Argentina: Waiting for Cristina Kirchner to Show Her Hand
Almost one hundred days after becoming the first woman ever elected President of Argentina, Cristina Fernández de Kirchner has little to show so far for her approach to managing the government. Experts interviewed by Universia-Knowledge@Wharton say that, as they expected, her administration is a continuation of the previous administration in which her husband Néstor Kirchner was President.
The economy’s strong performance over the last four years, along with the high level of support for the so-called “K” government, as Kirchner’s has been dubbed, permitted the 55-year old Cristina to win 45.2% of the popular vote. Second place went to Elisa Carrió, the opposition leader who created the Civic Coalition and won 23% of the vote.
“The economy has grown at an annual rate of 9% in recent years, and it is hard to make a change when everything is going more or less well, when unemployment is at [only] 8%, and when there is a high degree of social consensus that goes beyond the recent elections,” notes Ernesto O’Connor, director of economic analysis at the Argentine Catholic University (UCA).
Because of all that, it feels as if there has been a re-election within the Kirchner-Kirchner partnership -- a quiet transition in which there haven’t been a lot of ups and downs. After a bit more than 70 days as the first elected female president in Argentine history, Cristina has not made any significant changes in the style of government or elsewhere on the political and economic agenda. Alejandro Luis Corbacho, director of the political science department at the Argentine Center of Macroeconomic Studies (UCEMA), explains that the general feeling about Cristina Kirchner’s government is that “it is a continuation of the previous administration. The faces are almost the same. So is the tone of the bureaucratic discourse. And there are no policy changes.”
More cautiously, Eduardo Luis Fracchia, who heads the economics department at IAE, the Austral University School of Business, argues that “it is clearly too early to judge this administration. You need to give the government six months before you can issue more definitive pronouncements.”
No Plan for Inflation
For all that, the administration faces some problems held over from the administration of Néstor Kirchner, and they must be resolved in the medium and long term. Fracchia says that “one of this government’s failures has been its failure to recognize its own mistakes … when it comes to managing statistics about prices. Beyond that, the government does not seem to be truly serious when a bureaucrat like [Interior Commerce Minister] Guillermo Moreno continues to accumulate power in a dispute with his own Economy Minister [Martin Lousteau]. The government doesn’t have a concrete plan for dealing with inflation, the way they have in Peru, Chile and Brazil.”
During the administration of Néstor Kirchner, Moreno forged agreements on the price of food and public services. He also intervened with INDEC, the National Institute for Statistics and Census, to influence such sensitive economic indicators as the Consumer Price Index, a fundamental variable for calculating inflation. Until that happened, INDEC enjoyed great prestige. The IMF itself criticized the situation when it sent a severe note to the Argentine government about the changes introduced in the way INDEC operates.
“The problem is that when price levels are rising, you need to have appropriate policies that permit gradual adjustments in relative prices,” says Corbacho. “Unfortunately, they were not doing that at the time; the solution the government seems to have taken was to sweep the problem under the carpet and ‘shoot the messenger.’ If Argentina continues to use the slogan of constructing a ‘serious country,’ any intervention by INDEC aimed at manipulating statistics is not a move in that direction.”
Although INDEC announced a final inflation rate of 8.5% for 2007, private-sector analysts estimated that the real number was at least 22%. This much is certain: As a result of higher prices, labor unions are annually clamoring for upward adjustments in their salaries, which would amount to between 25% and 30% in 2008. Corbacho notes that the government is going to have to deal with demands from unions as well as with social conflicts, simply because there is work and economic activity. “They need to find a way to satisfy people, and do everything possible to moderate the demands made by labor unions if they are going to avoid the experience of the government of Isabel Perón -- a vicious cycle of higher inflation and higher salaries.”
Fracchia believes that Argentina still needs to “include on its agenda the goal of containing inflation within single digits, since that is the main macroeconomic problem. The labor sector will continue to be stormy, which has to do with the high inflation rate and the greater power of labor unions whose demands for salary hikes are more intense now that there is a low employment rate among skilled workers.”
Savings as a Solution to the Energy Crisis
Another longstanding problem could complicate the country’s economic crisis – the energy crisis. One of the first decisions that Cristina Fernández de Kirchner made in December was to launch an energy savings plan for consumers and state-run institutions. She moved the clock forward, and distributed some 100,000 lamps that conserve energy. She asked people not to over-use their air conditioners and prodded municipal governments to turn their lights off at night.
“That energy savings plan is not a solution,” says O’Connor. “The solution to problems of supply when prices are in disequilibrium is a gradual normalization of the system of prices. For example, naphtha is worth half what it is [elsewhere] in MERCOSUR). The regulatory regime [in Argentina] still doesn’t provide sufficient incentives for private investment.” Nearly two months after her plan was launched, Fracchia notes, “They say that the savings have been [only] 600 megawatts. Changing the daily work schedule was okay but of marginal importance when it came to the power needs of existing firms. But the negotiation with Bolivia will be crucial for the supply of gas in winter.”
When the cold weather arrives, the industrial sector will suffer shortages and penalties for the excessive use of energy. However, experts say that this will not solve the fundamental problem, especially when demand is continuing to increase. The latest reports from January show growth of 4.9% in demand. In addition, Bolivia is not guaranteeing that it can provide Argentina with the gas it needs if demand grows even higher in July and August, the coldest months.
