Foreign Relations of the United States, 1958–1960, American Republics, Volume V

155. Memorandum From Viron P. Vaky of the Office of South American Affairs to the Director of the Office of South American Affairs (Bernbaum)¹

Washington, August 22, 1958.

SUBJECT

• The Argentine Problem

This memorandum attempts (a) to draw together for perspective’s sake the significant politico-economic factors in the present Argentine situation and (b) to see what this suggests for US policy toward Argentina.

A. Political Situation.

1. Frondizi is subject to pressures from a large number of elements, many of them mutually antagonistic, and can itself lean on no widespread group or groups for support. Frondizi clearly has no strong tie with the military, and is plainly suspect as far as the supporters of the “Liberating Revolution” are concerned. He is suspect, too, by most of the opposition political parties, and the largest of these, the UCRP, is sufficiently anti-Frondizi to give evidence of an irresponsible rather than loyal opposition. The Peronists or Peronist-indoctrinated groups cannot be said to be his loyal supporters, and have their own axe to grind. Frondizi likewise finds it difficult to cater to labor in order to weld a strong supporting organization, having no economic “fat” to play with as did Perón. Frondizi’s own party has yet to prove it is a disciplined unified group, and evidences of incipient differences, particularly in doctrinal approach to the country’s problems, can be seen.

Each of these elements exerts pressures on the administration in terms of its own interests and concept of what should happen, and many of them, especially the “Liberating Revolution” elements have assumed the position of guardians of Argentine democracy. Moreover, these elements are to a considerable degree antagonistic toward each other, and watch each other closely as well as Frondizi.

2. In these circumstances, Frondizi’s political tactic seems to be to win widespread individual support from persons in all walks of life and to inculcate loyalty to institutions. Finding it hazardous to lean exclusively on organized elements in the population, Frondizi is apparently dedicated to the development and expansion of democracy, out of political necessity if not ideological belief. By appealing to all as individuals he seems to aim at lessening the clash of group interests, and by supporting institutional stability and loyalty to that concept he hopes to offer an alternative and counterweight to coups and the resort to force which have cycled through Argentine history.

3. Frondizi, in following this tactic, takes a calculated risk and plays for time. The administration is plainly trying to keep everyone quiet and to keep anyone from “rocking the boat” until it can mount an effective economic program that will diminish some of the causes for political and social discontent, and until more time has elapsed in which the concept of institutional stability can take root.

As a consequence, administration leaders stress the virtues of democracy, and Frondizi himself makes a big thing of meeting with and talking to all political leaders and the press to demonstrate that all shades of opinion have access to the Executive. A practical example of this policy was the nomination of a long list of persons to be ambassadors in the Foreign Service representing a wide range of parties and groups.

As a result of this effort to reduce the factionalism in Argentine life and balance each group’s interest, Frondizi gives the appearance of taking no firm stands and straddling the fence. There is likewise evidence of lack of internal coordination in his administration, as was demonstrated by the judiciary crisis, and, one may assume, there are clashes within his own administration as to pressures upon him to follow a given course in any given instance. Frondizi has, with all this, however, maneuvered well.

The tactic he follows constitutes a calculated risk because there is no assurance that he can be successful in finding an effective program in time since he cannot control all the elements in the situation, and because there are political risks in the very tactic itself of buying time and peace by being indulgent toward the different groups.

A word is in order here with regard to the Peronist problem. Frondizi seems to operate on the hypothesis that Argentina will achieve stability only if the rifts that divide the body politic are healed, and if the sizeable body of Peronists are reincorporated into the national life (“reencuentro”). He also acts on the premises that Peronism without Perón is no effective organized force, that it has seeds of discord he can exploit, and that he can assimilate the Peronists and disintegrate the movement. He cannot do this, however, if he persecutes them, and he cannot afford the outright opposition such persecution would provoke. There may be presumed to be other motives to his attitude toward Peronist elements, such as the desire to use the Peronists as a counterweight against the military and civilian elements of the Revolution, and to develop some sort of a cushion against the day when labor troubles become intense.

Given these motivations and starting from a situation in which the Peronists were “outside the pale”, Frondizi’s actions inevitably involve concessions toward Peronist elements. As Embassy Buenos Aires puts it, the Administration seems prepared to accept some Peronists for the sake of breaking Peronism. There is no political reason why Frondizi would wish to see Peronism as such reconstituted or installed in power since that can only mean his own political eclipse or demise. In being indulgent toward Peronists, however, he is taking risks—underestimating the effectiveness of the movement as an organized group, overestimating his own ability to channel Peronist energies the way he wants them to go, and antagonizing opposed elements to the point of action.

