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From the Fall 2012 Democracy Issue
By Emily Schmall
CHUBUT, Argentina—In mid-June, at the onset of winter in the Southern Hemisphere, a gang of burly, masked construction workers took over Cerro Dragón, an oil and gas field 15 times the size of Buenos Aires and Argentina’s most important source of hydrocarbons. Some 500 members of a union nicknamed the Dragons wrecked offices, spray-painted seditious messages on buildings, and barricaded access routes with torched cars in a scene Pan American Energy’s chief executive Oscar Prieto compared to battle-scarred Baghdad. The disarray forced Pan American-majority-owned by oil giant BP, with China’s CNOOC holding a 20 percent share—to halt production in the field for the first time in its more than 50 years of operations. The threat was calculated to irk a government already spending heavily on imported energy and that has demonstrated its willingness to take over companies.
“If we don’t come to a resolution … it’s best that they have us locked up, because it’s going to be madness,” Guido Dickason, a spokesman for the Dragons, told a Patagonian radio station. To quell the protest, the president sent national gendarmes, 11 of whom died in a car crash en route, a tragedy the government blamed on the Dragons. The showdown in Chubut was just the most visible of an increasing number of demonstrations taking place nationwide as workers demand wage increases and urbanites rally against currency controls. As has been the case for much of this decade in Argentina and across Latin America, the fears center around inflation, which most independent economists estimate at about 24 percent per year in Argentina, a figure the government adamantly rejects.
Facing global economic uncertainty, the Argentine government under the leadership of its firebrand left-wing president, Cristina Elisabet Fernández de Kirchner, is bucking conventions of international trade and intervening in the economy in the name of social progress. Kirchner and her team of Keynesian-inspired economic technocrats believe their program will put Argentina on a path to prosperity. Citizens of neighboring Latin American countries are keeping an anxious eye on her measures, while countries in financial distress from Greece to Zimbabwe are watching closely to see whether el kirchnerismo can work. This ideology, framed during the rein of the late President Néstor Kirchner and his wife and successor, is designed to protect the economy from the effects of any collapse in the global trade regime that may be on the horizon. But critics argue it could lead the nation to an economic downturn regardless of what happens abroad. Either way, economic isolationism—inspired by Argentina’s Depression-era president General Juan Perón—could begin to spread across Latin America.
FORCED TO RECONCILE
The two parties in Chubut were forced by law to reconcile. The Dragons—a group that had expanded over the weeks to include sympathetic residents and community groups—backed down in the face of legal threats. But escalating social unrest in pockets around the country and the capital, while hardly a new phenomenon in Argentina, raises the stakes for Kirchner’s ambitious, but potentially alienating, gamble of an economic program.
Balking at the international economists who suggest Argentina cut social spending during a moment of economic contraction, Kirchner is taking inspiration from new, non-Western markets like China as well as Argentina’s old leftists like Perón. As the world economy struggles, Kirchner is taking over industries with pledges to boost investment and attempting to stimulate the economy through public spending. Kirchner’s goal is to de-couple Argentina from the tumult of the global marketplace.
After winning re-election in October with 54 percent of the vote, Kirchner tightened currency controls and restricted imports, seeking to protect a narrow trade surplus and stem capital outflows that were draining central bank reserves. Import controls have severely crunched businesses that rely on raw materials from abroad. With American dollars now nearly impossible to come by on the legal market, entire shopping districts in the capital have converted into black markets, where Argentines pay shadowy figures linked to the criminal underworld nearly double the official rate for the coveted currency. Argentina’s tax agency even employs dogs to sniff out greenbacks at the borders. In July, a canine pair called Isidoro and Bruno discovered $20,000 in cash being smuggled out of the country.
“The aggressive trade protectionist import repression strategy and binding foreign exchange controls adopted by the authorities has led to a very significant decline in imports, has dampened domestic consumer and business sentiment, and disrupted a number of production and supply chains,” Goldman Sachs economist Alberto Ramos wrote in a July report.
Kirchner’s hard-won trade surplus and heterodox policies come, Ramos concluded, “at the cost of a significant decline in investment and overall activity and the eroding of confidence in the … regime and direction of macroeconomic policy.”
Still, the president hopes the signature programs of General Perón’s first term—seizing companies to fuel social programs while erecting import barriers to protect national manufacturers—will win her political points and insulate Argentina’s economy from global shocks. Never mind that Perón’s policies contributed to a recession and his eventual ousting in a coup d’état. His legacy and that of his second wife, actress-turned-social reformer Eva Duarte Perón, is cemented in the hospitals, schools, and social welfare ministry built with huge public spending. But the short-term results—both then and now—seem to be increased social upheaval, a severely contracting economy, and a dearth of Western allies. Kirchner, perhaps with Perón’s political immortality in mind, may not care.
