Another CFK Corralito

[AndyD]

It's true--as I've heard many times from Argentine economists--that the Kirchners have by no means single- (or double- <img src="http://baexpats.org/images/smilies/smile.gif" border="0" alt="" title="Smile" smilieid="1" class="inlineimg" />) handedly fixed the long-standing structural problems in Argentina's economy. But what are the biggest ones I usually hear cited? A skewed, inefficient, and needlessly regressive tax structure. An over-reliance on commodity exports. A weak domestic manufacturing base. Whatever you think about the Kirchners, it's impossible to seriously study Argentine history and not come to the conclusion that the knee-jerk neoliberalism that dominated the country from 1976 through 2003 (and was celebrated throughout by the West) has made all three of these problems vastly worse.

Paul, I think you're overlooking some important things in your assessment of our economy and the criticism to the Kirchners. To begin with, it would be extremely controversial to say that neoliberalism dominated our economy (I mean, Argentina's) from 1976 to 2003. From 1976 to 1990 there was a noticeable share of financial regulations, state-controlled enterprises, exports tariffs, large import tariffs, fiscal deficits and currency controls, depending on the administration that was running things. There were even extensive price controls in the mid 80s, it would be absurd to label the 1983 to 1989 period as neoliberal. The 90s were 'more neoliberal' but it still would be disputable to call them so, given the expansive deficit and tight administration of foreign exchange (or convertibilidad). I'm saying this but believe me that I'm pretty much against neoliberalism too .

I also find it inaccurate to say that the Proceso (1976-1983) installed chronic hyperinflation. There was a significant spike in inflation around 1975 to 1976 as the accounts were imbalanced during Peron's widow's administration following a plunge in commodity prices that found us unprepared because of the populism of the Campora-Perón period. Proceso then calmed down inflation until the region's debt crisis of 1982, despite their economic policy from 1976 to early 1981 being horrible. It is a complex matter, because Proceso partly succeeded against inflation by suppressing unions, which kicked back at a point besides other consequences. But I find it odd to place the origin of the chronic-inflation problem there.

It's also not accurate to suggest that Kirchner maxed out the budget when he came to power and was criticized by the IMF for doing that. Consolidated fiscal accounts were strongly positive until around 2007-8, if there was cricicism from the IMF it was pointed at other policy, mostly related to economic freedom. Still, it was extensively commented at the time that the IMF would approve his administration, until 2008 or so when INDEC was intervened, followed by other controversial measures. Not surprisingly, several economists now in the opposition were part of the pre-2008 administration (Redrado, Lavagna, Prat Gay). K policy and its results shouldn't be analyzed as if they were a static picture.

By the way, as it has already been pointed out, World Bank statistics are based on official (INDEC) figures, as you can verify it by looking at the inflation numbers they publish. The statistics you cited are based on polls that have been particularly criticized (pricing polls and home-income polls). I don't deny that there was advancement, but they can be attributed to the country leaving the 2001 crisis behind, the huge opportunity given by the world and by policy that produced an inconvenient acceleration. Is the government adding to the opportunity or subtracting from it?

I believe they are doing the latter but for motives that are not well reflected in the points you listed as being the most frequent complaints. Basically, my complaint is that we are not building an infrastructure for the future, as we should. Despite these being 'times of fat cows', we have consumed stocks that we had built. We depleted around half of our fossil fuels reserves due mainly to government policy (e.g. price caps) liberating resources to be applied to consumption or short-term investment at a cost that will be paid in the future. We lost monetary stability and created inconsistencies in the price system, meaning that there is a latent inflation that will have to be fought against when the subsidies are undone, unless we believe in increasingly-centralized planning although history and theory teach us otherwise. We used up surplus hydro-power that was made available in the 70s-90s and were forced to hurriedly increase our energy infrastructure via less-efficient thermal generation despite our hydro potential. An adequate pension system would be useful to strengthen the financial system, while it is costly to go from a discretionary state system to a (maybe partially) private one, but the government didn't make needed reforms first and then they sadly nationalized, thus consuming costs that we had paid in the 90s. We lost the competence and reputation of INDEC. We pseudo-defaulted on CPI-linked bonds. Etc.

When people talk about non-sustainability, besides referring to maxing out the budget (which happened only around 2008 so we are probably only starting to see its dark side), they mean using those kinds of stocks, which cannot be depleted twice and would be needed to maintain an horizon of certainty for long-term development. I don't think I'm orthodox at all in my thinking, believe me that I dislike expansionist austerity and such right-wing positions, but one thing is ultra-orthodox thinking and another is mainstream economic ideas.

