the greater bond emitter in
the emergent markets 28 . The financial sovereign deficit of State grew, with logics
consequences in the political power distribution 29 . Until 2000, the bond issuance
remained de main source of convertibility’s financing. In case that the financial operators
thought that Argentina could not pay its debt, sovereign bond issuance would not be a
foreign currencies source anymore. Phasing a perspective of fewer dollars in the local
market, it would lead to loss of confidence and a flight from the peso, doing the exchange
rate untenable.
The reversion of the flow of capitals and the increase of the public indebtedness as
currency source put to the fiscal deficit in the center of the scene (figure 10). The public
sector progressively increased its deficit by the growth of public spending from 1998 and
the increasing weight of the debt in the public accounts. The technicians of the IMF
began to notice this situation and to demand a change in the fiscal policy. Nevertheless,
the most technical critics left place to political considerations. In 1998, President Menem
was received in the annual assembly of the IMF under the applause of the financial
community 30 . The fiscal policy was based on a tributary reform that allowed a VAT
generalization. This policy did not eliminate the deficit.
28 More than a quarter of the total bond market in emergent countries was come from Argentine sovereign
debt. Blustein, 2003. 29 According Miguel Kiguel, Under-Secretary of Financing (1996-1999) “every time we finished a meeting [with
institutional investors], the orders would come”. JP Morgan y Merrill Lynch demanded a bond issuance for to 2 billon
dollars. (Blustein, 2003). 30 Later, the Independent Evaluation Office of the IMF criticized in its “Report on the Evaluation of the Role
of the IMF in Argentina, 1991-2001” (2004), the organization’s flexibility on the Argentinean fiscal accounts.
22
Figure 10– National State resources and spending, 1993-2001 (% of GDP)
0
5
10
15
20
25
1993 1994 1995 1996 1997 1998 1999 2000 2001
Resources
Spending
Source: Treasury Secretariat.
The fiscal situation became more determining. The national State did not have too much
margin to lower its spending since 82% of the national budget went to provinces
transferences and the payment of the interests of the debt 31 . So, the policy aimed to the
provinces, which had an importance as source of the fiscal deficit. But a tax reform only
could be made through the Congress. The legislative power became a key actor for the
economic policy’s continuity. After years of a strong political concentration and
centralization of the State structure, slowly, the tendency reversed.
By the end of 1998, Brazil, main commercial partner of Argentina, devaluated his
currency sinking the competitive possibilities of the local economy. In a context of
reversion of flow of capitals, absence of public assets to privatize, high unemployment
and poverty levels, and increasing sovereign debt and public deficit, the second expansive
phase of the Argentine economy ended and one long recession began. The following
year, the coalition conformed by the UCR and the Frepaso, prevailed in the general
elections. Fernando De la Rúa, a member of conservative wing of the UCR, was the new
president of the Argentineans.
31 Oszlak (2000: 17).
23
c) Third stage: the long agony of the Convertibility (19992001)
The new economic staff presented a different profile. They were not technocrats,
members of a think tank, nor did they have the formal academic preparation of the
previous staff 32 . The professional career had been developed in the public function, some
where members of the UCR, and they had closed contacts with local economic groups 33 .
Nobody had developed tasks in the IMF and, except Secretary of Finance Daniel Marx,
they were not perceived as orthodox economists 34 . This showed the initial weight of
political parties in the coalition, with higher differentiation form financial groups.
Table 4 – Third economic staff (December 1999 - Mars 2001)
Ministry MACHINEA
Under-sec. of Coordination EILBAUM
Sec. of Industry, Commerce and Commerce GIORGI – TIZADO
Sec. of Treasury VICENS
Sec. of Agriculture BERHONGARAY
Sec. of Economic Planning BEIN
Sec. of Finances MARX
Under-sec. of Tax Policy GÓMEZ SABAINI
Source: Own elaboration. Data from Boletín Oficial and Dalbosco (2003).
