The Return of Orthodoxy’s Prodigal Son? Argentina’s Neoliberal Rapprochement

Argentine President Cristina Kirchner (Wikimedia Commons)

Argentine President Cristina Kirchner (Wikimedia Commons)

The global financial crisis has prompted many capitalist adherents to question their faith in the neoliberal gospel. From the Baltic States to Greece, the merits of austerity have been openly contested. Against this backdrop, Argentina, one of the world’s leading neoliberal atheists over the last several years, may be preparing for an economically orthodox rebirth. It is hard to imagine a path to recovery in Argentina that doesn’t involve austerity. The only question that remains is whether the current administration of President Cristina Kirchner will be the one to shepherd the economy toward an orthodox reclamation.

 The Argentine government took its first steps toward reform in currency markets earlier this year. Beginning on January 20, 2014, the government decided to halt its currency market interventions, which had been artificially boosting the value of the peso. Since that time, the peso has depreciated by about 17 percent against the dollar, fueled somewhat by a partial relaxation of the government’s ban on buying foreign currency.

Before the currency devaluation, President Kirchner had hoped to have her proverbial cake and eat it too by spending without bounds and using central bank interventions to keep the peso strong. She ran a large government deficit to appeal to the urban and working-class base of her Peronist party, increasing energy and transportation subsides, the minimum wage, public sector employment, and social spending. Her government borrowed heavily from the central bank to fund these initiatives, effectively ‘printing money’ and catapulting last year’s annual rate of inflation to nearly 30 percent.

No Argentine politician wants to have inflation rear its ugly head again on her watch.  Hyperinflation, which destroyed popular living standards in Argentina and lasted until the early 1990s, is chiseled into the collective memories of most of the Argentine public. To keep inflation from rising too quickly and to protect citizens’ incomes, the Kirchner government overvalued its exchange rate. It also adopted administrative controls and even statistical tinkering to keep inflation in check.

But Argentines have increasingly fretted about the peso’s ability to hold its value over time. According to Poliarquía Consultores, a domestic polling firm, 73 percent of Argentines disapprove of how the government is handling inflation, naming it among the top three gravest concerns facing the country. Many Argentine citizens are savvy: their history of crisis has taught them to secure dollars during periods of uncertainty. Before the devaluation, they turned to the informal ‘blue’ market to buy dollars. Facing a highly regulated official market where dollars are tough to secure, some citizens bought dollars in this underground blue market—often at premiums reaching as high as 70 percent. These Argentines watch blue market prices like U.S. citizens mind prices at the pump or their 401(k)s.

Argentina’s currency devaluation aimed to eliminate the blue market premium by making dollars easier to attain. Yet Argentines will demand blue market dollars as long as they worry that their peso savings and investments will not keep their value. The government’s approaches to taming inflation, including its heavy-handed foreign exchange rate controls, were unable to restore confidence in the peso. Moreover, a depleted stock of foreign exchange reserves, which has fallen by about one-third over the last two years to $27.4 billion, leaves the government with few resources to artificially boost its ailing currency. At this point, inflation control will likely necessitate considerable political pain, including austerity.

Will the Kirchner government be willing to impose tougher austerity measures to keep inflation in check? There are some reasons for optimism. In addition to the currency devaluation, year-end cabinet reshuffling in 2013 has catalyzed a few reform initiatives. Juan Carlos Fabregas, Argentina’s new central bank governor, spearheaded a return to monetary policy orthodoxy by raising interest rates in order to slow both inflation and the currency depreciation. The country has also attempted to restore credibility with international investors by committing to repaying its long-standing arrears with the Paris Club of creditor nations; compensating the Spanish energy company, Repsol, for the government’s expropriation of YPF, Argentina’s main oil company; and introducing a new International Monetary Fund-developed inflation index.

Kirchner must now deliver an affirmation of these market-friendly initiatives using her fiscal resolve. Ultimately, controlling inflation means cutting government spending, including capping public salary increases—an important part of the political machine. The government is currently negotiating salary increases with Argentina’s unions, which hope to secure wage hikes that outpace inflation. Both teacher and metal workers unions accepted pay increases below the rate of inflation, but transportation unions launched a nation-wide 24-hour strike in April demanding higher wages. If the government acquiesces to their demands, it is likely to catalyze further inflation.

With her popularity sinking, Kirchner faces an unenviable political dilemma. She can cap public salary increases below inflation today or gravely erode them with runaway inflation tomorrow. Will she return to her prodigal roots by considerably increasing public wages and catapulting the economy toward crisis, or reluctantly embrace fiscal orthodoxy? Argentina’s economic fate likely rests in the balance.

Markets in Motion

Stephen B. Kaplan

Stephen B. Kaplan is Assistant Professor of Political Science and International Affairs at the George Washington University. Before completing his Ph.D at Yale University, Dr. Kaplan worked as a senior economic analyst at the Federal Reserve Bank of New York. His research focuses on the political economy of global finance and development. His most recently published book is entitled Globalization and Austerity Politics in Latin America.

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