Argentina’s President Kirchner needs a lesson in economic management.
President Cristina Fernández de Kirchner's temporary price freeze on food products marks the most recent instance of her gross mishandling of Argentina's economy. The price freeze applies to all major food retailers, which account for over 70% of the market. Historically, these types of economic policies have never produced positive results. Most often, food importers stop importing because they would lose money by selling their food at the prices ordered by the government. Customers of large retailers who stand in line hoping to buy at the frozen price will then find the shelves barren. This scarcity of goods will spawn a black market, where food will be sold at actual market prices. While some law enforcement officials may tolerate these black markets, other will try to dismantle them, only to discover more tenacious entrepreneurs setting up shop the next corner over.
Unfortunately, the temporary price freeze is only part of an alarming trend towards financial mismanagement, which includes the expropriation of major foreign investments. Last year’s nationalization of Repsol YPF has infuriated Spain, one of Argentina’s largest foreign investors. Kirchner’s presidency has also been marred by accusations of falsifying CPI statistics (which provoked a strong rebuke from the IMF), a weakening of central bank independence, use of the nation’s currency reserves for political payoffs, and the threat of default on its debt - again. To most outsiders it would appear that Argentina is repeating many of the mistakes that resulted in its economic crisis of the early 2000s.
While the situation appears bleak, not all hope is lost. There are a number of steps that Kirchner can take to get Argentina’s economic house in order and promote national growth. First, Argentina should stop “cooking its books” and release accurate inflation statistics. This would help repair some of the damage to the relationship between Argentina and the IMF, which is currently at one of its lowest points yet. In the past, Argentina’s leaders have found it convenient to blame the IMF for many of its economic woes, despite the fact that the IMF has supplied it numerous life-saving loans in the past, in addition to offering sound economic advice (although this advice has fallen on deaf ears more often than not). Releasing accurate statistics would also have the benefit of restoring investor confidence, and furthermore, it would demonstrate that Kirchner is willing to sacrifice political points if it means improving Argentina’s economic situation.
Second, Kirchner should avoid pursuing additional protectionist policies, which include tightening of foreign exchange controls and forced repatriation of export revenues. These moves, which were intended to stem the capital flight the country has been experiencing, have had the opposite effect. Kirchner should instead loosen controls on imports, the lower prices of which will be of benefit to Argentine consumers, and stop aggressive government intrusion into the marketplace. Recent changes to the central bank’s charter - which allows the government unlimited use of the bank’s reserves to pay its debts, contributing heavily to Argentina’s inflation - should also be reversed.
Third, Argentina should curb government expenditures and look to its neighbor, Chile, as a model for establishing a “rainy day fund.” Chile’s Finance Minister stocked away savings equal to nearly 15% of national economic output during the country’s commodities boom, which proved to be a fortuitous move as Chile has continued to thrive even during the recent downturn. This stands in sharp contrast to Argentina, where the recent slump in commodity prices has put a significant dent in government coffers and raised the debt-to-GDP ratio to over 40%. Government expenditures have been ballooning at an alarming, unsustainable rate in recent years. Argentina’s social security program, Anses, already consumes almost a third of GDP alone. A particularly burdensome fiscal load equal to 40% tax pressure would be required to meet these obligations, in addition to expenses for law and order, education, and health. Unfortunately, there is little political will to push for higher taxes, and in fact Kirchner has called on governors and mayors across the country to stop any such increases.
The road to economic recovery in Argentina will certainly be a challenging one, but there is no doubt that Argentina possesses the human capital and resources needed to grow and thrive. What remains to be seen is whether Cristina Kirchner can muster the political will needed to make the difficult decisions required for her country to do just that.
Jonathan Kirk is a graduate student at the Elliott School of International Affairs in the Latin American and Hemispheric Studies program. He is currently working at the United States Agency for International Development as a Security Analyst.
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