13
Feb

By Diego Sánchez de la Cruz, Alumnus of the Master in International Relations (MIR)

Over the last years, a lot has been said about the Argentinian economy and it’s performance. Economists like Paul Krugman were fairly optimistic about the Latin American country’s future, while other international observers saw some things differently.

As time has gone by, the performance of the Argentinian economy has slowed down significantly and the enthusiasm about the “Kirchner Model” is now almost gone. Many of the more serious concerns doubts about it’s future began when The Economist announced that it would stop publishing official inflation data from Argentina, arguing that such figures were experiencing major political manipulation.

If we take a look at the official numbers, prices increase in Argentina at an annual pace of 11 per cent, a much higher rate than most other Latin American countries. However, according to independent studies, Argentina’s real inflation rate is said to be around 25 per cent – and rising!

The government does not seem concerned about this trend: many times, President Cristina Férnandez de Kirchner has rejected the need to “cool down the economy.” According to the Argentinian President, trying to contain inflation “only leads to poverty and unemployment, as we have seen for decades.

At the moment, the amount of 100 pesos notes in circulation is more than half of the total monetary base. In fact, analyzing the Argentinian Central Bank report for 2011, we see that the number of circulating 100 pesos notes has tripled over the last five years. Bloomberg has reported that the money supply grew at a rate of almost 40% in 2011, following years of 30% growth levels.

It is important to remember that 2011 was a presidential election year, which perhaps explains why 52% of the new pesos were used to finance government spending programs. This can explain, for example, that the official propaganda budget grew almost 85% in the months leading up to the election.

Meanwhile, the Argentinian currency is losing it’s purchasing power very fast: a U.S dollar bought three pesos in 2009, while the current exchange rate is closer to five… The President herself seems not to suffer the same fate as the rest of the country, since her family’s state has grown from 7 to 92 million pesos in just a decade. Unfortunately, the rest of the country is not doing so well.

Other distorsions  

Another relevant distortion that observers may find when assessing the “Kirchner Model” can be found in poverty statistics. As explained by Mauricio Rojas, the official number of poor people is just below the 4 million people mark, yet independent studies show a different reality. According to evaluations by banks, universities and consultancy firms, the real number of poor Argentinians is somewhere between 8 and 10 million people.

In terms of job creation, analysts should also be very careful. Between 2007 and 2011, public employment grew significantly, at a rate of almost 70%. Today, one out of every five Argentinian households has at least one of its members of a public payroll. Meanwhile, private sector employment has stalled and could decline as the situation becomes worse.

Hence, as time goes by, we see that the deficiencies of the “Kirchner Model” are more apparent. Growth crumbled from 9% to 2% in 2012, perhaps signaling the beginning of the end of this experiment in demand-side economics. The President herself argued in a visit to Harvard University that “shopping malls and restaurants are full of people buying things”, as if this was any indicator that the economy was truly healthy.

Political and social instability is now growing. Foreign companies have been nationalized. Hostility towards independent media outlets remains high. Trade policy has become even more protectionist. The “Kirchner Model” is now facing reality, and sadly for Argentinians, the worst is yet to come.

Diego Sánchez de la Cruz, Alumnus of the Master in International Relations (MIR), is an analyst at Libertad Digital. His work on international economics has been published in different media outlets.

Comments

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