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Prior to the First World War in 1914, Argentina’s economy was considered one of the top ten in the world. Following the war, which disrupted the country’s economic advantages in trade, the country has experienced political upheaval, corruption, and pursued poor economic policies that have eroded what was once a beacon of wealth in Latin America. In 2002, the nation experienced the largest sovereign debt default in history and twelve years later some economists are fearing that it is heading down the same road. President Cristina Fernandez de Kirchner, who took power in 2007, has enacted populist economic reforms while attempting to consolidate her rule. However, these policies have eroded foreign investment, sparked high inflation, and are now beginning to create political unrest that threatens her hold on power. Extempers who read our brief earlier this season on Venezuela’s municipal elections will find some similarities between its economy and Argentina and this brief should be a useful tool for extempers that have to talk about the Argentinean economy or the rise and fall of populist and leftist policies in Latin America.
This brief will provide a brief history of Argentina’s economy, discuss its current economic problems, and then address what the government is doing and what it should do to avoid further economic calamity.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.
A Century of Decline
The Economist on February 15th provides an excellent overview of the Argentinean economy and argues that the country has experienced a “century of decline” since 1914. Prior to the First World War, Argentina experienced yearly economic growth of 6% and attracted a large number of European immigrants. Extempers who have taken AP World History may be familiar with the migrations of Italians (largely Southern Italians) to Argentina during the second half of the nineteenth century. Called “swallows” these immigrants worked the agricultural lands of the pampas, a fertile region in Southern Argentina, and the cattle industry. In fact, half of the population of the Argentinean capital of Buenos Aires by the outbreak of the First World War was foreign-born. The country was among the ten richest in the world and was better off than first-rate European powers like France, Germany, and Italy. However, as The Economist argues, Argentina’s growth was tied to the strength of its agriculture industry, its ties to Great Britain, and the openness of international markets. The First World War caused British investors to pull their money out of Argentina and direct it back home for the war effort. The Great Depression that followed ten years after the war closed international economic markets, as countries (including the United States) raised tariffs to promote domestic industries and this killed export-oriented economies like Argentina. Military dictators, who began to take power after 1930, closed off Argentina’s agricultural and business sectors to the rest of the world through autarkic policies and this gradually eroded Argentina’s economic advantages in agriculture. The country also failed to educate its non-elite sectors of the population and at the end of the nineteenth century only 75% of Buenos Aires population was literate compared with 95% or higher in other industrial cities like Chicago, Illinois. The result was that the country was ill-prepared for becoming a technological innovator and opening a new segment of its economy that was less labor intensive in the modern era.
One of Argentina’s most colorful and popular leaders of the Second World War was Juan Domingo Peron, an army colonel who was elected president in 1946. Peron campaigned as a champion of the working class and opposed British interests in the country. Historians have considered elements of his regime fascist and point out that some prominent Nazis found a refuge in Argentina after the end of the war in Europe. Peron’s popularity was tied with that of his wife Eva, fondly referred to as Evita by her admirers (Andrew Lloyd Webber has a great musical called Evita that recounts part of this period of Argentinean history and it was made into a movie in 1996 with Madonna and Antonio Banderas). Bloomberg on March 5th explains that Peron did economic damage to the country by choosing to cement his political support through patronage projects, which involved awarding lucrative government contracts to his friends, and deciding to print money to fund social programs. This produced high inflation and increased corruption within the government. The Wall Street Journal on February 21st adds that Peron closed the Argentinean economy off to trade with the rest of the world, seeking to make Argentina a self-sufficient nation, but this produced economic stagnation by the 1960s (Peron was ousted in a military coup in 1955 and returned to power briefly in 1974 before he died in 1975). In 1975, the country experienced the so-called year of “Rodrigazo” where the Economy Minister Celestino Rodrigo devalued the national currency. A devaluation means that the government makes its currency worth less, which an attempt to boost exports. For example, if the Argentinean peso used to be 10 pesos to 1 dollar and suddenly becomes worth 25 pesos to 1 dollar then Argentine exports will be cheaper on the American market. However, this has the effect of making any good that Argentina imports from the United States more expensive since it will cost more pesos to buy since the peso is worth less when compared to the dollar than it used to be. The result is that a devaluation can encourage exports and also encourage Argentines to buy domestically produced goods that are cheaper in local markets than foreign produced goods, thereby increasing the national economy and boosting jobs. Still, devaluations are harmful to those on fixed incomes and those that have saved because their money is now worth a lot less. The “Rodrigazo” produced an inflation rate of 35% a month and the military subsequently overthrew the government and then led the nation years later into a disastrous war over the Falkland Islands with Great Britain (Side note: Argentina had six military coups between 1930-1976).
