President Alberto Fernández is trying to solve the problem of big government with more government.
As if the economic crisis Argentina faced before the pandemic were not enough, the country has had to battle COVID-19 with a comorbidity: the radical policies of President Alberto Fernández.
Prior to the pandemic, it was already challenging for Argentines to maintain businesses and overcome the endless regulations and bureaucratic hurdles that comprise everyday life under the heavy-handed Argentine government. But since March, the government of Alberto Fernández and Cristina Fernández de Kirchner has made matters worse by imposing one of the longest quarantines in the world.
“Faced with the dilemma of preserving the economy or life . . . we choose life,” the president said, like a messiah promising the salvation of the people. We can worry about the economy after the pandemic, argued Fernandez. Wrong. When the economy shuts down, as Fernandez has ordered, people don’t work. When people don’t work, unemployment and hunger escalate, and, yes, lives are lost. Worse, despite the draconian government response, Argentina has the seventh-highest number of COVID-19 infections in the world.
The failure to contain the spread of COVID-19 is the latest in a series of Argentine government failures — none more devastating that perennial economic mismanagement. In brief:
- The Argentine economy has been in recession since 2018.
- Argentina ranks 126th in the World Bank’s Doing Business index, between Paraguay and Iran. It takes about five months to open a business in Argentina.
- For the year 2020, the International Monetary Fund is predicting a drop in GDP of 11.3 percent, just below the 12.3 percent contraction estimated by the World Bank.
- Argentina has public debt approaching 90 percent of GDP.
- Argentina has one of the highest inflation rates in the world: 36.6 percent over the past year. Every month, wages steadily decline, and every 10 or 12 years, like clockwork, the Argentine peso crashes, diminishing household savings.
- Meanwhile, the risk of sovereign default implied by Argentina’s bond valuations has been increasing continuously. Just a few weeks ago, the country-risk rate climbed to its highest level since the J. P. Morgan restructured the index after Argentina’s debt swap in September.
In August, Alberto Fernandez celebrated a successful debt renegotiation with the country’s private bondholders (at $300 billion, equivalent to 20 percent of Argentina’s total public debt).
Far from the “triumph” that President Fernandez claims, the restructuring did little to assuage investors. Argentine debt still trades at a steep discount, because investors rightfully recognize the dim prospects for a government that limits the creation of wealth through aggressive taxation, price controls, currency regulation, and skyrocketing levels of public spending.
Argentina still does not realize the problem that has trapped us in a cycle of repeated crises for decades: the government.
The “solutions” invoked by left-wing Peronists — the progeny of the populist 20th-century president Juan Perón — always involve increased state intervention in the economy. Alberto Fernández has done nothing different. Until now, his government has sought to control the shortage of foreign currency by making it more difficult to acquire dollars and by limiting the outflow of foreign currency through the capital markets. The police have even begun chasing people who buy dollars “illegally.” Therein lies the problem: The government declares it a crime for citizens to rely on a currency other than the peso. But government programs and their hefty price tags are responsible for inflation in the first place. The past 50 years of Argentine economic policy have been marked by deficit-financed fiscal profligacy. So long as Fernández carries on that dubious legacy, no number of capital controls will save the Argentine peso.
This government blames the former government for putting Argentina into debt beyond its means. The previous government claims that this debt was necessary to pay for the political programs of former left-wing governments. Argentina has a long history of debts, since 1824 — when it was the “United Provinces of the Rio de la Plata” —and the head of state Bernardino Rivadavia took out loans in foreign currency. Since then, it has been the same story: In 1983 the country had outstanding debt of more than $44 billion. That increased in the 1990s under Carlos Menem, Alfonsín’s successor — so much so that it pushed Menem to establish a “one-to-one” peg between Argentine peso to the U.S. dollar. The debt soon tripled and the bubble burst under Menem’s successor: Fernándo de la Rúa, who lasted half a term before having to resign amid a social crisis.
But that didn’t stop Argentine politicians. In 2003, government expenditures reached 22.7 percent of GDP. Thirteen years later, in 2016, following 12 years of socialist policies under the Kirchners, public spending reached a record 41.5 percent of GDP. Each increase in government spending is accompanied by an increased in deficits, then money printing by the central bank, and finally a currency crisis that kneecaps the national economy. As always, Argentina cannot solve the problem of big government with more government: The Fernández government must cut public spending. The pandemic is no excuse for economic mismanagement.