Among frequent criticism, measures that concentrate power in the presidency (e.g., the treatment of media) shouldn't be overlooked, that's also an important feature of a healthy economic system.

I could go on forever so I'll just comment about a point you place emphasis on: foreign investment. You'll probably agree that investment is good and necessary, the open questions being its origin and quantity. In general, our countries are not largely capitalized, plus it would be silly/impossible to ask locals to invest all of their savings in our economy given its uncertainty. Therefore, foreign investment is a good thing for us in general. In the last decade we haven't needed it badly because of circumstances. Firstly, we were using up excess capacity that was built up in the 90s; it's worth mentioning that it was built partly by means of foreign investment and investment from locals who brought back their money from abroad. Secondly, because of commercial dollars from the commodity-Brazil-Chile boom, a good portion of which were saved from 2003 to 2007 as there was fiscal surplus. Thirdly, because of strong foreign investment flows into our neighbors. When Brazil receives a lot of capital it cannot absorb so much so the 'invisible-hand' of the market transfers some of its effect to Argentina, for example by rising demand of oil-drilling supplies or of autos purchased by Brazilians who work for the oil industry.

My point is that I don't think we should conclude that foreign investment is not important. I wouldn't underestimate the issue because the panorama is deteriorating. Even though the external conditions for investment in Argentina are great (massive liquidity, agricultural-commodity boom, overheating in Brazil, etc.) we are (presumably) going from an average investment ratio to a lower-than average one. Besides, current policy may be impacting on the quality of that investment, as there are uncertainties related to the maintenance or not of subsidies, inflation, discretionary trade regulations, etc., so spending in fixed assets may be being tilted toward safer ones that are not the optimal ones.

In an attempt to prevent you from thinking that I'm too orthodox in my thinking, which is actually a hopeless disguise for blatant promotion , you can check my reports at a South America stock-investment model that I manage at Covestor, for example, criticism toward the stringent policy of the ECB in the June and July report:

http://covestor.com/andy-djordjalian/south-america

- Andy.

 

[arlean]

For gsi13686. I just want to say that I understand what you are saying. I did not take it that you were trashing the poor. I keep talking to Argentines, both professional and not professional, trying to understand why there are so many problems here. Argentina once was a wealthy nation, with the average per capita income the second highest in the world. There is no reason it should not be that way now. It is a resource rich country with intelligent people. But it happens just as you say. Any intelligent person will question: Why? I continually talk with any Argentine that has any opinion or understanding--or thinks that they do.

At this point, I see it the same way that you do. All seem to know they are in trouble but only a few understand the dynamics of what keeps them in this mess. I think your message is intended as one of compassion. I didn't read into it what the others did. A few get it. I have one profesor that I discussed it with in depth lately (as I do with almost everyone I can) and he sees it the way you do. He said that gradually the middle class is being eliminated in Argentina and it will be just the few very rich families and the poor.

It is the same in the states. Not many people get it. But more are starting to. Don't feel bad when other people don't understand. Remember that almost any information that is new, when others hold a different opinion, will be ridiculed at first. I apologize for the rudeness though. I never think there is an excuse for rudeness.

I don't know if you know who Adrian Salbuchi is but he is an economist--he has been a university professor of economics but I don't know if he still is. He has a very good handle on all this. You can see his videos at www.asalbuchi.com.ar and he also has a radio station but I don't know how to get that. I don't have a radio here.

 

[elclandestino]

Being natively from a country as corrupt as Argentina, I can say only one thing! Nothing could be done without a working legal system in place and persecuting everyone involved with previous regimes!

I was raised sorta parallel on both sides of Iron Curtain. On top lived and traveled in any system you can imagine. Lived briefly in Gaddafi's Libya too several years ago! Been to places like Iraq, Belarus, Uzbekistan, etc.

Official politics and who's in power are absolutely irrelevant! Did US change for better under Obama? No, it didn't! What matters is social and economical system, society's values, etc.

Argentina has a bad past of Peronists and militants haunting it!

Personality cults are very much of a 3rd world trait!

Top guys are all about getting richer. They couldn't care less about you or me

All I want is a personal sovereign with as little government's hand in my affairs

America experienced boom after sorting out its property laws and by industrialists not career politicians taking on important roles

During the Ottoman Empire you were free to do whatever you want, go wherever you want, go to any church/mosque/synagogue... As long as the Sultan gets paid in taxes

Argentines go after most charismatic type who can talk the talk, not walk the walk. They are not only. America has been run mostly by series of morons, while a guy like Ron Paul can't get 200-300 people at his conventions

Hard work, education and enterprise are the key. While most of EU is about to collapse, Germany gets stronger and stronger

 

[LostinBA]

this is offensive beyond belief but remembering other posts by this person i would not expect anything else. not a class act, apart from the fact that she is pretty clueless.

i know quite a number of upper middle class argentine professionals and academics who voted for CFK.