4. The stability of the Frondizi Government is directly related to the economic situation. The economic problems the country now faces are so serious and conditions so deteriorated that they give rise to social discontent with potentially serious political consequences. In an environment of economic and social unrest, such as that caused by serious inflation, it is difficult to keep the political balance that Frondizi is trying to maintain. Moreover, the problems are so pressing that he has limited time in which to show results before unrest could come to a head. Unless he can rapidly alleviate the economic distress he may be unable to finish out his term.

5. Argentina’s basic problem is political in nature and only secondarily economic. This does not deny that the immediate test of the Frondizi Government’s stability and viability will be in the economic field. There is no mystery, however, to the country’s economic problems. The economic solutions are clear enough, and, one is tempted to believe, recognized by the authorities. The problem is how politically feasible in Argentine eyes the indicated measures are, and how much can be done how rapidly in the given political context. In these circumstances, almost every economic decision and problem become political ones, and the Argentine situation has to be considered in these terms rather than in solely economic ones.

It is not, moreover, solely a question of political courage by Frondizi. Basically the question is how well the Argentine body politic as a whole can meet its problems through established constitutional and institutional means. This, of course, puts a premium on mature political responsibility. Directly related to this problem is how sorely Frondizi will tax the passions and emotions of the divergent elements in the population by his policies, particularly the indulgence toward Peronism.

B. Economic Situation

The consequences of Perón’s economic policies reduce, in real terms, to two elements: (1) decapitalization of the economy, and (2) distortion of its productive pattern, both resulting from a combination of inflation, artificial controls, and large-scale Government intervention in the economy. In the present picture, this situation manifests itself in at least three broad, major problems facing the Frondizi administration: (1) balance of payments disequilibria; (2) inflation, low productivity and real income; and (3) need for capital to finance necessary development.

Balance of Payments. Argentina is going through one of the worst payments crises in several years. Its reserves of gold, convertible and multilateral currencies is currently estimated at about $150 million. It has virtually no dollar balances. Argentine authorities have estimated the balance of payments’ deficit this year at about $300 million, which in the best of circumstances might be brought down to the neighborhood of $200 million. On May 1 when the Frondizi administration took over it faced a hangover of $350 million of outstanding import licenses. Present reserves, moreover, represent less than two months’ normal imports. An additional amount of some $120 million in financial commitments were outstanding for the year. Long-term external indebtedness totals almost one billion dollars.

Inflation and Public Finance. The cost-of-living index is now 30 percent higher than a year ago, and the rate of increase is on the order of 4 percent per month at the present time. A budget deficit of at least 29 billion pesos is indicated for this year, of which 10.5 billion is accounted for by official entities, including railroads, the Buenos Aires transport system and YPE It seems abundantly clear that government operations are now substantially inflationary.

Another inflationary element is the recent wage increase, the effect of which in terms of real wages has already been largely negated by the rising cost of living. Argentine authorities calculate an over-all monetary expansion of 22 percent for this year, one-half of which has already occurred.

Aside from the labor unrest which inflation provokes, the rapid rate of inflation has a corrosive effect on domestic capital formation and industrial productivity and expansion.

Capital for Development. The country’s basic services, power and transportation, are in a deteriorated condition, and the industrial plant is in need of modernization and expansion. The need for development capital in all fields is as immense as it is essential. Up until now the Government has insisted on undertaking itself much of the basic development, particularly in the field of public services and to contract large loans as a means of obtaining the capital. To what degree it will continue to do so will be pertinent to the rate of development, since such a policy places a greater strain on the already strained balance of payments.

Government Policy. In order to deal with its payments difficulties the Argentine authorities plan to widen the area of import prohibition, reduce drastically the issuance of new import permits, and accelerate the conclusion of oil development contracts to spur the development of proven fields in the hope of closing the oil import gap rapidly. In addition, the Government has established a series of new mixed rates designed to increase the peso return to exporters and to raise the cost to importers of significant trade items. The Argentines seem to place only limited hope in promoting any sizeable increase in exports as a means of cutting down the payments deficit. Efforts to increase exports have not been notably successful to date, and except for corn no significant increase in export availabilities have [has been] realized this year.

The basic philosophy seems to be one of accelerating the process of industrialization with oil, power, steel, and a large list of import-substituting industries as prime targets. A push toward industrialization, incidentally, would be consistent with Frondizi’s long-held beliefs.

