Shortages of food in supermarkets and warehouses; a scarcity of fuel; firings of workers in several industries; increased prices for basic needs; declining sales; damage to the tourism industry; withdrawals of bank deposits; lower tax collections, and higher risks. These are only some of the grave consequences from 101 days of protests in Argentina’s farming sector, following the announcement that the government of Cristina Fernández de Kirchner would impose taxes on farm exports.
It all began on March 11 when Martin Lousteau, then minister of the economy, presented a new tax regime that raised the fixed rate at which agricultural exports are taxed from 35 percent to 44 percent -- a rate that varies with changes in the prices of commodities, such as soy beans, wheat, etc. This tax would mean extra revenues of about $2.3 billion a year for the government. As Rafael Pampillón, professor at IE business school, explains in his blog, Argentina has grown very rapidly, at an annual rate of more than 8 percent since 2003. This has largely been the result of rising global prices for raw materials. “The government wanted to kill the goose that laid a golden egg by placing very high taxes on exports of soy beans,” he writes.
UNITED FARM SECTOR
For the first time ever, the four institutions that represent the farming sector – the Agrarian Federation; Rural Argentine Confederations; the Rural Argentina Society; and Coninagro – all got together to raise their voices in protests that blocked 300 stretches of road around the country.
Although the minister of the economy submitted his resignation, and several meetings took place between farming groups, the President, her cabinet and the Argentine government flatly refused to change their position. According to Carlos Malamud, chief researcher for Latin American affairs at the Elcano Royal Institute in Spain, “it is all about the desire of the government to increase the tax surplus and to increase its control over the supply of the funds that are collected directly and spent without any controls imposed by parliament or by international institutions. This has spawned a conflict that has consumed practically half of the period in which the Cristina Kirchner administration has ruled….[This is a’ very strange situation in that the government, rather than negotiate with the various parties involved, has decided to batten down the hatches, not only in institutional and political terms, but also as a mere power play.”
Farm workers have also received support from people who live in the main cities of Argentina and have engaged in noisy political protests on their behalf. Pressured by efforts that cut off some streets as well as widespread demand for a more open dialogue, the Kirchner administration decided to send its tax plan to Congress so that legislators could make the final decision. Although the various farming groups have called off their protest measures, the crisis is far from being resolved. Doubts remain about the votes that have been cast by the deputies and senators in the various provinces.
ECONOMIC CONSEQUENCES
While the Congress deals with the conflict, analysts say they are concerned about the collateral damage that this battle, the first in the Cristina Kirchner administration, has already had on the economy. Ernesto O’Connor, an economist and director of the economic analysis division of the Argentine Catholic University (UCA), summarizes the situation this way: “Positive expectations about the progress of the economy have abruptly collapsed, and there has been a sharp slowdown in economic activity in the second quarter, which means annual growth of 4.5% compared with the more than 7 percent forecast at the beginning of this year. It has also paralyzed investment, postponed consumption and led to a flight out of commodities and into cash. Meanwhile, the inflation problem is becoming more and more severe, reaching an annual rate of between 25 percent and 30 percent this year.”
Osvaldo Cado, a macroeconomic specialist at Prefinex, an Argentine consulting firm, has prepared a detailed report about the negative effects on the economy that resulted from the 101-day-long shutdown of agricultural production. Cado, who is also a professor at UCA, notes, for example, that “the Central Bank lost reserves of $2.2 billion. Argentina’s country risk rose by 490 basis points to 580. Private deposits fell by 6 billion Argentine pesos (some $1.9 billion.) The government wound up being unable to collect some $1.9 billion [in taxes] because of the impact of the decline in exports. As for the impact on inflation, it could mean an increase of another two or three percent.”
On the other hand, people talk about “the default after the default,” warns Martin Simonetta, executive director of the Atlas Foundation, a non-profit organization that promotes civil society. Beginning in 2008, the government needs to start making payments on the defaulted debt (a consequence of the default of 2001), notes Simonetta, who is also affiliated with the Argentine Chamber of Commerce. Between 2008 and 2011, “the government must make payments of more than $52 billion [on its debt], which will require it to collect more revenues from taxes or reduce public-sector spending. Clearly, they have opted for the former alternative by making such large increases in the taxes they want to impose [on exports].”
