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Foreign Policy
June 2003

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.

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   

© John Fitzpatrick 2003

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



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