The End of the Argentine Fiction

by Juan Kornblihtt[1], Razón y Revolución

With lower land rent and no new foreign debt, the Argentine crisis reenters the scene


The government blames the vulture funds and the big business-backed opposition for the current crisis. But far from this being a temporary situation, we are witnessing the unveiling of the limits of capitalism in the country. A stage of great social unrest looms ahead.

As El Aromo has been repeating for some time, the government’s strategy to achieve an organized transition before the general elections in October, 2015, and even hope for a victory in those elections was to start a new foreign debt cycle. Not only by the central State, but by authorizing provincial and municipal administrations, and especially the private sector, to take on more debt, taking advantage of the low interest rates available in the world market. However, the process that seemed to be under way with the agreement reached with the Paris Club, Repsol and the ICSID collapsed like a house of cards with the unfavorable judgment issued by the New York court, with no help from anyone. Beyond any circumstantial statements, the United States government did not annul the sentence, as it had done on other occasions, nor did any capitalists decide to buy Argentina’s debt from the vulture funds to solve the problem, nor did any international organization offer Argentina help to prevent the default.

One of the latter two possibilities could present itself in the medium term, but as the economy collapses, even if a deal is reached with a particular lender (China, for example), it will be hard to obtain extensive loans in the amount necessary. A process of taking on more debt requires at least the appearance of an economy that will grow and generate profits for lenders. The current scenario of recession and scarce reserves is evidence of quite the opposite. Combined with the prospect of reduced soy prices[2] due to the abundant harvest in the US, recession in Brazil and higher debt payments due in 2015 compared to previous years, the current situation exposes the Argentine economy’s vulnerability, with the reduction of two of the three sources of compensation (the debt and land rent) that have allowed it to reproduce itself throughout its history. The only option left is wage reductions.

Fictitious Expansion and Actual Decline

Capital accumulation in Argentina is sustained, as in the rest of the world, by the appropriation of the surplus value of its workers. Wage reductions seem to be a reliable source of revenue. However, the reduction in labor costs in dollars as a result of the devaluation of January, 2014 and the subsequent decline in real wages due to inflation did not lead to a sufficient increase in capitalists’ profits to restart the accumulation process. Industrial profitability stopped growing a few years ago and has recently started to drop.[3] It hasn’t dropped further due to the credit expansion that sustained consumption levels, in addition to wage reductions. This credit expansion, as shown in that article, was carried out through the banking system at the cost of increasing domestic public debt to record levels. It is an expansion of capital with no real foundation.

The other source that sustained profitability was State intervention through increased public spending, both through employment,[4] and transfers through social policies, as well as direct subsidies to companies. The rising fiscal deficit shows that this expansion is only sustained by printing pesos. Unsupported money used to back bonds for bank loans and loans for consumption, government employment, social plans and subsidies, among many other activities funded by the State. Argentine capitalism is sustained by the State transfers, either from agricultural land rent or foreign debt. When there is no material foundation, the issued bills lose their value in recurring outbreaks of inflation.

The fictitious nature of this expansion becomes clear when the real sources of wealth are no longer sufficient. In the golden age of Kirchnerism (2004-2008), the government was able to establish a strong alliance with foreign capital. The latter even backed the government in its conflict with the agricultural sector. This was natural, since the sector’s high profitability could become effective through the transfer of profits abroad. (See graph). In addition to this, the government was able to pay off debt with the country’s reserves (the debt settlement process), while in the ’70s and ’90s, this was done with new loans. All those dollars did not flow in as a result of these companies’ export capacity, since – with few exceptions – most of their business is limited to the domestic market or to the Mercosur market, at most. Those dollars came from the differential land rent obtained especially from soy exports, appropriated first through the withholding tax and increasingly through the Peso overvaluation later. The latter mechanism, achieved by keeping exchange rate variations behind the inflation rate, allowed the industrial sector to import inputs at low prices, while buying dollars to transfer its profits abroad. But this was done at the expense of landowners, since agricultural exporters receive less pesos for each dollar exported and transfer it to agricultural capitalists, who, in turn, transfer it to the rent.

The amount of dollars required increased as a result of the rise in imports to sustain an industry with foreign inputs, and the energy shortage increased as well, since local oil production was insufficient. First the currency exchange controls and then the devaluation made it clear that there were no longer enough dollars to sustain the accumulation of inefficient local capital. The result was the contraction of industrial activity. The devaluation has proven ineffective in relaunching the cycle because although profits are increasing in relation to labor costs, since there is no massive inflow of dollars, there is no correlative import capacity or possibility of transferring profits abroad. Foreign companies are starting to lose interest in domestic sales and investment, in particular the automotive sector. Suspensions, layoffs and even bankruptcies are becoming inevitable.[5] Not because of a conspiracy, but because what corporations want is to make money year after year. To accuse them, as the government does, of being unfair by failing to appreciate the profits they made in previous years in order to keep investing is ridiculous: Welcome to capitalism.

