ARGENTINES like to point out that President Frondizi’s regime is the first constitutional government the country has enjoyed since 1930. Be that as it may, a year after the inauguration of this widely hailed constitutional government— which was the occasion of Vice President Nixon’s ill-fated journey south — the country is under a state of siege, the important transport and petroleum industries have been mobilized and are under army control, the Congress is reduced to a rubber stamp, and most campaign promises in the economic field have been broken.

What has happened is one of the most startling about-faces in recent political history. That the move, in the view of economists, is an excellent one, courageous and long overdue, only adds to the irony of the situation. Economic liberalism is being imposed by force.

Force is necessary because there is practically no political body in the country which believes in the policy now being applied. State control of business enterprises is rooted in Spanish colonial tradition; it is found throughout most of Latin America, but most particularly in Argentina, where the long decade of Peron’s dictatorship did much to accentuate it. Although political freedoms were restored by the revolution of 1955, the habits of a controlled economy were so strong that practically no one considered the restoration of economic freedom as a necessary corollary.

Dr. Frondizi’s sudden decision last December 28 to become the champion of free enterprise, individual initiative, and foreign investment came therefore as a tremendous shock to the country, the more so since during the electoral campaign and his first six months in office he had done the usual political things, although astutely.

The ill-assorted coalition which elected him was in itself proof of his political agility. It included the Communists, the right-wing Catholics, the adherents of the ousted dictator Perón, and Frondizi’s own left wing of the Radical Party, which has a strong anticlerical tinge.

The new president’s concern on taking office last May was to weld into a satisfied and loyal whole this disgruntled group of supporters. There was something in the grab bag for everyone: for labor, still largely devoted to Perón, a 60 per cent wage increase, disastrously inflationary in its consequences but momentarily satisfying; for the Perónislas, a general amnesty and a law designed to return to their control a monolithic union organization; for the Catholics, permission to set up a private university, a most explosive measure coming from a Radical president but one which served to detract attention from graver matters; for the Communists, the right to publish a daily newspaper and a certain permissiveness for their activities in general, which further confused the labor situation; and for the Radical Party, the spoils of office, which are reputed to be considerable.

All of this — and particularly the pro-Perónista policy — was unpalatable to the armed forces, who had risen in 1955 to rid the country of the dictator. Frondizi was, however, successful in shunting aside the more outstandingly anti-Perón figures. On the whole, in spite of occasional rumblings they remained in the background, graciously accepting a large raise in salary, and followed the precepts of the revolutionary leader, General Aramburu, who stanchly maintained that Frondizi, whatever his faults, was the legally elected president and that democracy must be given time to work.

The exchange crisis

These political maneuverings — more concerned with the regime’s stability than with a coherent program — came brusquely to an end with the breaking out of the exchange crisis. The desperate financial situation was no news to economists, but inflationary wage increases and government subsidies had concealed it from the public. In the unsettled atmosphere of the past few years — dictatorship, revolution, and then Dr. Frondizi’s uneasy coalition it had constantly seemed more important to keep the people happy by distributing bonanzas than to make the economy balance.

By October of 1958, however, the peso on the free market had fallen from 37 to 77 to the dollar. The balance of payments has been running constantly in the red ($335 million in 1957, $196 million in 1958, despite drastic curtailment of imports). By the end of the year, reserves of gold and currency — including $40 million worth of Spanish pesetas — were down to some $185 million. By the end of November, the nation had contracted debts totaling well over $3 billion. The internal budget shows a deficit of approximately 50 per cent, in spite of a tax structure — one of the heaviest in the world which absorbs nearly 30 per cent of the national income. Furthermore, this inflated budget provides for almost no productive investment: 80 per cent of it is spent on wages and salaries; nearly 30 per cent of the employed population works for the government. Most serious of all. although less spectacular, the gross national product has remained absolutely stationary over the past four years.

