Text by Bruno Martín Picanzo Ubal
Argentina’s economic crisis has caught attention all over the world. Author Bruno Martín Picanzo Ubal has long observed the situation and explains how one thing led to another. He also discusses why the country’s behavior is likely to continue to put a strain on its battered economy. Does it only have itself to blame?
A century of economic decline. Eight defaults on its debt. One of the world’s highest inflation rates. To top it off, a museum dedicated solely to foreign debt. Maybe it is time to do some self-reflection? That might be a hard thing to do …
There is an old joke that goes something like this: If someone visits Argentina for a month, by the second week she or he will find things are different. If they return one year later, they will find things stayed the same. But enough preaching at the choir. What’s going on with Argentina? In two words: fiscal deficit. To put it another way, economic mismanagement.
Recap of important events
To understand, we need to do a recap of some events: In October 25th, 2015, so-called business-friendly and presidential candidate Mauricio Macri of the center-right Cambiemos (Let’s Change) coalition forced an unexpected runoff with Daniel Scioli of the ruling left-wing Front for Victory (Frente para la Victoria) coalition. Stocks and bonds soared the day after under the prospect of Macri reforming the battered country’s economy. After all, much was said about the pesada herencia (heavy inheritance) he had been left to deal with. Brace yourselves, for savage austerity was on the way, his dissidents warned. Of course, after four ultimately agonizing years, he himself left a worse pesada herencia. But we’ll get back to this later.
You might have noticed the peculiar adjective I used to describe Macri at the beginning of the last paragraph. It explains part of the big picture I’m trying to draw. How did Macri, the business-friendly hope for Argentina and poster child for the fight against populism fail so spectacularly? He had, in his words, “the best team in the last 50 years”, an approval rate of over 60% after taking office, considerable support from the United States and the rest of the developed world. In addition, he counted on the tacit support of the IMF’s (International Monetary Fund) by way of the organization’s largest loan ever at $57 billion when things took a turn for the worse. To put this in perspective, Argentina’s GDP – Gross Domestic Product – is approximately $470 billion.
Whether he didn’t want, know or simply couldn’t lead Argentina down a growth path, even his most ardent supporters would admit his government was – at least economically – a failure. Regardless of his intentions, political representatives should be judged by their actions, not words. Consequently, there is one question many ought to ask themselves, especially those who throw around the neoliberal epithet so often: What if Macri’s economic policies were not only business-unfriendly but not that dissimilar to that of his predecessors? As it happens, Argentina simply continued the downward spiral it was under his administration.
Underlining this is key, as there has been no shortage of articles and obstinate opinion pieces on Argentina that have painted a very inaccurate picture of what lead to Argentina’s latest economic calamity.
The poverty rate in Argentina
Let’s get down to the facts. Although Macri did inherit a mess, it was difficult to know the full extent of it, for the INDEC, the governmental agency responsible for analyzing social and economic indicators in the country had been infamously suffering from years of political pressure and heavy manipulation by the time he took over as President.
To fix a problem, you must first understand it. But what do you do when you don’t even know how many poor people there are in your country? When a head of state claims a country where children die of malnutrition every year has a poverty rate below 5% – which would be lower than that of Germany and Australia. When the then Economy Minister claims to not know his own country’s poverty rate because it’s a “complicated question” and a “stigmatizing measure”?
Macri had to face two tasks
Thus, Macri was faced with two tasks. On one hand, he presided over an economy in shambles: One of the world’s highest inflation and interest rates, unrestrained government spending, a central bank with dwindling reserves, an unsustainable fiscal deficit (which occurs when a government spends more than it takes in) and no access to capital markets. On the other, to clear the rubble Macri had to first restore the statistics agency’s reputation.
Of course, if you didn’t know this, which is understandable, I believe you’d be hard-pressed to not believe this Macri guy was the argentine incarnation of Robert Mugabe – after all, poverty went up from roughly 5% to 32% months after he took office. Except it didn’t. He simply restored the INDEC’s credibility. Unfortunately, besides this and a few other necessary but insufficient measures in the right direction such as returning to international markets after settling a 15-year debt settlement and lifting currency controls imposed by his predecessor, his gradualismo (gradualist approach) showed his administration had misdiagnosed Argentina’s source of financial mismanagement or plainly refused to grab the bull by the horns.
And the source of Argentina’s chronic economic malaise is and always has been its unsustainable fiscal deficit. Simply put, don’t run your credit card to the ground and keep your finances in check. If this seems obvious to you, hats off to your common sense, for Argentina has spent 66 of the last 70 years in the fiscal red. In other words, there were only four years in a 70-year timespan where Argentina’s expenditures did not exceed its income.
How to finance a fiscal deficit?
There are three ways to finance a fiscal deficit: By printing more money, which increases inflation, a hidden tax that deteriorates the population’s purchasing power and wages and hurts the poor the most; by increasing revenue through tax hikes or creating new taxes; and by borrowing.
