I come from a sad country
-Jorge Luis Borges, Argentine author
The 2018 G20 Summit will be held in Buenos Aires, the capital city of Argentina at the very end of this month (November 30-December 01). Argentina currently holds the G20 presidency. President Mauricio Macri will play host to G20 leaders including President Donald Trump, President Xi Jinping, Chancellor Angela Merkel, and EU Council President Donald Tusk. This significant global event is being held at a time when Argentina is in deep economic crisis. The G20 was born out of the 2007-2008 Global Financial Crisis to address global financial challenges. After a decade of its efforts to stabilise the global economy, that task not only remains unfulfilled but there are also growing signs that the global economy is again heading for another major crisis. The effort, though, continues under the banner "building consensus for fair and sustainable development'' for this year's G20 summit. That slogan is, however, cold comfort for the people of the host country with a plunging currency almost close to 100 per cent over the last one year, very high inflation around 30 per cent and 60 per cent interest rate to shore up the currency along with US$ 50 billion IMF bailout attached with usual stiff economic medicine of austerity. Argentina is seriously a cash-strapped country now with a long history of a chronically troubled economy. Argentinians have taken to the streets against the International Monetary Fund (IMF) prescription. The country is, in effect, in turmoil both economically and politically. The crisis is reviving the memories of the financial collapse of Argentina in 2001.
While Argentina has seen this before, in 2001, the present crisis is shaped by a number of factors which have coalesced at the same time to trigger the current economic crisis. These factors include US President Donald Trump's "America First" economic nationalism, with particular thrust on China, accelerating the breakdown of the global trading system causing Chinese economy to slow down; rise in US interest rates prompting a rush for the dollar which is now considered as a safe bet leading to dollars tracking back to the USA to take advantage of the interest rate hike; higher oil prices which are expected to rise even further from the US sanctions against Iran. Then there is continuing economic crisis in Brazil, the principal trading partner of Argentina.
As capital discretely flows out of the country to the safe haven awaiting better time, the Argentine Central Bank in desperation hiked key interest rate to 60 per cent to bolster the local currency, Peso, by encouraging investment in the local currency. But investors are not very impressed by the fact that 70 per cent of Argentina's debt are dollar denominated. In a further frenzy, the Central Bank sold more than US$ 12 billion from its foreign exchange reserve to stabilise the Peso. Despite all these efforts by the Central Bank, Argentina has been placed on "under negative watch'' by S&P. One major casualty of the crisis is the Central Bank Chief Luis Caputo who resigned his position but is rumoured to be forced out of his office by the IMF. His sin was constant selling of foreign reserves, including the fresh loan from the IMF, to enable the Peso afloat. The Financial Times commented on the saga in a front page piece, "Argentine crisis deepens as bank chief quits after 3 months in post'' which was widely reproduced in local newspapers. The newly appointed Chief of the Central Bank Guido Sandler has declared "to leave behind exchange rate interventions''.
Despite all these efforts the current economic landscape of Argentina is marked by continuing contraction of the economy, rising price levels and interest rates and a depreciating currency. The Argentine President Mauricio Macri assigned blames to his opponents and a whole host of others, except himself, for the current state of the economy. He even pronounced that "we have been living above our means''. His message was clear that the Argentines must learn to live within their means by further tightening the belt.
For all the economic woes now faced by the country, the President eventually found solution in resorting to help from the IMF and following through its prescription of an austerity plan packaged as "structural adjustment''. The measures include a tax on exports and reduction of budget deficits to zero in 2019. Overall, achieving such an ambitious goal of zero-budget deficit will hinge on further cuts to public spending which will result in cuts in spending on education, health care and pension, and public sector employment. Such an adjustment package also calls for price hikes for electricity, gas and transportation, as well as a freeze on wages. The austerity plan that is under execution in Argentina is not much different from that was dished out to Greece. The Argentine government believes that the present round of austerity plan will stabilise the economy but looking at the recent past history of the country, one can only hope against the hope. But prophecies about market uncertainties arising out of the current global trade wars and rising levels of private and corporate debt do have a tendency to be self-fulfilling. And that is not good news for Argentina.
It is fair to say that the rapid spread of the current economic crisis has caught the Argentinian government by surprise, but the present crisis has its roots in Argentina's volatile history that can be traced back to the 1960s or even before. I have found the economic history of Argentina quite fascinating owing to what is described as "Argentine Paradox'', a country that achieved the status of a developed economy in the very early 20th century but suffered a reversal by the 1930s and slid to a developing economy status (code word for an underdeveloped economy). Simon Kuznets, Nobel Prize-winning economist, said to have mentioned that there were four types of economies, the developed, the underdeveloped, Japan and Argentina. The literature on the comparative economic decline of Argentina is quite exhaustive.
During the 1960s Argentina faced serious economic crisis which caused massive social upheaval resulting in catapulting a populist leader in power in the early 1970 but his tenure was short lived. And the 1973 oil shock further added to its woes. Since its independence Argentina has defaulted eight times on its loan repayments. The country has experienced several bouts of very high inflation and currency depreciation. In effect, continuing unresolved fiscal situation resulting from continuing public expenditure growth outpacing gross domestic product (GDP) growth leading to accumulation of huge debt burden caused the state to default. With prolonged unresolved fiscal crisis, corrective measures were, obviously, taken care of by inflation as the state failed to do the job.
Argentina, a country with a population of 43 million, experienced a profound economic crisis in 2001 which triggered a serious civil unrest resulting in the change of government. Successive governments since then, including the current one, made piecemeal efforts to consolidate the country's fiscal situation using various policy options including interventionist (under President Cristina Kirchner) to more market-friendly economic measures (under the current President Mauricio Macri), but, apparently, of no avail. The gravity of the situation can be easily guessed where the poverty rate jumped from 29 per cent in 2015 to 32.6 per cent in 2016. Now the rate is likely to be even higher. To compound the problem, this year Argentina experienced its worst drought in decades crippling the agriculture sector, the mainstay of its exports (accounting for 54 per cent of total exports). To add further to the misfortune, there was a fall in commodity prices affecting export earnings. Overall the outlook remains quite pessimistic with the economy expected to be contracting by two per cent this year with the resultant rise in unemployment and inflation exceeding 40 per cent.
Muhammad Mahmood is an independent economic and political analyst.
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