Sovereign bankruptcy: for a long time, Argentina had Latin America's strongest--and third largest--economy; today, one in five of the country's citizens lives in extreme poverty. The financial crisis has resulted in the country losing its economic sovereignty. (Argentina).

Late in 2001, the economy of Argentina went into a major tailspin when a four-year recession turned into a full-blown financial crisis.

In February 2002, it defaulted on its $155 billion public debt, the largest such default by any country in history. The country's currency, the peso, was devalued, virtually slicing incomes in half and adding to the financial chaos. Savings accounts were frozen; people could not get their own money out of the banks in which they had deposited it. Unemployment rose to about 25% and, in the cities, 44% of the population became officially poor.

All this in a country that a century ago was one of the world's 10 richest countries; richer than much of Europe. Argentina attracted millions of immigrants from Italy, Spain, Britain, and Western Europe, and by 1914, half the population of its capital, Buenos Aires, was foreign-born. The city has been described as the most sophisticated capital in Latin America with its wide boulevards, trendy cafes and shops, and lively arts and academic communities. The country, blessed with a wealth of natural resources, including some of the world's most fertile land, was a major supplier of grain and meat to Europe. It was flooded with British investment as well as European immigrants in the 19th and early 20th centuries. Then, the decline started and decades of political and economic instability followed.

In the 1990s, the government (of President Carlos Menem and his Economy Minister Domingo Cavallo) tried to reverse the decline. They enlisted the help of the international banking community and the International Monetary Fund (IMF). That met with some success, but in the process the country lost control over its monetary policies: in order to receive international aid the government had to dismantle its state-directed economy (publicly run enterprises) and social programs. Government officials were laid off, there was massive privatization, and spending for education and health was cut. It seemed to help. Then external forces shook the scheme of reforms. Mexico's economic troubles in 1995 had an effect on investor confidence elsewhere, including Argentina, which led to economic decline and the collapse of several banks. The government recovered from that but more shocks were to come. As The Economist explains it, prices for Argentina's commodities stopped rising; the cost of capital for emerging economies started to go up; the dollar appreciated against other currencies; and Brazil, Argentina's main trading partner, devalued its currency. All this had a negative effect on Argentina's economy to the point that it couldn't pay its debts. That meant cutting expenses even more, which slows the economy more, which means less revenue, which means more belt-tightening. It became a vicious cycle of rising debt, higher debt payments, rising unemployment. These are circumstances that can destroy even efficient enterprises. In Argentina, some well-run operations faltered along with the inefficient ones.

Some politicians in Argentina blamed the International Monetary Fund for the country's economic collapse. The IMF had helped in the past, but this time it tightened its terms. Critics say the Fund has made some serious mistakes in the way it deals with emerging-market crises, suggesting it is not always a good source of economic advice. They say the IMF ties its loans to economic policies that focus on business growth through foreign investment and pays little attention to the social consequences of its policies, skimping on government support for social services. The theory is that successful business development will raise the standard of living for everyone. In practice, though, while some of the money trickles down to the poor, most of it stays with the rich. And, particularly in Argentina's case, wealthy people have found ways of slipping their money out of the country and into foreign banks.

Although the IMF has its shortcomings, many say that Argentina is responsible for its own downfall. The criticism is that even in the boom years of the early 1990s, governments continued to spend too much, leading to the debt problem that sank the economy.

Critics argue that what unhinged the country is massive corruption: inefficient government spending; an inefficient tax system; a high rate of tax evasion; a weak government accused of political mismanagement, which destroyed the country's banking system; and, failure to put money aside in good times meant the government had to cut spending in the midst of a recession.

As writer Alberto Manguel pointed out in an article in The Globe and Mail (December 2001) "The money lent to Argentina, several times, by the International Monetary Fund was pocketed by ... ministers, businessmen, industrialists, congressmen, bankers, senators ... The IMF's refusal to lend more was based on the safe premise that it would simply be stolen again ..."