And borrow Argentina did. A lot. And why? To finance its onerous fiscal deficit. To avoid generating too much discontent by keeping government spending high in a country perennially known for anything but stability. This is the country that once had a President draw rousing applause in Congress when declaring he would not honor Argentina’s debt obligations on the verge of what is consensually agreed was the country’s worst economic and social crisis. The way I see it, a country hell-bent on treating its alcohol abuse with alcohol. It is not a coincidence Argentina boasts the highest number of psychologists per capita in the world.
It is tempting to blame Macri’s excessive borrowing – or his supposedly neoliberal policies (even though Argentina remained one of the world’s most protectionist economies under his administration) as what did the economy – and ultimately, him – in. Yes, Argentina does have a debt problem today. But debt is not the cause of its illness but a symptom. Argentina’s gradualist approach under Macri was doomed from the start because it did not tackle its structural problems. He did not undertake the necessary reforms the country needed to avoid a collision. In the end, Argentina simply got a handy short-term dose of painkillers because rehabilitation would have been too painful.
What should be done
Namely, reduce public expenditures to reduce the sky-high tax rate (Argentines need to work more than six months a year just to pay taxes) boost competitiveness (Argentina is placed 83rd in the World Economic Forum Competitiveness Ranking) and open up one of the world’s most repressed economies (Argentina is ranked 148th in the Heritage Foundation’s Index of Economic Freedom). He ingeniously believed the money would keep pouring in to finance such a serial defaulter of a country. When international markets got tired of his snail-pace gradualismo, they turned off the money tap. He still refused to tackle the source of evil. Instead, he turned to the IMF, Argentina’s Santa Claus and the only entity deranged enough to finance the country’s lavish fiscal party at relatively low-interest rates – as the organization is financed with taxpayers’ money there is little incentive to spend wisely when you’re using someone else’s money on someone else. Since it joined in 1956, Argentina has signed 22 agreements with the organization. Partners in crime?
Ultimately, the irony of it all is reducing state expenditures apparently was not possible due to the social costs it would have on the population. As it happens, not reducing public expenditures leads to deeper crises. According to a study commissioned in 2018 by the Inter-American Development Bank that measures the government spending waste costs in Latin America and the Caribbean, Argentina has both the highest and most inefficient public spending in a region already known for endemic corruption and instability.
Where does Argentina stand today?
Argentina has a debt crisis because it has a fiscal crisis. It has a fiscal crisis because it overspends. And it overspends because it has a bloated public sector that leeches off the productive sector in the economy to sustain a system of crony capitalism and corrupt politicians, businessmen and union leaders whose implicit message to the population is feast today, hunger tomorrow. But more importantly, it has a moral crisis. It has a moral crisis because according to Federico Gonzalez & Asoc., a local political advisory firm, 75 percent of the population does not care about a political candidate’s honesty and stance on corruption.
Where does Argentina stand today? You figure it out. $100 billion of foreign debt restructuring. According to its Economy Minister, he is “not going to allow foreign funds (referring to the IMF) to set the guidelines on macroeconomic policy” and that there will be “frustration on the part of bondholders”. This goes in line with what the country’s vice-president recently declared, calling the IMF loan “illegal” and demanding a substantial haircut in the amount that needs to be paid back. The Economy Minister also stated Argentina would not incur in austerity measures and proposed a path to a fiscal balance – by 2023.
Of course, to accomplish this, Argentina would need to attract sufficient foreign investment and achieve a boost in exports to meet its debt obligations – as most of its debt is US dollar-denominated. Hats off to your common sense again, as one of the current administration’s policies has have been to increase taxes on the country’s most important exports. Agribusiness, Argentina’s most competitive sector which provides substantial foreign currency has been struck down with a tax hike. Contradictions are the order of the day in the land of good steak and tango.
Focusing only on symptoms
To put it another way, Argentina is asking for a 3-year grace period to do what it always does: Impose austerity measures, not on its bloated public sector, but the population by refusing to reduce its highly inefficient spending. By blaming the country’s shortcomings on its debt burden, the current administration is replicating Macri’s mistake. Surely, it cannot be all bad, can it? Could the now inescapable global recession triggered by the coronavirus pandemic present an opportunity for much-needed self-reflection? A chance to fall out of love with conspiracy theories and ponder the question that maybe, just maybe, the enemy has been within all along? Well, in the President’s words: “The world is conspiring to make our exit from the crisis more difficult”.
Focusing on the symptoms and not the cause of the illness will only exacerbate Argentina’s agony. Some of the policies are argentine classics: More tax-hikes, more money-printing and more scapegoating to turn a blind eye to the hard-truth that living beyond your means is not only unsustainable but is immoral and imposes much heavier social costs to the population in the long run. If there is a light at the end of the tunnel for Argentina, it is the light of an oncoming train.
Please note: This text is about a complex topic which reflects among other things the individual opinion, observations and researches of the author.