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Article by Foreign Policy Centre

July 9, 2008

Riding a rollercoaster, being afraid and knowing that everything will be fine in the end is rather exciting and generates some healthy adrenaline. Riding another rollercoaster, with loose tracks and poor infrastructure, and nevertheless managing to be safe in the end, is a priceless lesson for the future. In Argentina, the national government does not share this perception. After the traumatizing events of 2001, when the country became financially broke and pushed thousands of people into poverty, a similar situation is about to materialize.

Now under the Kirchner dynasty, Argentina is dangerously flirting with danger. The situation is deteriorating as the country has not yet regained its access to the global financial market – it relies on Venezuela, which benevolently buys Argentine bonds, not accepted internationally. Managerial incompetence is a risk factor. Since last year, the escalation of Argentina’s crisis is regarded as one of the highest risks in South America by UK-based political think tank Oxford Analytica. Unfortunately, the disastrous handling of the economy may be pushing Argentina into a black hole.

The economic recovery registered during Nestor Kirchner’s term masked other structural shortcomings that have a high destruction potential. The outdated management of energy sources, as well as the poor strategy of masking inflation rates, are bringing about immediate problems affecting the population.

Cristina Kirchner took office with a mission to sustain the economic growth initiated by her husband and improve on the country’s diplomatic efforts – not one of Nestor’s strengths. Much more charismatic, Cristina appeared to be the missing link for the confidence shown by Argentines on a domestic basis to expand to neighbour countries and international agencies that monitor the nation’s economy and politics. However, recent events have been completely different, albeit also incredibly predictable.

The problem with the management of energy sources is not new in Argentina. The crisis in 2001 resulted in the temporary suspension of a modernization plan. With the economic recovery excessively favouring the domestic market by preventing farmers from exporting products such as beef and pork, domestic consumption went on a high. A significant part of the population regained their purchase power, as inflation rates, forcefully kept low by the government, made it possible for the Argentines to buy and to enter into debt. Thus, energy consumption increased as much as the population’s economic power. However, as the energy production had a low limit, the country reached a consumption peak. Argentina began to depend on Bolivia, not a reliable country due to its domestic instability.

Generalized blackouts have not yet occurred. However, some blackouts have been scheduled by certain industries and are happening systematically. Cristina was aware of this problem when she took office, but she did nothing to solve it. The proposals she has so far presented to face this challenge are too simplistic for such a complex problem. To ask Brazil to give up its share imported from Bolivia is a desperate request rather than proper behaviour from a State to solve such a severe problem.

Actually, shortly before the energy crisis would erupt (which could happen at any moment), another political crisis came up. The row with farmers concerning the pricing control exerted by the government and the exporting quotas imposed on them has been important to show another weakness of this government – Cristina has been showing poor negotiation skills. Her solutions are not feasible, as she is supported by an artificial foundation – the inflation rates announced by the government. Producing and selling in the domestic market is causing losses for farmers, as the actual inflation rate is nearing 20%. Cristina is uncompromising in her negotiations and refuses to acknowledge that the 7% inflation rate announced by her government is unreal.

Despite the conflict between government and farmers, which has been going on for more than 100 days, the National Institute of Statistics and Censuses (INDEC) has reported a 9% economic growth in April. These official figures indicate a relevant improvement, as the government agency reported an 8.5% expansion in the first four months of the year. Compared to March, the INDEC has reported a 0.9% growth. Even with positive figures, independent economists have sustained that inflation and unemployment have been growing as a result of the high public expenditures since 2003. They also believe that the lockouts and the shortage of basic consumer products are bringing inflation back.

After submitting to the Congress the bill that establishes the ‘retentions’ (taxes levied on grain exports), Cristina has summoned a meeting with farmers to try an approximation. Being flexible was an important gesture. Nevertheless, the meeting did not produce any great advances. One on hand, the Casa Rosada speaks of ‘recomposing relations.’ However, it shows no concrete measures in that direction. On the other hand, farmers speak of a willingness to dialogue, but they do not accept the tax rise. Under this climate of uncertainty, the Congress has started discussing the ‘retention’ bill. Even with a majority in both houses, nothing ensures that the Kirchnerism will be able to have the bill approved.

As the issue is unpopular, and the government approval rates have been falling on a daily basis, many lawmakers who support the president may choose not to take a share of this unpopularity. They might decide to remain connected with the public sentiment by opposing the rise in export taxes.

Medium- and long-term perspectives are not at all good for the president. If the law is passed, nothing ensures that farmers will put an end to their demonstrations. In turn, if the government is defeated, economic problems will aggravate. As economy and politics are closely linked, and Argentina has just been out of an institutional crisis, governability issues cannot be ruled out. Either Cristina will defeat the farmers like water wearing away the stone, and they will realize that the only alternative is to slash productivity and keep on selling to the domestic market, or the government will suffer a severe confidence crisis with the correction of inflation rates to actual figures.

If the severe crisis in 2001 was essentially economic, it is now a political one in 2008. The destruction potential of the current situation is high. One should take into account Cristina’s poor administrative skills and how the attitude has shifted in the low-income populations (her electoral base). With the people turning against Cristina, her government will become unsustainable.

Thiago de Aragão is an analyst at Arko Advice and a researcher at London’s Foreign Policy Centre

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