32 Neither of the selected employees had a doctorate. Only four, Machinea, Marx, Gómez Sabaíni and Tizado,
had done postgraduate studies (all in the United States, the last three in Harvard). 33 Great part of the professional career of Machinea was developed in the Central Bank where he reached the
presidency (1986-1989). He had been in 1991 Director of the Institute of Economic Studies of the Argentine
Industrial Union (UIA) thanks to Robert Rocca, leader of Techint, one of the bigger local economic groups.
The Secretary of Industry, Commerce and Mining, Débora Giorgi, had been Director of the International
Negotiations Center Studies of the UIA. Mario Vicens, had been Director of the Central bank during the
Machinea presidency (as Roberto Eilbaum) and had strong contacts in the banking sector (executive of
Financial Bank and, in 2002, President of the Association of Argentine Banks). In 2000, Javier Tizado replaced
Débora Giorgi. This deepened the political alliance with the Techint group, where Tizado had been during 30
years executive of several of its companies. 34 Daniel Marx worked for many investment banks and had been negotiator of the external debt during the
governments of Alfonsín and Menem.
24
The situation inherited in 1999 was complex. The political concentration and
centralization of the State’s structure had been modified. The situation of the coalition’s
parties in the parliament was delicate. The strong influence of the central government on
the provinces during the Menem presidency had been deteriorated for two reasons. In the
first place, the Peronism controlled most of the provinces in the country. Secondly, the
shortage of public resources by deteriorated fiscal situation would progressively increase
to the tensions between the nation and the provinces. The national State no longer
counted on the resources to control them financially and its own financing (bond
issuance) happened to depend on them.
On the other hand, the financial deficit of State sovereignty was deeper again. With the
beginning of the recession in 1998, tax collection – strongly tied to the economic cycle
continuously reduced its level. The recession implied a growing social public spending.
Both affected progressively the fiscal situation and, thus, the State’s capacity to pay the
foreign debt.
This was serious because bond issuance was from 1998’s capital flow’s sudden stop the
source of foreign currency. The public sector had had a balance of payments with surplus.
The private sector sowed deficit throughout the period (figure 11). The indebtedness of
the State had exceeded its necessities. It financed to the private sector, obtaining dollars
in the international market that were injected into the internal market. The strong fiscal
deficit generated fragility signals on the sustainability of Argentine bonds. At the same
time, the Currency Board policy needed a strong fiscal discipline.
25
Figure 11 – Balance of payments of public and private (no financial) sector in Argentina,
1992-1999 (billons of dollars)
6
4
2
0
2
4
6
8
1992 1993 1994 1995 1996 1997 1998 1999
Public Sector Private Sector
Source: Ministry of Economy and Damill (2000).
A hypothetical fiscal balance would tend to turn the public sector capital account in
positive. The government would have resources for the payments of the sovereign debt
but, at the same time, it would become dollarseeker in the internal market, not bidder.
The reason is that the collected pesos would have to be transformed in dollars for external
transfer. The only way to avoid a strong contraction of M1 was that the private sector
became dollar bidder in the internal market, not seeker.
The private sector could obtain dollars by three ways. In first place, foreign currency
could enter in the market through a surplus in the commercial balance. But the price of
the Argentine exports had fallen from 1996, and in 1999 they were in the lowest point of
the period (figure 12). A second way was an increase in the productivity. But the fixed
capital investment was declining from 1998. If the local private sector did not manage to
obtain dollars, only a fort entrance of foreign capitals would do it. But, this time it had to
be greater than in the 1990s. It had to finance both the State and the private sector.
(Damill, 2000: 84).
