Argentina's President Kirchner Flunks Economics
Back in February, after Argentine authorities inexplicably seized the contents of a U.S. military plane that was delivering equipment for a routine police-training exercise, a local official in the Buenos Aires city government summed up the dismal state of her country’s foreign policy: “Our only friend right now is Hugo Chávez.”
On April 16, President Cristina Kirchner poisoned yet another bilateral relationship when she announced the nationalization of a majority stake in Argentina’s biggest oil company, YPF, which is owned by the Spanish firm Repsol. Her move prompted outrage in Madrid and threats of retaliation. Meanwhile, the Spanish technology company N2S abruptly canceled plans to establish an Argentine office. “Argentina really looked like a very attractive market for us and we believed it was serious in its commitment to foreign investment -- until Monday’s decision,” N2S managing director Francisco de la Peña told the New York Times. “I’m sure that a lot of other Spanish companies are as disappointed and worried about what has just happened as we are.”
The decision may have surprised Mr. de la Peña, but it did not surprise anyone who has watched President Kirchner launch one economically destructive power grab after another. As Brazilian journalist Míriam Leitão wrote in response to the YPF seizure, “Argentina’s capacity to err seems unlimited.”
After all, Kirchner is the same leader who in 2008 nationalized both her country’s private pension system and its largest airline (Aerolineas Argentinas). She is the same leader who in 2010 fired Argentine central-bank governor Martín Redrado for his refusal to transfer $6.7 billion of foreign reserves to help Buenos Aires repay defaulted debt. She is the same leader who has produced soaring inflation and massive capital flight, the latter of which increased by 89 percent between 2010 and 2011. And she is the same leader who has systematically doctored inflation and economic data, to the point that The Economist recently announced it would no longer be publishing the official Argentine statistics. (“We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors,” the venerable weekly said in an editorial.)
Speaking of The Economist, it notes that Argentina is now a net energy importer, despite its abundant resources. While the government has blamed its energy trade deficit on YPF’s reluctance to invest more generously in domestic production, independent analysts generally agree that “the real cause of Argentina’s declining energy trade balance is its maze of price controls and subsidies, which makes investment unprofitable and encourages excess consumption.”
By nationalizing YPF, Kirchner hopes to boost Argentina’s financial position and also score political points through the demonization of a foreign energy giant. But her timing couldn’t be worse, given that her country (in the words of Financial Times commentator John Gapper) “has deep fiscal problems, no access to international capital markets and a looming investment challenge.” Indeed, how will Argentina now entice foreign multinationals to invest in its capital-starved energy sector (or any other sector, for that matter)? How can it expect to maintain the trust of the global business community when it treats private assets like state piggy banks? As Mexican president Felipe Calderón declared following the YPF maneuver, “Nobody in his right mind invests in a country which expropriates investments.”
Of course, if you look solely at Argentina’s annual GDP growth, which topped 9 percent in both 2010 and 2011, you may wonder what all the fuss is about. Didn’t Kirchner win an easy reelection last fall, receiving more than 54 percent of the vote? And doesn’t she deserve credit for her country’s rapid economic expansion? The answers are yes and no, respectively.
We must remember that Kirchner was running for reelection against a weak, divided opposition, and that her approval ratings have since fallen. As for the economy, Argentina’s recent growth has been fueled by high global soybean prices, which in turn have been fueled by ravenous Chinese demand. The country has also benefited from strong growth in Brazil, its largest trading partner. Now that the Brazilian and Chinese economies are both cooling down, Argentine growth will slow considerably.
Moreover, because Argentina’s Kirchner-era expansion has been accompanied by surging double-digit inflation, it has not raised living standards for the poor and the middle class. “The poverty level is higher now than the worst moments of the 1990s,” former Argentine economy minister Domingo Cavallo told the New York Times in early 2011. “Without a doubt, inflation is increasing poverty.”
President Kirchner has relied on a mirage of economic vitality to conceal the effects of her policy failures. But as Argentina continues to lose investment and suffer from debilitating inflation, more and more of her countrymen are waking up to the harsh reality that they are much poorer -- and much closer to a crisis -- than they had thought.