The land of plenty runs dry: Argentina was once so prosperous that poor Europeans emigrated there. Now, children starve and thousands scavenge for food

Sitting on a bench outside her rough wooden shack, Mercedes Medina looks down at her five grandchildren playing at her feet, and sighs. "I know they're not getting enough to eat," she says, "but what can I do?" Mercedes washes and irons once or twice a week for a better-off family, for which she is paid five pesos -- less than two dollars. Mercedes, 56 years old, is her family's only breadwinner. "We didn't eat properly before," admits Mercedes. "Most days all we had was mare cozido [tea made from a local herb] and cacho bread that I bake at home. Now, there are days when we don't eat anything. I don't know how we're going to get through the next few months, because there won't be any work on the farms until after Christmas."

Mercedes lifts one of her grandchildren on to her lap. Though Mercedes herself is barefoot, the girl is warmly dressed against the winter cold. Even so, the child's swollen belly and thin legs are visible. "Never in my worst nightmare did I imagine that my grandchildren would go hungry." Mercedes's husband, 68-year-old Juan, is not at home. "Until the harvest ended, he cut sugar cane, but it's crucifying work for a man of his age. The owner pays one peso 20 cents for each surco [100-metre line] that a labourer burns and cuts. He can only manage one or two a day."

Mercedes Medina lives in Fumailla, a small rural town in the province of Tucuman, north-west Argentina. The dilapidated hospital in the town centre is closed, with a notice in large letters on the door: "We are on strike -- only the most urgent emergencies." After waving my press card at a harried-looking nurse, I finally get in to speak to Luis Alfredo Hassan, the doctor on call.

"The situation is absolutely deplorable," he tells me. "Children are dying from malnutrition and there's nothing we can do. The hospital has almost run out of essential drugs. We've got tuberculosis in the region and we haven't the resources to treat it properly. There's no point in giving prescriptions to most of my patients because they haven't got the money to buy medicine. After the last round of cuts, the public health service has gone bankrupt. Even the hospital staff are not getting paid regularly."

Dr Hassan said that, as far as he knew, the impoverished families received no assistance from either the Argentinian government or outside agencies. It seems that, because Argentina is still classified as a "middle-income economy", it does not qualify for foreign aid. Families like Mercedes's -- and there are estimated to be about 20,000 severely under nourished children in the province of Tucuman alone -- are left to cope as best they can. Doctors in the regional capital, Tucuman, say there are children dying from hunger in isolated rural areas because their parents can't find the bus fare to get them to hospital.

People have reacted more indignantly to the crisis in the federal capital, Buenos Aires, which is on the coast, a thousand miles from Tucuman. Once the heart of the country's thriving industrial sector, Buenos Aires has borne the brunt of the collapse in the formal economy. Although there seem to be few factories left in the industrial wasteland around the city, the dismissals go on: 413,000 workers lost their jobs during the first eight months of this year. Today, almost half the labour force is either unemployed or underemployed.

After thousands of angry, unemployed women had brought chaos to the city's transport system by setting up roadblocks, the government hastily organised a benefit scheme to give 128,000 unemployed heads of family 150 pesos a month.

The crisis has severely affected the capital's large and previously prosperous middle class, some of whom are now forced to do the kinds of work that they would have indignantly relected as demeaning ten years ago. These nouveaux pauvres are competing with the traditional poor over odd jobs in the informal sector.

In the evening, hundreds of ramshackle lorries, many of them without number plates, arrive in the city centre, bringing in the cartoneros (rubbish pickers), now estimated to number roughly 100,000. There are occasional clashes between the old scavengers, who systematically and neatly go through the rubbish for cardboard and bottles to sell, and disorderly newcomers, who rip open the black bags in search of scraps of food. The swollen "reserve army of labour" is encouraging self-important businessmen to insist on ludicrous qualifications from their would be employees: in some areas of Buenos Aires, street vendors of cigarettes have to speak English.

People of all classes are finding it difficult to understand what is happening to their country, as it runs counter to their mental image of Argentina, instilled in them as children, as a "land of plenty". In the late 19th and early 20th centuries, six million poor Europeans, chiefly Italians, emigrated to Argentina in search of a more prosperous life. Enterprising farmers occupied the pampas, the vast grasslands that fan out from Buenos Aires, and sent millions of tons of beef by refrigerated ship to Europe. By 1910, Argentina was the richest country in Latin America. Later in the century, some of the farming wealth was channelled into building a dynamic industrial sector. Argentina, it seemed, was on the way to becoming a successful, developed country.

So where did it all go wrong? I put this question to one of Argentina's leading economic commentators, Daniel Muchnik, as we sat drinking tea at La Biela, a Parisian-style cafe in Recoleta, the most sophisticated neighbourhood of Buenos Aires. Well-dressed people were shopping in the exclusive boutiques; evidently, the crisis hasn't affected all Argentinians. Muchnik was emphatic: "We adopted an unviable economic model, highly dependent on foreign capital, that was never going to bring us sustained development, and we adopted it in a completely servile fashion. Our crisis was caused as much by weak political leadership as by economic mismanagement. The military dictatorship in the 1970s killed 30,000 people, including the best of my generation. We have had a political vacuum, just at a time when we need leaders."

In the 1990s, at the behest of the International Monetary Fund, Argentina adopted orthodox neoliberal policies: it opened up its financial and capital markets, it privatised state companies, it dismantled trade barriers and it pegged its currency to the dollar, with one peso equivalent to one dollar. This fixed parity meant that the government couldn't print money, and the only way it could fund its spending projects was through selling state companies and borrowing heavily abroad. As a result, foreign companies took over many key sectors of the economy. Short-term capital poured in, attracted by the high interest rates offered by the government. Foreign banks and multinational companies made huge profits.

The economy achieved high rates of growth, and the government was feted abroad. However, as people like Muchnik warned at the time, the price of this success was an unsustainable foreign debt, which reached US$240bn by the end of last year. In December, the house of cards collapsed: fearful investors pulled their money out of the country, the government went bankrupt, and parity imploded. In a few days, the dollar went from being worth one peso to more than three. Desperate to stop the country's banks from becoming insolvent, the government confiscated people's savings.

"The situation is still absolutely desperate," says Muchnik. "Our foreign debt, public and private, is together worth more than twice our economic output, which is about US$97bn. The Central Bank has foreign reserves of $9bn, while we face debt obligations of $2Obn in 2003."

The government has no clear strategy for sorting out this mess. In a forlorn attempt to generate dollars, it is encouraging the farming sector, the only part of the economy in reasonable health, to increase its exports. This policy is exacerbating the rural exodus. Market towns are becoming deserted, as small farmers lose their land to huge, heavily mechanised plantations of soya, the new wonder export crop. Almost all of this soya is Monsanto's genetically modified Roundup Ready, which arrived in 1996 amidst much hype about higher yields and lower pesticide use (claims that have proved wildly inflated). Along with soya, there is extensive citrus production, particularly of lemons, of which Argentina has become the leading world exporter.