Clientelism
A major contributory factor to the problems in Argentina and Greece is the phenomenon of ‘clientelism’ – essentially, interest groups within society requesting favours from politicians as clients, often with little regard to a reciprocal contribution to the economy. This occurs in all societies, of course, but for different historical reasons interest groups have been particularly influential in these two countries. In the case of Argentina, clientelism is inextricably linked with Peronism. Understanding this Argentine phenomenon is essential to our being able to understand both the hyperinflation of the 1980s and the currency peg that followed in the 1990s, as well as the problems associated with reform during that decade.
Unfortunately, Argentina’s image in the West has been distorted by the romantic view of Eva Peron in the sentimental hit musical Evita. The reality was more complicated. Juan Domingo Peron was first elected in 1946, on a mixed programme of support for the working poor, protectionism, patriotism and nationalisation. He sought a ‘third way’ between the USA and USSR at a time of cold war tension. He tried to establish aircraft and car manufacturing through nationalized initiatives. This was hugely ambitious, and he could not achieve in nine years the kind of industrial development that had taken many decades in North America. In effect, the state tried to occupy the role that an entire social class of industrialists and financiers fulfils in an advanced economy.
While Peron’s industrial initiatives failed, the practice of subsidies and favours to certain interest groups remained. The thrust of Peronism became disbursing funds, not creating wealth. Under Peron and the dictators, the state exercised control on businesses, requiring start-up permits, import licenses and so on. This encouraged corruption and the establishment of conglomerates.
Peron’s concessions to the trade unions in the 1940s created an inflexible labour market in which it was difficult to fire workers. This was long lasting, and President Carlos Menem baulked at reforming many of these measures in the late 1990s, when the IMF urged labour market reform as part of the economic restructuring deemed necessary to ensure that the currency peg to the dollar would be effective.
In an advanced economy, wealth is created by industries that become concentrated into ‘clusters’ of specialist providers. Some of this wealth may then be used to support certain political movements.
With Peronism and other forms of clientelism, the money flows in the opposite direction: politicians seize revenue from whatever sources are available – oil, soya exports, borrowing from capital markets – and give it to favoured interest groups to buy votes.
This inverted dynamic remains ignored by policymakers in Brussels and in the IMF, and such oversight has been an historic error in policies towards Argentina and subsequently Greece. It is a fundamental mistake of analysis caused by looking at headline financial data, rather than the economic dynamics that lie underneath. True economic convergence is essential to the creation of an optimal currency area as a precursor for monetary union, as I shall discuss later.
Peronism’s mixture of apparent opposites – a bizarre coalition of social democracy, Communism and fascism – makes it a difficult phenomenon for those in Western Europe or North America to understand – and indeed it subsequently split into left-wing and rightwing factions. It did not create fertile ground for the development of a strong private sector. But worse was to follow. Economic problems, combined with a suspicion towards Peron from the church and the upper class, contributed to the military coup of 1955. Between that date and the fall of junta in 1983 Argentina suffered brutal dictatorships and relative economic decline. In 1950, the country was economically on a par with Australia or Canada.
Argentinean GDP per capita was 84 per cent of the average of developed nations; by 1973 the figure was 65 per cent, and by 1987, 43 per cent. Greeks should heed this warning from history – indicators of relative wealth can fall as well as rise. Greece had a GDP per capita of just US$ 11,580 in 2000, soaring to US$ 31,954 in 2008.8 By 2009, according to figures released by the Organisation for Economic Co-operation and Development (OECD), the Greek GDP per capita was 88 per cent of the euro zone average.
This is likely to prove to be Greece’s peak for many years to come. Impact of Peronism on Business Gerardo Saporosi, an Argentinian businessman who has kept his franchising business going despite all the economic upheavals of the past 15 years, says that the impact of Peronism and dictatorships was disastrous for industry in what had been an entrepreneurial country: Argentina was an industrial power at the end of the nineteenth century and the start of the twentieth. In that era, you could regard Argentina as being equivalent to Canada or Australia. It was in the process of becoming a great power – more advanced, for example, than Brazil, Russia, India or China, the famous ‘BRIC5 powers of today.
The process was abruptly halted by the appearance of Peronism, and various right-wing dictatorships that were backward and nationalist. The country closed itself to the world and is still paying for that dearly.
Also, during the 1960s and 1970s, Argentina was, like other countries around the world, a theatre for operations of the Cold War, in that the USA and the USSR launched their exercises in left-wing terrorism and right-wing counterrevolutions. The result: flight of foreign capital and local savings during the last 40 years.
Industries could not re-invest at the rate of the depreciation of their assets, and quietly were liquidated. The policy of convertibility of the 1990s finished off those who were left. The country is very ambitious, and her entrepreneurs as well. However, it is going to be several decades before Argentina receives inward investment at a level necessary to re-start the process of industrialisation. I doubt that the money of the Argentine diaspora living overseas is ever going to return. Peronism still has an influence. His 18-year physical exile between 1955 and 1973 meant that politicians of different stripes could evoke his name. He won two general elections, the second by a landslide, and was never defeated at the ballot box, giving extra legitimacy to his legacy. He and his wife have a near-mythical status, though he remains a highly divisive figure. In Greece, we can recognise the familiar hallmarks of Peronism.
There is a pattern similar to its policies, and a similarly inverted money flow: from politicians to such special interest groups as happen to be flavour of the month; rather than an income of wealth generated in a sustainable way from world-class businesses. Buying Social Peace Raul Alfonsin, the first Argentine president after the return to democracy in 1983, was head of the Radical Civic Union. As such, he was an opponent of the Peronists, but head of a left-wing party returned to power following dictatorship. His natural inclination was to reward the constituencies that suffered under the junta, in a manner similar to traditional Peronism. Between 1984 and 1989 there were 13 general strikes, in which unions called for higher wages and better working conditions. In turn, business groups and farmers asked for favours.
Attempting to meet these demands placed huge strain on public finances; the deficit increased and monetising the debt led to hyperinflation. Between 1975 and 1989 public debt rose from 14 per cent of GDP to 66 per cent, with most of the increase arising under the Alfonsin regime. According to IMF veteran Vito Tanzi, an adviser to successive Argentine governments, Alfonsin showed litde interest in or knowledge of economics, and was motivated by purely political calculations.
This period of worsening public deficits and hyperinflation featured a significant flight of Argentinian savings. It is estimated that, by the summer of 1990, some $3 billion of Argentine holdings were moved to Uruguayan banks. The Argentine state, after decades of clientelism and dictatorship, was highly corrupt and dysfunctional, owing to historical forces rooted in Peronism.
This meant that there was litde social or economic benefit from public expenditure. During the same decade, there was a remarkably similar initiative to buy social peace in Greece, as the left-wing PASOK government of Andreas Papandreou (1981-89) awarded similar favours to trade unions and other interest groups. He also disbursed patronage to party supporters through political appointments to the public sector on a vast scale. In Greece, the 1980s saw the birth of a ruinously wasteful and corrupt public sector.
