The economic and political crisis in Argentina that made headlines around the world at the end of 2001 was a long time in the making. Domingo Cavallo, Argentina's Economy Minister during three critical periods over the past two decades and who has recently been appointed Visiting Professor at NYU Stern School of Business, implemented many of the policies that have led Argentina to its current state of economic collapse.

Half a century ago, Argentina was the most socially integrated country in Latin America, with a large middle class and a strong industrial base. Its dramatic decline began with the military dictatorship that ruled Argentina from 1976 to 1983 when disappearances, torture and executions were commonplace. In 1982, the Military Junta appointed Mr. Domingo Cavallo to the presidency of Argentina's Central Bank. At that time, Cavallo made a decision that would mire the country's economy for years to come: he transferred the private sector's debt with international banks and credit organizations to the federal government, creating a foreign debt that to this day makes Argentina dependent on foreign credit.

In 1988, three months before the presidential election, Cavallo asked the international financial institutions to sever links with then president Raúl Alfonsin, the first democratically elected president after the dictatorship. Cavallo promised a new relationship with the would-be Peronist party government to be elected. The decision by the IMF and the World Bank to interrupt negotiations triggered a hyperinflation process that prompted an abrupt end to Alfonsin's democratically elected government, and the premature accession of Carlos Menem, the peronist president-elect.

Since 1991, as the Economy Minister of former President Menem, Cavallo spearheaded a privatization process dominated by corruption. The same local groups that had benefited from the federal absorption of the private debt and had exhausted the nation through privilege, corruption and tax-evasion were now, in association with international corporations and banks, acquiring the state owned companies that embodied the effort of generations of Argentineans. Cavallo's policy of pegging the peso to the dollar in a 1 to 1 relationship was instrumental in ensuring enormous profits for the newly privatized companies and the corrupted political elite.

While claiming to transform the country into a modern, democratic, free-market society, Cavallo and Menem represented a crony capitalism that was undermining Argentina's economic development. The currency board set up by Cavallo as Economy Minister made Argentina into a haven for foreign imports while destroying its industrial capacity. As a result of Mr. Cavallo's policies, Argentina is now one of the countries with the highest rates of capital flight all over the world. For each dollar of public debt underwritten by the Argentine State, there are from .85 cents to one dollar (according to different sources) from Argentine ventures and persons invested abroad, mainly in financial deposits and real estate.


Despite the mirage created by the Argentine peso's unrealistic parity to the dollar, the Argentine society spiraled downward into recession, poverty and inequality. Unemployment climbed from 6.9 to 17 percent when Cavallo was Menem's minister and is over 22 percent now. When Menem's administration ended in 1999, it left a ruined country and a trail of grave corruption that has included the prosecution of Mr. Menem and Mr. Cavallo for their alleged participation in the smuggling of arms to Croatia and Ecuador in spite of international embargoes to war zones.

In 2001, Mr. Cavallo was appointed again to the Economy Ministry by President Fernando De La Rúa. Stubbornly trying to preserve the currency board that he thought could grant him a Nobel Prize, Cavallo lost the last opportunity to avoid the economic collapse we saw in December 2001. Employing questionable procedures, Cavallo increased the public debt by at least 40 billion dollars. He also confiscated the savings that the would-be retirees had deposited in retirement funds, and exchanged them for degraded public bonds. This money did not go to finance production and create jobs but instead reinforced capital flight. The default on the Argentine debt and the devaluation of its currency were unavoidable consequences of this process. Since the last application of Cavallo's policies, 57% of the Argentine population has fallen below the poverty line.

Half of the Argentine's $140 billion foreign debt can be accounted for by Cavallo's three periods as Economy Minister. As a prominent leader through three different governments over two decades, Domingo Cavallo cannot disassociate himself from the consequences of the policies that brought Argentina to its present devastating crisis.
The loyalty of the main international banks to Cavallo is easy to understand because they made huge profits each time he was in charge. Much more difficult to understand is why prestigious academic institutions pledge allegiance to Mr. Cavallo.

To learn more click Go to the Archive and read JUL/ AUG 2002 issue.