Beneath Argentina's growth, economic fault lines simmer

• A version of this post ran on the author's blog, cuba.foreignpolicyblogs.com. The views expressed are the author's own.

To the untrained eye, Argentina’s economic future might seem bullish. Under current President Cristina Fernández de Kirchner, an average annual growth rate of 7 percent has been impressive, and is lower than that of only one other government in Argentine history. Positive external forces have been working in the nation’s favor in recent years: new agricultural technology has allowed increases in production and output; the rise of China and India have simultaneously fueled demand for its agricultural products and commodities; and most significantly, since 2003-4, high prices for these products have improved Argentina’s terms of trade. Brazil has become Argentina’s top trading partner, and that relationship will continue to be fruitful for Argentina as Brazil’s prosperity boosts its own.

Closer examination, however, reveals troublesome fault lines: bolstered by global demand and commodities prices, Argentina has been growing at a high rate in spite of poor economic policies. Years of expansionary fiscal policies by both President Fernández de Kirchner and her husband, Nestor Kirchner (her predecessor), have increased a bill of subsidies for Argentines to greater than 5 percent of the country’s GDP. The high levels of government spending and of subsidies have indeed fueled growth, but along other measures, the administration’s economic policies have created fundamental instability. Inflation is high, foreign investment in the country is shrinking, and the Argentine stock market has steadily declined during President Fernández de Kirchner’s tenure. Indeed, some Argentine economists predict that the country is on the brink of another crisis, and could actually enter a recession or a period of zero growth as soon as this year.

I joined a Pacific Council on International Policy delegation in Buenos Aires and Santiago this spring in an effort to better understand the economic and political trajectory of each country, and to analyze their respective global roles. Argentina and Chile share the third largest international border in the world, but the two Southern Cone nations differ greatly in their economic, political, and international realities. Indeed, Argentina’s challenges were particularly striking when seen next to the Chilean model.

The greatest roadblock for modern-day Argentina appears to be the absence of a broad political consensus on democracy and economic tactics. In Chile, a cohesive economic and political class shares a long-term contract on the means by which the country must operate and develop. That consensus is shared and consistent across parties and administrations. On the other hand, Argentina has suffered from inconsistencies, policy swings, and attempts at transformation among administrations – a problem some Argentine economists we spoke to called the “Now we are a new Argentina” syndrome. Economic policies are based on short-term gains instead of long-term growth strategies, and the disconnect between politics and sound economic theory impedes the application of the laws of economics.

In light of this challenge, Argentina has been unable to take advantage of recent economic boons to strengthen the country’s foundations. While Chile has saved revenues from high commodity prices and reinvested in education, innovation, and development, Argentina has multiplied its social subsidies, eroded the country’s fiscal surplus, and spurred high inflation. The administration’s policies – based on heavy government intervention in the markets – have spooked foreign investors.

Yet as long as output grows and social programs and handouts continue, the Argentine population as a whole continues to support the current administration and its interventions in the market. Among the population receiving benefits there is high support for the government, and President Fernández de Kirchner won re-election in 2011 with 54 percent of the vote. Recent polls show that 70 percent of the population favors heavy state management of the economy. This does not bode well for any hope of policy change until the moment the system fails, as the political incentives are skewed toward the very economic policies that are sending it down a precarious path.

The scenario is reminiscent of a tragic news story the Pacific Council delegation reviewed before visiting the country. In late February 2012, a commuter train in Buenos Aires crashed and killed 49 riders when its brakes failed as it arrived at its final stop. From afar, the tragedy was confounding: the train was traveling at less than 15 miles per hour, so why were there so many fatalities? The train, it appears, was so rusted through that it fell apart under pressure and the cars crumpled into one another. It should have been deemed insecure and unfit for passengers, but instead, citizens were subsidized to ride it.

In this case, it is Argentina’s economy that is on its way toward a train wreck, and will fall apart under pressure. Government subsidies for Argentines make it certain that many will be caught unawares when it does.

– Melissa Lockhart Fortner is Senior External Affairs Officer at the Pacific Council on International Policy and Cuba blogger at the Foreign Policy Association. Read her blog, and follow her on Twitter @LockhartFortner.