For his part, Guido Sandleris, director of the financial research center at Torcuato Di Tella University, stresses the decline in consumer confidence. According to his latest surveys, it was 1.8 percent lower in June than the previous month. “Since the farming conflict began, the [confidence] index has fallen by 13%, although you have to take into account that this decline in confidence has been taking place ever since January. It’s just that the conflict has clearly made things worse.”
BAD MEMORIES
The spontaneous, noisy protests in Buenos Aires, Cordoba, Rosario and other important cities in the country brought back memories of the Argentine default crisis of 2001. The country’s greatest economic, social and political crisis led then to the fall of the administration of President Fernando De La Rúa. “The problem is that the economy is cooling off in the worst way -- that is, with a crisis in confidence. You see this in the noisy demonstrations and the higher inflation,” says Sandleris.
Nevertheless, the government’s freeze on bank deposits in December 2001 is now only a bad memory. “Clearly, both events were social protests that needed to be heard by the political leadership, which is obviously supposed to represent all Argentines. For all that, there is no comparison between 2001 and 2008. There is no reason to make any economic and, above all, social comparisons,” says Cado.
According to Malamud, “This is the only recent political crisis in Argentina that is not the direct result of a serious economic situation. It is a political crisis that has led to a deterioration of the economic situation.” Generally speaking, says Malamud, “The economic situation is stable and prosperous. Naturally, there are some problems on the horizon, such as inflation and the energy supply. But now, along comes the worst political management in the [history of the] presidency of the country, including the administration of former president Néstor Kirchner. A presidential tandem is operating here, involving both the current president and the ex-president. That has tremendously aggravated the political pressure and made things tenser. If the Kirchners’ worst enemies had written this script, things could not have come out any worse [for the Kirchners].”
The approval rating for the current president has fallen by as much as 20 percent in these three tense months. That’s why Time magazine recently ran an article entitled, “The Melting of the Hillary of Argentina.”
Argentina’s global image has also been “significantly affected,” argues Malamud. “For those people who follow Argentine politics, the situation is hard to understand. This much is clear: International investors believe that this country counts less and less. If you look carefully at foreign direct investment in 2007, Argentina is not one of the leading countries, but is at the bottom of the middle ranks.”
Simonetta agrees. “Unfortunately, Argentina does not really exist abroad. It has no ‘capacity to damage’ other economies. It is merely a country that is losing a great opportunity to jump on the train of growth fueled by global commodity prices. The government’s voraciousness since 2001 has led to abusively high taxes that have paid for the tripling of public spending.”
LOOKING TOWARD THE FUTURE
Since Cristina Fernández de Kirchner became president last December 10, there have been few changes in the social and economic policies that her husband, Nestor Kirchner, pursued during his administration. The conflict over farming has gone on for too long, and time has been lost for resolving other fundamental problems, specialists say. Inflation is the most worrisome topic at the moment, Sandleris notes, “However, there are also other areas that have been left unattended, such as education and health. The government is paralyzed by the conflict. Cristina Kirchner’s administration has been marked by continuity in the approach taken by her husband. There have been few new initiatives, and some of those have been badly timed.”
As for the economy, you can’t help but notice the decline in growth, “which is now at an annual rate of 4.5 percent, with inflation of between 25 percent and 30 percent,” says O’Connor. “Poverty is also on the rise. The downward trend comes from a shortage of confidence over the medium term, beyond the issue of the conflict in the agricultural sector.”
The image of the government will also have to be improved, says Cado, perhaps through “some sort of shocking move that creates positive expectations [or] perhaps some changes in the faces in the [President’s] Cabinet, which is already very old. And it could mean adopting new policies that stimulate investment and integrate Argentina a bit more into the rest of the world. That could improve expectations as we approach the bicentenary of Argentina in 2010.”
According to Malamud, “We are at a point where it could be necessary to change the totally authoritarian behavior of the government. The way the government is behaving is a lot like other populist governments in the region, such as those of [Presidents] Hugo Chavez [of Venezuela], Evo Morales [of Bolivia] and Rafael Correa [of Ecuador].”
Observers cite an urgent need to deal with the economic slowdown, the decline in the government’s popularity and the failure of the Kirchners to respond to social complaints. “Confidence could recover over time if the government reacted the right way,” says Sandleris. “You have to send stronger signals and take more heroic measures to rebuild trust. The longer that process takes, the more costly it is going to be. The way I see things, it is not clear if the government understands what it happening.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the WhartonSchool of the University of Pennsylvania.
HP: Strong Latin Growth