No Shock Therapy: Macri Takes Gradual Approach to Reform
Argentina’s Mauricio Macri and his coalition have reasserted their position as the party of government following last month’s midterm elections. The first conservative to win the presidency since democracy was restored in 1983, his supporters won majorities in thirteen out of 23 provinces. They have also taken charge of five of the most populous districts in the capital Buenos Aires.
Yet Macri’s party, Cambiemos (Let’s Change), still doesn’t have a majority in Congress, which helps explain his step-by-step approach to reforming the economy. Read more
Argentina’s Right Gets Close to Unseating Peronists
Last weekend, Argentina experienced something of a shock as presidential candidate Daniel Scioli of the governing Peronist party was forced into an historic second voting round by the conservative mayor of Buenos Aires, Mauricio Macri.
Following twelve years of Kirchnerismo — the most radical form of the Peronist umbrella movement to govern to date — Argentina is set for a change in political direction. The extent and speed to which the country’s political course shall be altered, though, depends on the outcome of the presidential runoff next month. Read more
Britain to Boost Falklands Defenses, Argentina Eyes Russia
Britain will boost its defenses in the Falkland Islands, Defense Secretary Michael Fallon said on Tuesday, as Argentina was reportedly considering to lease bomber planes from Russia in return for beef exports.
Argentina still poses a “very live threat” to the British-ruled islands, Fallon said.
“The principle threat to the islands remains,” he told lawmakers in London. “I am confident that, following this review, we have the right deployment.”
Fallon told Parliament the government would spend £180 million over the next decade to boost the security of the islands. Personnel involved in their defense would remain at around 1,200.
The minister earlier told the BBC, “We do need to modernize our defences there to make sure we have sufficient troops and the islands are sufficiently defended.”
Four Typhoon combat aircraft are currently deployed to the islands as are a large Royal Navy warship and a small patrol ship.
The United Kingdom operates three helicopter carriers but no aircraft carriers which were instrumental in retaking the islands from Argentina after it invaded in 1982. The first of two new Queen Elizabeth-class carriers is due to enter service in 2017.
Argentina has stepped up its claims since 2010 when oil was found in a field north of the archipelago.
Last week, Argentinian and Russian officials agreed in Moscow to expand military cooperation between their nations. Unconfirmed reports on Tuesday said Russia had offered to lease twelve long-range bombers to the Latin American state.
Supporting Argentina’s claims in the Falklands could be a way for Russia to retaliate against Western sanctions. Britain was among the most forceful in calling for punitive measures after Russia occupied and annexed the Crimean Peninsula from Ukraine last year.
Britain has ruled the Falklands for almost two centuries and the overwhelming majority of its roughly 3,000 inhabitants are of British descent.
In a 2013 referendum, all but three of the island’s voters said they wanted the Falklands to remain an overseas British territory.
The islands are situated some five hundred kilometers off the Patagonian coast.
Kirchner’s Successor Likely to Be More Business-Friendly
As President Cristina Fernández de Kirchner comes to the end of her second and final presidential term, Argentina’s October elections could bring a new party to power for the first time since the 2001 economic collapse. Conservative businessman Mauricio Macri leads the polls after a 12 percent upsurge in the past year.
After Argentina defaulted on its debt last year for the second time in less than two decades, all the major parties acknowledge a need for economic reform.
New economic policy announcements from the incumbent government are unlikely to carry much weight, however, given how little is left of Kirchner’s presidency. Still, it is possible to gauge the mood of the country based on the reaction to her latest policies.
Although Macri, of the conservative Propuesta Republicana, leads the polls, Kirchner’s leftist Front for Victory still holds the majority in both houses of Congress.
Argentinian politics have long leaned toward the sort of Peronist populism Kirchner’s party represents. But it seems the country is increasingly yearning for a change — especially since the suspicious death of prosecutor Alberto Nisman in January, the latest in a series of political scandals that has seen allegations against high-ranking officials.