An economy at a standstill

Even these appalling figures do not tell the whole story. The entire productive structure of the country is out of date and out of balance. The transport system is completely inadequate. The railways, once the proudest in Latin America, run more slowly every year with wornout equipment over a poorly maintained roadbed. They carry 20 per cent less traffic and employ 45 per cent more personnel than in 1945, when they were run by the British and French. The road system is actually poorer than it was before the war. And Argentina is surely the only country in the world with fewer cars per capita today than in 1928.

The other public utilities are in the same plight. There is a huge power shortage, result and cause of a stagnant economy. People wait years for a telephone; existing phones work erratically because of antiquated equipment. In the summer whole regions of Buenos Aires lack water because, although the wide Plata River flows by the door, the filtering plant has not been expanded to take care of a growing population.

Agriculture, the only source of Argentina’s exports, is also stagnant. Improved seeds, fertilizers, insecticides, mechanized equipment require capital, but the Argentine landowner has been progressively decapitalized by a series of exchange manipulations and export controls which all add up to one thing: he gets less than the world price for his product. The difference has gone into the coffers of the state and theoretically has served to finance Argentina’s naissant industry. This is the very reverse of American farm subsidies and has had, naturally, the opposite effect: smaller acreage sown, smaller herds, smaller yields. However, Argentina, unlike the United States, desperately needs bumper crops. They are its only source of foreign exchange.

Industry, to which agriculture has been sacrificed, is secondary, light industry. It suffers from the power shortage and from its complete dependence on imports, not only for machinery and equipment but for raw materials and finished parts. Argentina imports all its iron and steel, coal, rubber, aluminum, and most of its oil, wood, cellulose, and industrial chemicals.

Furthermore, the policy of keeping the people happy has resulted in all kinds of featherbedding and in low productivity. As a result, Argentine industry is basically inefficient. An Argentine tractor or jeep costs far more than the world price and is inferior in quality.

The president ends controls

It was in the face of these inexorable facts, which no amount of political oratory or political remedies in the old tradition could dissipate, that Frondizi made his astounding reversal of policy. He decided to throw overboard the whole system of controls, subsidies, quotas, and permits, to which, in theory, he had hitherto been wed.

That the only way to avoid a further drop in the quotation of the peso and a general cessation of payments was to seek loans in the United States may have had something to do with this decision. The U.S. is thought to be more generous to those who profess the virtues of free enterprise, although an examination of the record — for example our aid to Spain and Yugoslavia — does not uphold the belief. In any case, the loans were granted, and simultaneously Dr. Frondizi began to talk to his people in a language they had not heard for a generation: balance the budget, higher wages only in return for more work, a just price for everything.

This new language has been accompanied by a stiff dose of hard economic reality. The freeing of the exchange system, plus the plummeting of the peso and the removal of subsidies in their various forms, has resulted in an immediate and sharp rise in the cost of living. The price of gasoline has tripled, electricity more than doubled, and — what has troubled the Argentines most of all — the price of beef has nearly doubled, too.

Since these more realistic prices are, in theory at least, not to be compensated by a massive increase in wages, it is expected that the wageprice squeeze will result in a lower level of consumption, freeing valuable beef for export and diminishing the demand for manufactured goods and thereby for imports. There is, of course, the danger that this diminishing demand will produce some unemployment. If the government stands by its promise to get rid of some of its superfluous employees in an effort to balance the budget, that will produce still more. It is hoped, of course, that the new basic industries will take up the slack. And meanwhile, the resultant “soft” labor market will doubtless make it easier to hold wages steady and diminish labor agitation.

What this new policy, in its negative aspect, amounts to is a forced program of national saving, rationing by tightening the purse strings. In a country noted for neither a high rate of personal savings nor a high degree of civic discipline, it is no doubt the surest way. But there is still the question of whether it is the best one.

Argentine oil and coal

There is, however, a positive side: a vast development program. The first target is oil. Argentina has large oil reserves (it ranks seventh in the world in this respect), but after fifty years of a state monopoly most of it is still underground.