Some of them even voted for her 3 times.

 

[LostinBA]

I think the more correct statement is they defaulted and REFUSED to pay their debt. Obama actually mentioned that to CFK in their oh so touted meeting. (He told her Argentina should repay the debt).

Of course, Obama has zero room to tell anyone to pay their debts.

What I want help understanding is something that I heard from an Argentine that Argentina doesn't have to pay the debt because it actually owes the money to itself. Does anyone know how much of the total value of the bonds in default were/are actually held by Argentinians themselves?

The other thing that confuses me is the vulture debt buyers that buy up the debt for cents on the dollar and then get judgments in foreign courts for the original amount plus penalties and interest that compounds. Does anyone know if the amount claimed to be outstanding total debt is this type of garbage cocksucker speculation?

Finally and this made me laugh tonight...I was hanging out with a CFK fanatic who told me that there is no inflation here since salaries rise with it. I guess his obvious point is that by doing so, inflation is rendered moot. Geez, I wonder how that impacts exports whose profit margin (and therefore taxable base) are eroded or whose prices must rise and ultimately become uncompetitive on the market, leading to economic degradation and currency devaluation...but then, I'm a layman, not an economist. If someone could help me understand the first 2 points, I'd be grateful.

 

[gsi16386]

Finally and this made me laugh tonight...I was hanging out with a CFK fanatic who told me that there is no inflation here since salaries rise with it. I guess his obvious point is that by doing so, inflation is rendered moot. Geez, I wonder how that impacts exports whose profit margin (and therefore taxable base) are eroded or whose prices must rise and ultimately become uncompetitive on the market, leading to economic degradation and currency devaluation...but then, I'm a layman, not an economist. If someone could help me understand the first 2 points, I'd be grateful.

Perhaps you want to direct this question towards the Salon.com author, katzp339, whom argued the same point. wages rise with inflation...I call bullsh!t on that, especially considering CFK falsifies the actual rate of inflation. Also 30-40% work in negro so they see no raise at all.

 

[katzp339]

I have no intention of defending everything the government does--in fact, I wouldn't even characterize myself as pro-government. What I do maintain is that Argentina has achieved remarkable successes in the past 8 years, and the refusal of much of the "serious" Western media to acknowledge as much reflects ideological bias more than anything else. Most of the criticisms in this thread concern the future; I'd prefer to see what actually happens here in the real world rather than predict doom according to condescending orthodox projections, as U.S. media outlets have been doing since before Kirchner even assumed office in 2003. I assume that economic growth will slow and government spending will fall, but that doesn't mean that the country didn't still hugely over-deliver relative to pessimistic forecasts in the last decade, despite the large number of government actions that I have condemned and will continue to criticize.

To respond to some of the comments from this past day:

Regarding the World Bank statistics, they come from a variety of sources. (The reason that the government doesn't want to share its data with international organizations like the IMF, after all, isn't that they're going to parrot government stats uncritically.) Just look at the WB report "Argentina: Income Supports Toward the Bicentennial," which you can download as a pdf by googling the title. It's going to take more than "INDEC lies" to convince me that the government hasn't done fantastic things regarding poverty and unemployment--points on which the WB clearly agrees.

As regards Argentina's debt, 3/4 of pre-2002 bondholders have already accepted new terms for repayment which obligate the country to pay 35 cents on the dollar. A quarter continue to fight in court. (http://www.economist.com/node/21533453). As of March 2011, Argentina owes about half of its remaining debt to national public-sector agencies, and more than 36% to public sector groups, a portion of which are of course Argentine. (Though I suspect this portion is large, I haven't been able to find exact figures).

Inflation-wise, I agree that lying about inflation is a problem, though I assume that the government does it for political rather than economic reasons. (This was largely the consensus at a recent economic policy event with leading economists I attended at IDES--and the tone there was hardly pro-K.) With so much debt owed to the Argentine public and private sectors, there just isn't much debt-repayment advantage to be taken from lying about official figures. And just to clarify (as I said explicitly in the Salon piece), I think lying about inflation is indefensible and a very bad idea.

