The steep fall in global commodity prices over the past several weeks has brought Argentina to the brink of fiscal collapse—alas, not an unfamiliar position for the South American country.
For far too long, the Argentine government behaved as if commodity prices would keep rising forever. It spent like a drunken sailor and made unsustainable commitments to the public sector. Such irresponsible fiscal policies were promoted aggressively by Argentine President Néstor Kirchner, who served from 2003 to 2007, and they have been continued by his wife, Cristina, who in 2007 was elected to succeed her husband as president.
Until recently, the Argentine government was awash in cash thanks to soaring commodity prices. This encouraged its fiscal profligacy. But in recent months, the price of soya—a key Argentine export—has declined significantly. To make matters worse, Argentina’s soya growers have been staging strikes to protest against high export taxes. Between the plummeting soya price and the economically damaging strikes, billion of dollars in projected tax revenues have been lost.
Meanwhile, Argentina has $23 billion in public debt that must be paid within the next two years. For a normal government, this would not be a problem, since it could roll over most of the debt. But in Argentina, the government’s shoddy treatment of international bondholders has come back to haunt it. Investors do not trust Mrs. Kirchner, and they have little motivation to buy government bonds. “Argentina hasn’t had access to international debt markets since its 2001 default,” Bloomberg News notes, “and demand for its local bonds has dried up on concern the government is underreporting inflation.”
Facing this confluence of fiscal challenges, President Kirchner has proposed a solution: the government will nationalize Argentina’s private pension system, which is reportedly worth around $30 billion. Kirchner insists that her plan is about “protecting our workers and retirees.” But this is a flimsy pretext; everyone can see that the nationalization scheme is really just a ploy to boost the government’s financial position.
“It looks like they want to use the workers’ money for non-pension spending,” University of Buenos Aires law professor Gregorio Badeni told The Economist magazine. “The reason private pensions were instituted in the first place was to stop the government from doing that.” As The Wall Street Journal reported earlier this week, Kirchner’s nationalization proposal “has jolted investor confidence and triggered a dollar outflow,” with both the Argentine peso and the Buenos Aires stock market plunging.
This is the second time this year that the Argentine government has made a naked money grab. In March, President Kirchner tried to increase to confiscatory levels the taxes paid by soya exporters. This sparked a bruising political battle with Argentina’s farming lobby, which Kirchner ultimately lost. In the aftermath of the tax fight, the government seemed to be changing its ways-until Kirchner announced her pension nationalization plan.
In political terms, Argentina’s private pension system makes for a less sympathetic victim than its soya growers. Over the years, the private pension funds have experienced periodic difficulties, most of which were caused by government meddling. In recent weeks, the global financial crisis has taken its toll on them. As The Economist observes, “the private pension funds are unpopular with the public.” They are certainly less equipped to defend themselves than the soya growers.
So will Kirchner get her way? That remains unclear, as there has been substantial resistance from the Argentine Congress. The private pension funds in danger of being nationalized are the main investors in Argentina’s beleaguered capital markets. In the short run, nationalization may temporarily solve the country’s fiscal crunch. But a state takeover of the pension funds would also hasten capital flight from Argentina and inflict serious long-term damage on the economy.
In order to move forward, Argentine politicians must come to terms with what really caused their economic meltdown in 2001, for that crisis still colors the political debate. Left-wing populists such as the Kirchners have blamed it on misguided “neoliberalism.” But that makes no sense. As journalist and Latin America expert Michael Reid writes in his book Forgotten Continent, “What killed Argentina’s economy in 2001 was not ‘neoliberalism’ or the free-market reforms, but a fiscal policy incompatible with the exchange-rate regime, and a lack of policy flexibility.” Indeed, “Contrary to many claims, Argentina’s policy mix was in direct contravention of the Washington Consensus.”
Today’s policy mix could have similar consequences for Argentina. Just look at how investors reacted to the pension nationalization proposal. As The Wall Street Journal editorialized last week, Argentina now “serves as a cautionary tale on how to ruin an economy.” If Kirchner hopes to achieve lasting prosperity and social stability, she should eschew Hugo Chávez-style economics and look instead to countries such as Brazil, Peru, and Uruguay, all of which are led by pragmatic center-left reformers. Argentina’s current trajectory will lead only to financial disaster.