Argentina’s “New” Crisis: The Child of Clientelism

By: Carlos Sabino - @Sabino2324 - Feb 4, 2014, 1:57 pm

EspañolAt first sight, it’s amazing. For more than half a century, Argentina — a country with vast and diverse natural resources and a well-educated population — has each decade faced an economic crisis. The country steps back once again, and millions of citizens sink into poverty.

The process is well-known, and it repeats itself with disturbing consistency: prices start to increase; people lose trust in the local currency and seek shelter in the US dollar; governments impose price and exchange controls; and unemployment rises.

A race towards inflation begins when unions demand salary increases, businesses continuously adjust their prices, and the dollar exchange rate increases. Finally, after some months, a drastic devaluation explodes and people’s savings in the local currency vanish, impoverishing a large portion of the population.

In 2014, this wicked cycle is repeating itself again. For at least two years, the rate of inflation has risen beyond what the country experienced in the previous decade — even if the government denies it. Since everyone seeks to protect himself from the inevitable devaluation, the dollar rate has increased rapidly. All the while, the government, headed by the absent Cristina Fernández de Kirchner, insists on complicated measures to try to ride out the situation.

Taking into consideration Argentina’s historic precedents, it’s not a venture to say that soon this crisis will hit rock bottom, with a strong devaluation, a significant economic set-back, and a rise of unemployment and poverty levels. Then, as always, the economy will start to recover, and after some years of prosperity, the cycle will start again.

Why does the South American country, with all its attributes, suffer from this cruel sequel of events that undermines its world status — from a prime position in the 20th century to now one of the backwaters? Why doesn’t Argentina follow the most stable and productive paths that other countries in the same region have chosen? The answer to this question, or at least the crucial point of this explanation, is in the disproportionate reliance on and belief in public expenditure and state interventionism. The nation’s current crisis is a good case in point.

When the Argentinean economy started to recover after its terrible crisis in 2001-2002, the government put forward a huge subsidy program for the poor and imposed strong restrictions on foreign trade. Argentina regained positive annual growth rates, but just like before, it grew with industries that had turned away from the world market. Inevitably, the state raised taxes until they became unbearable. It also expanded politicized welfare programs, that attempted to give an image of prosperity and poverty reduction.

The country grew, but it was mostly on account of soy exports, a product that China and other nations demand in big quantities. As soon as the world financial crisis burst in 2008, prices weakened, and the government saw itself trapped in a serious dilemma: fiscal revenues weren’t enough to sustain the widespread clientelism (vote-buying) and a bureaucracy that consumed most of the state income. Also, higher taxes on either exports or domestic trade were simply not possible.

At this juncture, the government adopted the same path as before, albeit with different ideological branding. The answer to this problem was to simply expand the money supply: to artificially create more pesos to sustain clientelism, bureaucracy, and corruption. The monetary supply in circulation did increase, and quickly, without any connection to the country’s real income or foreign currency reserves.

Naturally, the peso started to weaken: when there is a higher quantity of pesos in front of the same (or lower) quantity of dollars, each peso starts to lose its value. Correspondingly, each product starts to be worth more when it is priced in devalued pesos.

To not trigger inflation, the government tried to artificially lower the dollar exchange rate. They also imposed controls over all transactions, but they continued to spend the state’s reserves. Argentineans got alarmed, obviously, because they understood that something was going wrong, and they started to buy dollars.

Today, this process continue on in the same direction. It’s probable that inflation will continue to rise until the government finally gives up on the artificial price for the US currency: it won’t have a choice, because its reserves will have rapidly decreased. We will then have another gigantic devaluation with its unavoidable consequences on economic stagnation, poverty, the brain drain, unemployment, and a general step-back in the world scale.

Translated by Marcela Estrada.

Carlos Sabino Carlos Sabino

Sociologist, writer, and university professor, Sabino is director of the masters and doctoral programs in history at the University of Francisco Marroquín, Guatemala. Follow him @Sabino2324