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Argentina: Opening Old Wounds

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The clashes in the streets of Buenos Aires were the fruit of the populism that is spreading throughout Latin America.

BY WALTER T. MOLANO


The wave of protests and violence that spread across Argentina last week reflected the refusal by the agriculture sector to pay higher export tariffs. Farmers held back their products, producing food shortages across the country. Roads were cut, and there were confrontations in the center of Buenos Aires. Although the crisis may have come to a close, several old wounds sat at the heart of the problem.

The history of Argentina is the struggle between Buenos Aires and the provinces. Argentina is a very rich country, with enormous tracks of arable land. This allows for much of the wealth to be generated by the interior. However, the greater Buenos Aires is the gateway to the world. It dominates the major ports and river ways. Given that it also has the majority of the Argentine population; it is only natural that it uses its geographic location to carve out part of the wealth that passes through its doors.

Therefore, the control of the customs house was always the center of a vicious struggle between Buenos Aires and the provinces. It was the cause of civil wars, constitutional agreements and political struggles. This was the source of the co-participation schemes that allowed the federal government to share its tax revenues with the provinces.

However, in the aftermath of the default in 2001 and the ensuing economic crisis, the federal government introduced a new tariff on grain exports that was outside of the co-participation scheme. Moreover, the new taxes became one of the major sources of income that significantly improved Argentina's fiscal accounts.

Today, the federal government is awash in money, thanks to soaring grain prices. Much of the money is used to increase employment, particularly in urban areas. It is also used to help subsidize food prices that continue to climb, thanks in part to the pressures that are driving grain prices higher and the ongoing use of price controls. Unfortunately, President Cristina Kirchner's ill-advised decision to raise the retention tax to 40 percent proved to be too much for farmers, sparking the current wave of protests.

The new conflict is not just a reflection of the struggle between Buenos Aires and the provinces, or urban versus rural. It is also the manifestation of the class conflict that is inherent to Latin America, and which has been tapped into by the new generation of populist leaders. The riots in Buenos Aires were not between overall-wearing farmers and urban factory workers. It was between members of the middle class and the urban poor. Evita Peron
tapped into this rich vein of tension, by using her populist rhetoric to build up support for her husband. President Kirchner is doing the same.

However, this is not just an Argentine phenomenon. Class warfare lies at the heart of President Chavez's so-called Bolivarian Revolution. The aim of political figures, such as Rafael Correa, Evo Morales, Ollanta Humala and Daniel Ortega is to use the frustration by the lower classes to further their own political ambitions. Instead of using the funds from the nationalization of assets or the increases in soybean tariffs to modernize infrastructure, build new schools or improve medical care, they use it to foster clientalism by creating low paying jobs, protesters and people to attend political rallies. This only deepens the resentment by members of the upper classes who are witnessing the abuse of their taxes.

The clashes in the streets of Buenos Aires were the fruit of the populism that is spreading throughout Latin America. The latest incarnation of this conflict may be the street battles between the upper classes and the working poor, but it will not be resolved until Latin America implements the measures needed to create new opportunities for the entire society to reap the benefits of globalization. Latin America needs to improve its productivity and find new ways to add more value to their commodity products. This will allow better distribution of wealth throughout the entire social spectrum, and avoid the charades that currently dominate the political systems. 

Walter Molano is head of research at BCP Securities.

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