Query on Trotsky

Jay Moore pieinsky at SPAMigc.apc.org
Thu Aug 5 05:48:37 MDT 1999

NY Times, August 5, 1999

Recession and Rivalries With Brazil Stall Argentina's Economy


CORDOBA, Argentina -- When Fiat SPA inaugurated its giant Cordoba auto
plant less than three years ago, Argentine cabinet ministers clinked
champagne glasses with senior Fiat executives from Turin. They gave union
leaders hearty bearhugs and toasted the computerized, robotized assembly
lines never seen here before.

And all agreed that with the middle class growing and trade with giant
Brazil beginning to boom, Fiat could certainly expect to derive handsome
profits from its new $600 million investment in the factory.

Today, however, Fiat's Cordoba plant, like much of Argentina's auto
industry, is operating at less than a quarter of its capacity.

"We saw a future of great possibilities," recalled Vincenzo Barello,
president of Fiat-Argentina SA. "Our humor has changed. We've gone from two
shifts to one, and there is reason for concern."

Part of Fiat's problem is the recession that has been shaking Argentina
since last September, an outgrowth of low world commodity prices and the
continuing disenchantment among investors with emerging markets that first
erupted two years ago in Asia.

But of more lasting importance, auto executives fear, is the fallout from
Brazil's decision in January to devalue its currency, the real, by nearly
40 percent. As a result, Argentina has lost competitiveness in world trade
and has only a limited capacity to export its way out of its slump.

Argentina is committed to a completely different currency policy than
Brazil, one set in stone in 1991. It pegs the value of the peso one-to-one
to the American dollar, which has been relatively strong in recent years.
The practice has reduced the country's traditional hyperinflation to an
inflation rate of virtually zero, helped lure more than $100 billion in
foreign investment, and stemmed capital flight and bank failures during two
recent recessions. But over the last eight months, the sudden disparity of
the two currencies, by making it much more expensive for Brazilians to buy
from Argentina, has sharply reduced the country's exports to Brazil by 30

The drop in sales to Brazil -- which buys nearly one third of Argentina's
exports -- has deepened the recession here. Industrial production has
fallen 13 percent, unemployment has climbed from 12.5 percent in December
to 15 percent this month and the economy is expected to decline by 3
percent by year's end. The auto sector, which is most dependent on foreign
sales, has been the worst hit.

Motor vehicle production in Argentina over the first six months of this
year was down to 120,000 vehicles, a 48 percent decline from the same
period in 1998. Argentina exported 43,000 vehicles over the first five
months of the year, down 56 percent from the January-May period last year.

"We are in a crisis," said Alberto Garcia Carmona, the director of
institutional relations at General Motors-Argentina. "We lost our No. 1
client -- Brazil -- in January."

For now, President Carlos Saul Menem appears to have his hands tied in
adopting economic policies that would help regain market share in Brazil,
diversify trade beyond Argentina's immediate neighbors, or increase
domestic purchasing power. The so-called convertibility law that pegs the
peso to the dollar prohibits the Central Bank from printing pesos not
backed by dollars held in the Argentine Treasury, in a system known as a
currency board. As a result, Argentina has sacrificed a traditional
economic management tool of printing money to stimulate demand.

And with tax receipts dwindling and the fiscal deficit climbing to $5.1
billion -- double targets set in conjunction with the International
Monetary Fund in January -- government economists say any more deficit
spending is out of the question.

Earlier in the year, Menem talked about abandoning the peso altogether and
using the dollar itself as Argentina's official currency. Meanwhile, many
Argentine economists predicted that Brazil would eventually be forced to
follow Argentina by pegging the value of its currency to the dollar and
that a regional dollar-based currency would emerge. But Menem's
dollarization plans have stalled, the Brazilian economy has stabilized, and
Brasilia has shown no interest in establishing a regional currency to boost

Some foreign economists are now suggesting that Argentina should follow
Brazil's example and devalue. But Menem and the two leading presidential
candidates who hope to succeed him in December promise they will not touch
the peg.

Unlike Brazil, noted Martin Redrado, a former aide to Menem who now heads
an economic research organization, most Argentine businesses have the
lion's share of their debts in dollars. A devaluation, therefore, would
make it exceedingly difficult for businesses here to pay their debts. At
the same time, most large contracts are stated in dollars and Argentines
have about half of their bank deposits in dollars -- causing consumers here
to think in terms of dollars.