The result is what The Economist described as "an economic depression without parallel (in Latin America) since the 1930s."

SUGGESTED ACTIVITIES:

1. Rosendo Fraga, a political analyst, says "Argentina continues to act as if it were the country of 1913. We should look at Chile or Uruguay, and become a simpler, more austere country." Check out the situation in both these countries and compare them to Argentina.

2. The International Monetary Fund is the lender of last resort. It makes funds available to a country when all other sources of financing are reluctant to lend or invest, but in exchange requires the adoption of stringent economic policies aimed at restoring investor confidence. Anti-globalization protesters say both the IMF and the World Bank are interested in making the rich richer with little real concern for the poor. But, according to one report in September 2002, even IMF insiders are starting to wonder if the Fund knows what it's doing in Latin America. Open a file on the pros and cons of the IMF and discuss how you think it should operate.

3. Other Latin American countries, such as El Salvador, and Ecuador, are giving up their national currency and adopting the U.S. dollar. Discuss horn this helps boost their economies.

FACT FILE

Argentine accounted for 2% of South America's economy in 1810, 20% in 1853, and 60% by 1910; now, it has fallen below 10% again.

Websites

Argentina and the IMF--http://www.imf.org/external /country/arg/index.htm

Latin Focus (Argentina)--http://www.latin-focus.com/countries /argentina/argentina.htm#Economic%20Indicators

RELATED ARTICLE: What was said.

Here's how writer Laurent Joffrin summed up Argentina's crisis (in a World Press Review article reprinted from Le Nouvel Observateur, a Paris weekly in January 2002):

"The case of Argentina is one of the most complete, spectacular, and revolting economic and financial disasters we have seen since the Second World War."

But Mr. Joffrin also points out that applying Western free-market rules to different cultures is a recipe for failure:

"Without security for transactions, the impartiality of the court system, sound infrastructures, competent government officials, and government action to limit the effects of reform on the poorest people, the economy will not function. It will slide into corruption, casino financing, inequality, and tax evasion."

Ramon Castellblanch, assistant professor in the health education department of San Francisco State University, agrees:

"The U.S. government has got to drop its demand that Latin American governments mindlessly adhere to free-market theory. Land reform, food stamps, low-cost housing, health care, and education have got to be put on the agenda. So does money for the environment."

In February 2002, Globe and Mail columnist Marcus Gee wrote this about Argentina:

"It's hard to exaggerate how grim things are here ... One in five Argentines is out of work. The value of the peso has been cut in haft in a matter of weeks. (By June 2002 it was down by 72% at 3.60 pesos to the dollar.) Most people can't get their money out of the bank--the government forbids it--and when they do, it may be next to worthless."

And last but not least, is a comment by Eduardo Duhalde, after being sworn in as Argentina's fifth president in two weeks, January 2002:

"This is not the time to look for whom to blame, it's the time to tell the truth: Argentina is bankrupt. Argentina is destroyed ..."

RELATED ARTICLE: Scraping bottom.

By May 2002, charity groups in Argentina estimated that about 400 soup kitchens had sprung up in Buenos Aires alone; there were thousands more in other cities as citizens struggled with huge financial losses. Only a few years earlier, most Argentines thought charity meant sending money to Africa. Now their charity is staying closer to home as hundreds of thousands have slipped into poverty. In their battle to survive, some have become scavengers: in Buenos Aires one recycling cooperative estimated that 15,000 families live by picking over the district's garbage, five times more than before the economic collapse. This is only five percent of the total number of the estimated 300,000 families in the country who support themselves through scavenging. Others have become city street sellers. Many have started to barter goods. And, with poverty comes crime: theft, counterfeiting, and kidnappings all have risen, adding to the country's misfortunes.

When the collapse began, there were massive street protests and four presidents were toppled from power in a matter of days. After eight months of grim economic news, the people are, according to The Economist in a mood of "depression and shame, more than anger, at the country's plight."