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Blame it on Capitalism?
Subject Economic Development
Topic International Finance
Key Words Capitalism, Economic Growth, Debt, Default, Devaluation
News Story

Free market reforms and the full embrace of capitalism were promised to bring prosperity to Argentina. After a decade of free market reforms, Argentina finds itself deeply in debt, facing the prospects of devaluation and a default on its international obligations. The unemployment rate is 14.7 percent, the proportion of the population that is impoverished has risen to 29.7 percent, and workers, politicians and businessmen doubt the wisdom of the capitalist model that they had supported.

The International Monetary Fund (IMF) has approved a $13.7 billion package to rescue the Argentine economy, but many analysts believe that billions more will be needed if Argentina is to solve its problems. A default or devaluation by Argentina has the potential to plunge the country, the region and other economies into financial crises. Another significant fallout is that a failure in Argentina - a country that completely committed itself to market reforms - will be pointed to as evidence that capitalism doesn't work, especially by the left. This would undoubtedly remove the Bush Administration's proposal for the Free Trade Area of the Americas - a free trade zone stretching from the Alaska to the tip of South America, from consideration.

Argentina's problems appear to stem from ineffectual implementation of free market policies. State-run enterprises were notoriously corrupt and inefficient and were sold off through presidential decrees and backroom deals. Little was asked of buyers and bribes were given to government officials. Even after privatization these firms are not completely efficient. The government, against IMF advice, has engaged in excessive public spending, running up the country's national debt and fueling inflation.

Protests and a backlash to economic reforms are being waged in many South American countries besides Argentina. In Brazil, 40,000 anti-free market protestors marched on the capital in June. Venezuela's leader berated the free market during a national radio broadcast. Surveys in Argentina show 70 percent of the population is against further reductions in trade barriers. Argentina's standard of living has suffered and Argentina will have to undergo serious reforms in order to avoid financial crises and live up to its potential.

(Updated September 1, 2001)

Questions
1. With the liberalization of trade, Argentina was flooded by consumer goods. Domestic producers could not compete and when they folded, unemployment increased. Is this an expected effect of liberalizing trade?
2. The increased unemployment has been used to criticize capitalism without any mention of the benefits of trade. What benefits would you enumerate to counter this criticism?
3. Another charge against capitalism is that the rich in Argentina got richer and although there was an initial drop in poverty, the poverty rate has been increasing recently. What can an economist say about the distribution of income? Is this a necessary outcome of economic reform?
Source Anthony Faiola, "Argentina Doubts Market Wisdom," The Washington Post, August 6, 2001.

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