The most likely candidate to replace Kirchner as party leader is Buenos Aires governor Daniel Scioli. A former businessman, he disagrees with the president’s protectionist economic policy and would be likely to steer the economy in a more liberal direction.
Since last year’s default, the government has backpedalled on some of its interventionist policies and offered an attractive package to energy sector investors in an attempt to lure them back, utilize the country’s vast energy reserves and address its electricity shortage.
However, this package has managed to unite all parties against it who deem it too generous. Should a conservative government be formed in October, economic liberalization would probably be curtailed by a divided Congress.
Kirchner’s recent deals with China have also met with opposition. While intended to prevent further raids of the central bank’s reserves and strengthen ties with an emerging superpower, following last year’s $11 billion loan, it may result in further dependency on China, hamstringing the incoming president. A new leader may want to reaffirm Argentina’s ties with the rest of Latin America and the United States in order to counterbalance its increasing attachment to China.
Given the uncertain nature of the economic and political landscape, it is too early to predict the outcome of the election. But whichever of the two leading candidates wins, policy is likely to become more friendly to investors.
To Halt Decline, Argentina Needs to Shake Off Perón’s Legacy
The “tragedy of Argentina” is not so much one of unfortunate economic circumstances as the failure of one particular ideology which the country refuses to shake off — Peronism.
The Economist this week studies the causes of the country’s century of decline as Argentina looks set for a repetition of the 1998-2002 financial crisis.
The newspaper notes that in the early twentieth century, the Argentinians were among the richest people in the world. Their income was 92 percent of the average of sixteen rich countries now in the Organization for Economic Cooperation and Development. In the four decades leading up to 1914, growth had averaged 6 percent per year. But, as The Economist puts it, “It never got better than this.” Today, income per head of the population is only 43 percent of those same sixteen countries.
One underlying cause is that even when Argentina was booming, it was overly reliant on commodity exports. It failed to educate its masses and build an industrial base of its own.
Argentina is still the world’s largest exporter of soy oil and a major supplier of corn and soybeans. High demand for agricultural products from Asia, especially China, fueled the country’s economic expansion in recent years. When growth there stalls, so does Argentina’s.
A vibrant economy could absorb such a bump. Argentina’s economy was still expected to grow 5.1 percent last year, after a disappointing 1.9 percent in 2012 — assuming these figures, unlike Argentina’s official rate of inflation, are accurate. But in a misguided quest for economic independence, the country has enacted numerous policies that hamper trade, the most recently example being a mandate from President Cristina Fernández de Kirchner that forces companies that bring goods into Argentina to match their value with exports.
This has forced a carmaker like Germany’s BMW to export Argentine rice. Hyundai sells Argentine soy flour in Vietnam. Porsche agreed to export olives and wine.
Goods are nevertheless backing up at the border as officials try to slow the impact of expensive imports. Trade on a major grains exchange has dried up as farmers stockpile their soybeans rather than taking pesos which are rapidly decreasing in value.
The government has deployed price caps and export curbs to try to reduce inflation, unofficially close to 25 percent. It has also imposed capital and currency controls, including a ban on dollar purchases — to little avail. The peso trades on the black market at a discount of more than 40 percent to the official exchange rate.
Argentina could have used the revenue from commodity exports to modernize its infrastructure and spent its time in the sun to thoroughly shake up its political system. Instead, the proceeds were used to pay for education, public housing and welfare. When growth inevitably stalled, as it had soon after Juan Perón first became president in 1946, the dictatorial tendencies of the political movement that is named after him, just as inevitably, surfaced again.
Perón jailed political opponents; Fernández persecutes economists who dare publicize inflation numbers that deviate from the government’s. Perón nationalized railways and utilities; Fernández nationalized Aerolíneas Argentinas in 2008 and relieved Spain’s Repsol of its majority share in the Yacimientos Petrolíferos Fiscales oil company in 2012.
