Argentina Survived Cristina Kirchner’s Economic Traps
EspañolWhen I was a high-school boy, back in the early 2000s, my friends and I decided to play a classic prank on our classmates during a school trip.
We filled a bucket with water and placed it on top of their open door. As expected, when they entered the room, they got all wet.
Our classmates of course hated us at first, but we eventually all laughed it off.
Something very similar happened to Argentina’s economy, but it was no laughing matter. With populist and socialist policies, the previous Cristina Kirchner administration left the economy in shambles, which collapsed in 2016 under her successor, President Mauricio Macri.
- Read More: Cristina Kirchner Did Drive the Argentinean Economy into the Ground
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Our high-school prank is a good metaphor to summarize the Macri administration’s first year: the bucket of water that Kirchner left on his door finally spilled over him —and the entire country.
By the end of 2015, when Cristina Kirchner left office, the Argentinean economy had exchange controls that restricted how many dollars one could trade. This created, as has always happened, a black market for the currency.
It was imperative to lift this restriction that had severely harmed exports and investment for four years. And that is what the new administration did. In doing so, however, the true state of the economy came to light.
When the ban ended, the prices of tradable goods (those that can be imported and exported) showed their true value, which were obviously higher than the one it had before under the artificial exchange rate.
The blow to household’s finances was inevitable, but that initial shock was preferable than to letting the productive sectors of the economy die away.
By the end of 2015, Argentina’s public utilities were in a critical situation. Thanks to inflation and the freezing of what public utilities firms could charge households, electricity and water services deteriorated significantly.
Blackouts and water shortages are common, especially in Buenos Aires and surrounding cities. In addition, Kirchner forced the nation to bankroll large subsidies through money printing, which in turn fueled inflation.
Given this scenario, there were two possible ways to go: allowing public utility rates to rise or deepening the destruction of Argentina’s energy and water systems.
The Macri administration chose the first path, but the judiciary slowed down the adjustment, allowing only a half-baked rate increase. However, it was high enough to have a negative impact on consumption and production, which will fall around 2 percent this year.
By the end of 2015, Argentina’s tax burden was unbearable. The Kirchner administration had increased it by 17 percent of GDP. Moreover, some producers were not only excessively taxed, but also unfairly targeted.
This was the case of grain exporters, who suffered from export tariffs. Wisely, the Macri administration decided to eliminate them — although for soy it was only reduced — thus making this sector profitable again and attractive for investors.
The downside was that the true prices of agricultural products showed up, again. Without tariffs, the producer is no longer bound to selling in local markets. Obviously, he will choose to sell to whom pays best, and in this case, that’s international buyers.
In the long run, agricultural products will become affordable to most domestic consumers, but the negative short-term impact was preferable than shrinking the most competitive sectors of our economy.
Finally, by the end of 2015, the Argentina had the highest fiscal deficit in 15 years, exceeding six percent of GDP. This was just another “gift” from Kirchner’s Keynesian belief that public deficits are the road to prosperity, or from their clumsy administrators, who were unable to balance the budget.
To reverse course from Kirchner’s surely disastrous trend, Macri committed to a gradual change agenda, issuing large amounts of debt to finance public deficits.
This reluctance to reduce Argentina’s excessive public expenditure is one of the weakest points of Macri’s administration. However, it must be said that this is also, in part, Kirchner’s fault. If there were no deficits there would be no need to issue bonds…
On December 10, Macri’s administration turned one year old. We will witness the results of its many measures to change the course of the country only in 2017.
For now, what we can say is that Argentina has survived Kirchner’s many buckets of economic trouble.