Kirchner's Folly
by Luciano D'Orazio

Nobody in Argentina wants to trade places with Nestor Kirchner. With 20 percent of the population out of work, a $140 billion default loan bill to the International Monetary Fund and almost 60 percent of its population living in poverty, Argentina has a huge list of unfinished projects for its new president, scheduled to take power May 25. He has to rebuild frayed relations with foreign investors, re-establish trade relations with Argentina's neighbors as well as foreign governments, negotiate a debt repayment scheme and get the economy off its feet. At the same time, he has to maintain a distance between himself and his own party, the Peronists, whose legacy of corruption and mismanagement underwrote his attacks on his erstwhile opponent (and fellow Peronist) Carlos Saul Menem.

Which is why I shuddered when I heard the word "neo-Keynesian" in reference to Kirchner's economic policy.

Despite his stump speeches, he's a Peronist after all.

That may not sound shocking to North Americans, but it's potentially dire news for the third-largest economy in Latin America. To solve the economic problems of one system (the neoliberalism of former president Menem) by reverting to failed systems of previous administrations (the pubic-spending, import-substitution policies of party founder Juan Peron) is nothing short of madness. From 1989 to 1999, Menem implemented economic policies aimed at controlling hyperinflation and jump-starting a moribund economy. And he succeeded, opening Argentina to significant foreign investment, selling hemorrhaging public entities to private investors and wrangling a free-wheeling peso by pegging it 1-to-1 with the dollar.

He only finished half the job, though. Even though the peso gained new stability, letting Argentines purchase their first cars and take their first vacations abroad, the government still spent as if it had the old floating peso, with expensive building projects and giant public works. In the past to cover costs, the treasury simply printed more pesos, devaluing the currency but covering any suspicious budgetary holes. This option died with the dollar peg. Now it could not just print money when it wanted — the government had to adhere to Washington's monetary policy. But the fiscal flabbiness continued.

Argentina also developed a bad habit of asking for more but giving less. Argentines lived under a destructive culture of entitlement in which 40 percent of the population shirked their taxes. Yet that public requested increasingly more services, thinking the government would just print more money.

As a result, the government, faced with budget deficits and no means to fill the gaps, began to borrow. And borrow. Argentina ultimately borrowed $140 billion, mostly from the United States. And with a tumbling global economy and a deep recession, the government finally defaulted on its debt in 2001. It froze bank accounts and devalued the peso to the point of collapse. The collapse drove millions of Argentina's middle class into the poorhouse almost overnight. Hence the dire situation Argentina faces today.

Those Argentines who saw Kirchner as a reformer may be in for a rude awakening. His campaign rhetoric — even with his reputation as a straight-shooting, fiscal conservative — has less of the solution and more of the problem. To be sure, little concrete evidence exists of a coherent economic policy from the Kirchner camp (as the governor of sparsely populated Patagonia, he hardly needs one). But the hints and flashes from the campaign manifestos have a bad smell. Under the typically Peronist banner of "Argentina First," Kirchner says he will devote himself to rebuilding the country's manufacturing base "ravaged" by trade liberalization, claiming that he won't "be held hostage by corporations" — without detailing just what he means. As a stopgap measure to create jobs, Kirchner plans a huge government works program costing as much as $3 billion in the first year alone. He even plans to renationalize certain industries, like the railways, privatized under Menem.

All of the above, according to Kirchner, is possible without deficit spending. But he's wrong. "The cupboard is bare," said Myles Frechette, president of the New York-based Council of the Americas, in an interview with the Associated Press. "Great promises don't bring you anything, you have to have an economic plan that works." He's absolutely right. Large public works and re-nationalization of industries make for great PR. But they are especially difficult when the government is already $140 million in the hole.

Rather than boosting the economy, these populist measures will kill economic progress, just like they did before Menem. Taxes, again, would increase. Borrowing would increase. Interest rates would climb higher. Investments would drop. Prices would rise. Unemployment would continue its moon shot.

The real pity is that Argentina, thanks in no small part to the neoliberalism Kirchner attacks, may be about to rebound. This year its economy is set to expand by 5 to 7 percent. Industrial production grew by about 20 percent each month during the first quarter. The slowly recovering agriculture and tourism industries are helping to reduce unemployment and provide relief in some poorer areas of the country.

After spending an entire campaign attacking Menem, Kirchner has failed to see that the real crisis lies not in his opponent's political philosophy, but in his opponent himself. Menem chose policies that, in the long run, would have positive effects on the economy. However, his famous corruption and that of his cronies made the effective implementations of neoliberal policy almost impossible. The monetary peg and privatization could have worked — if Menem and company hadn't felt the need to line their pockets. The corruption spurred unheard of graft, which meant unnecessary projects and further borrowing. The Menem government helped itself to the country's nascent economic renaissance, without regard for how their excessive borrowing would massacre its financial stability.

The news isn't all bad. Kirchner does have a few good ideas tucked in between the popular speeches. The first order of business will be to restructure the debt repayment plan with the IMF. Also, Kirchner would like to strengthen trade ties with Brazil, Paraguay and Uruguay, its partners in Mercosur (Mercado Comun del Sur, a trading bloc), as well as restabilize the banking system. But politically expedient land grabs and popular short-run construction projects will leave no capital to pursue necessary goals. The sooner he accepts the role of the market in Argentina's future, the sooner Argentines will find lasting economic prosperity.

E-mail Luciano D'Orazio at loudogs1@aol.com.