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Lord Risby: I cry for you, Argentina

Richard SpringThere is no doubt that incumbent governments in many countries currently have difficulty in securing re-election. A notable exception is the almost inevitable outcome in Argentina, where presidential and legislative elections take place on 23rd October. The President, Cristina Fernandez de Kirchner is highly likely to romp home, leaving her rivals in the dust.

Next door the incumbent centre-right president Sebastian Pinera is massively unpopular – a juxtaposition that says much about the vicissitudes of politics. Chile is hugely successful and a model of corruption-free governance with a superb infrastructure, a trade and budgetary surplus, growth of 6.7% this year and inflation at around 3%. Radical free-market reforms have brought this all about. Yet President Pinera enjoys a mere 28% approval rating, with enthusiasm at low ebb even amongst his core supporters.

By contrast, Argentina is in an inflationary bubble, where few believe that the official rate of 10% is anything other than a huge underestimate. Buoyant demand for the country’s superb agricultural products, particularly Argentine soy, has propelled rapid economic growth, yet the infrastructure remains lamentably poor. For Argentine voters credit controls are lax on the back of very loose fiscal and monetary policy, all of which make for a heady cocktail.

Additionally, Argentina’s exclusion from international credit markets has both proved domestically popular and has served to keep government debt low. 
In 2002 Argentina defaulted on its World Bank and Inter-American Development Bank loans. To resolve this crisis the IMF stipulated a range of immediate policy actions which were rejected. Incredibly, the IMF backed off, and though its demands for fiscal austerity, tax reform, tight monetary policy, bank and utilities privatisation and financial reform were eventually agreed in principle, there was a notable absence of any strict timetables or numerical targets, unsurprisingly resulting in minimal reform.

Argentina’s default was the largest in financial history but it has chimed with the instincts of national pride entrenched in the Argentine electorate. Even today President Kirchner refuses to allow the IMF to audit their accounts. A clear policy of protectionism means that it is very difficult to find foreign goods in Buenos Aires shops. All of this is the antithesis of what modern market economics dictate, but while agricultural prices remain so buoyant and its northern neighbour Brazil continues to boom, the political rewards are abundant.
Chile on the other hand has moved from a highly protectionist economy to one of the most open in the world, and certainly above all in Latin America. Its infrastructure and service provision is vastly superior to that of Argentina, not least because of the steady contribution of copper mining which accounts for 20% of its GDP. 
It does face energy and environmental problems, and students are in open revolt at the costs of higher education, yet it has no sovereign debt to speak of and poverty continues to fall dramatically.
 One of its latest innovations is a government-sponsored start-up scheme for young entrepreneurs which has attracted droves of individuals from abroad - most notably Spain, with its enormous youth unemployment problems.
President Pinera, a billionaire, has failed the emotional intelligence test and has thus far been unable to communicate an appealing political vision. If he were facing an imminent election he would undoubtedly be booted out. So the irony is indeed a rich one - a popular president pursuing highly controversial and unconventional policies, parallel to one essentially producing the goods though lacking in the requisite skills of political connection or insight.
Sceptics suggest that the Argentine model must inevitably end in tears and that high inflation, widespread corruption, and considerable protectionism will in the end bring havoc. 
It should be noted that President Kirchner, whose home turf is directly opposite the Falklands, has expressed the deepest personal emotion about the islands, and if her economic policies ultimately fail, you can bet that the Falklands will rise up the political agenda once more.
Given the history, it will be well worth keeping a quiet watching brief on developments in Argentina in the months to come, both for on and offshore reasons.


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