Publication: Prism Volume: 8 Issue: 2

By A.I. Kolganov

The development of Argentina’s economy over the last ten years has been reminiscent, in many respects, of similar events that have occurred in the course of Russia’s market reforms. There are undoubtedly major differences between the economies of the two countries. And there are undoubtedly many differences between their histories, their national traditions and their mentalities. Argentina has not been through anything like the collapse of the USSR and its constituent economic structures, or the almost wholesale breakdown of social, political, ideological and cultural traditions which accompanied it. But this does not mean that Russia has nothing positive to learn from an analysis of the current socioeconomic crisis, however far away Argentina may be.


Liberal reform in Argentina, as in Russia, was preceded by a prolonged period of stagnation, which was accompanied by a deterioration of the economic framework, while technological standards lagged ever further behind the leading powers. The 1980s were frequently referred to in Latin America as the “lost decade.” From 1981 to 1990, Argentina’s gross domestic product fell by 8.7 percent. (In the same period, the Soviet Union there was still some growth, though it slowed from 3-4 percent per annum to zero). In the second half of the 1980s, following a period of military dictatorship, President Raul Alfonsin, a man very much in the mold of Mikhail Gorbachev, came to power in Argentina. It was no surprise that there was an almost instant rapport between them when they first met. Like Gorbachev, Alfonsin did much to promote the development of a range of democratic bodies and institutions in his country. Also like Gorbachev, however, he proved to be incapable of formulating or conducting an effective economic policy and, what is more (and this was of key importance), neither of them was able to offer his people a strategy for tackling the socioeconomic crisis which had deepened in each country under their leadership.

Economic hardship increased and, on a wave of popular discontent, new presidents came to power beneath populist banners. In Russia, Gorbachev was ousted from power in 1991 by Boris Yeltsin, a representative of the reforming element of the top-level party nomenklatura and of the shadow business world (who were supported by a partly naïve and partly cynical elite intelligentsia and, significantly, by right-wing liberal circles, and in particular the financial institutions of the West). In Argentina, the “democrat” president was replaced by the Peronist Carlos Menem, who was elected in 1989. Each very rapidly forgot his populist pledges and–guided by a group of radical monetarist advisers (thus receiving the same advice on methods, forms and mechanisms for the implementation of the reforms)–set about introducing economic reforms, crafted in the spirit of radical liberalism.


The beginning of liberal reform in Russia and Argentina was characterized by diverse–one might even say directly contradictory–results. Whereas Russia’s liberal economic reforms provoked a steep fall in production (from 1991-1994 GDP fell by approximately 40 percent), earnings, investment and so on from the very outset, Argentina, by contrast, saw the stirrings of economic growth. Argentina’s GDP in 1991-1994 rose by 32.8 percent. While Russia’s reforms were accompanied by inflation, reaching 1500 percent in 1992, Argentina managed to eliminate inflation. The old currency (the austral) was replaced by the new peso in 1991 at a ratio of 10,000:1, with the new peso freely convertible to the dollar at a ratio of 1:1. Argentina operated a so-called currency board policy, having anticipated a need to keep the money supply closely linked to the country’s available gold reserves. These reserves had to amount to 75 percent of the supply of national currency in circulation. The Argentinian government’s initial success at financial stabilization prompted several Russian politicians to seek to emulate it. Because the failures of Russia’s reforms were deemed to be the consequence of an insufficiently consistent application of liberal principles, they proposed that the Argentinian model should be copied.

But the reforms carried out in Russia and Argentina did have a certain amount in common. Both countries were implementing a far-reaching deregulation of the economy and the state had effectively abandoned its responsibility for the active long-term regulation of the economic framework, while several other functions of the state were also cut back. Both countries were engaged in a wide-ranging program of privatization, though in Russia, given its Soviet past, this was even more radical and extensive than in Argentina. In Russia, the state sector had of course played a much greater part in the economy than was the case in Argentina. But in Argentina privatization went much further, even extending to zoos and cemeteries, which remain untouched in Russia.

Argentina’s success in beating inflation and achieving financial stability attracted foreign capital to the country, and it was this combination of factors that produced economic growth. Direct foreign investments alone amounted to US$2-5 billion per annum. It took Russia until 1996-1997 to manage to secure any financial stability and stop the downturn, and foreign investment played an extremely insignificant role in the country right up until 2000. However, a number of common features in the liberal economic policies of Russia and Argentina soon generated similar results, after a “leveling out” of the differences which had originally been apparent in their respective starting positions.


The policy of linking the Argentinian peso to the dollar could only achieve stable results if Argentina had reliable sources for replenishing her currency reserves. However, Argentina’s weak export potential (which depended for the most part on the export of foodstuffs and agricultural raw materials), meant that even the slightest fluctuations in the external economic environment produced a hard currency deficit. From 1995 onwards, the country’s foreign debt began to rise. Argentina issued bonded loans, which initially brought in US$6 billion a year, rising to US$8 billion and, by the end of the 1990s, US$12 billion a year. Servicing this external debt was soon consuming 40 percent of Argentina’s export earnings (compared with a Latin American average of 15 percent).

Similar processes were at work in Russia. Here, too, financial stability was achieved only by increasing the levels of foreign and domestic debt, chiefly by means of issuing short-term state bonds (known as GKOs). Eventually, the Russian government, in trying to keep up the appearance of economic success, ended up borrowing way beyond the budget’s debt-servicing capability. August 1998 brought a financial crash. Many banks were bankrupted and members of the middle-class (as well as many others) lost the savings they had deposited in them.

