ARGENTINA AND ITS CRISES

 

ARGENTINA AND ITS CRISES

INTRODUCTION

All Argentines living abroad, in my case in Peru for the past 50 years, have been asked countless times, "How can it be that Argentina, once so prosperous, is in this state?" I understand that more knowledgeable and wiser individuals than myself have attempted to provide very scholarly explanations on this matter. I will try to give my perspective on the issue.

THE CHRONIC DIVISION DEFICIT

The problem arises when it is noted that there are not enough funds to cover the main outflows: import payments, debt repayment, and capital outflows from the country.

Argentina's foreign currency earnings have always depended primarily on food exports. Both grains and meat and their by-products are significantly the main sources of foreign currency. Nowadays, Argentine exports reach approximately 16% of GDP. The problem arises when it is noted that this is not enough to cover the main outflows: import payments, debt repayment, and capital outflows from the country. The chronic deficit has been dragging on for decades, being covered with loans as long as possible. When it became difficult to obtain financing, adjustments were made. Currency devaluation, inflation, redistribution of national income, impoverishment, etc. If we review Argentina's economic history, we see that roughly every 10 years, a process of this kind repeats itself. The current problem, which exacerbates everything, is that the country has already exceeded its borrowing capacity. The whole world is aware that Argentina is not in a position to repay the debt it has already incurred and therefore is no longer a creditworthy entity.

PERIODS OF BOOM

In Argentina's more or less contemporary history, it experienced three significant boom periods, during which the respective governments have been cited as models by various factions in the divided national political opinion.

1.    From 1945 to 1951, the post-war period. Argentina enjoyed greatly increased food prices because war-devastated Europe needed food. Perón publicly boasted that one couldn't enter the vaults of the Central Bank because they were stuffed with gold bars. True or not, the population lived well. Good salaries, good hospitals, ample and good public education, housing plans, public works, and many more. The problem began in 1952 when the terms of trade normalized, the Economy Minister changed, and Gómez Morales implemented the necessary adjustment.

 

2.    From 1992 to 1997. Interest rates in the US were very low, and financial capital, seeking higher returns with the belief that countries do not go bankrupt, began to invest in "emerging countries." A recognized Peruvian academic, Carlos Parodi, estimated once that the flow reached around US$500 billion. (In today's values, close to one trillion). All of Latin America received fortunes. Sale of public companies, purchase of shares on each country's stock exchange, and very cheap financing to national banks that had all the money in the world to lend and make a lot of money with the interest rate differential. That is the explanation for the success of Menem's convertibility plan and his temporary popularity. The cheap dollar and Argentineans abroad became famous for saying "give me two" because everything was amazingly cheap for them. In Peru, with its differences, it went through a more or less similar situation; Fujimori gained popularity for the amount of public works that abundance allowed him to build. But, there is always a catch, in 1997-98, the Mexican debt crisis occurred (tequila effect), the Russian debt crisis (vodka effect), and the crisis of Southeast Asian countries. Scared capitals, just as they had come, withdrew massively. All of Latin America entered into crisis, governments fell, economic plans collapsed, and economies were paralyzed with frequent breaks in payment chains. This massive outflow of dollars from the economy in Argentina ended with the crisis of 2001 and the urban semi-insurrection of December with the wave of looting supermarkets.

 

3.    From 2003 to 2013. The prices of raw materials tripled or quadrupled due to increased demand from China. All commodities soared, whether food or minerals, for example, and Latin America probably experienced the most prosperous period in its history. The truly interesting thing about this process is that both "popular" governments, of which there were several, and "orthodox" ones achieved more or less similar results in terms of economic improvement and reduction of poverty and indigence. Prestigious economists like Waldo Mendoza from PUCP in Lima argue, an opinion I share, that the well-being of a country's economy depends much more on the terms of trade than on the policies of governments.

AFTER THE BOOMS

In recent decades, the imbalance has worsened. Argentine entrepreneurs understood that the future of their capital is safer abroad.

After the wave of dollars passed and normalcy returned, we have governments dedicated to "adjusting." Some democratic, others dictatorial, some with great harshness, others with some delicacy, some faster, others more slowly, but if we review economic history, we can verify that the country's economic life is characterized by the restrictions imposed by governments of all colors and the underlying cause is always the same, the lack of dollars in the BCRA. In recent decades, the imbalance has worsened. Argentine entrepreneurs understood that the future of their capital is safer abroad and dedicated themselves to repatriating the profits produced in the country. Tens of billions annually leave the economic circuit and also condemn the industry, above all, to lack of modernization and loss of productivity. Much of Argentina's immense external debt is due to financing this flight, which many specialists estimate exceeds US$400 billion.

THE K INTERVAL

Cristina did not realize that, currently, in underdeveloped countries, Keynesianism does not work because the economic circuit has leaks. In the end, the result ends in inflation.

