Cry for Argentina. And for Venezuela, Too.
March 2, 2015
Over the past few centuries, a wide range of innovations have driven a dramatic rise in living standards throughout much of the world. The sizzle and speed of today’s information-technology innovations suggest to many that the march of economic progress is inevitable. With the world’s knowledge a mere Google search away, what can stand in the way of growth?
Inept government leaders can. More specifically, government leaders who implement misguided policies and practices that prevent people, entrepreneurs, and companies from together creating goods, services, jobs, opportunity, and hope. Sadly, many such leaders could be singled out for their errant choices that extract a heavy toll from millions of people. Two such especially notorious leaders today are President Cristina Fernández de Kirchner of Argentina and President Nicolás Maduro of Venezuela.
Neither country has been a paragon of responsible governance over the past generation, but these two current leaders have taken bad situations and made them worse. A Johns Hopkins University economist who constructs a “misery index” each year—ranking countries on inflation, unemployment, lending rates, and GDP growth—calculated that Venezuela and Argentina had the worst scores of the 108 countries for which data was available in 2014.
Argentina is South America’s second-largest economy. But it has not had access to global credit markets since defaulting in 2001 on a $100-billion debt obligation. It again defaulted last July. The government remains locked in a protracted legal battle with creditors who hold its 2001 bonds. President Fernández, who came to power in 2007 (succeeding her husband, who had been president since 2003), in a United Nations speech last year referred to these creditors as “vultures” engaged in “almost a type of economic and financial terrorism.”
The pain of Argentina’s global isolation has been intensified by economic mismanagement. Annualized inflation is running at about 40 percent. The International Monetary Fund has estimated that the economy shrank 1.7 percent last year and will shrink another 1.5 percent this year. The government says otherwise, projecting 2.8 percent growth this year. But few trust the government: years of manipulating economic data led to its official censure by the IMF in 2013.
Most recently, the country has been roiled by the death of Alberto Nisman, a former prosecutor who was leading the official investigation of the 1994 bombing of a Jewish center in Buenos Aires. In mid-January he was slated to appear before Argentina’s Congress to present his findings, which alleged that President Fernández and others in her government had engaged in secret negotiations with Iran to absolve the Iranian suspects and in return to trade grain for oil. But the day before he was supposed to make his findings public, Nisman was found shot dead in the bathroom of his home. Last week, a judge dismissed the criminal allegations against Fernández, but an investigation is underway to determine whether Nisman’s death was a murder or a suicide. The episode has done nothing to bolster trust in Fernández and her colleagues.
As bad as the economic and political climate is in Argentina, it’s worse in Venezuela. Because exports account for nearly 95 percent of Venezuela’s foreign-currency earnings, the recent collapse in oil prices (about which we have written here) has slammed economic activity. In a sign of desperation, President Maduro traveled to Iran in January to meet with the country’s Supreme Leader. He also dropped by Russia to meet with President Putin. Do you think this itinerary emboldened the CEOs of global multinationals to expand their long-term investments in capital and jobs in Venezuela and thereby help offset oil’s collapse? Or did it instead cement Venezuela’s status in the club of rogue nations?
Expansionary monetary policy, rather than expanding output, has instead helped drive the inflation rate up to about 68 percent—by some measures, the highest in the world. Rather than allow the price signals of the global economy to help reshape the economy, Venezuela’s leaders are trying to suppress them with multiple exchange rates: two for government-sanctioned goods like food, medicine, and car parts (6.3 and 12 bolivars to the dollar), and another for everything else (172 bolivars). This latter rate was adjusted in mid-February with a 70-percent devaluation compared to the previous rate. Adding to the confusion, the black-market exchange rate stands at about 190. Not surprisingly, the IMF projects the economy will contract 7 percent this year.
What is the result of a shrinking supply of dollars available to import basic goods plus stringent price controls over a widening array of products? Pervasive shortages of food and medicines, complete with massive Soviet-style lines outside grocery stores and pharmacies that require military protection to prevent rioting. Last week, the prime minister of neighboring Trinidad & Tobago offered to trade toilet paper for Venezuela’s oil. Amid an earlier toilet paper shortage in 2013, the government seized a toilet-paper factory.
Not surprisingly, all this economic turmoil is feeding political turmoil as well. The Venezuelan government recently arrested the mayor of the capital city, Caracas, and charged him with trying to orchestrate a U.S.-backed coup. This follows legal action taken against 33 mayors throughout the country in the wake of anti-government protests last year in which 43 people died.
The one piece of hopeful policy news from both countries is that they hold elections later this year. President Fernandez can’t seek another term this October, and parliamentary elections in Venezuela could rein in President Maduro. Reformers coming to power could be a first step in the uphill struggle to recover from years of policy malpractice. And that process of recovery can’t start soon enough.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.