A dramatic step was taken with the recent announcement of agreements made with private companies for oil development, representing the first break in the hitherto nationalistic oil policy, as well as a conscientious, if limited, effort to avail itself of private capital resources. The Government has also set up, in the office of the Presidency, a staff to act as a clearing house, information center and coordinator in foreign investment matters in general. There are at least some indications that Argentine officials appreciate the importance of the development of private enterprise generally and foreign private investment in particular. This is true in the general industrial field, if less true in the field of public services.

The Frondizi administration is also working hard toward a solution of the ANSEC problem and reportedly of the CADE question, both of which would be a preface to private investment in power facilities.

On the debit side, the Government has not faced up to the fiscal problems posed by inflation and what appears to be a permanent disequilibrium in the balance of payments. Internally, the budget is essentially inflationary, as noted above, and there seems to be no coordinated policy to eliminate the internal deficit. There is likewise no evidence of a consistent or generally restrictive monetary policy, and, in fact, the elimination of the 30 percent supplementary reserve requirement established last December increases the liquidity position of private banks which are now able to expand their credit operations. The establishment of the new mixed exchange rates is clearly an expedient and not the answer to balance of payments difficulties. It is understood that the IMF report was highly critical of Argentina’s fiscal policies.

In general, policy aspects, too, Argentina has not done all that it should to rehabilitate the economy. A case in point is the meatpackers’ situation. While one of the principal industries for generating foreign exchange it operates under conditions that inhibit and limit its operations.

One factor, however, seems to be worth bearing in mind. At least the top leadership is in a mood to do what has to be done to get economic growth started. To the extent that the administration’s political stability depends upon economic health, it may be assumed that it will do what it has to do to stay in power.

C. Meaning for US

The situation described above has significance for our relations with Argentina:

1. Frondizi will almost surely seek external public assistance to help solve the economic problems. Given the immediacy of the economic crisis and the extent of capital needs, Argentina cannot itself generate all the capital and technical resources required for economic rehabilitation. There will, moreover, be some political limitations to utilization of private foreign capital, such as in public services, and for government projects, such as the steel mill, already undertaken by official entities. In some fields, such as transportation and coal development, private capital is apparently not available at all. Consequently, while it is undoubtedly true that Argentina can do a good deal more for itself in utilizing both domestic and foreign private capital for development, it will surely find it necessary to seek public assistance as well, especially in the light of the political necessity to make economic progress quickly. It is difficult to see, for example, how Argentina can avoid seeking balance of payments aid before the year is out, given the serious payments crisis it faces. Likewise, there will be a compulsion to seek capital for key development projects, such as power, coal, and transportation. The applications of private companies for loans for various projects will also be supported by Argentina.

2. Frondizi apparently will look to the US as the main practical source of public assistance, but may also consider seeking aid from other sources, including the USSR. There is every indication that Frondizi would like to establish a close relationship with the US, and that he would like to receive sizeable aid from this country. The administration appears to be more inclined to turn to us than to European sources, perhaps influenced by the old charges of British “imperialism” in the country. Admittedly, Frondizi’s approach to the US is probably pragmatic, i.e., because he reasons the US is the best source of aid to him in his difficulties he is prepared to be friendly with us. Whatever the motivation, the practical result of the matter is that a cooperative relationship is thereby made possible, and would undoubtedly be of benefit to both. It is equally clear that in the last analysis Argentina is disposed to accept aid anywhere it can get it. In this connection, the interest of and intent of the Soviet Union to increase its economic activity in the hemisphere is pertinent. The Frondizi Government shows no inclination to spurn this possible source of aid, and the continuance of trade with the Soviet Bloc, the investigation of Soviet offers of oil equipment and purchases in the Bloc of key import commodities such as oil and coal are cases in point.

It is entirely possible that Frondizi will adopt the tactic of seeking to get all he can from both the US and the Soviets, and use the dealings with each to extract the maximum in assistance from the other. That Soviet offers might be used solely for tactical reasons, however, should not delude us. The economic pressures are severe enough that Argentina would be sorely tempted to increase its economic ties with the Bloc if it cannot satisfy its requirements—either to import capital goods or sell its export products—in Western countries.

3. How the US reacts to Frondizi’s economic aspirations will have a great deal of influence on his assessment of the value of cooperation with this country. In turning to us for aid Frondizi will be taking a political gamble that he can pull the country out of its economic doldrums quickly, and the success of that gamble (which includes taking politically risky measures such as the oil policy) will depend in his eyes on simultaneous extension of aid from external sources, principally the US. Since in his mind the issue at stake is his political survival and the opportunity to realize the objective of constitutional government, he will be very sensitive to our reaction. The administration’s willingness and desire to work with us in other fields will be affected correspondingly. The point to be made here is that Argentina’s need for aid gives us the opportunity to establish the basis for a good workable relationship with this important country. The urgency of the situation from the Argentine viewpoint, moreover, makes our posture during the next several months highly important in this regard.

