Argentina: The Limits of Populism

Argentina’s economic growth has stalled. Argentine President Cristina Kirchner’s populist power rests on a coalition that includes the nation’s labor movement. Now the labor movement is challenging the heir to the Peronist tradition; it called a general strike in mid-April. “We’ve arrived at this crisis situation – and that’s what it is, a crisis – because of this way of governing without accepting any ideas, contributions or help from others to solve the crisis,” labor leader Hug Moyano told the Wall Street Journal’s Taos Turner. “Mr. Moyano argues that Mrs. Kirchner’s government and that of her predecessor, her late husband Néstor, have fueled inflation through profligate spending, hurting workers.”

Kirchner’s policies are to blame for Kirchner’s problems as inflation and unemployment rise. MNI reported: “Argentina is expected to fall into recession this year, contracting about 3%, after more than a decade of robust growth, as high inflation, a weaker currency, shrinking consumer-spending power and poor business conditions deter consumption and investment.

Automakers were the first to put on the brakes after the government in January introduced a 30-50% luxury tax on mid- and high-end cars, which had driven the surge in production and sales over the past decade.

President Cristina Fernandez de Kirchner took the move to reduce sales of imported vehicles, part of a wider effort to curb a three-year decline in foreign currency reserves. Her administration is trying to protect the reserves to use for debt payments and cover rising energy imports until it can return to borrowing on global financial markets.

With the new tax coupled with rising inflation and interest rates, vehicle sales tumbled 25% in the first quarter of 2014 compared with the year-earlier period, causing output to decline 16%, according to the Argentine Automakers Association (Adefa).

The auto sector responded last week by suspending 3,500 workers for up to a week. Most of the workers will return to the factories this week.

The IMF is also raising alarms about Argentina. MercoPress reported: “ International Monetary Fund (IMF) Director for the Western Hemisphere Department Alejandro Werner has once again called for the region to embark upon economic reforms, claiming that the “least difficult” phase of economic growth is now over.

The IMF most recently forecast a 2.5 percent Gross Domestic Product (GDP) growth rate for the region this year, which it has termed “modest,” to be followed by three percent growth in 2015 and Werner attributed the lower growth rates to the of the commodities boom, instability in international capital markets and the region pushing up against the upper limits of its current production capacity.

Speaking to Agence France-Presse, Werner differentiated between Latin American countries closely-linked to the US economy, which he predicted will have a marginally better year, and those more dependent on commodities, which is the case of Argentina, for example.

There will be no short-term solution to Argentina’s problems. Reuters predicted: “Argentine President Cristina Fernandez is reversing some of the populist policies that defined her first six years in power and will have little choice but to stick to the new, more pragmatic path over the remaining 20 months of her final term.

Confronted by falling dollar reserves, a weak economy and high inflation, Fernandez has in the past three months cut heating gas subsidies and let the peso devalue by 18 percent.