Argentina- Looking to the Future

Author: Eoin Small

 

Argentina is a country that is as big as it is diverse. The country stretches from the tropical Iguazu falls in the North to the most southerly city in the world, Ushuaia, in Tierra del Fuego. While justifiably famed for tango, football and beef there is also a huge amount of cultural and geographic diversity in this country that is only slightly smaller than India, and now record numbers of visitors are coming to see this country for themselves. Estimates for 2003 put the number of visitors at 1.5 million. However, this is only a recent phenomenon, which has ironically been triggered by Argentina’s economic woes.

Sadly the Argentine economy has been steady decline since its hay day in the earlier part of the 20th century. At that time Argentina’s economy was comparable in size to that of France and the country was a magnet for immigrants attracting 6 million between 1857 and 1930. In a bid to halt the country’s economic slide and to create some fiscal stability controversial ex-president Carlos Menem pegged the peso to the dollar and engaged in a process of mass privatization. This double policy, while initially fêted by international organizations like the IMF and the World Bank, was to have a detrimental effect on the Argentine economy. Privatization lead to soaring unemployment and the peg to the dollar lead to an artificially strong currency. In the short term it stopped inflation but it made Argentine exports prohibitively expensive in the face of cheaper imports. This inevitably led to a decline in Argentine manufacturing and exports. The worsening economic situation was further compounded by widespread corruption and ineffective governance. This drop in economic productivity would in the end lead to Argentina defaulting on $140 billion in public debt, the freezing of banks accounts, the devaluation of the peso by 70% and political instability with the country having 5 different presidents within a 2-week period.

The political vacuum and financial meltdown triggered violence with over 20 people loosing their lives. The freezing of bank accounts and the conversion of people’s dollar savings to devalued pesos, a process called pesofication, brought the middle class out onto to the streets. People’s anger was justifiable as they essentially saw their savings divided by three and become, in any case, inaccessible. The world looked on as Argentina was on the brink of anarchy.

Two years after the turmoil the situation has stabilized somewhat and in many regards the devaluation has created opportunities for argentine business. Tourism is one example that has already been touched upon as visitors enjoy the great value that can now be found in Argentina, particularly if you come armed with dollars, euros and pounds sterling. Argentine exporters too have been presented with a number of new opportunities. Exports are now comparatively cheap in the international market, and this has triggered an exporting boom. This is also not only true for Argentina’s traditionally strong agriculture/commodities sector but also for manufacturing and clothing. Companies are also now struggling to meet a new domestic demand that is looking for substitutes for now expensive imports. This has spurred growth of 8.4% in the economy for 2003 with growth of 7% expected in 2004. While on the surface these figures seem impressive but on closer inspection one quickly discovers that the economy is only recovering to the level it was at in 1998 before it started its steep decline. In fact between 1998 and 2002 the economy contracted by 20%.

As the economy grows and exports continue to reap the rewards of the weak peso the extra capacity in the economic system is being quickly used up and within the next two years further investment will be needed to facilitate further growth. The problem facing Argentina is that at this point in time it is not a particularly attractive destination for investment, especially as neighbours Brazil and Chile seem to offer more stable business environments and the issue of the defaulted debt casts a shadow across the land.

One of the problems facing the government is the question of the privatized utility charges. Shortly after the crisis the government froze the utility charges. The foreign companies that owned utilities saw their returns and investments pesofied. Since they cannot raise their charges the companies have refused to make any further investments in the country’s already creaky infrastructure. Already there is evidence of power cuts, water shortages and a deteriorating telecom system. Politicians have blamed this on the utility companies and accused them of brinkmanship as they try and strengthen their hand in negotiations with the government. The politicians are loath to acquiesce to the demands of the utility companies, as Argentines have not forgotten that before the devaluation some of the utility´s profits were amongst the highest in the world. They also feel that the utility companies were more than happy to cream profits off Argentines when times were good and repatriate those profits abroad. In any case many Argentines are struggling as it is to pay their pesofied bills and any increase would be too much for many.

There is also the outstanding issue of restarting payments to defaulted bondholders plus a much-needed revamp of the country’s financial institutions. The man charged with solving these problems is President Nestor Kirchner. Kirchner was unfortunately denied a popular mandate when former president Menem pulled out of the final run off of the presidential election to avoid a humiliating defeat. Opinion polls showed Menem trailing Kirchner by 40% so faced by political ruin he thought better of it and pulled out of the race. In many ways Kirchner owes his presidency to the king maker of argentine politics and former caretaker president Eduardo Duhalde. (Duhalde controls the electorally crucial province of Buenos Aires where nearly 40% of the country´s poulation live and crucially backed Kirchner against Menem.) However, since his election Kirchner has set out to lessen his dependency on Duhalde’s power base by courting public support. With this he has been successful with huge approval ratings in the opinion polls. By sacking unpopular figures in the military, lifting immunity for officers involved in the military dictatorship and impeaching unpopular figures in the Supreme Court Kirchner has set about creating his own alternative power base to counter Duhalde. Kirchner has gained most of his kudos for his uncompromising stance against the IMF and foreign holders of defaulted bonds.

In his speeches Kirchner compares Argentina in the 90s to a casino, (the inference being that those who gamble should be prepared to loose). He describes former president Menem’s close relationship with the USA as “carnal relations” while proclaiming that the burden of foreign debt is the equivalent of genocide. Kirchner therefore puts emphasis on the need to address the internal debt to the millions of poor Argentineans. These poor are clearly visible as the cartoneros make the long journey into Buenos Aires´ wealthier neighbourhoods from the shanty towns of Greater Buenos Aires to sift through rubbish to reclaim recyclable goods to make a living and the piqueteros protest for jobs and greater government support.

The key factor in Argentina’s economic recovery is the leadership of Kirchner. The main issue is whether Kirchner can translate his obvious popularity into strong leadership. This will involve having to abandon the gesture-politik that has marked his first 9 months in power and having to confront the pressing issues that face Argentina. Kirchner must convince investors that Argentina is open for business while also protecting the interests of the millions of Argentines who are most vulnerable. If Argentina is to continue it’s economic recovery difficult decisions will have to be taken and for now at least the public are satisfied that Kirchner is the right man to take them.