South American Socialist Economies: Argentina

Francisco A. Laguna & Jennie Linder Cunningham

Today, we continue with our 4-part series on South American countries that self-identify as socialist or that have certain socialist characteristics.  This first blog focuses on Argentina.

Mar Del Plata  Photo Credit: Fernandopascullo via Wikimedia Commons

Mar Del Plata
Photo Credit: Fernandopascullo via Wikimedia Commons

In a situation similar to that of Venezuela, the official currency of Argentina, the peso, is mistrusted and often eschewed or exchanged for the dollar, primarily on the illegal exchange market. The peso has experienced significant depreciation, including 20% from January to February of this year, and a reported 17% loss in just two days in January. GDP has continued to fall, particularly as a result of increasing inflation and a weak economy in nearby and influential Brazil, Argentina’s top trading partner.

Under the regime of current president, Cristina Fernandez de Kirchner, a 2% GDP surplus in 2005 became a 2% deficit in 2013. Although the government had released optimistic growth estimates for last year, it drastically lowered those estimates, reporting a 3% GDP growth for 2013, with experts predicting a flat growth for 2014.

 Government protectionist policies heavily restrict Argentines from buying dollars, which has caused a thriving black market for dollars – an illegal exchange market that is hard to even term “underground”, as numerous storefronts, or cuevas (caves) have set up shop on major roads in cities like Buenos Aires. The official exchange rate is prohibitive, causing tourists and Argentines alike to utilize the underground market, which offers much more lucrative “blue dollar” exchange rates. The unofficial exchange rate has even been published in newspapers alongside the official exchange rate. Those looking to exchange pesos can visit the cuevas or single proprietors (“arbolitos”) on the street, or utilize email-based courier services like Mobile Wechselstube (Mobile Exchange). The difference between the two exchange rates in early 2014 reached 60 percent, with rates averaging 11 pesos to the dollar at unofficial outlets versus 8 pesos at official outlets.

Congress, Buenos Aires Photo Credit: David Berkowitz via Wikimedia Commons

Congress, Buenos Aires
Photo Credit: David Berkowitz via Wikimedia Commons

Unfortunately, Argentina is arguably still recovering from a series of economic recessions in the 1970s and 80s, and a series of coups and unstable governments since the 1950s, as well as (certainly) a serious economic crisis in 2001. Today’s problems seem to reflect these past economic problems. A number of factors led to policies intended toward closing Argentina’s economy post-WWII, rather than opening, with much of the rest of the world. Extreme income inequality in the (agriculturally) rich nation meant that a large percentage of the population was open to the socialist and interventionist policies of Peron. Argentina a century ago was perhaps ahead of its time – but now, decades of socialist-inspired policies have contributed to the gradual, and often rapid, economic declines.

The lack of política de Estado (long-term state policies) has been a major contributor to economic decline, particularly in combination with a tradition of semi-socialist and redistributionist tendencies: weak property rights; a presidential history of manipulating the Supreme Court; constitutional term lengths; and national budgets, which currently do not need legislative approval. A democratic regime is not necessarily a precondition to economic stability, but political stability certainly is. Quite recently, in 2012, the government nationalized Repsol (a Spanish firm’s), stake in YPF, an Argentine oil company, by announcing that it would obtain a 51 percent share in the company. Oil production by YPF had been rapidly declining.

Currently, the government is involved in a controversy concerning the payment of sovereign debt and debt restructuring involving, among other things, a decision by the United States Supreme Court not to review lower court rulings that Argentina pay bond holders that did not opt into the restructure plan.

Map of Argentina

Map of Argentina

Quality of living has declined as well; the crisis of 2001 wiped out major portions of bank accounts, rendering savings and pensions significantly smaller. Civil rights observers such as the UN, Amnesty International, and Human Rights Watch point to women’s and reproductive rights, indigenous people’s land rights, migrant’s rights, and issues pertaining to torture as particular areas of concern. Women’s reproductive rights remain quite limited, with minor gains being made through a Supreme Court decision that allows for abortions in the case of rape – but compliance with the decision has been a major obstacle.

Agriculture and livestock – the commodities that made Argentina rich in the first place – have also suffered during the de Kirchner era. This has also had a negative effect on an economy that failed to effectively diversify and continues to rely on these staples. In 2011, Argentina was the world’s fifth-largest wheat exporter; the latest figures put Argentina in tenth place, significant considering that the top ten wheat exporters account for about 90 percent of world wheat exports in most years. Argentina is perhaps most known for its beef exports, and is currently tenth in the world for beef and veal exports.

In addition, importers and distributors of foreign products are experiencing increasing difficulties obtaining import permits for goods that had routinely imported, including foods and basic industrial inputs.  Critics of the government claim that these difficulties amount to non-tariff trade barriers that give preference to local industry.

Overall, regime instability, a history of redistributionist policies, and a mismanagement of exchange and inflation policies have unfortunately contributed to a declining economy, stagnant growth after years of relative prosperity, a wildly unstable currency situation, and a decline in general quality of living.  Current policies are only adding to the uncertainty.

TransLegal works routinely with clients doing business in Argentina and advises on such issues as obtaining government approvals for imported products.  Call us with your questions concerning doing business in Argentina.

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