Legacy of Skin-Deep Reform

NEW YORK —  With the Argentine peso falling 40% in free-market transactions last week, and a yearlong freeze on all dollar-dominated savings accounts of more than $3,000, the long-dreaded crash has come to Argentina, but the rest of Latin America has, at least for now, come through unscathed.

Most of the crying for Argentina, as it happens, is in Spain, where leading banks and utility companies made huge investments in the home of the tango. Now they are discovering what British and U.S. firms learned long ago: When things go bad in Argentina, politicians rob foreign investors to calm angry voters.

Biting the hand that feeds it is an Argentine tradition, a hallmark of the governing Peronist party. For Americans, the influence of Juan Peron and his party on Argentina is hard to grasp. Imagine, though, if instead of Franklin D. Roosevelt, Tony Soprano had been our longest-serving president in the 20th century and had built a corrupt political machine that dominated our politics for 60 years. Then, imagine that instead of Eleanor Roosevelt as our most influential first lady, President-for-life Soprano had married an ex-Vegas chorus girl with the body of Marilyn Monroe and the political judgment of Jane Fonda.

The only two alternatives to the Peronists are the opposition Radical Party and the military. Neither can govern. The military lost public confidence, and deservedly so, during the last dictatorship, when thousands of innocent Argentines were murdered by thuggish officers.

The military then topped this off with a catastrophic and idiotic attack on the Falkland Islands in 1982--sheep-dotted British outposts in the South Atlantic that Argentina pointlessly but fervently claims.

Following the military collapse, Argentines elected Raul Alfonsin of the Radical Party as president, but one of the country’s recurring bouts of hyperinflation set in, and Alfonsin had to resign the presidency to Peronist successor Carlos Menem in 1989.

For a time, Menem seemed to have given Argentines a new direction. The wildly popular currency-convertibility plan, linking the volatile peso to the stable dollar, allowed Argentines, for the first time in decades, to go to sleep at night knowing their money wouldn’t be worthless by the time they woke up. Inflation was stopped and Menem was a hero.

Foreign investors, pundits and U.S. foreign policymakers were also charmed by Menem’s pledges to reform the Argentine economy and to draw his country closer to the United States in international politics. To some degree, Menem delivered. Key state-owned industries were privatized, often with significant reductions in employment for workers in featherbedded public industries. Argentina reduced its trade barriers and supported U.S. proposals for a Free Trade Area of the Americas (FTAA).

But Menem’s reforms were only skin deep. Failure to fully overhaul the country’s labor laws, which make it extremely difficult to fire redundant employees or cut wages and which give inordinate power to corrupt but traditionally loyal Peronist trade unions, meant that wage costs in Argentina remained unrealistically high even as foreign investment in the country gradually slowed.

Worse, politicians continued to treat the national treasury like a private piggy bank, showering favors on lobbies, well-placed industrialists and organized blocs of voters. In the old days, Argentina always handled these costs by printing more money. With the peso tied to the dollar, that couldn’t happen. Argentina borrowed money instead, and the debts piled up until they couldn’t be paid.

After Menem’s second term, voters gave the Radicals another chance--and they muffed it again. Last month, Radical Party president Fernando de la Rua, like Alfonsin before him, was forced to leave office before the end of his term by popular outrage over economic failure.

Now, under recently installed Eduardo Duhalde, the Peronists are back in power and up to their old tricks. It appears that the Peronist party will do what it knows best: repudiate the unsustainable debt it has built up with a bout of inflation and rhetoric that blames evil foreigners for Argentina’s woes.

This is unlikely to work, and it is hard to see what will happen when these policies fail. Historically, when squabbling politicians have led the country into a truly impossible position, the military takes over, turns the economy over to technocrats, and after things have stabilized a bit, lets the politicians back in.

That probably can’t happen now, at least not for a while. The crimes and blunders of the last military regime were so outrageous that even officers understand that they should stay out of politics. If, however, the Duhalde government continues to make a bad situation worse, the men in uniform could start looking better.

During Latin America’s unhappy past, military coups were a little like hitting the control-alt-delete buttons on a computer. Nobody thinks that is a good thing to do, and everybody knows that it involves data loss and delay, but when system crashes come, there sometimes aren’t any alternatives.

If, as now seems likely, the Peronists fail and the Radicals remain ineffective, Argentina may decide to reboot.

Fortunately, Argentina’s troubles aren’t setting off another wave of Latin America crises. Mexico is now seen as hooked to the U.S. economy, and its prospects are tied to how fast the U.S. emerges from recession. Similarly, Chile gets credit for years of sound fiscal policy and a sensible economic model that has enabled it to weather the global slowdown in reasonably good shape. Even Brazil, Argentina’s closest neighbor and its main partner in Mercosur, the ambitious program that seeks to build a common trading bloc in South America, has survived the news from Buenos Aires. Brazil’s long- battered currency remains well above its lows last fall, and its stock market has made some impressive gains.

When investors--and foreign-policy professionals, for that matter--think about Latin America, they increasingly divide the continent into three categories. There are the stellar performers like Chile, where a long record of solid achievement makes Chilean debt a solid blue chip.

There are the serious reformers like Mexico and Brazil. These countries are not out of the woods yet, but they have made a real beginning on cleaning up the corruption, inefficiency and instability that have bedeviled Latin America for generations.

Finally, there are the laggards, countries like Argentina, Venezuela and Colombia that are still mired in the continent’s old and failed ways. None of them has to be poor. All are rich in natural resources, and their populations are, by world standards, well-educated.

In all three countries, elites have historically been corrupt and shortsighted; populist political movements repeatedly fall for snake-oil salesmen selling no-pain solutions for difficult problems.

Buenos Aires has more psychoanalysts per capita than any other city in the world, giving a new poignancy to an old joke:

Q: How many psychiatrists does it take to change a light bulb?

A: Only one, but the light bulb has to really want to change.

Unfortunately, it seems that, despite a lost century of missed opportunities and economic decline, Argentina is still not ready to change. Until it is, look for one unhappy turn of the screw after another.

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Walter Russell Mead, a contributing editor to Opinion, is a senior fellow at the Council on Foreign Relations and the author of “Special Providence: American Foreign Policy and How It Changed the World.”