Wednesday, 25 November 2015

Peronists Lose in Argentina after 12 Years of Populist Rule [update 2]

After years of disastrous economic performance, Argentinian voters this week threw out the Peronistas who have had a political stranglehold on the country for decades—and some commentators are suggesting (or hoping) it might be a permanent expulsion, not least for the economic basket-case they’ve made of the place.

Our guest poster Ryan McMaken explains below why the disastrous economic performance led to the ejection of the populist Kirchners, in favour of a relatively pro-market President to clean up the mess left by their 12-year rule. But if history is any indicator, he says, once the new president starts to do the unpleasant work of austerity and fiscal restraint, the Argentinians will sour on him and quickly elect someone new who will start the cycle of debt, inflation, and economic disaster all over again.

[UPDATE 1: New President-elect Mauricio Marci (right) was asked “what books he would take to a deserted island, and answered The Fountainhead, by Ayn Rand." (Translation here.) Hat tip David Prichard.]

[BONUS QUESTION: “What explains the dramatic differences in economic performance between the two Americas?” asks philosopher Stephen Hicks, and he has a surprising answer. If you’re not a philosopher. Long term, he says, “it’s the difference between philosophies that centre on rational individuals who produce and trade with each other to mutual benefit – and those philosophies that appeal to power conflicts between semi-irrational collectives who exploit each other. That clash of philosophical traditions goes far in explaining … the differences in economic performance.”]

Peronists Lose in Argentina after 12 Years of Populist Rule
by Ryan McMaken

The Peronists lost in Argentina after 12 years of populist rule, as voters, in a close election, opted for the economically liberal candidate who, according to USA Today, "promised to reduce the state's role in the economy and embrace more pro-business policies." "Pro-business" is most definitely not the same as being "pro-market," but we'll see how Mauricio Macri, the new president, proposes to end some of the crippling regulations and interventions that have hobbled the Argentinian economy over the past decade. 

Over the past 12 years, the rule of the Kirchners — first Nestor, then his wife Christina — ruled in the populist model of the Peronists. They committed to extravagant government spending programs, currency manipulation, and to a cronyist model of government favours for select corporations and industries. 

Prior to the most recent era of Peronism under the Kirchners, Argentina laboured under Peronist Carlos Menem, who set the stage for the 1998-2002 economic crisis in Argentina. 

As the economy headed down in the wake of Menem, the Argentinian voters opted for Fernando de la Rua who was faced with the unpleasant work of implementing cutbacks in government spending and attempting to bring inflation and government regulators under control. 

As is so often the case with those who have to clean up after the economic populists, Rua quickly became unpopular and was replaced by Peronist Nestor Kirchner in 2003. 

Kirchner set to work implementing the same policies that had led to the 1998 crises. He imposed high taxes on exports and imports, inflated the currency, and massively increased government spending from 14% of GDP to 25% of GDP. The Kirchners have imposed price controls, and under Christina, the economy took an especially ominous turn toward the authoritarian as Kirchner threatened lawsuits against critics of her economic policy and against those who attempted to provide alternative measures of the economy independent from the official government numbers. Christina imposed capital controls as capital fled the country, and by 2014, Argentina was said to have one of the highest inflation rates in the world. 

Needless to say, the economy has not been robust. 

With the election of Macri, however, Argentina may just be going through the same motions it went through when Menem left office. Argentina is following the familiar 4 Stages of Populism as described by Dornbusch and Edwards. We may be in Stage IV right now:

A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organisation that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime. The populists are gone, but the ravages of their policies continue to manifest themselves. In Argentina the expression “economic bomb” is used to describe the economic imbalances that government leaves for the next one.

The new anti-populists lay the groundwork for more economic growth, but they become unpopular when the reality of austerity sets in. 

So, new populists are voted in and the cycle begins all over again. 

Macri's time may be short lived when it becomes apparent that the way to fix Argentina's economy will involve pay cuts for government employees, less consumption, more work, and more saving. 

Ryan McMaken

Ryan W. McMaken is the editor of Mises Daily and The Free Market.

He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. This article first appeared at the Mises Daily.

UPDATE 2: The Casey Daily Dispatch posted this frankly excited analysis of the news:

A New Day in Argentina

Is it a new day in Argentina?

Are contrarian investors in the country about to make multiples on their investments?

These are the major questions on the table after Mauricio Macri won the Argentine presidential election on Sunday.

