Transcript Argentina

NS4540
Winter Term 2016
Argentina Economy
Overview
• Robert Looney, “Argentina’s Dubious Boom” Foreign
Policy March 14, 2012
• When Argentina defaulted on its sovereign debt in 2002
few predicted the country would soon bounce back
• Yet aided by aggressive fiscal and monetary stimulus
• Argentina enjoyed 7.6% growth through 2011
• Commensurate gains in employment and declines in poverty
• Lead many to conclude that Greece was better defaulting
rather than go through harsh austerity program
• Other’s claimed that Argentina showed the weakness of
the Washington Consensus and that a new set of rules
should guide policy making
• Fact is the country just living on borrowed time.
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Peronist Model I
• Model of Argentina’s post-crisis boom was the Peronist
policies of the 1940s and 50s.
• Corporatist Peronism accommodated interests of
business, labor and the poor through collective
bargaining managed by the state
• Resources were skimmed from the country’s highly
productive agricultural sector to cover cost of wages and
profits in excess of competitive levels
• But Peronism promised more than it could possibly
deliver
• Expansionary macroeconomic polices led to ever-rising inflation,
stagnant productivity and battles among highly organized
interest groups
• Spurred popular unrest, and
• Repressive government reactions
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Peronist Model II
• Expansionary macroeconomic polices led to
• ever-rising inflation,
• stagnant productivity and
• battles among highly organized interest groups
• Spurred popular unrest and
• Repressive government reactions
• Argentina left with
• Anemic public services
• Crumbling infrastructure
• Profitless industries and
• Paralyzing union demands for wage increases unsupported by
productivity gains
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Peronist Model III
• Peron overthrown by military in 1955
• However legacy of Peronism survived
• Peculiar mix of
• Corporatism
• Populism, and
• Nationalism
• Peronism rose and declined during the 1980s and 1990s
• Argentina especially hard hit by policy experiments
designed to curb inflation. Often left
• Economy uncompetitive in global markets
• Burdened by a huge external debt and
• An overvalued exchange rate pegged to dollar
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Post 2001-02 Crisis I
• Its economic troubles culminated in a financial crisis in
2001-02 with
• The collapse of the fixed exchange rate and
• A sharp recession accompanied by fierce unemployment and a
wave of bankruptcies
• Economic polies of the post-crisis administration of
Nestor Kirchner 2003-07) appear to have initially taken
into account hard lessons of unsustainable policies
• While Peronist in spirit, Kirchner’s economics initially
amounted to a pragmatic response to the massive
income redistribution brought on by the financial crisis
and subsequent recession
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Post 2001-02 Crisis II
• On one hand the crisis
• Wiped out household savings
• Increased unemployment to 24%, and
• Impoverished large segments of the middle class
• On the other hand
• Depreciation of the currency made exporters more competitive
and
• Greatly reduced the burden of their debts denominated in pesos
• Kirchner suspended payments on the country’s
sovereign debt, relieving government budget of massive
obligations
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Post 2001-02 Crisis III
• Also echoed Peronist tradition by
• Favoring domestic industries
• Maintaining maintained a grossly undervalued peso exchange
rate
• Plowing huge sums into expanded social programs, and
• Imposing price controls on key sectors (such as energy) to
suppress inflationary pressures
• On their face policies hardly seemed sustainable
• Stroke of luck – programs coincided with the start of a
global commodity boom
• Provided government with windfall revenues from export taxes
• As a result Argentina able to clear debts with IMF ahead of
schedule
• Freeing Kirchner from IMF’s calls for fiscal prudence and
demands to shift to more market oriented policies.
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Post 2001-02 Crisis IV
• On other fronts, Peronist populism widespread
• Government went to war with commodity exporters, protecting
the purchasing power of Kirchner’s constituents in an inflationary
environment by restricting food exports and imposing price
controls
• When Kirchner decided not to run for reelection and
handed the presidency to his wife, Christina in 2007 many
thought she would begin liberalizing the economy
• Did not happen.
• Consequences apparent in energy
• Argentina has abundant deposits of natural gas
• Country appeared on verge of becoming a major exporter in
early 2000s
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Post 2001-02 Crisis V
• However price controls reduced profitability of
investment in the sector to such an extent that domestic
shortages are now forcing importation of natural gas
• Ironically this has made it necessary for the government
to subsidize imported gas even as it refused to allow
natural gas producers to charge for the full cost of
production
• Estimates waste involve are $8 billion of 2% of Argentine
GDP
• Government’s tilt toward its urban industrial constituents
taken a toll on farm output.
• Argentina has a clear comparative advantage in
agriculture – similar to U.S. Midwest.
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Post 2001-02 Crisis VI
• Yet early in Cristina Kirchner’s rule, farmers went on
strike to protest government’s attempt to transfer money
from them by increasing taxes on exported wheat, soy
and meat.
• Under Ms. Kirchner total taxes on agricultural exports
has risen to 75% effectively curtailing new investment in
the sectors
• Instead investment is flowing into uncompetitive sectors
favored by Peronist politicians and bureaucrats
• Most bizarre example is government’s import substitution
program in frigid Tierra del Fueo
• In 2009 Ms. Kirchner sought to create jobs in this
desolate isolated region.
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Post 2001-02 Crisis VII
• Tried to encourage production of consumer electronics –
TVs smartphones
• Policies
• Doubled the value added tax on imported electronics – backed
up with restrictive licensing requirements
• Also lowered the already minimal taxes paid by electronics
companies (mainly Samsung) that assemble in the region.
• The costs through exemptions from income tax, valued
added tax and taxes on imported parts have cost
Treasury about $1.3 billion
• More than $100,000 for each of the 10,000 jobs that have
been created
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Post 2001-02 Crisis VIII
• By 2012 Argentina faced double problems of slowing
global economy and productivity sapping domestic
economic distortions
• Country’s increased levels of protectionism generating
threats of retaliation from its regional trading partners
• Less tangible is the decline in quality of governance.
• Marked deterioration in the World Bank’s government
effectiveness and the rule of law
• Also a significant drop in economic freedom
• Capital began fleeing country but government could not borrow
because of he unresolved debt settlement
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Argentina: Governance
Argentina Governance (Percentile)
80
70
60
50
40
30
20
10
1996
2000
2003
2005
2007
2009
2011
2013
Legend
Voice
Political Stability
Government Effectiveness
Regulatoy Quality
Rule of Law
Control of Corruption
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Economic Freedom Argentina/Brazil
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Post 2001-02 Crisis IX
• Plainly this unsustainable economic model holds little
promise for debt-strapped Eurozone countries seeking a
fresh start.
• However Argentina’s initial post-crisis successes do offer
some insight to IMF stabilization programs
• By focusing on austerity these program are extremely expensive
in terms of lost output and falling living standards
• By contrast aggressive Argentine-style stimulus in wake of a
large devaluation could offer attractive short run solutions
• However imperative to make transition from a demand
oriented strategy to one focused on expanding
production for external markets as soon as recovery
under way
• In Argentina the lingering power of Peronist interest
groups has led Argentina to miss this transition window
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