D. Course of Action

I believe that it is important for the US to respond quickly and warmly to Argentine overtures for cooperation and friendship, and to assist that country economically, insofar, as we practically can. Implicit in this statement, of course, is the premise that it is in our interest to support Frondizi’s efforts to stabilize the country.

1. Having made overtures toward the US, we can, by responding promptly and effectively, establish an experience or tradition of cooperation difficult to reverse and demonstrate the value of cooperation with us.

2. Given Frondizi’s mood of doing what has to be done despite the risks, we can probably achieve a great deal by way of persuading Argentina to adopt constructive policies with comparatively little aid. The present leadership is disposed to do things, and has a good many of the abilities to succeed. Consequently, prospects for adoption of the type of policies we would like Argentina to adopt seem much better now than with the Aramburu government which proved politically impotent in making the basic decisions required.

3. If Frondizi’s political survival is at stake, our failure to assist him may force him to turn to the Soviets or to the left in internal politics in an effort to retain political power.

4. If Frondizi fails in his efforts to carry out his program policies which he has adopted and which we believe constructive (such as private capital in oil development) will be discredited. It will be remembered that the principle of private oil exploitation, toward which Perón moved at the end of his career, was discredited when it became involved in his downfall, and so was set back by some three years.

5. It is in the interest of the US and the hemisphere that Frondizi complete his term of office and succeed in stabilizing the country. This is not because he is a great friend of the US or an indispensable political figure, but simply because stability and development in Argentina depend upon letting the concept of constitutional, institutional government become firmly rooted. If Frondizi’s legally elected government is unable to complete its term, the cause of constitutional government in Argentina will have been severely weakened. The great likelihood would then be extremist and authoritarian solutions to the problems with all that that entails for hemisphere politics.

E. Recommendations

If generally agreed that the US should aid Argentina, there is no ready answer as to what this means in practical measures. How much and what kind of economic assistance we should give, for example, will have to be determined by further study. This paper, however, makes two recommendations:

1. In our general handling of Argentine relations in all aspects (not solely economics) we should make special efforts to accommodate Argentina and to demonstrate warmth and sincerity. It is probably true to say that the state of our relations is more important to Argentina than to us. It will do us no harm to recognize the Argentines’ peculiarly egocentric view and the “life and death” feeling of urgency with which she sometimes approaches these matters. Catering to these sensibilities, where we reasonably can, would cost us little and gain us much.

2. Insofar as economic aid goes we should undertake quickly an overall study of possible aid to Argentina to better estimate what we might be able to do and under what circumstances. We know that Argentina will seek aid from us and we know what the problems are. In these circumstances, rather than wait and react to their approaches, we should prepare ourselves by analyzing and studying the problem now. Moreover, this should be a coordinated study from the standpoint of all the tools available to us for economic assistance, such as technical cooperation, DLF, Eximbank, etc.

What is envisioned, in other words, is that something of a task force from various agencies would study the Argentine situation as a whole, determine what the US might be in a position to do, what combination of things, if any, we might do for maximum effect, and under what conditions we would do what. Thus prepared we could more effectively negotiate with the Argentines.

It is logical to assume, for example, that there are technical cooperation activities which could contribute greatly to economic development particularly if meshed in with loans or other types of assistance. Up until now we have merely waited for isolated requests and then considered them. It might, however, be profitable to study the situation and suggest, even promote, activities, if indicated, which would accelerate overall development. Such an overall study might similarly examine such things as trade policy for the same reasons. This type of approach might make it unnecessary to consider “massive” loans by making modest aid more effective.

There are examples of something like a coordinated approach in our handling of economic crises in countries like India, France, and Turkey where several types of aid are extended in one package. The crisis in Argentina, in terms of our overall interest, may well counsel a similar approach now.

I have no illusion as to the practical difficulties in organizing such a study, but it would seem worth the effort, all the more so if the Frondizi visit to this country eventuates. It might perhaps not be too naive to suggest that such an approach could be a good experiment in the handling of similar economic problems which we face throughout the hemisphere.²

1. Source: Department of State, Central Files, 735.00/8–2258. Confidential.

2. A notation on the source text, apparently by Bernbaum, reads as follows: “Excellent views with good ideas. Idea of a task force a good one—we’ve had one before—this one could build on what’s already been done.”

   Another notation, initialed by Bernbaum, appearing on the first page of the source text, reads as follows: “REA—Mr. Turkel. See pp. 8–10. How about going along on a task force with Alex Rosenson to represent us.”