Longtime Casey Research readers know Argentina is one of Doug Casey’s favourite countries in the world. Doug, who founded our firm, has a home there and multiple Argentinian investments, including the spectacular La Estancia de Cafayate development.

La Estancia de Cafayate is located in the heart of northern Argentina’s wine country. It offers one of the world’s premier sporting and lifestyle experiences. It features miles of beautiful hiking trails, a world-class golf course, and a luxury athletic club and spa.

Doug and numerous other freethinking individuals call Cafayate home. It’s become a modern day “Galt’s Gulch.”

Macri’s victory could have major long-term implications for Argentina. To get a boots-on-the-ground take, we asked Doug for his opinion.

•  Here’s Doug Casey:

Sunday night, there was great rejoicing among the people I associate with here in Argentina. Mauricio Macri, the pro-business mayor of the city of Buenos Aires, defeated Daniel Scioli, the Kirchnerite governor of Buenos Aires province, by 52% to 48% of the vote. This was an important election for anyone who has money in this country (including myself).

Let me give you some brief background. For the last 12 years the country was ruled first by Néstor Kirchner (from 2003-2007), then by his wife Cristina, who was elected in 2007, then re-elected in 2011. Nestor died of a heart attack in 2010. Nestor had the good luck to come into office at the dead bottom of a horrendous crisis. From there, everything cyclically recovered, aided by higher commodity prices; the Argentine economy is based on agriculture. People, idiotically but predictably, attributed the better times to the Kirchners, as opposed to a commodity boom. Néstor was just a garden variety leftist. But Cristina turned out to be a raging statist ideologue, modelling herself on her idol, Eva Perón.

The Argentine economy has been in a steep decline since the accession of Juan Perón in 1952. Perón was an admirer of Mussolini and Hitler and, like them, instituted a regime of strict state control of the economy, enriching well-connected businessmen, while giving all manner of “free” goodies to the peons. The peons felt they were getting something for nothing, so subsequently always elected a politician who claimed to be a Peronist.

Cristina took it to another level. She nationalised Aerolíneas; and La Cámpora, her youth group, is said to extract about a billion dollars a year from the airline. She nationalised the country’s biggest oil company, so, of course, there’s been no energy development even though Argentina has some of the world’s biggest shale deposits. She put export duties ranging up to 40% on soybeans, corn, wheat and cattle; then farmers are expected to pay ordinary income tax on whatever profit is left. She nationalised the country’s pension funds, spent all the FX reserves, and filled the government with tens of thousands of her supporters. Meanwhile, it’s alleged she personally stole over $10 billion, not counting what subordinates and cronies have scammed.

So, back to Sunday’s election. If Scioli had won, it would have been more of the same, just on a lesser scale. But there’s a good chance that Macri will get rid of lots of gnocchis (as featherbedding government employees here are called), will repeal the export taxes, defang La Cámpora, reduce money printing, etc., etc. He’s no Ron Paul, but there’s reason to believe he has, at least, a basic understanding of economics.

He’ll be forced to take radical action since Cristina has run the country until its wheels have about come off. But if he does it, a couple hundred billion dollars Argentines have offshore could come home. And as much more from foreign investors. Sure, people in the government will still steal - that happens everywhere but maybe Singapore. But, as I’ve said for years, if the country gets a government that’s only not criminally insane, the place could, and should, boom. At a minimum, asset prices, which are now extremely low, should rise to world levels.

I came down here because I liked the lifestyle - and despite Cristina it remains one of the world’s best. But now, there’s also a good chance that those of us who put money here in the last decade, after years of being laughed at, could make a bundle. And the lifestyle will get even better…

Chart of the Day

Argentina has the world’s fourth largest shale oil supply...

Shale oil is trapped deep within rocks. About a decade ago, it was impractical to get out of the ground. However, recent advances in technology have made it economical to extract shale oil in some cases.

Today’s chart ranks the countries with the seven largest shale oil deposits. These numbers account for all oil that can be produced based on current technology and industry practices.

As you can see, Argentina has a huge supply of shale oil. Yet, because of misguided government policies, almost none of it has been tapped.

Doug Casey is hopeful Macri will create a more business-friendly environment in Argentina. If that happens, there could opportunities to make tremendous amounts of money in Argentina’s oil industry. We’ll let you know if these opportunities surface...


Justin Spittler
Delray Beach, Florida
November 24, 2015

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