Argentina's new president, Eduardo Duhalde, blames US-backed free-
market policies for his country's economic crisis. Ex-President
Carlos Menem says President Duhalde is incompetent. Conservative
gurus declare that Argentina needs more, not less, free market.
Amid all the accusations and finger-pointing, one thing is clear:
No one knows what to do. This bewilderment results from the
reluctance of free-market advocates, international financial
institutions, and the governments that support them to acknowledge
the conflicting demands of electoral democracy and the free market.
The competing demands of politics and economics threaten other
Latin American countries, too. Venezuela, one of the largest oil
suppliers of the US, implemented free-market policies without regard
to political fallout. Now, both its economic liberalization and
democratic institutions are in jeopardy.
Colombia, Ecuador, and Peru nominally favor a free market, but
don't have the political stability to support it. Even countries
doing relatively well - Chile, Brazil, and Mexico - would find it
difficult to reconcile free-market measures with stable politics in
the case of an economic downturn. The dramatic and high-profile
meltdown in Argentina, however, provides the clearest example of
what can happen when both democracy and free-market policies are
implemented without regard to the effect of each on the other.
Since 1983, Argentina has strived for both economic and political
liberalization. Local markets were opened and undemocratic practices
erased. With the Army in the barracks, public assets were
privatized, inflation mastered, the peso pegged to the US dollar,
and the government prevented from printing money.
Sound economic policy required fiscal restraint. But to remain
viable, politicians needed money, so they borrowed - and borrowed.
Foreign investors and international financial institutions kept
lending. As the borrowing continued and the new economy failed to
bring broad benefits, the gulf between what was economically
desirable and what was politically attainable widened.
The privatization and liberalization of the Argentine market,
wealthy in natural resources and human capital but too weak to
compete internationally, followed an established pattern.
International capital arrived, and public assets were transferred to
private hands under terms that often reeked of corruption. Local
industries were forced to compete with global prices, and cost
control became the primary goal of production. …