A Crisis and a New Beginning?

With no new loans and with decreasing soy prices, there are no other sources of dollars. A new devaluation is becoming inevitable, as is already shown by the increase in the “blue rate” (black market rate) and the establishment of the “stock market dollar” (or “blue-chip swap”) for imports. But the devaluation is not a measure to stimulate the economy as a result of increased competitivity, as the UIA [Argentine Industrial Union] hopes. It is true that the devaluation of the official dollar would stimulate the sale of grains that are being stored up by soy producers who got their way in January and hope to achieve the same now. That inflow of dollars would provide a certain level of actual support for the government’s economic policies, but less than on other occasions due to the reduction in soy prices. But for the rest of the economy, increased import prices and fewer possibilities of transferring profits abroad would imply coming to terms with a lower level of actual wealth. Therefore, the effect would be stagnation with inflation in an attempt to reduce wages and recover some of its profits measured in dollars. As we saw in January, without new dollar flowing into the country, establishing a new official peso rate does not help at all. Furthermore, the situation is worse now due to the lower soy prices and the fact that Brazil, the Argentine industrial sector’s main business partner, is in recession. In addition, the debt payments due in 2015 are higher than in previous years and add up to about 14 billion dollars. Therefore, the lack of foreign currency will be even greater than this year.

As a result of this scenario, even if part of the default issue is resolved (either because the US court allows debt payments in currencies other than the dollar or because a sector of the bond-holders accept Paris or Buenos Aires as new payment venues), Argentina is gradually losing its appeal as a debt market, as the economic contraction becomes increasingly evident. The State could obtain a last-minute bail-out, just like De La Rúa (who was President of Argentina from December, 1999 to December, 2001) did with the so-called “Blindaje” [“Financial shield”]. However, without a guarantee of future business, there is no solid foundation for the launch of a new debt cycle.

In 1976, the debt cycle was launched on the basis of the “Rodrigazo” [a set of economic policies implemented by Minister of Economy Rodrigo] of 1975, which resulted in a reduction in labor costs in dollars and in real wages, with the guarantee of increased productivity through repression and with the promise of trade liberalization policies that would provide new business opportunities, as well as reduced public spending. All of that within a context of credit availability due to the global crisis. The following stage in this process of taking on massive debt began after two outbreaks of hyperinflation (one under President Alfonsín in 1989 and another, which is not as well remembered, under President Menem in 1990) and with the guarantee of privatizing public companies. The current situation is more complicated. There are no new privatizations or liberalization policies to be offered and, with China in the picture, in order for wage reductions to be appealing, they would have to be even greater than under the Dictatorship. The promise of Vaca Muerta [a major oil and gas field discovered in 2010] seems to be the only source. Although it is a big business opportunity, it requires large initial investments for future profits that will depend on sustained record oil prices and the development of new technologies. Furthermore, even if the prediction made by the US EIA (Energy Information Administration) with regard to the size of the field turns out to be correct, it would only be sufficient, initially, to meet domestic demand and much later for exports.

In this scenario, the only certainty is that the economic contraction and crisis will be of historical proportions. As in 1975, 1989 and 2001, the working class will be forced to fight to preserve its standard of living. In the future, the new debt cycle could mitigate the collapse to a certain extent, but unless there is a new boom in commodity prices, the cycle cannot be relaunched, since without it, there is no material foundation for taking on massive levels of new debt.

With a low level of land rent and not much new debt, the harsh reality of this fiction called Argentina will begin to be unveiled, with wage reductions and economic contraction as the only insufficient source of profits. Not only during this phase of a change in government, but for a longer term. We have before us a stage of great social unrest, in which class struggle will determine the quantitative and qualitative nature of the resolution.


[1] Originally published in El Aromo nro. 80, October-November 2014. Translation: Marisela Trevin.

[2] Soy is Argentina’s main export.

[3] Jonathan Bastida Bellot and Emiliano Mussi, “Las finanzas al rescate. En torno a la unidad entre el capital financiero y el productivo”, El Aromo No. 80, September/October, 2014.

[4] Nicolás Villanova and Sebastián Cominiello, “Santiagueñazos a la vista. Empleo estatal, precariedad y conflictividad obrera”, El Aromo No. 80, September/October, 2014.

[5]Ianina Harari, “A mita de camino. ¿Qué nos dejó el paro del 28A?”, El Aromo No. 80, September/October, 2014.

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