The growth in villas certainly reflects a policy failure on the part of the government, but not an economic one--if anything, the growth of these villas, populated largely by people from neighboring countries and to a lesser extent from the interior, reflects the "pull factor" of a strong economy, especially in Argentina's big cities. You guys certainly wouldn't claim that illegal Mexican immigration to the US during boom times (which has actually reversed in the last three years) reflects economic weakness.

Finally, my statement about wage increases simply reflects objective facts. While not everyone has benefited from wage increases that keep pace with real inflation, both measurable average wages and the minimum wage have risen at rates more than double the official inflation level, basically on par with what independent economists have estimated as the rate of real inflation. (http://www.jussemper.org/Resources/Economic Data/argentina'sliving-wagegap.html, http://www.ambito.com/noticia.asp?id=562231, http://www.forexpros.com/news/general-news/argentina's-minimum-wage-rises-23-percent-153124) Also, I understand that the minimum wage does not apply to those working en negro, though to be fair the government has also launched a high-profile campaign to combat the practice. And working en negro doesn't mean no raise, it means a raise that economists can't measure--you're making claims you can't possible support, gsi. Let's call the undocumented stuff a wash and move on.

Rather than predicting doom, let's wait for it to happen. Then--assuming it's worse than the slowdown in U.S. media darlings like Brazil and Chile--the many strident naysayers of this forum can all say "I told you so." Until this occurs, you should recognize that you're joining a long list of people who've been prematurely foretelling disaster for more than eight years--and that's just a historical fact.

 

[Lucas]

.....but that doesn't mean that the country didn't still hugely over-deliver relative to pessimistic forecasts in the last decade, despite the large number of government actions that I have condemned and will continue to criticize.

.....Until this occurs, you should recognize that you're joining a long list of people who've been prematurely foretelling disaster for more than eight years--and that's just a historical fact.

.......historical fact, indeed.

Also tell them to hope and pray for that to happen so they doesn't loose face later on when things did not go the way they have preached in this forum and maybe some others.

 

[citygirl]

I think many have been saying for a long time that Argentina's economic policies are not sustainable and that all their eggs are in one (soy) basket so to speak, not that every year people are saying it's going to fail.

And historically speaking, Argentina DOES go through a boom/bust cycle every 10 years. So I don't think anyone was saying things were going south 8 years ago (when you start from the bottom, not many places to go but up) But over the last few years, yes, many people have seriously questioned the steps taken by the K's government to build the foundation for continued economic success.

 

[katzp339]

I don't think anyone was saying things were going south 8 years ago (when you start from the bottom, not many places to go but up)

Conventional wisdom has held, from the very beginning, that Argentina (or any country) can't really grow without prioritizing austerity and debt repayment. The last decade would seem to counter this narrative, but instead of even acknowledging the possibility that refusing to pay back debts can actually be good for a country, much of the U.S. media has just ignored Argentina's success and continues to await the failure of the current model.


And when I say this has been the narrative from before Kirchner even began, I'm not exaggerating. Just look at what "most economists say," according to this NY Times article from May 2003 (http://www.nytimes.com/2003/05/18/business/argentina-turning-the-corner-leans-to-its-left.html?pagewanted=all&src=pm):

On the campaign trail, Mr. Kirchner has defined his economic philosophy as ''neo Keynesian'' without providing much in the way of specifics. But he has talked, of a huge public works effort to lift the country out of nearly five years of recession, led by a program to build three million new homes, which he says will create five million jobs in a country where the unemployment rate has been running at record rates of more than 20 percent.


But most economists say it would be a mistake for the new government to try to spend its way back to growth and jeopardize the budget surpluses that the markets and the I.M.F. expect. ''You need to have saved during the boom to be able to spend in the troughs,'' said Juan Luis Bour, director of the Foundation for Latin American Economic Research, based here. ''But what happens when you start from a point where you're broke?''


As a candidate, Mr. Kirchner also declined to meet with an I.M.F. delegation, leaders of the country's main industrial federation and the United States ambassador here. But now that he is about to take office, business leaders are predicting that the man who ran as a left-of-center populist will take a cue from Brazil's new president, Luiz Inácio Lula da Silva.


''The difference from Menem is not going to be that great because the degree of freedom available to him as president is going to be limited,'' said Carlos Pérez, executive director of Fundación Capital, an economic consulting firm here. ''He is going to turn out being someone like Lula, who frightens people during the campaign but, once victorious, begins to moderate his discourse and ends up being more Catholic than the pope.''

He didn't "take the cue," so according to conventional wisdom he couldn't possibly succeed like Lula has. No matter that, at least in the last eight years, he (and his wife) largely did.