Investors complained when Argentina expropriated YPF from under the noses of its Spanish partner, the giant energy firm Repsol. But with what could be the world’s third-largest shale gas deposits, minerals, and large-scale agriculture, few companies have pulled out of the country. Argentina’s balance sheet remains strong, even if the government is paying with hefty energy imports the price of what teamsters’ union leader Hugo Moyano describes as “arrogance.” Once an instrumental supporter of Kirchner and her government, Moyano formalized his split with the ruling coalition and its supporters at a rally in June, after the president refused to appoint a union leader to the upper echelons of her administration. “How are we supposed to believe that she brings all of society together if she says they are Peronists and yet do not call on us. The essence of Peronism is the workers and to deny the workers is to deny Peronism,” Moyano says.
Kirchner is severing other ties her husband and predecessor relied on to build Argentina’s economy following the 2001 collapse. After Argentina seized YPF last April, Spain retaliated by canceling a contract to deliver natural gas. Argentina has been scrambling ever since to arrange shipments from mainland Europe, the UK, and Brazil at higher rates from the likes of BP, ENI, and Petrobras. Even with an optimistic $35 billion plan to revive Argentina’s output, the country will remain a net energy importer for at least five more years, admits Miguel Galuccio, chief executive of the newly nationalized YPF.
But there is a broader fallout from the YPF expropriation. Repsol is planning to sue Argentina for $10 billion—what it claims is the value of YPF. President Barack Obama recently canceled preferential tariffs when Argentina refused to answer court orders to pay American bondholders, still suffering from a 2002 default on government debt. Since Argentina expropriated YPF from a Spanish company, the European Union threatened sanctions and London tabloids characterized Kirchner as a political and economic tyrant.
Reacting to the near universal ostracism, even by Argentina’s neighboring and historically friendly countries, Kirchner’s strategy, at the very least, has been inventive. Trade delegations have visited Angola, Azerbaijan, and China, while Argentina was instrumental in adding Venezuela to Mercosur, the southern cone’s common market.
Meanwhile, two former heads of Argentina’s central bank have warned of a looming recession, though the country is still expected to grow this year, albeit at a much slower rate than in recent years. When official statistics agency Indec released figures showing declines in manufacturing and other forms of industrial activity, Kirchner sympathizers responded that a slowdown was inevitable, particularly with the devaluation of the Brazilian real and the crisis in Europe.
These figures mask a discomfiting reality—that the emperor has no clothes. The dream of Peronism has eluded Argentina once again—part of what the Peruvian novelist and writer Mario Vargas Llosa says is Argentina’s “tendency to self-destruct.” And it may be playing out in other countries that could consider themselves models for Argentina’s Kirchnerism—particularly Venezuela under Hugo Chávez.
For supporters, Kirchnerism has come to be associated with social justice, including the late president’s overturning a law that shielded ex-military officers accused of committing atrocities during the dictatorship, and economic policies that find more sympathy in the ideas of John Maynard Keynes than in those calling for more austerity and low inflation.
Néstor Kirchner is credited with turning Argentina’s economy around after the country’s financial collapse in 2002, but he remains notorious in some circles for ignoring obligations to debt holders and trade partners. His wife Cristina, a former senator, succeeded her husband in 2007 after he refused to run. She promised to maintain and expand his economic and social vision. Argentina’s first woman to be elected president, Kirchner won a landslide second term last October after her husband, who’d planned to reclaim the office, died suddenly of a heart attack in 2010. Dressed in the all black garb of the newly widowed, Kirchner spoke often of her late husband during and after the campaign as simply él, or him. “He, I am sure, lives in each young person. He lives in each worker. He lives within each woman, within students, teachers, scientists that have come around to believe that the collective construction of Argentina isn’t just necessary, it’s also possible,” she said during her inauguration speech.
Néstor Kirchner took office as president in 2003 after former President Carlos Menem withdrew from the race in an attempt to avoid a landslide defeat in the run-off. In the end, Kirchner was elected with only 22 percent of the vote—hardly an electoral mandate. The three prior administrations had been chased out of office by rioters protesting unpopular austerity measures that seemed only to intensify the country’s woes. In 2003, more than half of Argentina’s population, some 40 million people, lived below the poverty line in a country that at the turn of the century had been among the richest in the world.
Due to its unwillingness to pay back its debt, Argentina had no access to external financing and diminished tax revenue. At first, insularity was the only option. But since entering office, Kirchner has maintained her late husband’s outlook, while introducing some of the most combative economic policies in Latin America’s recent history. Her supporters treated the YPF expropriation as a national holiday, celebrating a complete rupture with the free market ideology of the 1990s that had bankrupted the country. Kirchner’s move, which she described as “a recovery of sovereignty and control,” was heralded in posters and graffiti as “taking back what’s ours.” The move was also celebrated among regional neighbors, who rewarded Kirchner by voting unanimously to give Argentina a rotating seat on the United Nations Security Council next year.
