The Kirchner Era: The Good, The Bad, and The Ugly

For many of us at McGill, Argentina seems like a distant place. Why should I ever read an article on the subject, you may ask? Well, other than the fact it is second largest economy in South America, Argentina has been home to some pretty amazing and yet bizarre economic activity over the past ten years. Did you know Argentina alone decided to set the price of its oil at $67 per barrel, when most countries’ oil prices hover around $30 per barrel? Did you know that since 2012, automobile companies can only import as much as they export, leading them to buy peanut factories? Did you know that if your grandmother kept one peso moneda nacional from 1970, today it would be worth 1/10,000,000,000,000 of the current pesos? This article intends to look back over the past 10 years of the Kirchner era that ended in December, where Néstor Kirchner ruled one term before being replaced by his wife Cristina Fernández de Kirchner, in an effort to find ‘The Good, The Bad, and The Ugly’ of what can only be described as the Great West era of the Argentinian economy.   

The Good: Oil Prices and Short-term Stability

Since being elected in 2003, the Kirchner power couple have imposed their nationalist views on the country. While many criticize the pitfalls of a nationalist regime, it still offers some undeniable upsides. Take, for example, the oil industry. It plays a big part in their economy, and Yacimientos Petrolíferos Fiscales, Argentina’s biggest oil company, is one of the most important in the country. Since oil prices have crashed last year, Argentina is one of the few places on Earth where oil companies are not suffering the full collapse of prices: the government regulated oil prices to be set at $67 per barrel. The policy was originally intended to protect customers from triple-digit prices, but since 2014, it has also proven effective to protect companies from bankruptcy without the necessity for giant governmental subsidies. Abandoning free trade agreements and relationships with outside parties, with respect to the economy, the populist regime provides a heavy helping hand to ensure the country’s selfish success. This might lead to retaliation over the long term, but so far, Argentinian companies seem to be better fit to survive a global repression.

The Bad: Unappealing Investment Environment and Investors Run for the Exit Door

Foreign investments in Argentina have plummeted during the Kirchner administration. Between 2010 and 2012, economic growth dropped from 8.5% to 2.2%. The involvement of the government in public companies deterred foreign investment. Since the beginning of Cristina Fernandez’s presidency, Argentina’s four most important companies have been re-nationalised: national airline, Aerolineas Argentinas; Argentina’s biggest oil company, YPF; Argentina’s railway system and its national pension fund. As an example, following YPF’s weak results in 2012, the government decided to nationalize the company based on absurd arguments regarding high dividend yields and low investment levels. The government absolutely did not create a favorable environment to attract foreign investment, despite high yields due to protectionism, nationalism and political instability. In addition, the IMF scandal regarding the lie about “the quality of the official data reported to the [IMF] for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP)” in order to reduce debt payments of bondholders, again induced an unfavorable investment environment.

While many international companies were questioning whether Argentina was suitable for investments, companies who were already willing to import into the country faced enormous hurdles. As you now know, President Fernandez de Kirchner mandated in 2012 that automobile importers would have to match their imports with exports of equal size. With no past recourse, importers were forced to become exporters overnight, or else risk being shuttered by the Argentinian government. As expected, car companies, the largest imports into Argentina (9.6% of imports), struggled to meet those standards and new-car sales plummeted. To adapt to those new requirements, many companies engaged in bizarre actions, such as BMW buying a rice factory, Mitsubishi, a peanut company; Subaru,  a chicken-feed factory; and Porsche, an olive factory. While this helped Argentina balance its automobile current account, it also forced these companies to import less into the country to the detriment of the Argentinian people. It also forced international companies to become less dependent on and involved with the Argentinian economy.

The Ugly: The Struggle of the Argentinian Middle-Class, Inflation, and the Unofficial Spot Rate

Starting in 1970, Argentina suffered an extreme hyperinflationary period, halting all economic progress and growth for the next two decades. This period was labelled the ‘hyperinflationary dark days’ of Argentina, and drastically slowed economic growth throughout the country. Can you take a guess at the rate of inflation over the next 22 year period? I’ll give you a hint: in the United States, inflation increased the dollar by 1.5 times over that period. Nope, your guess was definitely not even close. In 22 years, inflation caused one peso moneda nacional to be worth 1/10,000,000,000,000 pesos today. I hope your Argentinian friends did not stock too much money under their mattresses!  

Following that 22 year period of struggle for the Argentinian people, in 1989, the peg to the US dollar appeared to have solved all of Argentina’s problems, and for a short time, stability and strength was brought to Argentina’s monetary system, at least for the upper-class. As we can see on the GINI index, which measures income inequality, disparity between the social classes grew tremendously between 1989 and 2001. In 2001, the meltdown of the economy had the government in serious financial trouble, eventually defaulting on their debt and abandoning the peg. Exports halted, and the Argentinean GDP dropped 28% over three years. As a last resort to combat this economic collapse, the government moved to a floating peg. The devaluation sparked  capital to flee from the country, ultimately forcing the government to put a temporary freeze on capital outflow. Imports slowed, and the recession persisted as Argentinian living standards plummeted.  Argentina was back at square one and had to start building up their economy once again.

Growth was slow at first, but over the next years GDP grew at an average 8%. Argentina learned from their mistakes and had started moving forward. When the 2008 financial crisis hit the world, Argentina was forced to allow their crawling peg to slip more, and continued to allow it to slide to higher rates up until 2015 when it was abandoned completely. Only time will tell if its floating rate will bring stability to the system.

Twelve years ago, the Kirchners’ inherited an economic recession and running inflation. While they can be credited with bringing economic growth to the country, they also caused dangerously high inflations that their predecessors worked so hard to shutter. Inflation (measured by consumer price index, CPI) hovered around the 10% mark for the next twelve years, which for any economy is dangerous high and can spiral into uncontrollable hyperinflation. For example, in Canada and the US, the mandate of the central bank is to keep inflation around 2%.They forewent the long-term benefits of stable monetary policy that previous governments had been working on for more than ten years, in order to pursue their short-term personal agenda, which can only be seen as poor leadership.

Moving Forward

Depending on how you look at it, one can argue the past ten years of the Kirchner era were both a success and a failure. The economy prospered (GDP was almost multiplied by five times in nominal terms) and inequality of wealth shrinked to the lowest level in 30 years. However, this success was achieved at the cost of sound monetary policy of low inflation, and an openness to free trade and global partnership with Western nations. Moving forward, with the new government’s emphasis on globalization, and a JPMorgan banker Alfonso Prat-Gay as economic minister who promises to decrease inflation and open the country to trade, and floatation of the currency complete, the economy will see a drastic change. Only time will tell if the Argentinian people will have to pay the price for the Kirchner’s high inflation party, and whether the western music of economic growth will ever stop.

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