From the May 29, 2009 Weekly Standard Online
May 29, 2009
by Jaime Daremblum
Last October, the Wall Street Journal editorialized that Argentina "serves as a cautionary tale on how to ruin an economy." Now President Cristina Kirchner may pay a political price for her--and her husband's--mismanagement. With national legislative elections scheduled for next month, the Argentine economy is in terrible condition, Kirchner has low approval ratings, and polls indicate that her Peronist party could lose control of at least one house of Congress.
Mrs. Kirchner took office 17 months ago, succeeding her husband, Néstor Kirchner, who served as president from 2003 to 2007. Thus far, two of her most significant economic proposals have been to raise agricultural export taxes and to nationalize private pension funds. The tax increase was rejected by Argentina's Senate last summer, but the pension plan was adopted in November. The government takeover of $30 billion in funds alarmed international investors and spurred capital flight. Since then, Kirchner has not provided sufficient reassurances to the business community.
"Argentina's stock and bond markets severely underperformed in the first three months of the year," Dow Jones reports, "with the banks' most market-sensitive balance sheet items--their government bond holdings--suffering most." The government has piled up a huge debt, inflation is estimated (by independent observers) to be around 20 percent, foreign direct investment is shrinking, and analysts are predicting an economic contraction. As Reuters notes, "Argentina is confronting phantoms from the past, with a recession, capital flight, and potential political turmoil looming as global economic uncertainty persists."
To be sure, Argentina's economic woes are not entirely of Kirchner's making. The South American country has been affected by the global financial crisis, and by the recent downturn in commodity prices. Argentina is a major exporter of agricultural products and has been suffering its worst drought in decades. But Kirchner's policies have worsened the agricultural situation and angered Argentine farmers, who have staged a series of economically damaging strikes.
Like her husband, Mrs. Kirchner has embraced populist economic policies that would make Hugo Chávez smile. And indeed, the radical Venezuelan president enjoys close relations with both Kirchners. Chávez recently visited Buenos Aires, where he and Mrs. Kirchner signed bilateral accords on economic and energy cooperation. By partnering with an autocratic, anti-American demagogue, the Kirchners have harmed their country's relationship with the United States and further alarmed global investors.
Alas, Argentina has a long history of economic meltdowns. The last crisis occurred in 2001 and 2002, leading to political upheaval and necessitating a massive bailout from the International Monetary Fund. Both Kirchners have blamed the 2001-02 crisis on "neoliberal" (read: free-market) economic policies. This is nonsense. As Michael Reid writes in Forgotten Continent, "What killed Argentina's economy in 2001 was not 'neoliberalism' or the free-market reforms, but a fiscal policy incompatible with the exchange-rate regime, and a lack of policy flexibility." Argentina did not collapse because it followed the "Washington Consensus" agenda; in fact, says Reid, "Argentina's policy mix was in direct contravention of the Washington Consensus."
Unfortunately, the Kirchners have promoted a false storyline about the 2001-02 crisis, and they have used that crisis to demonize the sort of free-market policies that would make Argentina more attractive to foreign investors. The Kirchners have borrowed from the Chávez playbook, with its emphasis on nationalization, populism, and class warfare. On their watch, the Argentine government has tried to assuage investors by doctoring its official inflation estimates--nobody trusts these numbers, which are risibly low--but the trick hasn't worked.
The Kirchners' reckless policies have brought Argentina, once again, to the brink of disaster. "At some point authorities are going to have to bite the bullet and go through a major recession there to get it going back in the right direction," BlackRock portfolio manager Will Landers tells Reuters. "That's not going to be comfortable because that's what happened in 2001."
Interestingly enough, Néstor Kirchner, the former president and current head of the Peronist party, is running for a lower-house seat in next month's legislative elections. He has also recruited a bevy of Argentine mayors and governors to run as congressional candidates. "By taking such a prominent role in the campaign," says the Economist, "Mr. Kirchner has raised the stakes." Indeed, the June 28 elections have become a referendum on Argentina's first couple. The Kirchners may be in for a big disappointment.
Ambassador Jaime Daremblum is a Hudson Institute Senior Fellow and directs the Center for Latin American Studies.
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