Just this month, after urban riots left 30 people dead and several presidencies swiftly terminated, the government of Argentina defaulted on its debt, thereby branding itself a deadbeat nation, a whole new category of rogue state. Argentina missed a payment to its creditors, one of which is the International Monetary Fund (IMF), the omniscient financial institution that oversees the fiscal collapse of countries. As the default approached, the IMF issued a series of nasty notes about the new government’s plans to recover from bankruptcy. The IMF especially did not like the part of the recovery plan that softened the blow of economic depression on the middle class and placed some of the burden for financial revival on banks.
Funny. It seems only fair, at this point, that banks should pitch in and help out, as it is obvious that the middle and working classes have already done their bit to make Argentina into a viable financial proposition. They stood by supportively for about 10 years as their government followed IMF, World Bank, and Inter-American Develop-ment Bank (IDB) instructions for maintaining a secure and prosperous niche in the international economy by cutting salaries and slashing away at the federal budget. Unfortunately for them, the IMF, the World Bank, and the IDB were blowing smoke, while the politicos gleefully ripped them off, and the final result was national destitution.
As usual, it wasn’t supposed to turn out like this. The government and the IMF tried hard to make Argentina attractive to foreign investors, so that they would bring their money in, build hydroelectric plants, outlet malls, fast food franchises–provide jobs–and we all know the rest.
It didn’t work; the plan has never worked anywhere in Latin America, so far as we know. (Please do not bring up Chile: Making 30,000 people (at least) disappear into mass graves and torture chambers in order to achieve consensus on an economic program is too high a price. Besides, after all that, nearly 25 percent of the population still live on less than $2 a day.) Moreover, in Argentina the plan went much, much too far. By November 2001, the free market policies imposed had left the country without a national financial system and without sovereign control over anything more than a few toll booths on a couple of highways. No, wait. Those were privately owned by foreigners too.
Argentina had become a pirate’s paradise, and the Ministry of the Economy shamelessly advertised its financial attractions on its website (www.mecon.gov.ar): “Foreign investments are warmly welcomed and virtually unrestricted. Argentina’s is probably the most pro-business foreign investment legislation in the world, with no sector restrictions–investments allowed even in sensitive areas like oil, mass media, nuclear power generation and nuclear mineral mining.”
Well, call my broker.
“No approvals or paperwork of any kind are required to materialize foreign investments–there is absolutely no red tape. No registration of investments is ever required; complete confidentiality assured. Foreign investors are entitled, without approvals or formalities, to repatriate capital and remit profits abroad at any time–no waiting periods whatsoever.” And not only that: There were no performance requirements on either domestic and foreign investment; no provincial income tax, no capital gains tax, no income tax on dividends, no income tax on interest, and no export taxes on manufactured goods.
So no wonder the country is broke. It’s not collecting taxes. The most reliable revenue was coming in from the fire sale on public assets, also required by the IMF and World Bank. Reminds me of the joke about the lawyer working on Wall Street during the Depression who came home and told his wife: “Had a good day today. Sold my desk.”
Of course, once you’ve sold your desk and your files, you are out of business, which is exactly what happened in Argentina. Business cannot wait to get out of there, and it’s hard to stop. On January 18, after the new President froze bank deposits, a Buenos Aires judge had to send criminal investigators from the Federal Police to Citibank and Bank of Boston headquarters, after someone blew the whistle on the sudden escape of $25 million. The B.A. papers called it “an agitated morning” over at Citibank… You can bet it was. At the time the average citizen was not allowed to withdraw more than $1,000 a month, and there was some blow-dried foreign banker type pulling out with $25 million.
And the fact is the bankers and foreign investors had been pulling out a lot for a rather long time, thanks to three laws passed since 1989 at the behest of the IMF. The State Reform Act of August 1989 allowed 176 privatizations, including gas and electric utilities, telecom companies, railways, airlines, and YPF, formerly the state-owned oil company, now trading over the counter in New York. In a true corporate bonanza, the companies that bought public utilities and telephone companies demanded the right to index their rates to adjust for the rising cost of living in the U.S., although there was no inflation in Argentina. The Economic Emergency Act of September 1989 mandated massive deregulation of foreign investment, and the Convertibility Act of April 1991 pegged the peso to the U.S. dollar, effectively eliminating any national monetary policy.
It didn’t take long for the privateers to come calling. In 1992, when Gas del Estado, the state-owned natural gas company, was privatized, Louisville Gas and Electric (LG&E) got in on the deal by buying into three new gas distribution companies in Argentina. As of 2001, LG&E was collecting from more than 600,000 bill-paying customers each month at rates that increase with inflation in the U.S.
The Dutch corporation Disco bought into the Argentine supermarket industry by purchasing Supermer, which owned the supermarket chains Americanos and Mini Sol. From these outlets alone Disco collected revenues of $300 million in 1999, raising its Argentine supermarket revenues to nearly $2 billion. By the time of the economic collapse, three foreign-owned chains–Disco, Norte (a joint venture between the Exxel Group and Promodes of France), and French-owned Carrefour accounted for nearly one-half of all supermarket revenues in the country.