Disregarding not only property rights but constitutional limitations on her executive power, Fernández toyed with the notion of seeking an unlawful third presidential term. She appears to have shelved those plans since her party nearly lost its majority in the Senate in last year’s election — for now.
The problem is not just one of poor leadership. Argentina’s political failures are institutional. “Short-termism is embedded in the system,” writes The Economist. “Money is concentrated in the center and the path to power goes via subsidies and splurging.”
Redistributive policies may help the poor but Peronism’s abiding confidence in the state’s ability to be an instrument of “social justice” has all too frequently led to thuggish government behavior when autarkic policies failed to produce the promised economic gains.
To escape this trap, Argentinians themselves must change. The Economist recognizes this will be difficult. “That is partly because the experience of the 1990s discredited liberal reforms in the eyes of many Argentines.”
At the time, President Carlos Menem tamed inflation, privatized industries and pensions and pegged the peso to the dollar. This restored confidence and brought back foreign investment and growth but when the dollar started to rise in value, and financial crises in East Asia, Mexico and Russia dampened growth globally, Argentina ended up in a depression.
But it is also difficult for Argentinians “because reform requires them to confront their own unprecedented decline. No other country came so close to joining the rich world, only to slip back. Understanding why is the first step to a better future.”
Despite the Arab Spring, it was not a Middle Eastern country which grabbed biggest headlines for resource nationalism in 2012. It was Argentina, where populist President Cristina Fernández de Kirchner proposed a bill on April 16 to renationalize Yacimientos Petrolíferos Fiscales (YPF), the country’s largest energy company. Her idea was subsequently approved in early May 2012 by the Argentinian legislature.
The move sent shock waves across the global energy industry, the desks of geostrategists and political risk consultants. Leaders from Europe to Mexico rushed to criticize the move. Kirchner cited the need to keep energy prices manageable for Argentinians but at that time, the price of gasoline within the country was actually less than the price at the pump to be found in some of its neighbors.
The renationalization of YPF, at the time largely owned by Spain’s Repsol, came at a time when some geostrategists were predicting a shift in global energy politics from the Middle East to the Americas. North and South America are home to the largest oil resources outside of the Middle East and North Africa.
Other projections were more modest, noting that with shale gas in the United States, presalt oilfields off shore in Brazil, Canadian tar sands and above all gains on energy efficiency, the United States might one day be able to reduce its energy imports to countries strictly within the Americas. The renationalization of YPF suggested the future of energy policy in the Americas might be closer to the goals of Hugo Chávez than regional development.
Argentina’s renationalization of YPF at the expense of Spain’s Repsol was so shocking that even some of the most seasoned political risk firms were caught off guard.
The threat of nationalization falls under what the business world considers political risk. While all international industries are concerned with political risk, the energy industry whose project can cost billions of dollars and take years to complete is particularly concerned.
One of the firms that concern itself with political risk is Maplecroft based in Bath, England. The company’s “Political Risk Atlas of 2012” had only ranked Argentina as a “medium” risk. The damage already done, the “Political Risk Atlas of 2013” gave Argentina a similar “medium” ranking, though it described the nationalization of Repsol as the most “notorious” example of resource nationalization last year.
In the 2013 edition, Maplecroft identified Somalia, the Democratic Republic of the Congo, Sudan, Afghanistan, Myanmar, Iraq, Libya, Central African Republic, Syria and Yemen as places with an “extreme risk” that resources will be nationalized. All of these nations boast either weak governments, even weaker respect for the rule of law or both.
One year later, the most striking thing about the nationalization of Repsol is how little Argentina has suffered any consequences for a clear breach of the rule of law that undergirds all democracies. It has not however dented enthusiasm for Argentina amongst most investors. Repsol is seeking compensation for the seizure. It has also flirted with the idea of accepting shale gas from the government. A United States government study noted that Argentina’s 774.000 billion cubic feet of recoverable shale gas constitute the third largest reserves in the world. Argentina’s ability to stun Repsol with impunity may encourage other nations to follow suit. Any country with a sagging economy may be tempted to nationalize its resources.
