March 8, 2012
by Jaime Daremblum
Whenever Argentina starts rattling sabers over the British Falkland Islands, it's a surefire sign that the South American country is experiencing some type of domestic turmoil. So it comes as no surprise that President Cristina Kirchner has responded to high inflation and massive capital flight by picking a diplomatic fight with London over a sparsely inhabited archipelago that has been a U.K. possession since 1833. While Kirchner, thankfully, has not launched a military conflict — as the Galtieri dictatorship did in 1982, shortly before it collapsed — she has been escalating her rhetoric in hopes of stoking nationalist sentiment and distracting attention from concerns at home. Next month marks the 30th anniversary of the 1982 war, so the time is especially ripe for a fresh round of bellicosity.
American observers should not be fooled: The ongoing diplomatic row between London and Buenos Aires is nothing more than a political smokescreen designed to benefit Buenos Aires. Kirchner would rather have Argentines railing against British "colonialism" than railing against their own government, which has become an international embarrassment.
Just look at the (almost comical) dispute over Argentina's real inflation rate. Kirchner insists that inflation remains in the single digits. But it's now painfully clear that her government has been systemically doctoring official inflation data for years. (This practice actually began under Kirchner's late husband, Néstor, who preceded her as president.) Last month, The Economist announced that it would no longer be publishing those data, saying in an editorial, "We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors." Instead of relying on bogus numbers produced by Buenos Aires, the venerable newsweekly will be using inflation estimates from PriceStats, an independent firm based in Cambridge, Massachusetts. PriceStats calculates that annual inflation in Argentina is now over 24 percent, and that the country's cumulative inflation since 2007 has been a staggering 137 percent.
Kirchner refuses to acknowledge just how high inflation has soared, and her allies have been tormenting any writers, editors, economists, or statisticians who dare to report the truth. Last September, for example, Judge Alejandro Catania subpoenaed various Argentine newspapers, demanding they hand over the contact information of journalists who cover economic issues. He also began harassing the International Monetary Fund office in Argentina, ordering it to disclose the names of private consultants who had been supplying the institution with legitimate inflation figures. Such harassment prompted the American Statistical Association to call for the United Nations "to safeguard those targeted from further harm." On February 1, the IMF executive board gave Argentina 180 days to improve the quality of its official inflation and GDP figures, "with a view to bringing the quality of the data into compliance with the obligation under the Articles of Agreement."
The steep rise in inflation — and Kirchner's disturbingly autocratic response to it — has exacerbated capital flight, which jumped from $11.4 billion in 2010 to $21.5 billion last year. While it slowed a bit in the fourth quarter of 2011, thanks to new government controls, Argentina's third-quarter outflow "was the most since the central bank began issuing the quarterly reports in 2002," according to MercoPress.
Meanwhile, many Argentines are still fuming over the tragic February 22 train accident that killed 51 people in Buenos Aires. Reports indicate that the accident was caused by official neglect. Argentina's auditor general has said it was entirely preventable. So why didn't the government take action sooner against the railway company that caused the crash? Blame corruption in general and the Kirchners (both Cristina and Néstor) in particular. "Over the past eight years," noted one Argentina-based journalist, "the Kirchner government has repeatedly turned a blind eye to the deteriorating rail network, pumping millions of dollars into the system while demanding little in the way of upgrades or safety improvements in return."
To be sure, Cristina Kirchner easily won reelection last October, garnering more than 54 percent of the vote. But she was competing against a weak and divided opposition, and in many ways she bought her victory through lavish, fiscally irresponsible government subsidies. "Irresponsible" is the best description of her economic policies, which include foolish import restrictions aimed at protecting Argentina's foreign-exchange reserves. (Automakers such as BMW and Porsche have been forced to start exporting other products, including meat, leather, rice, and wine, in return for import permits from the Argentine government.) Don't be misled by commodity-driven GDP growth: Kirchner is accelerating her country's relative economic decline — which, admittedly, began long ago.
That decline is nothing short of remarkable. On the eve of World War I, Argentina was richer than France and Germany. But after World War II, it entered a period of populism and dictatorship, punctuated by political violence and hyperinflation. The Galtieri regime fell shortly after Argentina's defeat in the 1982 Falklands war, but the return of democracy was not enough to help the country escape another episode of hyperinflation in 1989. Nor was it enough to prevent a historic debt default in late 2001.
According to the narrative promoted by Kirchner and her left-wing supporters, Argentina's default was a result of free-market economic policies. But that's nonsense. As journalist Michael Reid has explained, "What killed Argentina's economy in 2001 was not 'neoliberalism' or the free-market reforms, but a fiscal policy incompatible with the exchange-rate regime, and a lack of policy flexibility." Indeed, the policy mix that triggered the crisis "was in direct contravention of the Washington Consensus."
Today, after several years of appallingly bad economic mismanagement, Argentina is facing yet another looming crisis. For now, high commodity prices are camouflaging a slow-motion disaster. But those prices won't stay high forever. And in the words of Daily Telegraph commentator Jeremy Warner, the country "is once more an economic basket case." Sooner or later, its next crisis will erupt.
Read this article in Spanish here.
Ambassador Jaime Daremblum is a Hudson Institute Senior Fellow and directs the Center for Latin American Studies.
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