Then there’s Argentina’s new insurance industry, which ballooned with clients throughout the ’90s after Social Security was privatized. Mapfre of Spain–with MAV, Mapfre ART, and Mapfre Aconcagua–was well on the way to taking over. The corporation reported in 1998 that its combined insurance operations in Argentina produced $167 million in premiums, a 101-percent increase over 1997.
And banking. Canada’s Scotiabank is almost everywhere through its wholly-owned Argentine subsidiary, Banco Quilmes, now Scotiabank Quilmes. Banco Quilmes had traditionally been an important retail bank used by the working class; it had assets of $2.6 billion and deposits of about $1.5 billion. Other foreign contenders in banking include Hong Kong Shanghai Banking Corporation and Banco Bilbao Vizcaya (Spain), both of which bought in after capital controls were lifted in the 1990s. We don’t need to bring up Bank of Boston and Citibank again.
Our own U.S.-born AES Corpor-ation (“The Global Power Company”) cashed in on the privatizing of the Argentine state electricity company through three subsidiaries and collected $31 million during 2001 from 700,000 electricity users in Buenos Aires, La Plata, and points north. The electrical service provided by AES clone corporations left much to be desired. In recent years, blackouts in Buenos Aires were so lengthy and frequent that street protests materialized demanding–to no avail–that the government retake the electric utility. AES was unfazed: It informed the public that its mission was to insure integrity, justice, social responsibility, and fun for its clients and workers.
Fun? That’s new. AES has not really provided much fun for anybody, unless they mean playing Crazy Eights by the light of the moon, since the TV is off and the reading lamps are out. Or how about trudging up ten flights to your apartment because the elevator is chronically without power…
IBM mined the motherlode of telephone services through its IBM Global Services Corporation (IGS). IGS provides “wide ranging outsourcing services” to the telecommunications company, now made up of five different private companies, all wholly-owned subsidiaries of Telefónica S.A. of Spain. Telefónica moved in on the privatization of the phone system and made $212 million between October 1999 and March 2000. And despite the desperate times this past year, Telefónica still managed to pull down $74 million for the same period.
The local subsidiary of Suez Lyonnaise de Eaux (France), together with Aguas de Barcelona, Vivendi, and a local bank, created Aguas Argentinas to take over the Buenos Aires water system through a 30-year concession. This enterprise proved to be uniquely profitable–under the contract, the State retained virtually all operating risk and Aguas took possession of all water installations and the authority to raise rates at will.
Of course the usual retail artists from the USA swooped down on private sector services to flog their artery-clogging, tooth-rotting wares: McDonald’s and Coca-Cola. McDonald’s distinguished itself by hiring 113 mentally handicapped young persons at 80 of its franchises and winning honorable mention in the keen competition for the Entrepreneurial Good Citizen Award, Community Participation Division, last year. Ronald McD. proudly claimed that his handicapped employees receive “the same benefits as the rest of their compañeros,” which is zero. Virtually all compañeros are part-time employees who are entitled to low hourly wages and that’s it.
Coca-Cola, also a competitor in the Environmental Responsibility Division of the contest, was recognized for its “Learn to Care for Our Environment Program.” Coke sponsored seven 50-minute classes for seven weeks in selected public schools and taught 1,200 students that the environment was their responsibility. We hoped they took that to heart because the environment is certainly not Coke’s responsibility. In response to market demand, Coca-Cola’s bottling plants have introduced non-returnable bottles to Argentina, durably manufactured of polymers that degrade only under intense and sustained radiation. To cope with the accumulating garbage, EDASA, a Coca-Cola bottler, holds seminars about responsible management of solid waste. Good Citizen Coca-Cola also uses robots in its subsidiary’s bottling plants, although open unemployment in Argentina is hovering at 20 percent.
In an encouraging development, we’ve noticed that international business is getting better and better at weathering these economic breakdowns. Take Procter & Gamble, for instance, which is heavily invested in Argentina. Its spokesperson, Hector Bonavita, pointed out that P&G has been through this before in Mexico, Asia, Russia, and Brazil, and is prepared to roll with it. Mr. Bonavita explained that P&G responds by simply retooling its production for the internal market to produce for export. Plans were for P&G’s pet food line, Eukanuba, to sell in the Southern Cone Common Market, MERCOSUR, but since both Argentina and Brazil have collapsed, Eukanuba will be reconstituted to export to Australia and Japan. This is not a problem as there are no export or import duties to speak of. In the old days, when Argentines could afford to feed their pets, Eukanuba generated $300 million in revenues for P&G in Argentina, but no more. Mr. Bonavita did admit that P&G will have a problem with its papas fritas Pringles line, as these are not produced locally and will probably become too expensive for Argentines to import after the devaluation. Oh well, let them eat pets; they can’t afford to feed them any more anyway.
Gabriela Bocagrande is still waiting for her Good Citizen Award.