04 11 2019

Don't blame Christina

Christina and Lula Christina and Lula https://commons.wikimedia.org/wiki/Cristina_Fern%C3%A1ndez_de_Kirchner#/media/File:Cristina_y_Lula_2.jpg

When Mauricio Macri won the Argentine Presidential elections in 2015, there was excitement in Washington, the European Union and, above all, among the Latin American right. They would finally get rid of the incompetent and populist government in Argentina. 'The technocrats to the rescue', wrote 'The Economist', and stated that Macri 'is choosing well-regarded technocrats to occupy the main economic positions'. Unfortunately, after making a heroic attempt to rescue the country, Macri lost the presidential elections in October 2019 and the same bad populist guys (and women) are returning. Or this is what the international mainstream media want us to believe. They are not only wrong, it is a flagrant distortion of the facts.

One of the most incredulous news-stories is courtesy of the Danish state broadcaster, DR. Their correspondent in Buenos Aires, Kristian Almblad, tells the broadcaster: 'With small deviations, the country has been in an economic crisis since 2001, when it was hit by a financial crash. Then they had to take on big loans that they are still paying back', he says, and further: 'There is a broad consensus among experts ... that Christina ... was economically irresponsible.'

So there we are: an irresponsible populist government in charge of Argentina since 2003 ran down the country and left a disaster to poor Macri in 2015. Wrong economic policy, wrong international alliances, wrong everything. Macri had all the good intentions, but unfortunately he was not up to the task. Right?

Lest we completely forget history: Argentina was in the 1990s the poster child of the neoliberal effervescence that had taken over the world after the fall of the Soviet Union. Under President Carlos Ménem, Argentina undertook under the benevolent auspices of Washington, the IMF and the World Bank a radical reform policy that introduced free convertibility of the peso, linking it to the dollar, privatisation of public companies, liberalisation and opening up of the economy to foreign competition (and, by the way, he decorated the Chilean general Augusto Pinochet and granted an amnesty to the Argentine military officers involved in the dirty war that led to an estimated 30,000 dead). Ménem was presented by the IMF to other developing countries as the shining example to follow. But the shining example ended in disaster: with an overvalued peso, the economy went into recession in 1996 and collapsed in 2000 (now with Ménem's successor, Fernando de la Rúa, as president). This led the IMF to provide huge support packages, much of which was squandered in a misconceived attempt to maintain the value of the peso of one-to-one to the dollar. In the end, the only tangible result was more indebtedness.

The then relatively unknown Nestor Kirchner won the Presidential Elections in 2003 after Ménem pulled out of the second round, anticipating he was going to lose. At that time, the external debt was considered impossible to pay pack, and Kirchner opted for a 'default', that is, non-payment, stating that the country was willing to pay, but that a significant reduction of the debt was needed (a socalled 'haircut'), converting himself overnight in hate figure number one for the 'international financial community'. Argentina managed to restructure the debt with a 'haircut' of around 73%, and the Argentine economy made a surprising U-turn recovering vigorously. After only three years, GDP exceeded the pre-crisis level.

Source: World Bank, Atlas Method (https://data.worldbank.org/indicator/NY.GNP.PCAP.KN)

As for the economic recovery, Argentina compares favourably with Greece, which entered into a severe debt crisis in 2007, and where a default was ruled out. The IMF forecasts that Greece's economy in 2023 will remain 17% lower than the pre-crisis level, and that is after 12 years of crisis management under the auspices of the IMF and the EU! IMF actually considers that Greece will not reach the pre-crisis level before 2034.

Source: World Bank (https://data.worldbank.org/indicator/NY.GNP.PCAP.KD?end=2018&locations=GR&start=2000)

At the same time, a social redistribution policy implied that the poverty rate in Argentina was reduced to less than half, extreme poverty was reduced to 5% and unemployment was reduced from 26% to 7% (the reason why the Kirchner-Fernández governments earned the 'populist' label).

This is not to say that the legacy of Kirchner-Fernández does not have its downsides. As it can be seen in the previous graph, the economy stagnated after 2011 (among others due to a fall in the price of Argentina's main exports), a series of controls were maintained that led to economic efficiencies (foreign exchange control, artificially low tariffs for many public services, etc.), inflation was around 20%, and there were moderate deficits on public finances and the current account. But poverty had as mentioned been significantly reduced, unemployment was relatively low and not least: the external debt was manageable (52% of GDP). The economy that Macri received in 2015 was stagnant and there was a need for reforms, but there was no acute crisis.

One of the challenges facing Argentina was that it did not have access to the international financial markets, since US vulture funds, which had bought a small part of the Argentine debt for a song, rejected the agreed 'haircut' and demanded to be paid in full (with a profit of hundreds of percent). They were backed by an American judge of their own choice. This made it impossible for Argentina to honour its debt, since the payments they made to the creditors were confiscated by the vulture funds. In other words, pure state-sponsored extortion.

Macri, instead of recognizing the delicate balance of the Argentine economy, started radical reforms. His first priority was to gain access to the international financial markets, so he could borrow money. He agreed to pay 4,65 billion dollars to the vulture funds (issuing new government bonds, thus starting a new cycle of indebtedness). He eliminated capital controls and international investors flocked to the country attracted by high interest rates, buying short-term government bonds (while wealthy Argentines were more cunning and grabbed the opportunity to take their money out of the country). He abolished the price controls for public services and the export tax for agricultural products (leaving a gaping hole in the public finances). During the first year of the Macri government the economy was dismal, but in 2017 it seemed to be recovering, driven by the influx of financial capital from abroad, and Macri benefited from the bonanza during the midway elections in 2017, strengthening his position in the Argentine Congress. Alas, his policy did not work. Inflation increased, the foreign short-term capital fled the country and the peso came under pressure. Then, in mid-2018, IMF, led by Christina Lagarde, came to the rescue with the largest financial package the IMF has ever put together: 57 billion dollars, much of which was squandered once again in a futile attempt to avoid the devaluation of the peso. And, furthermore, the funds were 'frontloaded', that is most was paid out in advance, based on pure fantasy projections predicting that the country would start a vigorous economic growth. Which of course did not happen. Critics accuse the IMF of indebting Argentina with 57 billion dollars just to fund the capital flight.

Of course, almost all major international and national mainstream media had applauded the Macri government, and the IMF and the World Bank were happy to have Argentina back in the fold (the Christina government had paid them what they were owed and then unceremoniously booted them out of the country). However, in the mid of this almost unanimous applause, there were also some more prudent voices, warning that the IMF and Argentina were about to repeat the mistakes of the past. They were not listened to.

But could Macri have acted differently? Didn't Argentina seriously need reform? Yes, he could have acted differently, if he and his people had not been blinded by their own class interests, ideological prejudices and outdated economic theories, in vogue in the happy neoliberal years of the nineties. External debt has returned to a level that will necessarily require restructuring, inflation exceeds 50%, poverty is affecting one third of the population and unemployment is growing.

Macri and the IMF have left a sacred disaster for the incoming Government, of which the most unforgivable is that they have indebted the country once again without any benefit to show for it. The task the new Government is facing is all but enviable.

So don't blame Christina.



















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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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