Four key points to understanding the Argentine economy
AFP – The third largest economy in Latin America has seen highs and lows over the decades, and is regularly in the headlines over its crises and sometimes risky economic policies.
Here are four points that are key to understanding the country’s economy, whose latest crisis has been a currency devaluation:
– World power to debt default –
At the start of the 20th century Argentina was the fifth largest world power, thanks to its agricultural exports. In the 1950s, the country prospered and industrialized. Argentines obtained better access to healthcare, paid leave and pensions, backed by powerful unions.
But the country’s debt soared during the 1976-83 dictatorship due to spending on military equipment. Then in the 1990s, to protect the peso-dollar parity, economic policies culminated with Argentina’s defaulting on its repayments during the 2001 economic crisis.
– Recovery thanks to soya –
The government of Nestor Kirchner, elected in 2003, benefited from higher prices for agricultural products — as Argentina was the world’s top exporter of flour and oil from soya — to repay its debt in record time.
Nestor Kirchner and then his wife Cristina (2007-2015) implemented protectionist and leftist policies: control of exchange rates, limits on imports, hikes in state spending, and nationalizations, including that of the oil company YPF, then owned by Spain’s Repsol.
– Macri’s return to liberal policies –
Elected in late 2015, Mauricio Macri, a center-right businessman, inherited a fragile economy. He abolished exchange controls, settled remaining debt with US "vulture funds," and cut state subsidies on electricity, gas and water, which unleashed social discontent.
Committed to a process that he termed "normalization of the economy," Macri promised better days ahead for Argentines, but failed to contain inflation. Spending power decreased.
The Argentine president opted for progressive reforms as public opinion was not ready to endure more painful measures but which would have given quicker results.
– A fragile economy –
Historically, the budget deficit has been high, fueling inflation. The Kirchner government financed this deficit through monetary issuance, while the Macri administration cut the deficit from six to four percent in part by limiting public spending.
In his economic recovery plan, Macri proposed an influx of foreign investments to infrastructure and energy. But foreign companies hesitated to put funds into a country where the value of an investment could plummet by 20 percent in several weeks.
The short-term challenge now to end the peso crisis is to stabilize the currency and find the most balanced agreement possible with the International Monetary Fund.