26
Figure 12 – Argentinean imports and exports prices, 1993-2001 (Index 1993 = 100)
0
20
40
60
80
100
120
140
1993 1994 1995 1996 1997 1998 1999 2000 2001
Exports
Imports
Source: INDEC
The risk of falling in the sovereign debt cessation of payments grew progressively during
2000. Economic recession continued and fiscal deficit grew. It was evident the State’s
capacity to pay its debt was fragile. Between 2001 and 2005, the debt’s amount to pay
was 22 billons dollars 35 . Financials operators were reluctant to take more Argentinean
debt without a previous solution of the solvency’s problem. The bond’s issuance
dramatically fell. The chosen option then consisted in the external debt exchange through
agreements with the IMF and foreign creditors (figure 13). At the end of 2000,
government obtained an agreement with international organizations and the Treasure of
Spain for 39 billons dollars. The strategy was to demonstrate capacity of payment, to
reduce the convertibility’s uncertainty and to reach the external financing again. In return,
Argentina had to accomplish goals fixed by the IMF to solve solvency’s problem (fiscal
deficit).
35 Mussa (2002: 42).
27
Figure 13- Issuance of medium and long term sovereign bond, Argentina, 1991-2001 (billons
of dollars)
0
5
10
15
20
25
30
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
With exchange
Whitout exchange
Source: Ministry of Economy of Argentina
But during 2000, the foreign currencies were drained by the process of flight of capitals
to the outside. By the end of February 2001 the fiscal deficit was deteriorated and the
country risk rating went off. Ricardo López Murphy became the new Minister of
Economy. The majority of the new staff came from the Fundación de Investigaciones
Económicas Latinoamericanas (Foundation of Latin American Economic Research
FIEL). The recruitment repeated the predominance of a particular think tank 36 , with
contacts with international organizations 37 and an important academic formation 38 ,
although formally smaller than those of the CEMA (less PhD). They had greater
experience in the public function 39 . The level differentiation diminished.
36 López Murphy, Artana, Solanet and Savanti were members of FIEL 37 López Murphy, Artana, and Sturzenegger had been consultant of WB and the IMF. 38 López Murphy had a master from the University of Chicago. Artana had a PhD from the University of
California. Sturzenegger had a PhD from the MIT and was a Harvard professor. 39 Daniel Artana had worked in YPF (petroleum state company before the 1990s) and in the Treasury
Secretariat (1980-1987). Manuel Solanet had been Secretary of Treasury in 1981-1982.
28
Table 5 – Fourth economic staff (mars 2001)
Minister LÓPEZ MURPHY
Sec. of Coordination SERENO
Under-sec. of Commerce and Investment GIORGI
Sec. of Treasury ARTANA
Sec. of Production SAVANTI
Sec. of Economic Planning STURZENEGGER
Sec. of Finances MARX
Sec. of State Modernization SOLANET
Source: Own elaboration. Data from Boletín Oficial and Dalbosco (2003).
The central bet of the staff was a huge reduction of the public spending. After announcing
the measures, between popular manifestations and the resignation of half the national
cabinet, López Murphy resigned opening the doors to the return of Domingo Cavallo. In
the first quarter of 2001, the flight of capitals exploded, reaching its tip in March with 5
billons dollars, a monthly historical record 40 . The continuity of the convertibility was
affected seriously, with fewer dollars in the local market each day. Once again, Cavallo
called upon his think tank (FM).
Table 6 – Fifth economic staff (Mars - December 2001)
Ministry CAVALLO
Sec. of Coordination CASTAÑÓN
Sec. of Commerce GIORGI
Sec. of Treasury BALDRICH
Sec. of Industry SÁNCHEZ
Sec. of Economic Planning STURZENEGGER – MONDINO
Sec. of Finances MARX
Sec. of Public Income FARRÉ
Sec. of Agriculture REGUNAGA
Source: Own elaboration. Data from Boletín Oficial and Dalbosco (2003).
The crisis and the influence of the international monitoring generated a political
concentration. The parliament voted a law of delegation of faculties. It aimed to
demonstrate the support to the government. This political concentration around the figure
40 Cf. Di Cola (2005: 49).
29
of the new Minister would not be corresponded with the centralization characteristic of
the first mandate of President Menem. The fiscal conflict between the nation and the
provinces, controlled by the Peronism, was more and more acute.
