Tough Times Ahead for Argentina
DEVELOPMENTS
Argentina has experienced three farmer strikes in the past four months, as well as increasing food rationing in the capital city of Buenos Aires and food shortages in its provinces. The source of the strikes is a sliding export tax instituted by President Cristina Fernandez, which has resulted in a tax increase of 27 to 40% on soybeans. The price of food has increased recently in large part because of ongoing farmers' strikes. However, the continuing troubles have done more than exacerbate food security in this South American republic, as it has ostensibly resulted in a vicious cycle of inflation that could have a significant ripple effect in the region.
This crisis has placed Argentina – a major agricultural producer – in a difficult position and it is increasingly attempting to convince purchasers that it is still a reliable source. Concurrently, the price of food has been increasing while overall inflation continues to rise. The numbers are intimidating for consumers – food prices have increased 30% in the last year and inflation stands at 20%. As a result, Argentina’s consumers have decreased consumption, thus slowing the economy. This has resulted in the negative economic projections for the remainder of this year and will likely be a continuing source of political friction.
BACKGROUND
Argentina has not been a stranger to inflation in its recent history. In the 1980s, it experienced skyrocketing inflation, reaching 1,000% in 1998. Understandably, this economic instability affected Argentina’s political and economic development. Although the Argentine experience was common to the region in the 1980s – referred to as Latin America’s ‘Lost Decade’ because of the high inflation rates and excessive debt– Argentina’s recovery plan for abandoning such high inflation was unorthodox. In 1991, the government pegged the value of its currency (the peso) to the U.S. dollar (the “Convertibility Plan”). Albeit risky, the Convertibility Plan worked. The Argentine peso was stabilized and inflation declined. Moreover, during this period Argentina, like many of its neighbors, opened to free markets.
During the 1990s, Argentina enjoyed strong economic growth as a result of the privatization of various industries and the influx of foreign investment that was ushered in through this new "free market" approach. Argentina’s growth was also assisted by the U.S.-implemented Brady Plan that afforded national banks liquid assets instead of non-liquid ones, thus allowing the banks to ease the debt crisis. However, the boom years would come to an end as international shocks rendered Argentina’s Convertibility Plan a liability rather than an asset.
In 2001, Argentina suffered one of its largest market crashes. The collapse of Argentina’s capital markets in the late 1990s, caused in large part by the Asian economic crisis, affected the amount of investment capital that flowed into Argentina. Reduced capital investment inhibited Argentina’s ability to manage its financial obligations, which in turn led to higher interest rates on Argentina’s bonds. In the face of the economic downturn, Argentina attempted to offset the crisis by raising taxes. The plan failed and the economy crashed. The increase in taxes weakened consumer spending and choked an already-constricted economy as the country was borrowing dollars from abroad but could not print more dollars to pay its international debt. As a result of the economic collapse, President Fernando De La Rua resigned. Four successive presidents would attempt to resolve the social and economic chaos that ensued. Argentina entered a period of social and economic chaos as the cost of living rose. Many people went hungry and some were even driven to raid supermarkets.
Nestor Kirchner became president during this economic collapse. His term focused on restoring the credibility of the government by targeting corruption, eliminating the Convertibility Plan, and, in a very bold move, refusing to pay full price on Argentine bonds. Mr. Kirchner’s administration returned much-needed stability to the government and under his fiscal plan the country saw economic conditions improve. Argentina’s economy during Mr. Kirchner’s tenure was also boosted by a growing demand for Argentine agricultural products and an undervalued currency that increased demand for other Argentine exports.
Last October, Mr. Kichner’s wife, Cristina Fernandez de Kirchner was elected president and many had high hopes for her tenure. However, her term has thus far been plagued by an overheating economy, rising costs of fuel, and a fair amount of civil strife. The government has reportedly stopped releasing poverty figures, presumably in an effort to mask the growing challenges facing the Argentine economy. It would seem that a fatal combination of public spending, government-mandated wage increases, an undervalued currency, low interest rates, and a government proclivity to under-account the current rate of inflation are combining to make high inflation a major obstacle for Mrs. Kirchner’s government. This dangerous recipe threatens yet another economic crisis.
ANALYSIS
The economic woes plaguing Argentina are both very real and very dangerous for the region and the U.S. Not only is Argentina a key country in South America, it has the potential to affect Brazil’s vulnerable economy by adding yet another shock to the ongoing rise in fuel prices, the financial crunch, and the worldwide food crisis. Brazil and Argentina are among the most important players in Latin America, as together they make up a significant portion of the region’s economy.
Domestically, Argentina may not be able to pull itself from its precarious position as it continues to edge closer to a full-fledged economic crisis. The government’s tendency to provide imprecise statistics is worrisome because it indicates the current regime's willingness to disguise economic issues. The danger of such tactics increases when considering the government's tendency to misreport inflation data. And it still does not provide adequate information to foreign banks and corporations. Such behavior scares away potential foreign capital investors and increases interest rates and premiums on Argentina’s debt.
Although Argentina is still in a position to combat inflation through increased fiscal austerity, such measures are unlikely to be adopted by Mrs. Kirchner as evidenced by her imposition of taxes on agricultural goods to finance social spending programs. Mrs. Kirchner appears more committed to focusing the government’s resources on social programs, and by extension social expenditure, than addressing growing inflation and social unrest. The future of Argentina’s economy remains uncertain and the growing civil unrest will likely continue, as will demonstrations against perceived governmental mismanagement. Mrs. Kirchner’s new government is currently balancing a struggling economy, stagnant wages, and civil unrest. Her response to this cocktail thus far has been viewed by many as uninspiring.
The looming Argentine economic crisis could affect the U.S. by adding more pressure on the besieged American economy. Argentina, much like the U.S., attracts migrant workers from the rest of Latin America. Thus, a downturn of the economy there is likely to increase the number of immigrants seeking to enter the U.S. instead. Moreover, an economic meltdown in Argentina may spread to other countries in the region. This, in turn, would likely affect American companies, as Latin America is a strong consumer of U.S. products. At the same time, a downturn in agricultural production in Argentina will likely continue drive up the cost of food staples globally. Many countries are already experiencing significant increases in the cost of foodstuffs and a number of developing countries have seen near riots erupt as a result. In this context the Argentine situation threatens to negatively impact the U.S. and the cost of food globally.