Argentina Emerging
Has Kirchner's Protectionist Approach Been Key to 'Miracle' Recovery?
By Marcela Sanchez
Special to washingtonpost.com
Friday, April 28, 2006; 12:00 AM
WASHINGTON -- Five years ago, Argentina's economy crashed, plunging the country into depths of poverty and unemployment comparable to those of the Great Depression in the United States. While it took more than a decade and a world war for the United States to recover, Argentina is already on the rebound and is expected to be the strongest economic performer in Latin America this year.
Last week, the International Monetary Fund and the U.N. Economic Commission for Latin America and the Caribbean upgraded their economic forecasts to predict 2006 growth rates for Argentina of 7.3 percent and 7.5 percent respectively, the highest in the region -- scarcely four years after the country's gross domestic product was negative 10.9 percent. Argentina's collapse led to the largest loan default in world history, yet early this year the South American country paid its total IMF obligations of $9.6 billion.
Argentina's recovery is no miracle, not even a model worth following, Argentine officials claim. If anything, they say, it is an Argentine solution to an Argentine problem.
"We had our own recipe,'' President Nestor Kirchner said last week, verbally thumbing his nose at outsiders, such as the IMF, whose prescriptions he has rejected. "If we had followed ... the Fund and all the rest,'' he added, "we know how we Argentines would have faired.''
Countering what Jose Octavio Bordon, Argentina's ambassador to the United States, called the "indiscriminate liberalization" of the past, Kirchner has adopted protectionist measures such as quotas and tariffs on imports to revitalize local industries. Even products from Brazil, Argentina's neighbor and Mercosur trade-bloc partner, are taxed. While conventional wisdom suggests protectionism makes local industries lazy and uncompetitive, Argentina now exports more than ever before.
Kirchner's government has also taken steps to reestablish state ownership of companies privatized during the 1990s, such as a French water company and an Argentine passenger rail line. Critics call these efforts a case of collective amnesia, as Argentina seems to have forgotten that many state-run utilities were failures. Yet the government appears to be a better manager this time around, turning a profit with the postal service that it nationalized in 2003.
Protectionism and nationalization combined with price controls and the freeze on utility rates, plus a recent history of loan defaults, would seem to make Argentina unattractive to both domestic and international investors. But investment has more than doubled since the crisis to 24 percent of GDP, and rose from $29 billion in 2004 to $41 billion in 2005.
Last month, Argentina offered its first bond issue to international investors since 2001 and Standard & Poor's raised its credit rating for the second time in a year.
In the process of renegotiating its debt with private creditors -- a milestone that reduced interest payments from 8 percent of GDP to 2 percent -- Argentina may have created a "revolutionary instrument,'' as the Financial Times called it, that links loan payments to the country's economic performance.
After establishing a base rate of return, Argentina promises to make higher payments as the country's growth rate improves and pay less if it declines. This GDP warrant offers at least two significant advantages, according to Walter Molano, an emerging-markets analyst for BCP Securities.
First, it gives bondholders a reason to want "to make sure that Argentina grows as much as possible.'' Second, it reduces the role played by multilateral creditors such as the IMF and the World Bank, which also left many bondholders disenchanted.
For now, both Argentine officials and economists in Washington agree there is a long way to go before declaring victory. Inflation is a big threat to recovery and Argentina's poverty rate still stands at 34 percent, although down from 57 percent just four years ago. In terms of wealth distribution, which many analysts see as Kirchner's main goal, his measures are failing. According to the National Statistics and Census Institute, the richest segment of the population is expanding its income at a much faster clip than the poorest segment.
Not long ago, Argentina was Washington's poster child for the need to implement market reforms. Now, it seems, rejecting some of those policies outright has become key to Argentina's recovery. Skeptics here and throughout the hemisphere may one day be proven correct. But whatever new advice Washington's thinkers may offer will certainly be taken with a grain of salt in Argentina. For the time being, at least, Argentina's protectionist approach -- and its rebellion against the IMF -- seems to be making progress where other models did not. |
