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Argentina: Repeating the Tragedy of Venezuela
Apr 08, 2014 / Written by: Gary Isbell
It appears that Argentina and Venezuela have more in common than meets the eye. They were both Spanish colonies, have a majority Catholic population, once enjoyed a vibrant and growing economy—and they are both falling headlong into chaos, bankruptcy, civil unrest and massive poverty.
Do the woes of Argentina and Venezuela have a common root? Perhaps at first glance they do not, but upon a closer look we see that they suffer precisely the same cause: flawed socialist principles.
It has been painful to see Venezuela suffer a steady decline as it implements the failed socialist policies of the late Hugo Chávez. Argentina has not fared much better since it also suffers almost identical results under the direction of the late Néstor Kirchner with his legacy continuing under the command of his comrade and wife, Cristina Kirchner.
The Argentine peso has hit a recent low of 12 cents per U.S. dollar, not much different than the Venezuelan Bolivar that has plummeted to 16 cents per U.S. dollar. This is the sharpest drop since the last economic collapse over a decade ago. If not remedied with drastic measures, the present crisis will result in the nation’s sixth national bankruptcy in a little over 100 years. While Argentina cannot pay back its foreign debts, the peso has become essentially worthless in the rest of the world. So what did President Cristina Kirchner do after her country was devastated by the largest devaluation of its currency in 12 years? She flew to Cuba for a summit meeting with the Castros! Perhaps they gave instructions on how to run a more decrepit economy.
Argentina and Venezuela have experienced firsthand how socialist policies cause capital flight, pour money into a bottomless pit by reckless government spending and producing excessive inflation; all in the pursuit of the socialist utopia.
The crisis started when Argentine public debt reached 166 percent of GDP in 2002 caused by a spending spree that devastated its economy. Couple this with an unemployment rate of 21 percent and a dire political situation; it sorely needed sound principles to correct its freefall. While some continue to blame “vulture funds” and the litigation that ensued subsequent to the most recent default, few accuse the Argentine government for implementing a false solution to the economic woes of the country.
When Mr. Kirchner assumed his presidency in 2003, he inherited a bankrupt country that was $81 billion in debt, rampant political corruption, widespread poverty and civil violence. Facing a national meltdown, Kirchner enacted rash moves to save an otherwise dire situation by reducing Argentina’s external arrears by more than 67 percent. He battled to keep the peso competitive and invested heavily in the housing market and his country’s infrastructure. All of these maneuvers appeared to allow Argentina to take advantage of high commodities prices that resulted in an officially claimed 8.8 percent annual growth in his first four years in office, a questionable growth rate that undoubtedly could not be sustained.
In addition to fiscal reforms, Kirchner attempted to restructure the Supreme Court that was known for its corruption by reducing it from a nine-judge panel to five and appointed more respectable judges. These reforms effectively purchased the confidence of public opinion and investors while allowing for the execution of future political maneuvers.
In a slight of hand that shifted the possibility of corruption from nine persons to one, Kirchner substantially altered the organization of the council that nominates judges that gave him the power of veto that he used to govern almost by diktat. One example if this was where he demanded that the independent statistics agency alter growth figures that effectively mislead investors by inaccurately minimizing inflation in 2007. The Economist reports “We hope that we can soon revert to an official consumer-price index for Argentina. That would require INDEC to be run by independent statisticians working unhindered. Until then, readers are better served by a credible unofficial figure than a bogus official one.1
Now President Christina Kirchner is quickly running out of time to avert yet another bankruptcy as the current financial crisis intensifies. She is unable to replicate the supposed annual growth rate achieved by Nestor, in part due to questionable official figures of growth and higher government spending financed by the printing of more money. With an official annual inflation rate reported at only 11 percent, private analysts peg the real figure to be closer to 28.
Couple this with a crippling capital flight of $29.5 billion in the last three years alone along with wilting wheat and soy exports, Kirchner is scrambling to keep dollars onshore through extensive currency controls one of which limits citizens to two online purchases per year from international vendors; a move that only punishes the average citizen while paying lip service to the country’s fiscal misery.
Argentina became a net importer of energy in 2011 for the first time since 1984. This was the result of the nationalizing of YPF oil industries owned by Spanish oil giant Repsol. This sent shock waves to international investors who have reacted by pulling out of Argentina. Without sufficient investment funds for exploration and development, the federal government lacks the cash to resurrect the golden goose it killed through appropriation.
Talks have begun in an attempt to settle the overdue debt of $6.5 billion with the Paris Club of creditor nations along with plans to compensate Spain’s Repsol $10.5 billion for the seizure of its Argentine investment in 2012. Though this is a step in the right direction, it does little to assuage the fears foreign investors have of future confiscation.
Both the Kirchners are from the left wing of the former Peronist government. After coming to power, Mr. Kirchner became a close ally of the late Hugo Chávez demonstrating only subtle differences in the strategy concerning the nationalization of major industries. The Kirchner government has nationalized YPF oil industries, Aerolineas Argentina airlines, the private pension system and implemented enormous control over many aspects of commerce effectively suffocating the business environment.
Additionally they have altered contracts in privatized utilities that provide public services, which was done as a temporary measure in 2002, and still remains in effect. Independent regulators are now under the authority of the government, which effectively sets utility prices. Much like Venezuela, resource-rich Argentina has serious problems with energy shortages and providing essential goods and services. They have frozen the retail price of natural gas thus discouraging any investment in exploration and development and a high export tax on beef limits sales to the domestic market while permitting farmers to export only at the government's discretion.
Executive Director of Libertad y Progreso Consultants, Aldo Abram, stated “With elections due next year, this government is already a lame duck. Kirchnerism is ceasing to exist and investors will wait until a new government takes office and makes the absolutely necessary changes. The policies of this administration have been absolutely adverse for an investment environment, among them, the foreign exchange restrictions whereby the official dollar rate is about two-thirds of its real value.”2
The socialist policies implemented by the Kirchners have accomplished little different than has been realized anywhere else socialism has infected a government. The Kirchners have accomplished a great deal in a short time: massive government spending on inefficient social programs, the amassing of prodigious debt, the nationalizing of key industries, promotion of cronyism and crippling their country’s infrastructure. To their tragic credit, they are following Venezuela’s footsteps.
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