Surprising though it may seem, several Russian politicians began yet again to suggest that the cure to Russia’s economic ills might be found in imitating the policies of the Argentinian government, even though the Argentinian economy was even then on the brink of collapse. Former finance minister Boris Fedorov invited his Argentinian counterpart Domingo Cavallo to Russia, and went out of his way to applaud the currency board policy, calling for its application in Russia, even though the lamentable state of the currency reserves made such a suggestion completely impossible.

By the end of 1998 there were signs that Argentina’s economic situation was deteriorating. Production levels began to fall (though not yet greatly). In parallel, there was a noticeable rise in unemployment, reaching 18 percent of the active population in 2001, which, even for Latin America, was a figure which threatened to cause intense social upheaval. Wages began to fall. These first rumblings of the approaching economic earthquake were provoked essentially by the contradictions inevitably inherent in the program of radical liberal reform and then magnified by the repercussions both of the 1997 Asian financial crisis and the financial crisis in Brazil. The devaluation of the Brazilian real had led to an expansion of Brazil’s exports, which adversely affected Argentina’s export position.

As a result, Argentina gradually developed a negative trading balance. Its external debt rose (to US$147 billion in 2001) while currency reserves dwindled. By 2001, deposits in commercial banks totaled $30 billion, while the currency reserves amounted to only US$14 billion. When the IMF refused to deliver a promised loan of US$8 billion, the Argentinian government tried to avert a financial crisis by imposing a ceiling on withdrawals from the commercial banks. This immediately created a banking panic and resulted in delays in payments by small and medium-level entrepreneurs. The people of Argentina took to the streets. The introduction of a state of emergency only served to pour more oil on the flames.


Many would deny that it could be the same story for Russia. Russia has enjoyed economic growth for three years now and has no reason to fear a repetition of Argentina’s pot-banging protests (“cacerolazos”). However, it should be remembered that Russia’s economic growth (which is, incidentally, rather unstable and uneven, such that by the end of 2000 there were already new negative structural shifts) has been based chiefly on external economic factors–namely the reduction in imports following the devaluation of the ruble and the rise in oil prices on the world market. And now, as the influence of these factors diminishes, the first signs of stagnation and financial trouble are already appearing. At the end of 2001, growth in production in the manufacturing industries slowed markedly, the Central Bank’s gold reserves began to shrink, and in January 2002 inflation rose. Instead of the 1 percent monthly rise in prices planned by the government, prices rose by 3.1 percent.

Attempts to tackle these difficulties will run up against the same problems as in Argentina. Like the Argentinian government in the early 1990s, the Russian government failed to take advantage of the fruits of economic growth (albeit temporary growth) and embark on a serious modernization of the manufacturing industries. On the contrary, the technological lag behind the developed nations has widened. As in Argentina, funding of scientific research and development is wholly inadequate. The proportion of the GDP spent on research and development is 0.46 percent in Argentina and between 0.8 percent and 1.0 percent in Russia, while in the developed countries the figure generally exceeds 2 percent. It is worth noting that, as in Argentina, so too in Russia foreign loans have been completely squandered and a portion of them has quite simply been looted. In both countries, corruption, penetrating to the core of the machinery of the state, is preventing the development and implementation of policies that serve the general national interest. Note, incidentally, that in both countries the right-wing liberal policy of rolling back the state and developing the “free” market has resulted in greater bureaucracy and unprecedented corruption, in direct contradiction of the “theories” of the liberals, according to which these evils should attach only to social-democratic economic reforms.

As in Russia, Argentina’s most serious problem is poverty (in Argentina around 40 percent of the population lives below the poverty level, while the figure in Russia is 27 percent). In addition, Russia grossly undervalues its workforce. On a reckoning of one dollar’s worth of production output, the Russian worker earns three times less than his counterpart in the Unite States. It is these social aspects of liberal reform that have proved to be the most important reasons for Argentina’s profound crisis. The financial failures were like the fuse on a time-bomb primed way back, at the core of which were the fundamental social and economic contradictions the liberal “reforms” inevitably generated.

Taken as a whole, these problems have prevented both Argentina and Russia from establishing a modern, dynamic economic model, capable of providing the country with a high level of competitiveness and of creating a stable society.

Yes, Russia’s population, accustomed as it is to social protectionism and paternalism, displays a lesser capacity for self-organization and independent action (though, on the other hand, the pressure-cooker may blow with much greater violence). Yes, the liberal socioeconomic policy of Russia’s presidents and governments is mitigated to some extent by this paternalism on the lowest rungs of the economic system (although our leaders’ constant efforts to tackle this “defect” may inflame the situation). Yes, we have different social and cultural traditions. But nevertheless, if the Russian authorities do not learn the lessons of the Argentinian crisis and do not make serious efforts before long to resolve the contradictions arising from their attempts to pursue a right-wing liberal course similar to Argentina’s (and Russia’s present leadership, by their very socioeconomic, political and ideological nature, cannot objectively favor this), then the current Argentinian situation may turn out to be an innocent side-show compared to what’s around the corner for Russia.

Andrei Kolganov is a doctor of economics and a senior research fellow at Moscow State University.