The strategy of the economic staff changed throughout the period. Well aware of López
Murphy’s vain attempt to reduce the fiscal deficit, Minister Cavallo bet to the foreign
currency generation by the private sector through of competitiveness plans (subsidies, tax
exemptions). With a heterodox and critical speech of the IMF and the credit rating
agencies that he blamed of “myopic” the Minister looked to extend his political base.
Progressively, Cavallo leaved his starting position. In June, the government conducted a
vast operation of renegotiation of the debt by 30 billons dollars to a high cost of annual
15% interest rate 41 . The amount of the interest rate showed to financial operators the level
of the government’s desperation. The fiscal deficit was not reduced and the deposits and
the reserves continued falling. At the beginning of July, the Minister declared that:
“ever since I am Minister of Economy, I have been little successful in communicating in a clear
and complete way the economic policy to the markets. As soon as I return to Argentina, I am
going to redouble the efforts so that the markets understand us and improve the Argentinean
credit rating”. (Clarín, “Señales para el mercado”, 12/07/01)
Days later, the government announced a severe fiscal adjustment, the law of “deficit
zero”. The State would only spend what collected. It would not take more credits to
finance itself. The plan was supported strongly by the IMF, with the increasing doubts of
the financial operators 42 .
41 In a symbolic decision, the Minister made the debt exchange’s presentation before 300 operators at Wall
Street escorted by Bill Harrison, president of JP Morgan, Jacques Boorman, IMF Development Policies
Department Director and David Mulford, who was leading the international division of the Credit Suisse First
Boston. Clarín, “Demostración de fuerza de Cavallo ante los inversores de Wall Street”, 31/05/01. 42 Clarín, “En medio de rumores, el FMI salió a darle un fuerte apoyo a la Argentina”, 12/07/01.
30
Faced with the lack of resources, the provinces and central government began to issue
internal bonds to pay suppliers and civil service wages. By the end of 2001, these bonds
represented 40% of M1. In November, the flight of capitals continued and the reduction
of the deposits was accelerated. The reserves of the Central bank that tried to maintain
the foreign currency level descended dangerously (figure 14). The government decided
the freezing of the banking deposits. On December 20, this decision generated a popular
mobilization that forced President De la Rúa’s resignation.
Figure 14 - International Reserves in Argentina, 1990-2001 (billons of dollars)
0
5
10
15
20
25
30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Central Bank of Argentina
Conclusion
The concepts developed in the theoretical provide useful tools for the historical analysis
of the Argentine case between 1991 and 2001. The economic policy was favored by
external circumstances like the deregulation of the capital market throughout the 1980s,
the increasing international liquidity and the centerperiphery flow. In this initial stage,
the State’s reform tended to generate an administrative decentralization, greater financial
dependency of the provinces and, consequently, the centralization of political power. The
31
1992’s tax reform strengthened this tendency. The initial urgency of reforms, given the
creditor’s political power, impelled a deep political concentration.
Since the 1993’s Brady agreement, the State supplanted the monetary emission of the
past by the bond issuance of sovereign debt. The crisis of the Tequila in 1994, the end of
capitals flows and the absence of active assets to privatize showed the limits of the
economic policy. Towards 1998, the issuance of national debt was the main support of
the convertibility. The deficit of financial sovereignty was translated by a progressive
modification of the political equilibrium. The groups that controlled circuit circulation, as
credit rating agencies or investment bank, increased their weight in the local policy.
The 1999’s government was then in a complex situation. Given the administrative reform
done previously, it needed an agreement with the provinces to solve fiscal deficit. The
Governors had little margin to reduce its own spending in a situation of social
deterioration. A scheme that had generated high political centralization was reverted
dramatically. A particular social group, mainly composed of financial operators, had a
dominant weight in political power’s distribution.
The deficit’s increase of the financial attribute diluted the inner sovereignty of the State.
The democratic regime did not manage to redistribute political power. On the contrary,
political inequality grew making elections less relevant to policy’s choices. This limited
the role democratic of democratic institutions to promote citizen rights.
32
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