But the larger framework of state intervention has polarized the country. She is a hero to some who liken her in idolizing graffiti to a latter-day Evita. But a growing cross section of Argentines from union machinists to the leadership of mining giants are viewing the direction of their country with increased skepticism, worrying about the costs of these initiatives. History suggests that isolation is not a viable path out of the economic wilderness. Americans remember the Smoot-Hawley Tariff of 1930 that launched a global trade war and intensified the impact of the Great Depression. Indeed, in an attempt to control inflation in Argentina, Kirchner’s policies punish imports and traditional commodities exports, favoring industrial exports—forcing companies in Argentina that primarily import (like luxury jeweler Cartier) to export an equal dollar amount of Argentine goods. Argentines are already starting to feel the pinch, and workers are growing more vocal.
CHÀVEZ'S POLITICAL NARRATIVE
To retain power and press her agenda of kirchnerismo, Kirchner presented herself during the campaign for a second term not only as an incumbent president but, perhaps more importantly in a society fascinated with death, as a grieving widow whose life-long love had died suddenly. Did she, in turn, have cancer in December? Perhaps. Will she seek to change the constitution so that she can run for a third term? So it’s said. This would be a mirror of the campaign Chávez is waging in Venezuela amid reports that his cancer has returned. In Argentina, as in Venezuela, the media has become a web of half-truths, with certain newspapers and cable news channels parroting the official line. The Kirchner government demonizes the country’s two most important daily newspapers, Clarín and La Nación, and Cabinet members rarely give interviews to anyone outside of the vociferously pro-Kirchner press.
When her husband died, Argentines mourned for Cristina, as she is known, just as they grieved at the end of the revered duo at the center of Argentina’s grand political narrative—General Perón and Evita. Graffiti artists painted messages and illustrations in homage to El Pingüino, as the deceased Kirchner was fondly known because of his origins in Santa Cruz, a Patagonian province with large penguin colonies. Supporters of La Cámpora, the 30,000-member youth group founded by Máximo Kirchner to help launch his father to the presidency, stenciled him onto the old stone walls of Buenos Aires as El Eternauta, the hero of an iconic Argentine comic book. A contemporary version of the Peronist Youth to which the Kirchners belonged in the 1970s, La Cámpora emphasizes Perón’s fight for the poor along with the Kirchners’ policies of social inclusion and state intervention.
In the first months of her second term, Kirchner has become a figurehead even beyond her role as president and life partner of a man who has grown since his death into mythic proportions. La Cámpora is the rapt audience for many of Kirchner’s speeches from the Casa Rosada (Pink House, the executive mansion), where people sing and chant, “We are heirs of Perón and Evita” and “soldiers of Cristina.”
Kirchner pledged to stick to the program of her husband and predecessor when she ran for high office in 2007. And the ideologues of La Cámpora are helping her keep her word. Néstor Kirchner chose July 9, 2003, his first Independence Day as Argentina’s president, to make a fiery speech about the need for the country to break away from “the chains” of “multinational institutions.” He echoed the rhetoric of Chávez, which has found fertile ground in Argentina.
In four years, the first Kirchner oversaw his nation’s economy rise from the ashes of widespread unemployment and debt. After de-pegging the peso from the dollar, Néstor Kirchner’s economic advisers took advantage of the newly depreciated currency to boost public investments and exports of Argentine products like steak and Malbec wines. This attracted tourism, private investment, and improved agricultural efficiencies. Buoyed by global commodity prices, Argentina’s economy grew at an average annual rate of 7.7 percent from 2004 to 2010, lifting millions out of destitution.
The Kirchners—and economically left-leaning administrations throughout the region—believe Argentina’s fantastic growth has proved that their strategies worked, says Morgan Stanley analyst Daniel Volberg. “It vindicated a moving away from the Washington consensus,” the reforms proposed by Washington D.C.-based financial institutions like the World Bank and IMF for developing countries in crisis. After years of following the advice of the IMF, Volberg says, “Argentina ended up in one of the worst economic crises in its history. The past decade has been a response to that.”
Cristina Kirchner launched herself to the presidency in 2007 on the strength of promises to maintain her husband’s popular measures. Since 2008, she has nationalized the airlines, public pensions, and the country’s largest oil company. The result: Domestic flight prices on Aerolineas have spiked while striking air traffic controllers interfere with takeoffs and landings; pensioners express anxiety about their future retirement funds, and Argentina, at least temporarily, has become dependent for its energy on the whims of union thugs like the Dragons.
