Will Argentina Roar Again?

Will
Argentina Roar Again?

The
fact that the IMF has gone out of its way to help Brazil, while
treating Argentina harshly, reflects the difference in the regional
and international importance of the two countries. Argentineans
did not like this treatment but Brazil has become the
de facto Latin America’s main power.
by:
John Fitzpatrick

Having
new neighbors can make you a bit apprehensive. What if they have unsocial
habits and make a lot of noise, have dogs that howl all night long,
or don’t paint the fences and let the neighborhood go to ruin? At the
same time, would it not be great if they were an improvement on the
previous neighbors who were always causing you problems?

This
is the position Brazil finds itself in with Argentina, which has a new
president, Nestor Kirchner. Since other neighbors like Venezuela, Colombia,
Peru and Paraguay are bothersome, to say the least, Brazil must be hoping—but
is certainly not betting on it—that the new tenant in the Casa
Rosada presidential palace in Buenos Aires will bring some calm to the
street at last.

While
Brazil was damaged by the meltdown of the Argentinean economy just over
two years ago, many Brazilians were secretly pleased to see their southern
neighbor, which they regard as arrogant and insensitive, humbled*. The
economic collapse led to the fall of the government in December of 2001,
the deaths of around 30 people in rioting, and a default on Argentina’s
debt**.

Brazil
paid a high price for the end of the decade-long system, which linked
the Argentinean peso to the U.S. dollar. There was a spillover effect,
as nervous foreign investors tarred other emerging economies with the
Argentinean brush. It led to a rise in the Brazil country risk, making
it more expensive for Brazilian companies to raise funds abroad, and
a fall in the value of the Brazilian currency, the real. It almost virtually
ended Brazilian exports to Argentina, one of its main trading partners,
and the only other heavyweight in the Mercosul free trade body.

Will
Kirchner Join Lula and Dance to IMF Tune?

Things
have changed enormously over the last year in both countries. Here in
Brazil we have a new president, Luiz Inácio Lula da Silva, from
the left-wing Workers’ Party (PT). Not only has Lula thrown out his
old left-wing ideological baggage and started dancing to the IMF tune,
but he has also raised Brazil’s regional and international profile.
This could lead to tension with Argentina.

In
his election campaign, Kirchner promised that new economic growth, job
creation and better social services would come from government spending.
He was also reported to have said he would refuse to repay foreign creditors
if this meant denying help to the poor***. This, of course, would put
him in conflict with the IMF, which has been playing hardball with Argentina
and demanding reforms, including a budget surplus of 5 percent of GDP.

Brazil
will be praying for Kirchner to forget his electoral rhetoric, cooperate
with the IMF and avoid a return to the bad old days. Lula’s government
has shown itself to be serious in tackling Brazil’s financial problems,
and is trying to reform the costly state pension scheme and inefficient
tax system. Lula wants Congress to pass these reforms this year, and
faces a tough battle. Should Argentina’s crisis deepen, this could once
again spread to Brazil and delay these crucial reforms.

However,
Argentina needs more than Brazil’s prayers and advice. It needs the
kind of financial assistance Brazil has received from the IMF and other
international bodies over the last few years. The IMF has admitted that,
perhaps, it has been a bit tougher than it needed to be with Argentina.
But, at the same time, the IMF will not bail out a new untried regime
without concrete evidence that it is not wasting its time. Kirchner
must reach a deal with the IMF by September, when Argentina is due to
repay a loan of almost US$3 billion.

Sham
Victory in Presidential Election

Kirchner
is of Swiss descent, but even this will not help him with the IMF money
men in Washington or the gnomes in Zurich. The fear is that he will
be too weak to govern. His victory in the recent election was a sham,
since he gained office when his main opponent, former president Carlos
Menem, stood down before the run-off. Since the three main candidates
were Peronists, the people were voting for individuals rather than policies.

Menem
knew he had no chance of winning and, by his irresponsible act, deprived
Kirchner of any legitimacy, since he only gained 22 percent of the votes
cast in the first round of balloting. Kirchner’s "victory"
was also partly due to the support he got from the outgoing president,
Eduardo Duhalde, a power broker in Buenos Aires province.

Duhalde,
also a Peronist, was one of a series of stand-in presidents after Fernando
de la Rua resigned in December 2001.
To give him his due, Duhalde showed more tenacity than his predecessors,
and in recent months the Argentinean economy has started showing some
small signs of an upturn. However, some observers believe that Kirchner
is now in Duhalde’s pocket.

Kirchner’s
previous experience was as governor of a small province in Patagonia
with a population of around 200,000. Whether he can turn Argentina around
is extremely doubtful. He got off to a bad start by warning the armed
forces to keep out of politics and reshuffling the high command. Since
the Argentinean army has been quiet over the last decade, this was a
pretty inept thing to do. It led to criticism from within the military.

At
the same time, Kirchner was criticized by the head of the Central Bank,
Alfonso Prat-Gay, who accused him of talking "nonsense" by
calling for a weaker peso to help exporters. "I would recommend
the recently elected president not put his credibility on the line for
something that is not predictable," the Central Bank chief said
in a public rebuke. So far the Central Bank boss has kept his job, but
who knows for how long.

Brazil
in the Spotlight

The
fact that the IMF has gone out of its way to help Brazil, while treating
Argentina harshly, reflects the difference in the regional and international
importance of the two countries. A collapse of the Brazilian economy
would have had a more contagious global effect than that which resulted
from the Argentinean debacle. Argentineans did not like this treatment
but it reflected reality.

Brazil
is currently in the spotlight and Lula’s approach is being studied,
not just in Latin America but elsewhere in the world. Lula and the PT
may have got rid of their old beliefs virtually overnight but, at least,
Lula has credibility. He resisted the military dictatorship, mobilized
the industrialized trade unions, created the PT and fought hard to get
where he is today, personally and politically. He has learned to change
unlike, say, Fidel Castro in Cuba, whose regime is out of touch with
today’s world order or, more pertinently, political leaders in Argentina
where Peronism still casts a long shadow.

The
fact that Lula has been appointed the unofficial spokesman of the developing
world at the G-8 summit is proof of this rising stature. Other Latin
American leaders have acknowledged that Brazil is the continent’s main
power, and have indicated that they will expect Lula to represent their
interests in talks with the U.S. on forming the FTAA—the proposed
Free Trade Area of the Americas. Even Argentina has grudgingly accepted
this.

However,
old habits die hard and it was interesting to note that, during a visit
to Brasília this week, the new Argentinean foreign minister did
not endorse one of Brazil’s aims—a permanent seat on the U.N. Security
Council. This is not a particularly important matter at the moment,
but it shows that differences remain between the two neighbors and rivals.

John
Fitzpatrick is a Scottish journalist who first visited Brazil in
1987 and has lived in São Paulo since 1995. He writes on
politics and finance and runs his own company, Celtic Comunicações—
www.celt.com.br,
which specializes in editorial and translation services for Brazilian
and foreign clients. You can reach him at jf@celt.com.br

This
article appeared originally in Infobrazil, at
www.infobrazil.com

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