Haaretz on February 20th goes on to explain that the 1980s were a dismal time for Argentina, as aside from losing the Falkland Islands War it defaulted (meaning it did not have the money to pay or refused to pay) on its debt in 1982 and 1989, which harmed its relationship with international creditors. The Economist article previously mentioned notes that in 1989-1990 the country experienced hyperinflation and the inflation rate between July 1989 and July 1990 rose over 2,000% and peaked at 20,000%. Things became so bad that shoppers rushed stores to buy items before prices astronomically rose again and looting was created in cities. The unrest forced President Raul Alfonsin to resign before the end of his term, which continued the country’s political dysfunction.
In the 1990s, Argentina attempted to liberalize aspects of its economy and adopt a more Western-friendly economic model. However, the corruption in its political system remained and government spending remained too high, which led to the government seeking loans from the International Monetary Fund (IMF). In 1998, the world economy experienced a slowdown, due to economic problems that emerged in Russia and Mexico and the bursting of the so-called “tech bubble” at the end of the decade. This gradually dried up foreign investment that the Argentinean economy needed and as Latin American countries began to experience economic problems of their own they devalued their currencies (Brazil was one of the largest to do so), which harmed Argentina’s exports to these nations. This produced a perfect storm of economic chaos as unemployment increased, GDP declined, and the country entered into what some economists refer to as the Argentine Great Depression of 1998-2002. It also did not help that Argentina in the early 1990s under Economy Minister Domingo Cavallo pegged the Argentine peso to the dollar, which was designed to increase confidence in the peso because businesses by 1990 only wanted customers to pay them with dollars, which was a more stable currency that was not going to suddenly lose value. While this stabilized the country’s inflation rate throughout the 1990s, it hurt the government’s ability to devalue the peso to boost exports relative to other Latin American nations because doing so would harm the credibility of the Argentine financial system and reduce confidence in the peso as a national currency.
As the economy declined, the government was forced to accept more financial assistance from the IMF and as a condition of that aid it had to cut government jobs and social services. This provoked national strikes against the government and the country experienced bank runs in November 2001 as people expected the peso to eventually be devalued and sought to turn their pesos into dollars before this occurred. The government reduced cash withdrawals at banks to stop the runs, which triggered street protests in which 27 people died. The protests forced President Fernando de la Rua to resign on December 21, 2001. Interim President Adolfo Rodriguez Saa then defaulted on more than $100 billion in public debt, which The UK Telegraph reported at the time was one-seventh of the money borrowed from financial institutions by non-developed nations. In January 2002, new interim president Eduardo Duhalde ended the peso-dollar peg and the peso fell in value on the international market, causing inflation to soar.
The Argentine Great Depression was tough on Argentines. The Huffington Post on January 30th explains that 20% of Argentines were out of work between 2001-2002, poor children experienced malnutrition, and the peso lost 70% of its value. It was estimated at the time that the economic crisis caused 50% to fall into poverty. The poor that could not get their money out of banks or did not have enough of it to exchange for American dollars were hurt the most as their money could buy fewer goods in markets, so the standard of living for the population went down. Argentina’s neighbors were also nearly brought down by its economic problems, much like the eurozone experienced a crisis a couple of years ago when Greece faced serious financial problems. The Associated Press on February 10th reports that Brazil’s currency, the real, fell by more than 50% in 2002 due to Argentina and economists at the time worried that Brazil, Ecuador, and others would face a flight of international investment as a result of the crisis.
