Argentina’s Economic Crisis Never Went Away

Argentines remain enmeshed in a populist policy trap as inflation soars past a whopping 70 percent.

By , an intern at Foreign Policy.
Argentines protest economic issues
Argentines protest economic issues
Argentines protest to demand better wages and more jobs outside the presidential headquarters in Buenos Aires on Aug. 11. LUIS ROBAYO/AFP via Getty Images

Argentina’s annual inflation rate soared past 70 percent in July—the highest level in three decades—according to data released by the Argentine government last week, and it could hit 90 percent by the end of the year. The runaway inflation has left many in the country mired as they turn to barter and parallel currency markets amid dwindling Central Bank reserves, a bloated fiscal deficit, and a looming debt bomb.

But this is not the country’s first dance with economic danger.

“For those of us who have been around for longer, living in this country, everything has a sense of déjà vu,” said Carlos Gervasoni, an associate professor and chair of the political science department at Universidad Torcuato Di Tella in Buenos Aires. “It’s always the same story, there are just different flavors of what Argentina faces every five or 10 years.” 

Argentina’s annual inflation rate soared past 70 percent in July—the highest level in three decades—according to data released by the Argentine government last week, and it could hit 90 percent by the end of the year. The runaway inflation has left many in the country mired as they turn to barter and parallel currency markets amid dwindling Central Bank reserves, a bloated fiscal deficit, and a looming debt bomb.

But this is not the country’s first dance with economic danger.

“For those of us who have been around for longer, living in this country, everything has a sense of déjà vu,” said Carlos Gervasoni, an associate professor and chair of the political science department at Universidad Torcuato Di Tella in Buenos Aires. “It’s always the same story, there are just different flavors of what Argentina faces every five or 10 years.” 

Argentina’s ongoing battle with inflation dates back to the 1980s, or even earlier. But the COVID-19 pandemic, coupled with Russia’s war in Ukraine, shrinking global food supplies, and tighter energy markets, has sent shock waves through an already battered economy. Nearly 4 in 10 Argentines currently live below the poverty line. The economy—which is highly dollarized given the diminishing value of the Argentine peso—is running through billions of dollars’ worth of foreign reserves on a weekly basis. Some Argentines have resorted to trading milk for diapers. Others complain that the frequent changes in prices have left them guessing the cost of their newspaper or bag of rice—often they only find out when they get to the cashier. Tourists who do try to use debit cards overseas have to pay a tax of almost 50 percent on transactions—a desperate measure to keep foreign currency reserves in the country. 

“It is a big problem, of course, but being born in it, you kind of get used to it,” said Alfonso Sundblad, a student at the University of San Andrés in Buenos Aires. “But what you feel the most is the uncertainty—you can never unplug from the political world and the economy, even though you’re a child.”

Yet, given an unstoppable fiscal deficit—the government spends much more than it takes in—the Central Bank keeps printing more pesos, which pushes the value of each one lower, making inflation even worse. The Central Bank of Argentina last week hiked lending rates to stratospheric levels (the benchmark rate is now 69.5 percent) in a bid to check inflation, but such steps will also check investment and economic growth. 

And then there’s another debt crunch. Argentina still owes the International Monetary Fund $40 billion as part of its 2018 bailout, but took out another $44 billion loan earlier this year from the IMF to meet its obligation, adding to the risks of a default, which would just make everything worse. 

“The combination of global shocks, overprinting money within Argentina, and a very high inflation expectation combines into this toxic stew,” said Benjamin Gedan, the deputy director of the Latin America Program at the Wilson Center. 

When it comes to defaults, Argentina does have a bit of a history. Since it joined the IMF in 1956, Argentina has sought and agreed to 22 financial-support programs from the organization, the most notable of which was during the 2001 Argentine financial crisis when it defaulted on a $21.6 billion IMF loan. (It also halted payments on $95 billion worth of bonds to other creditors.) 

Following the 2001 crisis, many Argentines blamed, and still blame, the IMF for imposing harsh conditions that worsened the country’s already dire economic situation. Last year, Argentine President Alberto Fernández criticized the IMF’s 2018 loan to Argentina, the largest loan in IMF’s history, as being “toxic and irresponsible.” 

The IMF does often condition loans on government reforms meant to rein in runaway deficits, which translates into slashed subsidies, lower spending, and public discontent. (One reason for the massive Central Bank rate hike is to push interest rates closer to the rate of inflation, which is one of the IMF’s demands.) But in Argentina’s case, where deeply embedded structural issues in the political economy serve as a breeding ground for its financial troubles, fiscal tightening might be just the bitter medicine the country needs to snap out of its downward economic spiral. 

In the early 1900s, Argentina was richer than France and Germany. Immigrants flooded in, attracted to the country’s agricultural and manufacturing promise. And then came populism, in the person of Juan Perón—a general who became a powerful secretary of labor with the arrival of the military dictatorship during World War II. In charge of labor relations, pensions, and social services, Perón offered the moon. A few years later, he was president. The movement he established, and which still lives on in various guises, prioritizes popular economic welfare in the short term at the cost of long-term economic development. It’s been a very long short term.

Argentina arguably has one of the biggest welfare systems in the developing world and subsidizes utilities, transportation, and retirement benefits for all its citizens. According to Gervasoni, of Universidad Torcuato Di Tella, an average Argentine pays the equivalent of less than $5 per month for their electricity. In stark contrast, typical Italian and German households are likely to pay more than $230 and $270, respectively, on their monthly energy bills. In a bid to protect domestic consumers and earn revenue, the Argentine government relies heavily on export taxes. Earlier this year, the government hiked export taxes on processed soybeans, one of its top commodities, to 33 percent, giving soy growers fits but offering a way to squeeze more out of one part of the economy that is working. (Argentina’s tendency to nationalize big firms, most recently the Spanish-owned half of oil company YPF in 2012, also doesn’t chum the waters for foreign investors.)

While maintaining a robust welfare program and generously subsidizing utilities seem like a great option in the short run, the Argentine government simply does not have enough coin to keep at it. “It’s a conundrum for the government, because they know that things are deteriorating,” said Eduardo Levy Yeyati, an Argentine economist who previously served as chief economist at the Central Bank of Argentina. “Nobody wants to push the red button—it’s like the trolley problem.”

No politician wants to be the bearer of bad news—especially when it is nearing election season in a country with particularly strong unions and a Peronist history. In early July, Argentine Economy Minister Martín Guzmán resigned amid rising tensions with Vice President Cristina Fernández de Kirchner, implying that he lacked the political backing to make the necessary macroeconomic policy choices. Guzmán’s successor lasted just a few weeks. Now, Sergio Massa has inherited the problem. 

While Massa has publicly promised to cut back export tariffs and stop printing more money, he has not laid out a concrete plan to do so. Meanwhile, the ongoing political turmoil continues to add to Argentines’ lack of confidence in their leadership and exacerbate their financial anxieties.

“I think sometimes people have this impression that Argentinians are so flexible and resilient because they have survived so many crises, that these conditions are the norm and hardly disruptive,” the Wilson Center’s Gedan said. “I don’t think that’s the case. I think conditions now, even for Argentina, are extreme.”

Anusha Rathi is an intern at Foreign Policy. Twitter: @anusharathi_

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