When Kirchner assumed the government, following the aforementioned 2001 turmoil, he found, from 2003 onwards, a massive influx of dollars due to the improvement in grain prices. He had the essential tools to control social pressure, and the living conditions of the population improved significantly. This is an undeniable fact. He tried to develop a Keynesian policy. Inject money into the market so that increased consumption generates an increase in investment and production, creating a virtuous circle. Much of the corporate profits achieved during this time ended up in tax havens or Miami banks. When the foreign exchange inflow normalized, in 2012-13, the government tried to boost consumption by injecting money into the economy and producing fiscal deficits, but employment stagnated. Cristina did not realize that, currently, in underdeveloped countries, Keynesianism does not work because the economic circuit has leaks, profits end up in tax havens. In the end, the result ends in inflation. Alan García in Peru, during his first term, 1985-90, tried to do the same. As the economy did not grow despite the issuance, he issued more. The result, an inflation of 7 million percent in his five years in government. This is an extreme case, no doubt, but the mechanism is the same. Once the terms of trade are normalized and abundance ends, stagnation occurs. The economy and employment stop growing, and the fiscal deficit begins to increase. Indebtedness reaches its limit, and there is no choice but to print colored papers.

MACRISMO

Macri, upon assuming, assumed that with him, a great businessman, a man of great fortune, foreign investments would begin to flow abundantly. History proved his belief wrong. Not only did investors not arrive, but capital flight continued at an even faster pace, and he had to secure a loan of US$50 billion to finance it. Of course, consumption restrictions and general impoverishment were not enough to balance the balance of payments.

THE FERNANDEZ

If Macri left a debt of US$50 billion, the Fernández left other debts. An initial total sums up to an additional US$85 billion.

They had to manage a debt-ridden and resourceless country. They continued to reduce the purchasing power of the population and compensate the lower-income sectors with various social programs. As the electoral process approached, Massa, the ruling party candidate and economy minister, decided to push forward. He had to devalue under pressure from the IMF and then issued money with few limits and less discretion. He left the economic variables profoundly altered. Inflation of 200%, the Central Bank with negative reserves, uncontrolled currency in circulation, highly misaligned prices, the banking system compromised by withdrawing its deposits, and a lot more. If Macri left a debt of US$50 billion, the Fernández left other debts: US$40 billion to exporters; US$15 billion to the BCRA for the use of committed reserves; US$25 billion to bank depositors, former Leliq and Lebac, now repos. This only adds up to an additional US$85 billion to the previous ones.

MILEI

Indeed, he found an economy in deep crisis, and his "solution" is the most severe adjustment, which, according to his own words, is the largest in world economic history. The only known plan is to try to reduce inflation, which he found to be over 200% annually, through monetary anchoring. That is, reducing the amount of circulating money. For that, he had to eliminate the fiscal deficit and money issuance. He has dried up the economy so much that he has caused a huge recession and is condemning millions of people to hunger and extinguishing the middle class. He maintains that if he can greatly increase business profits, foreign capital, seeking profitability, will rush to Argentina, thus allowing the international balance of payments to be leveled.

CAN MILEI SUCCEED?

Some independent journalists, surprised by the reduction in inflation over the last 2 or 3 months, leave the question open as to whether Milei's plan can lift the country out of its current plight. Andrés Malamud, an Argentine political scientist, argues that the flow of investments to underdeveloped countries depends fundamentally on the interest rate in the American market and the price of the commodities each country exports. If interest rates in the US are high, capital stays there. They only leave when they decrease. Currently, interest rates are high, and the Federal Reserve indicates that they will remain so for a while. Remember that capital requires above all stability and security. Milei, at this time, cannot guarantee any of that. In all this time, he has not managed to get even an article approved, let alone a law. He governs by decree, which is easily revocable by Parliament as soon as they change their minds.

¿CAN HE WITHSTAND THE WAVE OF CONFLICTS THAT ARE COMING?

A series of conflicts between organized workers against wage erosion are beginning to emerge. Bus drivers, oil workers, land transporters, university students, and even the CGT announce various measures of struggle. Probably repression will be harsh, but people's desperation in the face of impoverishment is great. It only takes one important union to succeed as an example, and the whole plan collapses.

LET'S ASSUME THAT INVESTMENTS ARRIVE

As we said, it is not the most likely alternative, however, it is a possibility. In that case, they will be directed towards what is called comparative advantages. What can generate more profits. In this case, soy agriculture, hydrocarbons from Vaca Muerta, and mining, especially lithium. These are enclave economies. They provide development and employment only to the surrounding population and some isolated technicians and professionals. Buenos Aires, Greater Buenos Aires, and much of the country will experience poverty and a complete lack of future.

CONCLUSION

The only reasonable possibility for the country's survival is to balance the flow of foreign exchange, which now means suspending external debt payments and exchange controls to prevent capital flight. Any other expectation and wonderful futures painted by power-hungry politicians are not achievable. The drama is that there is currently no political party willing to take on these tasks. It will have to be forged in step with the conflicts that will inevitably arise.

Silvio Dragunsky Genkin Lima, April 17, 2024 Silviodragunsky.blogspot.com

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