Argentina’s economy: the story that never repeats, but often rhymes

By Giovany Orozco Leal-

Buenos Aires, June 1, 2012. REUTERS/Marcos Brindicci

Besides battling with the socioeconomic and humanitarian challenges posed by a global pandemic, 2020 will be a year of historical significance in the collective consciousness of Argentina. In a single year, the country went from mourning the loss of national figures the size of Joaquin Salvador (also known as Quino, perhaps Latin America’s most famous cartoonist) and controversial footballer Diego Maradona, to celebrating becoming one of the first Latin American countries to finally legalise elective abortion after a long-fought battle in congress.


On the economic front, one of the most recent highlights came in August 2020 with the renegotiation of $65 billion of sovereign debt between the Argentine government and its creditors, after the government declared the ninth default in Argentine history earlier in May. The health crisis caused by the pandemic was one of the factors triggering this default and subsequent debt re-evaluation; however, the country’s economy was already facing a recession before the pandemic started, with decreasing GDP levels and high levels of inflation since 2018 (with inflation estimates between 40% to 50%).


The causes that triggered the 2018 recession are diverse and complex, some include Argentina’s increasing reliance on external financing to fund its budget expenditure and current account deficits, which left it vulnerable to external shocks at a time where the US’ Federal Reserve started increasing its interest rates (driving investors away from riskier markets in developing countries). This was coupled with the worst drought Argentina had suffered in 50 years, significantly hurting agricultural exports revenue during 2017 and 2018.


This situation led the then government of President Mauricio Macri to turn to the International Monetary Fund (IMF) for support, leading to one of the largest lending programmes (in dollar terms) in the IMF’s history. These resources, however, did not help to avert the crisis, and in October 2019 the centre-right government of Macri lost the presidential election to the centre-left ticket of Alberto Fernandez and former president Cristina Fernandez de Kirchner. This election outcome caused an already devalued Argentine peso to take another hit.


Symptoms of a bigger problem


Although some of the difficulties that Argentina is facing sound specific to its current economic and political climate, the Argentinian economy is no stranger to concepts such as high inflation, recession and defaults, which have continuously made headlines since the start of this century. In 2001, the economy went through a currency crisis that spiralled into one of the largest defaults on government debt in the world, and a subsequent recession which many credit to be the source of the current challenges facing the country.


The severity of the 2001 crisis had major social, political and economic consequences on the country. After a prolonged period of political unrest, Nestor Kirchner was appointed president of Argentina in 2003, marking the start of the Kirchner administration that lasted until 2015. The economics of their policy programme were particularly defined by a heterodox mix of increased government expenditure leading to an increase in fiscal deficits, an increase in the tax burden, price controls as a form of subsidy in the utilities sector (such as energy and transport), and multiple protectionist policies including a tax on meat exports.


During the first part of the Kirchner administration, the Argentine economy grew between 8-9% annually, and unemployment rates dropped from 16% at the onset of the 2001 crisis to 8.5% in 2007, with a growth in foreign reserves and current account surpluses during this period, indicating a strong recovery from the financial crisis. However, structural problems remained unsolved, as price controls in utilities turned the country from a net exporter to a net importer of energy, while government expenditure kept on growing.


These structural problems started becoming more evident when the global financial crisis hit in 2007/2008, slowing down growth and hurting the exports market, which also caused inflation to rise again, with private estimates of inflation yielding significantly higher inflation results than official estimates (which led to the suspicion that the government was manipulating its official economic indicators).


Between 2008 and 2014 Argentina went through a period of economic stagnation, that led to a default of its debt obligations after a controversial US court ruling in 2014 mandating that the Argentine government had to compensate a small minority of investors who rejected the latest debt renegotiation (and to whom the then government was refusing to make payments to).


The stagnation of this period is particularly puzzling given the fact that Latin American countries, Argentina included, were in a relatively stable macroeconomic situation when the 2007/2008 crisis broke out (so much so that the new investment opportunities in the region were expected to provide relief from the effects of the crisis). In the case of Argentina, the standard narrative goes that domestic mismanagement and public deficit expansions hurt the recovery from the previous recession and paved the way for the stagnation at the end of the decade. However, focusing solely on this narrative can be problematic if it ignores the very specific position of Argentina in the global market and the impact of international conditions on the domestic situation.


Argentina in the world economy


Besides economic volatility, another feature that strongly tends to be associated with Latin American economies is their reliance on the export of raw materials, and Argentina is no exception (in 2019 the main exports from Argentina to US markets were crude oil, aluminium, precious stones (silver and gold), and wine). This has had several long term implications for Argentina, which has to rely on the import of machinery from industrialised countries to extract its own natural resources (refined oil, machinery, mechanical appliances, and electric machinery and equipment were among the main imports brought from the US during the same period); creating a direct interdependent relationship between Argentina and the global economy.


This interdependence became clear, for example, when looking at the impact the Mexican, Brazilian, Asian and Russian crises had on the Argentine economy during the late 1990s which preceded Argentina’s default in 2001, even during a time when Argentina was relatively isolated from global financial markets. A more recent example can be found in the impact from the stagnation of European economies after the financial crisis of 2007/2008 and the slowdown of the Chinese economy (which had grown to become Argentina’s second-biggest trading partner) in 2014.


Highlighting the role of the relationship between the global economy and Argentina (or similar countries in the region which visibly share similar macroeconomic structures), does not need to negate the role of national economic entities such as the central government or the central banks (whose decisions do have implications in the short and medium-term). However, a narrative that only focuses on the role of national entities alone risks misrepresenting the deeper and often overlooked issues behind the country’s macroeconomic instability. It can even prove harmful, as this narrative was used in US courts to argue that the Argentine government had to use tax money to compensate a small minority of foreign investors during its 2014 default, while the country was already undergoing a recession.


Furthermore, versions of this narrative are still present in the loan packages offered by the IMF, which may promote a restructuring of the economic institutions within the nation but fail to recognise and address the structural issues of Argentina’s development, and therefore, fail to effectively provide macroeconomic stability.


During the current context, it is important to recognise that the Covid-19 pandemic is a public health crisis rather than an economic crisis, and although the impact this crisis will have in Argentina is difficult to predict, it will likely have strong long-lasting socioeconomic implications. On one hand, the government imposed some of the toughest lock-down restrictions in the region, but the true impact of these measures on the labour market is yet to be seen. On the other hand, the worsening of global economic conditions during this period is likely to play its own role in the mid and long term conditions of the Argentine economy. Overall, what the new normality will mean for Argentina is hard to define, but perhaps it is still possible to hope that in the current crisis the structural problems, that have always laid below what was once considered to be the old normality, can continue to be exposed.

 

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