Argentina's Economic Emergency

Much has been said about the Venezuelan economic crisis – and quite rightly so. Despite not being a socialist country, many have taken to attacking (and defending it) as such.

Several thousand miles south is Argentina. It too has entered into an economic nightmare. Its currency has lost its value and inflation is high. It possesses a very business-friendly conservative president. President Macri has not been able to lower inflation, which is the highest amongst G20 nations. It is failing to enact the economic reforms it promised the IMF, most of them aimed at curbing public spending and borrowing. It was also a victim of the commodities collapse. In the commodities boom of the past decades, the country repaid the money it owed the IMF, clearing its entire debt to the multilateral organisation in 2007.  Macri said his country is facing "an emergency" that required massive spendings cuts and agricultural taxes. This year, Argentina's currency has already lost half its value compared to the US dollar.

The Cristina Fernández de Kirchner government which was in power from 2007 until 2015, raised public spending, nationalised companies and heavily subsidised many items of daily life. Importantly it controlled the exchange rate, which created all sorts of practical problems, such as giving rise to a black market for dollars and heavily distorting prices. Macri was elected on a promise of ending all distortions and returning Argentina to a market-oriented economy where supply and demand, not the state, would define prices.  he put an end to capital controls and began a global campaign to repair Argentina's reputation with foreign investors. He also promised to bring down inflation. In May, he turned to the IMF for help. A loan from the IMF, Argentina would be able to intervene in currency markets for longer and also pay off bonds coming up for payment. Macri said he did not plan to use the $50bn (£37.2bn) loan from the IMF except to boost the country's reserves. But with the peso sliding further and hit by a poor soybean and maize harvest, the economy continued to deteriorate. In June, the economy fell by 6.7%, its worst downturn since 2009.  Macri on 29 August unexpectedly asked for the early release of the IMF loan. Its chief Christine Lagarde said the fund was ready to help Argentina but news of the request for early assistance caused the peso to drop more than 7%, its biggest one-day decline since the currency was floated.


Argentina is the biggest exporter of soy meal and soy oil and is also a big producer of corn, wheat and raw soybeans. From 1 January, those primary exports will be taxed four pesos for every dollar in value. Processed products will be taxed three pesos for every dollar in value.


Edward Glossop, Latin America economist at Capital Economics, said the measures "ultimately fell short of expectations". He criticised the decision to reinstate export taxes, calling it "a hark back to more interventionist policymaking" as practised by  Macri's predecessor, Cristina Fernandez de Kirchner.
"It unwinds President Macri's decision to cut agricultural taxes on his first day in office back in December 2015 and liberalise export and import markets. Raising export taxes is against what President Macri stands for."


 Macri, has said a lack of trust from the markets had forced him to ask for help.  Investors take fright at the deterioration in key economic indicators in countries that have seen hefty capital inflows in the past, and decide to shift their money somewhere safer. Rising US interest rates also lured investors to pull their dollars out of Argentina. All The resulting fall in the currency makes imports dearer and adds to inflationary pressure. Companies that have borrowed in foreign currency see their debt burdens increase. Recession bites and the contagion spreads to other countries deemed to be vulnerable. While the request for IMF assistance was designed to soothe investor concerns, the effect has been the opposite in the financial markets, triggering concerns about the country’s ability to pay its debts.  Latin America’s third-biggest economy is forecast to shrink this year, while borrowing has become harder for firms in the country amid higher interest rates.


 The trade unions are already vocal in protesting these austerity reforms, meaning a political crisis could follow on the heels of the economic turmoil. Macri triggered labor unrest, when he ordered lay-offs and cut utility subsidies, in an attempt to reduce the budget deficit.

Turkey and India are also among the ountries where their currencies have fallen on the international market. Turkey is heavily dependent on foreign capital with 70 percent of its debt denominated in dollars and euros, compared to a 35 percent average for emerging markets. Most lending to Turkey is from European banks, with the most exposed being Spain's BBVA, Italy's UniCredit, France's BNP Paribas and Holland's ING. Spanish banks' exposure to Turkish debt is equivalent to about 6 percent of Spanish GDP.

See this month's Socialist Standard on Turkey

Capitalism is an inherently unstable sytem.