In 2003, Nestor Kirchner, the governor of Santa Cruz, won the country’s presidential election and with Economy Minister Roberto Lavagna helped stabilize elements of the economy. The painful devaluation that was done by Duhalde helped Argentina stabilize its finances because of high commodity prices for its agricultural products like soy and they worked to restructure Argentina’s debt. MercoPress on March 14th reveals that since 2001, Argentina has refinanced 93% of its pending debt and those who possessed the country’s debt prior to the economic problems of 1998-2002 have had to take “shaves,” which means that they are having to get back less money than they put in (ex. you lent Argentina $1,000 and you now have to accept them paying you $250). In 2007, Nestor’s wife, Cristina, won the presidency and Nestor was expected to switch with her to keep their dynasty going, but he died of a heart attack in October 2010. She was re-elected in 2011, but her term of office expires in December 2015 and according to the Argentinean constitution she cannot run for a third term.
Argentina’s Current Economic Problems
So where has Argentina gone wrong a little more than ten years after its sovereign debt default? First, the country has a new inflation problem to worry about. The Cato Institute on January 31st writes that since 2002, the Kirchners populist programs of increasing the country’s social safety net for the poor and disadvantaged have caused total government spending as a percent of GDP to double to 44%. Instead of raising taxes to pay for this, though, the government has opted to simply print money which is a recipe fo disaster because the more bank notes of a currency in circulation, the higher prices tend to rise because there is too much money chasing too few goods. Forbes on January 31st writes that the Kirchners tried to control an increase in prices fueled by government spending by putting price controls on food and electricity, but this has produced shortages of both goods. Price controls, where the government sets how high of a price a good can be, are politically popular but economically misguided because businesses tend to produce less of a good or have little incentive to upgrade its quality if they cannot earn more than it is worth on the free market (price controls usually put the price of a good below what its market value truly is so the seller typically incurs a loss). Argentina in recent years has experienced an inflation rate as high as 74%, but the government insists that it is far lower. In fact, Argentina has proved Mark Twain’s quip that there are “lies, damned lies, and statistics,” by tweaking its economic data over the last six years to say what it wants it to say rather than reflect accurate facts about the economy. The Economist on February 22nd writes that between 2007-2013 the country’s national statistics agency, INDEC, cherry-picked prices to make inflation seem lower than it really was. For example, last year INDEC argued that the country’s inflation rate was below 15% while independent economists estimated that the inflation rate was over 25%. Argentina has been forced to change its inflation calculations after the IMF last year threatened Argentina with expulsion, a step that would permanently erode Argentina’s ability to get future IMF bailout funding, if it did not start accurately reporting inflation data. Argentine Economy Minister Axel Kicillof introduced a new consumer price index, called the IPCNU, which was developed with the IMF. The government has also been accused of not adjusting its poverty rate to real-time inflation as it argues that only 1.2 million Argentines are in poverty when the actual number might be over ten million.
Foreign investment has also taken a hit in Argentina because of the Kirchners unwillingness to respect property rights. The Forbes article previously cited recounts how in 2008 the Kirchners nationalized private pension funds worth $30 billion. Ambassador Jaime Daremblum, director of the Center for Latin American Studies at the Hudson Institute, writes for RealClearWorld on February 19th that the Kirchners also nationalized Argentina’s biggest airline, Aerolineas Argentinas, and then seized the majority stake tht the Spanish oil company Repsol had in YPF, an oil company established by the Argentinean government in 1922 and privatized in 1993, in 2012. This had the effect of renationalizing YPF and was a flagrant violation of sovereign property rights within the country. Much like Venezuela, which appropriated foreign-owned assets, this was a political boon for the Kirchners since they justified the move against Repsol by claiming it was not investing an adequate amount in the nation’s energy infrastructure, but it came at a significant economic cost as foreign investment has begun to dry up. CNN notes on January11th that the government’s attacks against big business, its price control policies, and its heavy handed way of dealing with dissenters has caused foreign businesses to look elsewhere. After all, if a business does not have guarantees that its property will not be taken from it then it will not put economic assets in that country since what Argentina has done is akin to theft. The lack of foreign investment in the country has contributed to dwindling foreign currency reserves, the amount of foreign currency that Argentina’s central bank has available (this is needed to buy imports that the country needs because many of the consumer goods people want or need are not produced domestically) which RealClearWorld explains fell below $28 billion in January from $52.6 billion in 2011.
