The Financial Express

Argentina's economic crisis: Culmination of deep-rooted economic challenges

Argentina's economic crisis: Culmination of deep-rooted economic challenges

"Argentina was not invited to the Bretton Woods conference in 1944 that created the IMF, and it did not join until 1956. But it has been making its presence felt ever since.'' - The Economist, September 07, 2019.

Alberto Fernandez and his running mate the former president Cristina Fernandez de Kirchner (popularly known as CFK) won the presidential election in Argentina held on October 27 amid a deepening economic crisis. Now the newly-elected president is faced with the sobering task of salvaging the economy from the crisis which may dim the glow of his election victory.

In fact, Argentina's economy is in dire straits, the currency, the peso lost its value by two-thirds since 2018, inflation is running at around 30 per cent. To add to the economic woes, the economy has contracted by 4.0 per cent and external debt has increased by 60 per cent since 2015. The Washington Post exclaimed "The peso is falling - and so it seems, is the sky''.  It further went on to say "Inflation and poverty rates are soaring. National reserves are shrinking fast. In short, Argentina - in a terrible déjà vu of crises past - is hurtling once again towards the economic abyss''.

Argentina has a very long history of economic crises dating back to the time the country gained independence in 1816. Since independence the country has defaulted on its external debt (i.e. debt held by foreigners) nine times. The current economic crisis is the culmination of long-standing deep-rooted economic challenges and more recent ones. They are not all imported economic shocks, rather largely internally generated as reflected in the fiscal and monetary policies of the country, in particular its crippling debt levels. Since 1980s Argentina has defaulted multiple times on its debt, the most significant one being the default of US$95bn in 2001, the biggest default in history. Its credit rating now stands so low that the country is effectively barred from international bond markets.

The outgoing president Mauricio Macri was elected in 2015 promising to cut inflation and invest in vital infrastructural development. Despite taking some economic reform measures, the president reneged on most of those reform measures such as relating to currency controls. On September 01 this year, the government failed to stabilise the exchange rate with high interest rates and selling foreign exchange reserves. To deal with the situation, the government reintroduced currency control.

More worryingly, President Macri's tenure was marked by the contraction of country's GDP (gross domestic product) by 3.0 per cent accompanied by a surge in inflation rising to more than 50 per cent, and a currency crisis. The IMF (International Monetary Fund) doled out a US$57bn (equal to 10 per cent of the country's GDP), the biggest loan in the IMF's history to reorganise its finance.  This is not the first time that Argentina needed a bailout from the IMF. The country has entered into 21 IMF bailouts and other economic rescue programmes since it joined the IMF in 1956.

Argentina has been increasingly relying on external finance to fund its budget and current account deficits which has left the country vulnerable to changes in the cost of or availability of financing. Higher interest rates in the US last year saw a massive outflow of capital away from emerging market economies, especially countries with very large debt in foreign currencies like Argentina. Surprisingly as interest rates are now falling back in advanced economies including the US, there is no corresponding rise in capital inflows into those markets, instead fall in inflows into emerging market economies continues and has come down to the lowest level since the 1990s.

An IMF team of officials visited Buenos Aires in late August to further streamline the release of agreed loan of US$57bn. But no sooner the team left the capital than the government announced it would postpone US$7.0bn in payments on short-term local bonds and seek to reschedule (i.e. an extension of the maturity date) US$50bn longer-term bonds mostly held by foreigners. The government is also seeking to delay repayment of US$44bn of IMF loans. The simple fact is that Argentina has fallen back into crisis because nothing much has changed from the last crisis. In essence, successive Argentinian governments succumbed to the same temptation that undid their predecessors.

The current reputation of the country is in stark contrast to how the Argentine economy was performing in the past. In the late 19th century up to the outbreak of the First World War, Argentina achieved an impressive economic growth rate of 6.0 per cent per annum. It was an impressive growth rate at the period and that rate allowed the country to rank as one of the 10 wealthiest nations on earth. But despite such success the country failed to build growth-supporting institutions and environment thus leading to its relative decline.  Even in 1914, one-third of its population was illiterate when comparable countries almost eliminated illiteracy. Income per capita now is about 40 per cent of that in developed countries among whom it once belonged. This relative decline of Argentina has attracted a host of economic historians to study the Argentine economy, terming the relative economic decline of the country as "Argentine Paradox". In fact, many developing countries have a lot of lessons to learn from Argentina's economic history.

The underlying problem is largely the political system which is run by a narrowly based elite power structure. Power has oscillated between military dictatorship and populism, and this is why the country has miserably failed to cement its institutions.

Argentina's wealth was based on a boom in global free trade prior to the WW I, mostly through export of beef and other primary products. But all that came to an end with the outbreak of the WW I and then the depression. Argentina's current poverty rate is 35.4 per cent, the highest in more than a decade. Economic history has shown countries rarely get rich and remain so by agriculture alone. No country's economic prosperity is preordained, nor is guaranteed continuation of prosperity once achieved.

The period between 1914 and 1945 was most catastrophic for most economies in the world, but eventually most countries went through a post-WW II economic reconstruction and restructuring but that was not the case with Argentina. It started its journey of long economic decline simply because it failed to restructure its economy. But this is the period which also saw the consolidation of democratic institutions and values in developed countries around the world.

Faced with declining economic fortune, the country made poor policy choices veering towards corporatism. This is reflected in the changing political landscape in the country. The post-war period in Argentina brought dictatorship and populism, a code word for fascism. The man who came to embody the new political doctrine, Juan Peron, was one of the leaders of a military coup in 1943. He became president in 1946. His political philosophy, now known as Peronism, projected an assertive, disciplined nationalism. He encouraged a cult of personality and initiated Nazi-style economic self-sufficiency and corporatism - chiefly favouring large state enterprises and a highly regulated and protected economy erecting high tariff barriers. Under Peron the state went so far as to monopolising foreign trade including taxes on exports. The appeal to personality cult underpinned the whole system which created clientelism. Thus, populism laced with personality cult emerged as the fundamental tool to run society of control.

Peronism endured and indeed endures; the newly-elected president and vice-president  style themselves as Peronists.  President-elect Alberto Fernandez was Chief of the Cabinet of Ministers of Peronist President Néstor Kirchner and retained the same post under Kirchner's wife and successor, President Cristina Fernández de Kirchner. The president-elect and his very high-profile vice president have a gigantic task to put the economy back on track. Argentine history is replete with widespread political unrest and violence in periods of economic distress.

Mr Fernandez has pledged during his election campaign to "rework'' the IMF programme. That triggered capital flight along with the currency hitting a record low and the stock markets plunged. A sense of despair now pervades the country. This is encapsulated in a comment by a Financial Times correspondent where he said that the great question was whether the country (Argentina) was ever going to grow again..With the election of Mr Fernandez as president, there is a growing fear that he might resurrect some if not all of the old economic policies which did not achieve their objectives. And the task is made even more difficult in view of continuing downturn in the global economy and the rising risk of global financial crisis. The defining trait of Argentina has so far been resorting to borrowing instead of putting the economy on the track by instituting reform measures capable of developing its own adjustment mechanism. This calls for making difficult and hard choices to make the country better at earning rather than borrowing.

Mr Fernandez is now faced with insurmountable odds. Current popularity can soon sour if he cannot deliver the goods he promised during his election campaign.  The political coalition he leads is called Frente de Todos (Front for All).  In his election victory speech he alluded to the difficult tasks ahead and asked for greater efforts and compromise from all Argentinians.

Muhammad Mahmood is an independent economic and political analyst.

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