In the early 1990s, Argentina began a strong push toward neoliberal reform, drawing praise from the economic ideology’s proponents worldwide. This move precipitated the depreciation of the peso against the U.S. dollar, as well as defaults on massive debts to the International Monetary Fund, all culminating in an economic crisis in 2001. The crisis pushed millions of Argentines into a state of economic uncertainty: inflation rose to as much as 42 percent, and Argentina spiraled into chaos.
Thirteen years later, similar concerns are starting to mount. Indeed, The Economist’s February 15 cover story pointed to Argentina as an example to developing countries of what not to do. The article harps on massive social spending projects, overreliance on commodities, and early protectionist policies—all valid factors in Argentina’s economic decline. Still, despite the prevalence of media attention denouncing the Argentine project, very few solutions have been offered.
Furthermore, very little attention is placed on the regional effects that a weakened Argentina would have, particularly in regard to Brazil, its largest trading partner. The implications of Argentina’s collapse are crucial on an international scale, and discussion of any way forward requires a more nuanced and constructive take on the issue at hand.
A new consumer price index registered inflation of 3.7 percent in January alone, the highest official rate since 2002. Argentina has not yet settled its foreign debts and has ongoing negotiations with French financiers and the Spanish oil giant Repsol. It is unlikely that a temporary price fix would bring about economic stability, with massive inflation reflected in daily price hikes for food and other items. The value of the peso plunged 19 percent in January, while prices went up by 3.7 percent, the highest increase in 11 years.
There’s no shortage of opinions about the moment when the country’s economy started to go astray. No one theory solves the puzzle. “If a guy has been hit by 700,000 bullets, it’s hard to work out which one of them killed him,” said Rafael Di Tella, professor at the Harvard Business School. Some explanations point to a young Argentina that was nowhere as advanced as internationally perceived and thus was forced to play up to unrealistic expectations. Another perspective blames weak political institutions that lacked the power to generate successful economic policies. A bit of each of these explanations contributes to the current debacle affecting the administration of current President Cristina Fernández de Kirchner.
Put simply, Argentina in the 20th century seems out of sync with the global economy. It was a model for export-led growth when the open trading system collapsed. It pushed for the “right” policies at the wrong times. Argentines reach for the metaphor of the “pendulum” to describe the swings of the past three decades: from loose economic policies in the 1980s to Washington Consensus liberalization in the 1990s and back again under the presidency of Néstor Kirchner and now his widow, Cristina. Argentina is a long way from the turmoil of 2001, but today’s mix of rising prices, wage pressures, and mistrust of the peso have nasty echoes of the past.
On February 3, President Kirchner presented a plan to combat inflation, asking Argentines to watch for and purchase from a list of 140 products with fixed prices, available at participating supermarkets, appliance stores, and gas stations. Fittingly, the crisis has only served to heighten doubts about her government. Argentine consumers are increasingly taking to the streets to protest the unmitigated price hikes. Economic adaptation has become necessary for the average Argentine citizen, who frequently resorts to buying U.S. dollars as a means to counteract the peso’s devaluation.
In order to ease black-market demand for dollars, Argentina allows those with a monthly income of 7,200 pesos ($900) or more to purchase up to $2,000 per month in U.S. dollars. However, buying dollars as a saving measure each time the peso is devalued is not an option for those who live on limited income. Poor citizens receive no reprieve from the disadvantageous economic climate.
Implications Beyond the Borders
Internationally, Argentina has lost its way. It has shut itself out of global capital markets, although negotiations are under way to restructure its debts with the Paris Club of international creditors, an informal grouping of the world’s 19 largest economies. Brazil, hardly a free-trade paragon, is pressing Argentina to open its borders; once, it would have been the other way round. “Only people this sophisticated could create a mess this big,” goes a Brazilian saying that jabs at Argentine exceptionalism.
The reason for Brazil’s concern is clear: Argentina is its largest political partner in the region and one of the foundations of Mercosur, the Southern American free trade agreement. Argentina is also Brazil’s third-biggest trading partner, with $36.1 billion total trade between the two countries in 2013. Indeed, Brazil’s real fell to a five-month low as the devaluation of Argentina’s peso fueled aversion to emerging-market currencies.
As it prepares to present itself as an international player, Brazil cannot afford weakness from its most important regional ally. “Brazil is eager to ascend to the epicenter of the most powerful nations and gain some degree of influence upon the global system,” said Hussein Kalout, fellow at the Weatherhead Center for International Affairs, “yet it must first solidify its regional infrastructure, Argentina being the priority.”
Argentina is also mired in the U.S. court system while looking for a solution for its outstanding debts. Argentina filed a longshot appeal to the U.S. Supreme Court on February 18, asking for a reversal of a lower court’s ruling that could force the country to default on billions of dollars in loans.
Making Argentina pay cash in full to investors who didn’t accept bond swaps in exchange for defaulted debt could destabilize the global economy by making other voluntary debt restructurings substantially more difficult, if not impossible. Secretary of State John Kerry has stated that the Obama administration would not file an amicus brief in support of the Argentine appeal. With little chance of the court overturning the prior decision, the international market is preparing for repercussions.
Democracy and the Future
In the face of a turbulent future, what can Argentina and the Kirchner administration do? Di Tella believes that the most urgent step is to stop printing money. Others, like Harvard government professor Steven Levitsky, believe the focus should be on optimizing the social policies in place. He argues that while effective in stemming Argentine inequality, “some policies like the widespread energy subsidies have become so inflated that they do more harm than good.”
Scholars like Di Tella and Levitsky see the Kirchner government as willing to seek economic revitalization through avenues previously discarded on ideological grounds, albeit with a focus on minimizing backlash from its core constituency. The Kirchners are known for their social programs and their belief in spreading wealth. While they do not want to alienate those who have stood behind them due to those principles, it has become evident that some beliefs will have to be sacrificed for Argentina’s future stability.
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