In the face of dwindling foreign currency reserves, Cristina Fernandez de Kirchner was forced in January to devalue the Argentine peso, which is something that she promised she would never do. The devaluation, according to The Economist on January 23rd, was the biggest since the 2002 debt default and the currency’s value declined by at least 12%. This successfully slowed the steep decline in foreign currency reserves leaving Argentina by once again making exports cheaper, but it has produced a bigger inflation problem and reduced confidence in the national currency. Argentineans who have a larger number of pesos are currently exchanging them for dollars, often on the black market. To find out how the Argentinean black market for currency works, click here. Basically, people are swapping their money for dollars on the black market because they fear that inflation is going to erode the peso faster than the American dollar, so the dollar is a more stable currency to have one’s savings in versus the peso. The Economist on March 7th points out that there is a 38% gap between the government’s official exchange rate with the dollar versus the black market, which means that one has to exchange 38% more pesos to acquire a dollar than going through official government channels. However, since the government limits dollar transactions to keep dollars from leaving the country (so as not to reduce its foreign currency reserves), people are willing to go to the black market and exchange more pesos to get dollars because they have so little confidence in the peso. It’s better to deal with a higher rate of exchange on the black market and give away more pesos to get a hold of a more stable currency.
The New York Times on March 13th writes that the currency devaluation has led to higher prices for Argentinean consumers and has led to sit-ins by police and strikes by teachers. Widespread looting has also hit elements of the country. The Times writes that some businesses have taken to writing prices on scraps of paper rather than using price boards because prices continue to change on a daily basis. It adds, along with The Huffington Post previously cited that people are finding their own ways of handling the economic crisis: women are taking former spouses to court for increased alimony payments, Argentines are choosing to avoid ordering things they do not need or are not going out to eat, people are choosing to buy cheap pirated DVDs instead of going to the movies, and criminal groups have even doubled their “protection fees” in parts of the country. The Economist of March 8th reveals that the country’s unions want a 40% wage hike to deal with inflation, since the earning power of their members has declined, but this presents a problem for the government because significantly raising wages may produce a higher inflation rate by putting more money into the economy at a time when the government needs to cut spending and get money out of the economy to lower prices and undermine the purpose of the devaluation. How the government handles negotiations with government unions will be something extempers need to keep an eye out for.
Finally, a big problem in the Argentinean economy is corruption and inefficiency. Argentina currently sits on the Vaca Muerta shale oil and gas field, which the Bloomberg article previously cited argues is a Belgium-sized layer of underground rock that has the potential to make Argentina the fourth-biggest nation in the world in shale-oil resources. However, the nation energy industry is rife with corruption as the Kirchners have granted oil leases to political friends that have no experience in the energy industry and are allowing the lands they control to sit idle. Instead of investing in resources to exploit the areas they possess leases to, those that own the leases have chosen to wait for funding from the now state-owned YPF or someone to pay them more for the lease. The result is that Argentina’s annual oil production has fallen by 24% over the last decade at the cost to the economy of $60 billion, which is a much needed amount of foreign capital. Additionally, The Guardian on March 6th writes that Kirchner has been tied to corruption scandals involving construction corporations, money laundering, and the acquisition of luxury houses and private jets. Her wealth has also increased 700% since her husband Nestor took office in 2003. Attacks on news agencies that report on corruption, like the Argentinean government’s dismantling of Grupo Clarin, the nation’s biggest media company with an anti-monopoly law in 2009, have only made the issue worse by insulating Kirchner from problems she needs to fix to get the Argentinean economy going again.