The country imports $300 million of petroleum products a year. Here too Frondizi, who in earlier years was an energetic defender of the nationalistic taboos responsible for this state of affairs, has completely reversed himself. He has called in American, British, and French oil companies to get out the oil at last. They are working under various forms of service contracts which avoid the tabooed word “concession" but which are nevertheless extremely profitable to the oil companies.

The second target is coal. There is coal in Argentina, too, although it is somewhat inaccessible, in the far south on the Strait of Magellan. Here a French consortium has been called in to develop the mine, build a railroad and a port. Argentina should be able to supply its present needs — it is hoped these needs will increase as the economy develops — in about five years.

A steel mill has been in the process of construction for years on the Paraná River, to use imported iron and imported coal. Work on this is being hastened, and the first blast furnace should be functioning by the end of this year.

The power shortage, too, has been tackled. By coming to terms with the American, Swiss, and Belgian companies whose expropriation he himself had urged, Frondizi has obtained promises of a new investment and has at the same time, by this act of simple justice, considerably improved the investment climate. Argentina has also settled the dispute over the Bemberg inheritance, which had resulted in the spoliation of thousands of small investors in France, and returned German property confiscated when Argentina declared war on March 27, 1945.

The government is almost pleading for foreign capital to come into this once xenophobic country. The merest hint of a new venture is played up in the press. A popular variety show calls itself Dollars! Dollars! Dollars!

Grumbling about austerity

Frondizi’s new policy has, of course, aroused a tremendous amount of comment, most of it unfavorable. No one enjoys being forced to tighten his belt or feeling that he has been cheated in voting for one thing and getting another.

Technical criticism of the program is more serious. Although in theory it is a restoration of the principles of free exchange and free enterprise, in fact the new measures have been so hedged round that in many cases the new free system is more complicated than the old controlled one. Furthermore, agriculture, the one sure source of revenue, still suffers from a double tax, on both its exports and its imports, so that in spite of relatively more favorable conditions, it remains at a disadvantage on the international market. This is the result, say the few liberal Argentine economists, of entrusting the new policy to functionaries who do not really believe in it and who cannot rid themselves of their old habits of control.

A still more serious criticism is that the policy, while probably too severe from a political point of view, is not severe enough to generate the capital necessary for the dynamic thrust forward which its success implies.

The likelihood of continuing crises in the balance of payments is pointed up by the fact that the interest and amortization on loans already granted — to say nothing of the hoped-for investment —represent 11 per cent of the national income over the next five years. This the country, even living austerely, can probably not afford. There is, in this respect, the unstated belief that, should the program bog down, the United States will come to the rescue. The Argentines, rightly or wrongly, are convinced that it was we who imposed it and that we will feel a responsibility for seeing it through. In any case, we are already getting the blame for the immediate painful results.

In spite of these criticisms, however, the new policy is a great and courageous step forward. It may not be the best way of tackling Argentina’s basic problems, but it is the first time in a generation that a serious and coordinated attempt has been made to do so.

The main question now is political: Will the country, accustomed to easy and carefree living and quite unprepared for the disaster which seems to have fallen out of a completely blue sky, accept this severe dose of austerity? The fact that economic realities have played so littlepart in political oratory, that the people have constantly been told that theirs is one of the richest countries on earth and are therefore more concerned with the distribution than the creation of wealth, makes it all the more difficult for them to understand what is happening. In the circumstances, it is easy for demagogues, right, left, and center, to proclaim that the whole business is an imperialist plot to ruin the country so that it can be bought more cheaply.

The two main sources of serious trouble are the still large body of Perón supporters and the armed forces. Here Frondizi’s earlier maneuverings to mollify the one and neutralize the other have served him well. He has taken the precaution, however, of having the Congress vote a state of siege for an indefinite period. This gives him extremely wide powers, the most valuable of which has been the ability to mobilize labor in order to break a strike. The army is not too happy in this unpopular role and thus acts as a sort of brake on abuses.

Frondizi is engaged, then, in a very delicate balancing act of which the stake is the economic future of the country.