"Therefore any positive impact of a devaluation," Redrado said, "would be
erased overnight by the rise in prices."

Auto and other business executives are unified in support of the currency
peg. They say they hope the dollar will continue its recent slide, thereby
making the peso more competitive again. But they concede that the slumping
auto sector underscores other interconnected problems that have no easy

High tariffs to protect the anemic steel industry, for example, punish all
heavy industries. Meddlesome government regulations, high corporate taxes
and inflexible work rules all increase costs over traditional competitors.
That is one reason Argentine exports represented only about 9 percent of
the economy even before the Brazilian devaluation, roughly the same as
Brazil but far below the better than 30 percent that exports represent in
the Mexican and Chilean economies.

Argentina's cost problems are not new, of course. But they were supposed to
be eased by the emergence of the Mercosur trading union in the early 1990s
to unite the markets of Argentina, Brazil, Paraguay and Uruguay and their
220 million consumers. Under Mercosur's automotive agreement, Brazil and
Argentina receive tariff benefits for auto companies with plants on both
sides of the border. Motor vehicle production mushroomed in Argentina from
138,958 in 1991 to 455,000 in 1998.

Unfortunately for Argentina, the 1995 auto agreement is due to expire at
the end of this year, with fully free trade in vehicles scheduled to be
phased in by 2004. Negotiations on a new auto pact were supposed to be
completed by the end of last year, but Brazil's devaluation has only
widened the differences between Argentina and Brazil.

The last negotiating deadline passed July 31 without an agreement, as
Brazil refused to consider Argentine demands for a continued guaranteed
market share for Argentine autos and auto parts in Brazil as well as the
rollback of local subsidies for auto makers who build plants in Brazil.

"We need an agreement," said Rodolfo Ceretti, director of institutional
relations in Argentina for the Ford MotorCo. "All the improvements we made
in increasing efficiencies and lowering costs were lost in Brazil's

Lately, Fiat and the other foreign auto companies here have been forced to
sell some of their export models in Brazil at or below production costs
just to keep their plants running. Meanwhile, Argentine auto dealers have
been forced to cut retail prices sharply by as much as 30 percent on some
models. Ford recently decided to drastically downsize a planned
modernization of its plant outside Buenos Aires to produce a medium-sized
car named Focus from its original $320 million upgrade to a more modest $70
million program.

"It's a long-term problem, with the industry facing the prospect of
restructuring over the next three to five years," said Luis Fernando Katz,
the head of economic studies at the Association of Automotive
Manufacturers, the local auto trade group. "There is the prospect for
transferring assembly lines to Brazil and diminishing production in

Top auto executives say they were not likely to abandon any time soon the
$5 billion investment they made in new plants, modernizations and worker
training over the last seven years. Nevertheless, the introduction of new
models has been delayed, and Fiat and Volkswagen AG have already
transferred production of some models to Brazil, where costs are lower. And
some analysts believe the relatively small operations that
DaimlerChryslerAG and the Toyota Motor Corp. have in Argentina could be in
jeopardy if the recession here is prolonged.

Production, sales and earnings for all seven foreign auto companies in
Argentina have been disappointing this year. Revenues generated by Ford
declined more than 40 percent in the January-June period -- to $530 million
from nearly $1 billion during the first six months of 1998. And the Fiat
plant that is capable of turning out 550 cars a day has slowed its daily
production to a mere 130 cars this month despite a new government program
subsidizing trade-ins of old cars for credit to buy new models.

The auto companies have laid off some workers, but they are mostly
suspending shifts for weeks at a time, paying workers 50 percent to 75
percent of their salaries. Workers say they are able to make up their lost
factory income by finding part-time work during the shift suspensions.

But the situation could easily change for the worse, labor leaders say,
especially if the companies get serious about shifting more and more
production to Brazil.

"I don't know if the men are taking pills to sleep," said Jose Campellone,
the 60-year-old leader of the autoworkers union in Cordoba, "but the
workers are definitely anguished about the future."

Copyright 1999 The New York Times Company

Louis Proyect


More information about the Marxism mailing list