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29/10/2007 | Back To The Future In Argentina

Mary Anastasia O'Grady

Argentina held a national election yesterday to chose a new president for a four-year term. As we went to press, it was too early to call the official winner, but there was one positive development: Exit polls here in the capital were showing that portenos had voted heavily against Peronist candidate Cristina Fernandez Kirchner, wife of President Nestor Kirchner.

 

Since 2003, the Kirchner government has steamrolled over checks and balances on executive power -- and Mrs. Kirchner's candidacy was widely viewed as the "continuity ticket." So if this city, the cultural and business center of the country, did indeed vote against the first couple's power grab, it would suggest the survival of Argentina's republican spirit. This also would be good news for the continent, where many countries are engaged in an epic struggle touched off by the return of the primitive caudillo politics that the Kirchners -- and their ally Hugo Chavez -- represent.

Even so, the president's wife was favored to finish in first place nationwide, and early returns late yesterday suggested that she had topped the 40% of the vote she needed to avoid a runoff election. This is bound to discourage liberal democrats here but it may turn out to be poetic justice. Beneath what seems like robust growth this year, the Kirchner government has made a mess of the economy, through a deadly combination of excessive government spending and price controls to generate a false sense of prosperity. Nothing could be more appropriate than saddling Mrs. Kirchner with the task of cleaning it up.

For starters, there is a desperate need to abandon the current system of price controls coupled with export taxes on energy and agricultural goods. It is not holding down inflation or inflationary expectations; it is instead distorting capital allocation and has seriously undermined government credibility.

Even bad economists understand that price controls cause shortages. In an effort to mitigate that problem, Mr. Kirchner's central planners have put controls only on certain items within categories of consumer staples. These items are then singled out to go in the basket of goods used to measure inflation. But since price-controlled items tend to be of very poor quality and also sell out very quickly, most Argentines end up buying products at market prices, which are escalating. In the energy sector, where controls are more broadly imposed, shortages are cropping up.

Meanwhile, export taxes, designed to fill state coffers while discouraging producers from sending output abroad, also have lowered the incentive to produce.

Government efforts to manipulate inflation statistics have damaged public confidence. Although the official inflation rate is 9%-10%, some independent economists put the number at around twice that. The government is now exploring a "core" inflation model that would strip out excessive price increases in order to paint a more favorable picture. But this is unlikely to fool the public, and union leadership has already said it will demand 20% salary increases next year to compensate for the rising price level.

Pressure on public wages, and subsidies aimed at masking price increases in energy, are also driving market fears that the government is headed for the same fiscal and borrowing trouble that brought the country to its knees in 2001. Pablo Guidotti, an economist trained at the University of Chicago who is now at the Torcuato Di Tella University here, points out that the country's public debt as a percent of GDP is now bigger than in 2001. Moreover, he says that its composition is not much different than it was back then, and that the 2005 debt restructuring has raised the average interest rate that the country pays.

The government is currently on track to produce a 2.5% primary budget surplus in 2008, but Mr. Guidotti points out that if it were to fall to 1.5% of GDP, borrowing requirements could quickly get back to 2000 levels, both in dollar values as well as a percent of GDP. "If refinancing rates were to increase," he adds, "these conditions would deteriorate further."

Why worry about a drop in the budget surplus? A better question, given the history of Argentine politics, is why not worry? This year alone, government spending is expected to increase 60% while revenues will rise by only two-thirds of that. The Peronist-controlled congress has granted the executive both "emergency powers" to rule by decree and "super-powers" over budget management. Unless the new president is overcome by a sudden urge toward spending restraint, it's hard to see how the fiscal accounts will not deteriorate.

Export taxes, price controls, inflation worries, and the breaking of utility and debt contracts by the government back in 2002 are having a negative effect on investment. The government boasts of an investment-to-GDP rate this year close to 23%. But a recent paper by five Argentine scholars casts doubt on that. In the study, titled "Investment in Argentina," former central-bank president Javier Gonzalez Fraga and others argue that much of this "investment" is really consumer spending on things like cell phones, housing and recreational four-wheel-drive vehicles.

The authors also say that Argentina captured only 60% of what tiny Chile attracted in 2006 and 76% of what went to Colombia. No wonder the Kirchners, who made their careers denouncing the International Monetary Fund, are now flirting with it again. It holds the key to rescheduling Paris Club (bilateral) debt so as to restore government-guaranteed export financing for U.S. and European companies investing in Argentina. Look for the IMF, which is desperate for a role in the world, to find a way to salvage the pride of the political class here so it can begin calling Argentina a "client" again.

Tally all this up and what you get is an Argentina that hasn't changed a bit since the politicians drove the country into the ground in 2001. The only question left is whether the new government will break with the past and reconcile with markets. It shouldn't take long to answer.

Wall Street Journal (Estados Unidos)

 


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