For O’Connor, it’s essential to pay attention to “the need for reducing subsidies, such as those affecting public transportation, since they are excessive. You also have to look at distortions in the economy,” such as in the case of any shortfalls in the production of food, one of the key sources of income for the government.
In the International Realm
During her presidential campaign, Cristina revealed a style that was different from her husband’s. She made more trips abroad and met with important figures such as Bill Clinton in the U.S. and José Luis Rodríguez Zapatero in Spain. Analysts took a positive view of that approach because it was a way for Argentina to look beyond its part of the world, find new sources of investment, and re-launch its negotiations with the Paris Club – an informal group of finance ministers from 19 countries -- to which Argentina has owed $5.8 billion ever since 2001, when Argentina defaulted on its debt.
Nevertheless, “for the moment, foreign relations under the Cristina Kirchner regime have not changed the way it seemed they were going to change before she took power,” says Corbacho. “The country continues to be very close to Venezuela, Bolivia, and Cuba. At times, the government overreacts to situations. The relationship with the United States continues as before, with ‘much ado about nothing.’ If Brazil continues its unstoppable march toward membership in the G-8, what will be left for Mercosur? Not much.” Brazil is one of the leading countries in the MERCOSUR trade bloc.
Shortly after taking her new office, Cristina had to deny that $800,000 carried illegally into Argentina by Venezuelan [businessman] Guido Alejandro Antonini Wilson, in an airplane he borrowed from the Argentine government, was meant to be used to finance her presidential campaign. The money allegedly was sent by Venezuelan President Hugo Chavez in an attempt to influence the election in her favor.
Fracchia notes that the “impulse toward a [so-called] Southern Bank -- an institution that will be created by Argentina, Brazil, Venezuela, Bolivia, Paraguay, Ecuador, and Uruguay -- is a questionable one. Generally speaking, support [for the Bank] from the political alliance headed by Venezuela’s Hugo Chávez is of dubious value when it comes to orienting the governments’ foreign policy. On the other hand, a substantive relationship [between Argentina and Venezuela] is conspicuous in its absence. These sorts of ties have yet to develop as much as people had anticipated. We are awaiting Cristina’s travels in March, when she can better define her foreign policy agenda.”
As for the Paris Club, O’Connor believes that the parties have plans to put together an agreement. “I believe that there is a will [to do that] and interests are converging. After that happens, there could be a greater globalization of the [Argentine] economy with deeper trading relationships with Europe and the United States.”
Although Argentina is physically far removed from the United States, it will need to keep a watchful eye on the current economic crisis there, which is affecting other markets such as Europe. “I don’t think that it affects the Argentine economy,” adds O’Connor. “You should not underestimate the role of China, which is in some respects independent of the crisis in the United States. It doesn’t look like commodity prices are going to stop rising, or that they are totally dependent on interest rates in the United States.”
Fracchia agrees. “We have only a little trade with the U.S., so we should not be affected much by our trading relationship. What’s more relevant are the financial aspects -- that is, if there were a big drop in stocks and bonds. The impact will depend on whether the recession is short or it lasts a longer time. This is the fundamental point since the [Latin American] region is growing with a so-called tail wind. For the time being, our country continues to be ‘shielded by soybeans,’ as we say.” Every year, Argentina adds to its planted acreage of soybeans because rising global prices make it more and more tempting for producers to do so. As of last January 26, for example, the average value of a ton reached a record-high $315.
It make sense for Cristina “to emphasize the importance of [increasing] the [Argentine] fiscal surplus, along the lines of the previous administration,” adds Facchia. “It remains to be seen, however, if it would be best to address that goal by reducing public spending or having fewer [tax] deductions. But the commitment has already been made to attain a surplus of 3.5% of GDP, which is a convincing sign from the macroeconomic point of view.”
The President’s Positive Image
Despite salary battles, growing inflation, the energy crisis and lack of a clear government plan, the President has maintained her positive image. A study by consultant Ricardo Rouvier showed that her popularity rose by six points in the first month of her mandate. In addition, the School of Government of Torcuato Di Tella University reported that the Index of Confidence in the Government grew by 16% between the first and second month of her administration.
“The important thing for the government is to keep the population happy,” notes Corbacho. “Everything looks better when you have money in your wallet. When that happens, you don’t care much about the quality of your institutions or the fact that the branches of the government don’t have independent powers. If problems of energy supply were to continue, however, inflation would rise and people would not find any answers to the problem of [economic] insecurity. Over the longer term, that would affect the government’s popularity.”
Néstor Kirchner also continues to be highly popular. Over the past few months, he has removed himself from politics and opened an office in the neighborhood of Puerto Madero, just a few blocks from the Casa Rosada. From that location, Néstor runs the Justicialist Party, which has the same roots as the party of the current President, known as the Front for Victory.
According to Fracchia, Cristina Kirchner has a very strong personality, and she is going to fight for her ideas. But this doesn’t necessarily mean that her ideas will diverge from her husband’s in the future. “The task of reorganizing Justicialism means relying on a lot of political capital, which she will exploit the way she wants, using her own criteria,” he concludes.