Currency controls by the tax agency Federal Administration for Public Funds (AFIP) have made it virtually impossible for many Argentines to access dollars, their traditional resource for hedging against inflation. The currency crackdown inspired protestors known as cacerolazos (the casseroles, for the dishes they would use as drums) to hit the streets of Buenos Aires, just as they did in 2001 when Néstor Kirchner froze dollar-denominated funds in what were known as corralitos, or little corrals, which were debts the government only finished repaying in early August. Observers say the policies that worked in the period since its previous domestic collapse of 2002 are ill-suited in a context of global contraction. “It had made sense to have policies that favored fiscal spending and lax monetary expansion over price stability. The problem now is that the government doesn’t seem to appreciate that the policies are no longer appropriate,” says Esteban Fernández Medrano, an independent economic consultant in Buenos Aires.
Drought, a trade war with Brazil, and delays on imports have cramped economic activity. Industrial activity fell by 5.1 percent in May compared to a year ago, according to statistics agency Indec. The inflation rate is a far cry from 2003 when it spiked as high as 40 percent. In June, after AFIP denied requests by Argentines for U.S. dollars to use as savings, there was a mini-run on local banks, which wound up losing 10 percent of their dollar-denominated deposits—some $1 billion—in three weeks, before strict controls on capital movements were instituted. Despite the dollar-sniffing dogs and other tight controls, capital flight continues as money heads abroad. Analysts say the economy will soon flatline, and opposition economists believe if Argentina is not already in recession, it’s well on its way. The president’s approval ratings have fallen in tandem.
Kirchner made a passionate defense of herself and her policies after statistics revealed that in the spring, the economy declined for the first time since 2009, by half a percent. “We have been told that these nine years of growth were the product of a tail wind,” Kirchner told the nation. “Today, they say that it’s not having a little less growth that will turn the world upside down, but that it’s our policies, precisely those that are helping us to withstand the impact of the crisis. Economics is not an exact science. … Have strength, boys and girls, because in you is the present and the future of the country. Defend it, too.”
Many Argentines blame the free-trade policies of Carlos Menem, the IMF, and other like-minded institutions for the 2002 default. Free trade will perhaps never again have the same appeal in Argentina. Paul Krugman rightly compares Greece today with Argentina a decade ago. Economic collapse and currency devaluation did wonders for Argentina’s manufacturing and export industries, feeding entrepreneurship and efficiencies. But that time is now over for Argentina, and the country needs to be more realistic about the shortcomings of policies that encourage domestically produced goods, no matter the cost. At the same time, it must acknowledge the double-digit inflation rate and the reality that Argentina hasn’t yet experienced enough stability to cut off regular, workaday people’s access to the relative safe haven of the dollar.
Argentina has always been a risky investment. Work stoppages and demonstrations are frequent, and the dominant popular ideology, Peronism, favors nationalization. Investors and traders are watching commodity prices. Argentina has soy, silver, and large energy reserves, with Carlos Slim, the world’s richest man, holding a stake in YPF. At the same time, salaries in Argentina are generally rising at a faster rate than inflation. Unemployment is down to 7.6 percent. Lots of people have iPhones.
The WTO and G-20 can sanction Argentina. But they shouldn’t. The Kirchners’ line that big developed countries protect their industries, so why shouldn’t Argentina, is reasonable, even in this era of free trade and low tariffs. The size of Argentina’s economy with its potential for mineral and agricultural resources entitles it to participate on the world stage, even if its politics are blasphemy to the creed that the best trade is free.
Kirchner’s isolationism is partly the result of a disastrous experience with free trade during the Menem years, coupled with a profound wariness of the United States for the silence maintained during the years of dictatorship. While the Kirchners’ legacy has yet to be written, it’s clear many of the policies are short-sighted and are likely to be short-lived. That a country whose economy is miniscule compared to those of the EU and United States dares to challenge the orthodox economic regime that had been rather mechanically and clumsily applied should not be surprising.
But the Kirchner model is not exportable, not only because there’s a level of economic dishonesty that threatens the country’s young democracy, but because it simply isn’t sustainable. Argentina wants to exploit the opportunities of a globalized economy without taking on any of the risks. Instead, the policies meant to engender domestic production have severely hindered it. Such a position will continue to make it a pariah, depriving its citizens of the freedoms they fought so tirelessly to restore after years of dictatorship and feeding a black market underground that fully understands the benefits of globalized trade. Only a coordinated appeal by Argentina and its partners and friends can avoid the catastrophe that may lie over the horizon.
Emily Schmall is a writer based in Buenos Aires and a former reporter at Forbes.
[Photo of Peróns: Cares Y Caretas. Photo of Kirchners: the Presidency of Argentina]