Professor Michael Ross of the University of California, Los Angeles points out in his 2012 book, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, that resource nationalism tends to come in waves. Other examples of resource nationalism took place in Bolivia and Egypt in 2012 which halted gas exports to Israel and Jordan. We are likely entering a new wave of resource nationalism.
The last era of resource nationalism was in the Middle East which saw the nationalization of foreign oil interests in the 1960s and 1970s. This wave of resource nationalization often spawned violence. In 1956, Israel, Britain and France attacked Egypt over the nationalization of the Suez Canal by Egyptian leader Gamal Nasser. The incident is still well remembered in the region but the fact that American president Ike Eisenhower brought an end to the conflict in favor of the Egyptians is forgotten.
More recently, the conflicts and disputes in the Sudan, the Caspian Sea and off the coast of the Philippines are clearly influenced by resource nationalism.
Indeed, Kirchner’s move to nationalize YPF came after recent oil discoveries near the Falkland Islands led her to renew Argentina’s claim to the disputed territory.
There are positive signs, though. One nation stung by Kirchner’s move was Mexico whose state-owned oil company Pemex is a 10 percent stakeholder in Repsol. There is a certain degree of irony, of course, as Mexico famously became the first major oil exporter to nationalize its reserves in 1938. Argentina, though only a small producer, nationalized its oil production in 1907 before privatizing the state run oil company in 1993.
Yet, recently, Mexico has signaled that it hopes to liberalize its energy industry in a substantial way for the first time since Pemex, the state oil company, became a monopoly. Large scale privatization may indeed be possible, though it will require a constitutional revision. Mexico is making the move after two straight years of expanded oil reserves both onshore and offshore.
While examining this issue last year, I noted that even in this era of globalization, “mercantilism still lurks in the shadows.” Yet the example of a country like Mexico shows that trends toward nationalization are not irreversible.
This story first appeared at America’s Future Foundation’s Doublethink blog, April 19, 2013.
Falklanders Defy Argentina, Vote to Remain British
Residents of the Falkland Islands voted overwhelmingly to remain an overseas dependency of the United Kingdom in a referendum on Sunday and Monday, defying increasingly aggressive Argentinian claims of sovereignty over the islands which are situated some five hundred kilometers off the Patagonian coast.
The vast majority of Falkland Islanders, numbering less than 3,000, is of British descent and content with their present political status which gives them a high degree of autonomy while remaining nominally part of the United Kingdom.
Neighboring Argentina has long claimed possession of the islands. While it failed to take them by force in 1982, the country, coping with lackluster economic growth, rampant public spending and high inflation, insists that the Malvinas, as the islands are known in Spanish, are Argentinian territory.
“Malvinas is not an Argentine cause, it is a global cause, because in the Malvinas they are taking our oil and fishing resources,” President Cristina Fernández de Kirchner told a summit of Latin American leaders in Montevideo in late 2011. Earlier, she had called Britain a “crude colonial power in decline” and vowed to “reclaim” the Falklands.
An opinion poll conducted by YouGov for Sky News found that only 15 percent of Argentinians believe that the Falklanders ought to have a say in their own future. The government in Buenos Aires has dismissed the referendum as “irrelevant.”
An opinion poll in Britain, by contrast, found that 77 percent of voters there agree that the future of the Falklands should be decided by its inhabitants.
Britain’s prime minister David Cameron told lawmakers in July 2011, “As long as the Falkland Islands want to be sovereign British territory, they should remain sovereign British territory. Full stop, end of story.”
Roger Edwards, a former Royal Marine who served in the Falklands War and is now a member of the islands’ Legislative Assembly, told news media before the vote that he hoped the referendum would send “a very clear message to the world that the Falkland Islanders wish to remain as an overseas territory of the United Kingdom with the right to determine their own future.” He added, “We were settled here before Argentina was even a state.”