Export restrictions, price controls, bully diplomacy and spiralling inflation are among the key results of Nestor Kirchner's misguided economic policies.
BY JOACHIM BAMRUD
Just as Argentina's exports are booming, the country's populist president Nestor Kirchner decides to impose a 180-day ban on beef exports. The reason? Their price is "too high" in Argentina, so by boosting domestic supply, Kirchner hopes prices will fall. This, after his earlier tactic of urging Argentines to boycott their beef failed. Fortunately, a federal judge last week issued a temporary stop to the new restrictions, allowing exports until he has made a final decision on whether the ban was constitutional or not. Of course, Kirchner has appealed the ruling.
Kirchner started the year by pressuring consumer goods giants like US-based Procter & Gamble Co. and Netherlands-based Unilever to freeze their prices, as he has done with supermarket chains. As Standard & Poors has pointed out, price controls "could undermine private investment over the medium term, lowering GDP and potentially weakening the sovereign's credit rating."
And when the companies don't go along, Kirchner simply bashes them. Last year, he urged a boycott of British-Dutch oil giant Shell when the company refused to freeze prices on its products. And he practically expelled French utility giant Suez recently over a similar price dispute. Suez had refused to continue freezing prices on water provided by their subsidiary Aguas Argentinas, and - after continued hassling and pressure from Kirchner - finally decided to leave Argentina alltogheter. Kirchner moved up the date by rescinding the contract and is now busy preparing state management of the previously private company. As Bear Sterns recently pointed out, "the public sector is unlikely to be an efficient provider of public services, and this will divert scarce public funds from critical investment in education and health."
All of this supposedly to achieve better prices for consumers. The problem with these policies, apart from deterring badly-needed foreign investment in Argentina, is that they will fail and are failing miserably. Argentina last year doubled its inflation rate to more than 12 percent, one of the highest in Latin America, and this year will likely end up with a rate of 15 percent or more.
RATHER than blaming private enterprise for the spiralling inflation, as Kirchner has, he needs to reduce public expenditure dramatically. This is not rocket science, but policies that have proven successfull in Argentina itself in the past as well as countries throughout the world experiencing similar inflation problems.
Tragically, even the Central Bank has been unable to help. The formally autonomous bank is supposed to defend the Argentine peso, but has been pressured by Kirchner to avoid using the tools it normally could have used, such as boosting interest rates to dampen economic activity. The Argentine Central Bank stands in stark contrast to the Central Bank in neighboring Brazil, which has been managed superbly by Henrique Meirelles (thanks in large part to the strong support Meirelles has received from President Lula).
But it's not just in the fight againt inflation that Kirchner has failed. While we applaud the decision to pay early the debt to the International Monetary Fund, fact is that Argentina deserves no applause for the way it has handled the debt default in 2001 nor its private creditors since.
THEN there's Kirchner's bully diplomacy. In the latest example, Kirchner is trying to bully its smaller neighbor Uruguay from stopping the $1.6 billion construction of a paper mill factory - the largest foreign investment in Uruguay ever. Kirchner is demanding an environmental impact study. When the government of Tabare Vazquez initially rebuffed the demand, Kirchner threatened to take Uruguay to international courts to suspend the construction by Finland-based Botnia and Spain-based Grupo Empresarial Ence. In the interim, he let Argentine protesters of the factory practically shut key cargo and transit roads between Argentina and Uruguay, causing major damage to Uruguay's commerce and tourism.
The clash with Uruguay comes after Kirchner hosted 33 other heads of state from the Western Hemisphere in November for the Summit of the Americas. Instead of trying to iron out differences between participants, he led the group of five dissenters who refused to advance the final negotiations for a Free Trade Area of the Americas. Rather than letting other presidents be able to communicate their views, he monopolized the public parts to attack the agenda for an FTAA.
Argentina's economy has, indeed, been growing at strong rates the past three years. However, let's put that into perspective. First, the initial growth came after a disastrous economic crisis in 2002. Second, the most recent growth is largely due to strong exports - nothing we can necessarily thank Kirchner for. If anything, rather than respect the market forces behind the export growth, he wants to tinker with it, as seen in the latest beef controversy.
All in all Kirchnernomics is another chapter in the history of misguided economic policies in Argentina. If Kirchner continues with his policies and is re-elected next year, there is ample reason to cry for Argentina.