How to Fix the Situation
The first fix that Argentina can make is to enact anti-inflation measures to get the economy stabilized. This means that the government will need to reduce spending and raise interest rates. The central bank of Argentina, called the BRCA, has raised interest rates from 6% to 29% and between February and March, according to The Economist of March 7th, more than thirty billion Argentinean pesos (worth $3.75 billion) have been taken out of the economy. It is not out of the question that another devaluation could be coming by the end of the year, as BRCA could try to devaluate the currency by 2% a month in order to take advantage of a good harvest of agricultural goods and boost exports. The government also needs to show the international community that it will actually reveal the truth about national inflation and prove that the IPCNU index is reporting real facts and not government propaganda. Doing this increases the likelihood that international investment may return to Argentina, since one of the reasons why foreigners are staying away is their distrust of Argentinean authorities. However, anti-inflation measures may prove painful for segments of Argentinean society as Reuters reports on February 28th that one in four Argentinean families rely on state welfare programs that have been expanded under the Kirchners and that these programs cover unemployment aid and scholarships to poor high school students. Moving to reduce these benefits could imperil Kirchner’s political legacy, which she does not want to harm, but reducing the benefits will likely need to happen to get the economy stabilized. The U.S. economy experienced similar anti-inflation measures in the late 1970s and it cost President Jimmy Carter his job, but those measures put the economy back on the path to economic recovery. Policies will also require an ideological shift by Argentina’s leaders, who have tended to overspend when economic times are good, which leaves them with fewer resources to help the country when its economic fortunes decline.
The government also needs to do more to recognize it is part of the problem. MercoPress on March 11th reports that Economy Minister Axel Kicillof insists that Argentina does not have serious economic problems, despite evidence to the contrary, and has argued that reporting of the country’s inflation, lack of foreign investment, and foreign exchange problems are overblown by the opposition that just wants to weaken Kirchner’s government. The Wall Street Journal on February 21st explains that Argentinean economic growth is forecast at 1.2% this year, which is down from 4.9% last year. Declining consumer confidence due to the devaluation and weak consumer demand in Brazil for Argentinean automotive products will hurt the economy, which makes it even more important that the Argentinean government level with its people and sell the fact that there are problems that will require painful corrections. However, this is somewhat unlikely since Kicillof is an academic Marxist and questions whether high inflation is truly bad for an economy. A government overhaul that eliminates corruption and ensures that oil leases and government contracts are given to those who can do the best work, rather than those that are politically connected, would do some good as well in terms of showing that Argentina is serious about developing its resources and not using them to win votes.
Another step that the Argentinean government must take is to reassure foreign investors that Argentina is a safe place for their money. Remember the Vaca Muerta shale oil and gas field discussed in the previous section? Well, Argentina does not have the expertise and equipment to fully explore that field and they need foreign investment to help them. The Christian Science Monitor on February 26th writes that Repsol, who had its majority share of YPF taken from the Argentinean government two years ago, recently settled with the government for $5 billion in bonds. Repsol had threatened legal action against the Argentinean government and companies like Chevron, who have signed billion dollar deals to explore the field. Still, experts think the government will need to do a lot more than settle with Repsol over its past nationalizations. The government still needs to solve the demands of all of its creditors from the 2002 sovereign debt default, as some hedge funds have refused to take shaves. MercoPress from March 14th writes that these hedge funds have taken Argentinean authorities to court and in November 2012 a U.S. federal court demanded that Argentina pay these funds $1.3 billion, which is the face of the bonds that they originally bought from the Argentinean government plus interest, before other restructured bonds are paid. The IMF has criticized the decision for interfering in global debt reduction deals and Argentina has yet to follow through, but the ongoing litigation about such measures gives investors second thoughts about investing in the country because they remember the three debt defaults that Argentina has had since the 1980s. Think about it. If you were an investor, would you park your money in a country that has not paid off its creditors with full value three times in the last thirty-five years?
Overall, the Argentinean economy can benefit from more political transparency, less government intervention in the economy through price controls, export controls (these hit beef producers who cannot fully export their product on the international market to satisfy consumers at home), and social programs (which, while generous, are creating inflation), and more aggressive anti-inflation measures (e.g. high interest rates, high taxes) that will take excess money out of the economy and reduce inflation. These measures will be painful and there is no guarantee that Argentina will follow them, but if they seek to regain their place as a world economic leader that is the price that they are going to have to pay.