Argentina's Version of Enron (Miami Herald) Via NY Transfer News * All the News That Doesn't Fit source - walterlx@earthlink.net Miami Herald - April 21, 2002 ARGENTINA'S VERSION OF ENRON Crisis in privatized pensions a warning for U.S., some say by Jane Bussey The privatized pension funds in Argentina, launched nearly a decade ago on the promise of creating a "social revolution" in the region, are now being compared to "Enron 401(k)" plans. Instead of turning blue-collar workers into blue-chip investors, holders of these diminishing pensions are now just singing the blues. By one estimate, each dollar turned over to the Retired and Pension Fund Administrators, known as AFJPs, before the recent collapse of the economy is worth only pennies today. Only one out of three workers enrolled in the private program is actually making contributions, according to a February report on the AFJP performance. The funds performed well on the average, but with default on debt, devaluation and a freezing of bank deposits, only the foreign stocks and bonds and Argentine stocks, which comprise 16 percent of the mix, have maintained anything close to their value. Far from turning Argentines into believers in capitalism, some elderly have become disciples of anti-free-market ideas, marching, manning picket lines and waving banners in protests in Buenos Aires. Retirees who have seen their private pension funds melt in the economic collapse have joined those from the old Social Security system whose benefits have been sharply reduced by the bankrupt government. With the partial privatization of the U.S. Social Security system being debated in this country, the Argentine experience has raised concerns, a number of experts say. Carmelo Mesa-Lago, a professor of international relations and Latin America at Florida International University, said that other countries should look at the lessons from the Argentine situation. "This could have happened [here after Sept. 11] if President Bush had been successful in privatizing Social Security funds," Mesa-Lago said. ``The lesson of Argentina is not only good for Latin America but it is good for the United States and other industrialized countries of the world." The problem, he said, is that there is no way to isolate pension funds from politics or economic mismanagement. "If the state doesn't manage the economy properly, as was the case for Argentina, then the temptation for the state to manipulate the pension funds is high," Mesa-Lago said. Christopher Ecclestone, a strategist for Buenos Aires Trust who has written frequently about the pension funds, calls them a "disaster" from the start. "They were used first as a way for banks to make enormous profits," Ecclestone said. Under the program devised by former Economy Minister Domingo Cavallo and launched in 1994, the new private managers of the pension funds -- banks, for the most part -- were given an upfront fee of 38 cents for every peso deposited, when the peso was pegged at one-to-one with the dollar. FEES `OUTRAGEOUS' "It was totally outrageous," Ecclestone said. ``That also detracted from the capital-accumulation power of the funds." Besides the high management fees, which were later reduced but still comprise a hefty portion of each monthly contribution, 65 percent of the money was invested in government bonds. The government defaulted in January on its $141 billion debt, and the market now values these bonds at some 30 percent of their former value. Funds held in time deposits are both devalued and caught up in the bank deposit freeze; the cash has been devalued; the funds held in the Argentine stock exchange have also lost value. Only the foreign securities component has held up. At one recent financial conference Ecclestone attended in New York, "they compared [the Argentine pension funds] to an Enron 401(k)," he said. The push to establish private, profit-making pension funds to replace government-administered Social Security started in Chile in 1981. Chile's labor minister at the time, José Piñera, pioneered the private pension funds and then became the guru for change. In a campaign spearheaded by the Cato Institute, a Washington think tank that promotes libertarian ideas, Piñera has toured the world to promote private, profit-making pension systems. Piñera speaks in expansive terms, calling his creation a "social revolution" and referring to his proselytizing effort as ``a great crusade." FREEDOM TO INVEST The idea is that people should have the freedom to invest their own money instead of giving it to the government under Social Security. In developing countries, the theory goes, workers become property owners with a stake in capitalism. In another benefit, the money poured into private pension funds increases savings in each country and creates wealth through investments in the stock market. Some economists argue that even this system turns into a pay-as-you-go one because new entrants into the stock markets must purchase the stocks held in retirement accounts in order for retirees to realize the gain. Piñera's plan was taken up by the World Bank, which strongly supported moves to privatize the government-run Social Security systems in Latin America and Eastern Europe. Eight countries in Latin America have privatized their systems, while Nicaragua passed a law two years ago to change the system, but it has not yet been implemented. Researchers at the Cato Institute insist that Argentina's failure is not a sign that privatizing Social Security is a mistake. "I don't think you can blame the pension funds for not succeeding in the terrible environment the government created," said Ian Vasquez, director of the Project on Global Economic Liberty at the Cato Institute. "We have always said the reforms are a step forward," Vasquez said. ``Everyone in Argentina has suffered whether they stayed in the old system or not, and that is because the government has so mismanaged the economy." SUCCESS IN CHILE Chile's private pension funds have offered annual returns of around 10 percent year after year. But the reality emerging from the Argentina's experience is that countries like Chile have been successful with their private pension systems because the economy has expanded for over a decade. The Cato Institute insists that pension-fund privatization ran into problems because governments have restricted where the money could be invested. In Mexico, for instance, the private fund managers are still not permitted to invest any retirement funds in the Mexican stock market because of its past collapses. This month, the Mexican Congress is expected to take up proposed legislation to allow investments in foreign stocks and in housing, energy and infrastructure projects but still not in Mexico's stock exchange. Another problem for any system that moves to change a government-run Social Security program to private retirement accounts is that the government is deprived of tax revenue. Wage earners start contributing to their private accounts instead of making payroll-tax contributions to Social Security, creating a deficit for the government, which still must make payments to workers who stayed in the old system. "The decision to privatize Social Security made Argentina's situation more precarious," says a new study by Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research in Washington. The switch to private pension funds reduced government tax revenue by about 1 percent of the gross domestic product, or some $3 billion each year, the study said. Argentina financed this shortfall by borrowing. As interest rates rose, the country had to borrow even more. The original deficit plus interest payments was almost equal to the government budget deficits that Argentina ran in recent years. "The fact that the government and international financial institutions apparently did not take these risks into account in promoting Social Security privatization was a serious and costly error," the study concluded. ================================================================= NY Transfer News Collective * A Service of Blythe Systems Since 1985 - Information for the Rest of Us 339 Lafayette St., New York, NY 10012 http://www.blythe.org e-mail: nyt@blythe.org ================================================================= nytsa-04.24.02-05:23:33-4298