Argentina’s stunning recovery from the economic crisis of 2001 dealt a blow to orthodox economic
theories imposed by the International Monetary Fund (IMF) and other international institutions. Former
president Néstor Kirchner and now his wife Cristina Fernández de Kirchner have consolidated
political power on the basis of that success. But some serious problems loom on the horizon. This article
argues that as Cristina takes over the nation, the lack of a real national development plan and the government’s
growing disregard for democratic institutions hamper efforts to address challenges like rising inflation
and a serious energy shortage.
On Dec. 10, 2007 Néstor Kirchner handed over the presidential baton to his wife, Cristina Fernández
de Kirchner in what was the first husband-wife handover in Argentine history. Cristina was appointed
presidential candidate by her husband, with no internal party elections or debate, highlighting the crisis
of the Argentine political party system. By passing presidential power between spouses, the Kirchners
appear to have found a formula to perpetuate themselves in power indefinitely without the need for a
Cristina Fernández de Kirchner (CFK) won the presidential elections on Oct. 28, 2007. The presidential
campaign had generated the least public interest in recent decades,1 and
was characterized by a lack of substantive debate and a highly splintered opposition on both the left
The lack of debate is disturbing given the magnitude of some of the political and economic issues
Argentina faces in the short and medium run. Many analysts have touted the success of Argentina’s heterodox2 exchange
rate and monetary policies and the remarkable economic growth rates since 2003. However, CFK inherits
from her husband an economy that is at a crucial juncture regarding energy (gas and electricity) supply,
inflation, income distribution, and institutional degradation.
Will CFK mark a break from her husband’s approach in dealing with these issues? Some argue that her
campaign slogan, "el cambio recién comienza" (change is just beginning) is an indication
that she will take a different tack. Her actions during her first weeks as president, however, indicate
that she will continue with the same policies of her husband, with only cosmetic changes.
To understand CFK’s approach to economic and institutional issues, it makes sense to first understand
the legacy inherited from her husband.
Kirchner’s Economic Legacy
President Néstor Kirchner came to power on May 25, 2003, when Argentina was still reeling from
the effects of the worst social, financial, and economic crisis in its history.3 Although
the crisis is considered to have ended, the effects of almost three decades of neoliberal economic policies,
corruption, and cyclical crises are still visible in indicators such as the rates of poverty (27%), indigence
(9%), and unemployment (10.1%).4 Kirchner has both contributed to
leaving the crisis behind and to perpetuating the nefarious legacy of neoliberalism and corruption.
The Key to Economic Growth: Heterodox Macroeconomic Policies
The main features of Kirchner’s macroeconomic policy were designed one year before he came to power
by then-President Duhalde and his Economy Minister Roberto Lavagna. In April 2002, ignoring substantial
pressure from the IMF, Lavagna implemented a series of heterodox economic policies that, coupled with
a favorable international environment, turned out to be the key to Argentina’s economic recovery.
In this sense, Kirchner’s main virtue was to keep both Lavagna and his policies in place. While Lavagna
left the Kirchner administration in 2005, the policies he designed are still in effect:
- a competitive exchange rate policy, known as a managed or "dirty" float, such
that exports and import substitution are encouraged;
- a monetary policy that supports the process of economic growth;5
- building up Central Bank reserves to avoid having to negotiate with the IMF in the event
of a financial crisis; and
- a large primary fiscal surplus to be able to make very substantial scheduled debt payments.6
The first two policies are in direct opposition to policies promoted by the IMF and orthodox economists.7 Given
the spectacular failure of orthodox policy prescriptions in Argentina and around the world, Kirchner
and Lavagna did well to ignore pressure to implement failed recipes. As a result, Argentina’s macroeconomic
performance over the last five years has been quite remarkable as illustrated in Figure 1, where quarterly
growth rates since 2001 show a substantial economic recovery.
Figure 1: Economic Growth Rates (quarterly)
Source: Ministerio de Economía
A key factor in Argentina’s economic growth performance has been the Central Bank’s "dirty float" exchange
rate policy: the Central Bank buys or sells dollars in the foreign exchange market as necessary to ensure
that the exchange rate stays within predetermined boundaries so Argentine exports remain competitive.8 The
fixed one-to-one exchange rate policy of the 1990s had resulted in an overvalued peso which encouraged
imports more than exports. The new exchange rate regime has clearly changed that (Figure 2).
Figure 2: Exports, Imports, and Trade Balance (monthly, millions of dollars)
Source: Ministerio de Economía
The Central Bank purchases foreign exchange with newly printed money, which is then re-absorbed ("sterilized")
by the Central Bank through bond issues.9 Since the crisis, the
foreign exchange market has tended to have an excess supply of dollars, which means that the Central
Bank has been mostly buying dollars and accumulating record levels of international reserves (Figure
Figure 3: Central Bank Reserves (quarterly, billions of US dollars)
Source: Banco Central de la República Argentina
International reserve accumulation has become a widespread practice among Asian and Latin American
countries. High levels of international reserve provide breathing room for domestic economies in the
eventuality of a financial crisis and, more importantly, the ability to avoid having to submit to harmful
IMF policies and conditions.
Another component of Kirchner’s macroeconomic policy package has been a historically unprecedented
primary fiscal budget surplus,10 in order to be able to meet Argentina’s
very substantial debt service schedule.11 While Argentina had a
relatively small primary surplus for much of the 1990s, the surplus has become dramatically larger (Figure
4) due to several factors:
- High economic growth rates and high levels of economic activity, coupled with moderate
inflation, have resulted in increasingly higher revenues from the 21% value-added tax.
- Following the devaluation of the peso in 2002, the government imposed export taxes on
many of the primary commodities which have also resulted in high levels of fiscal revenue.12
- The government has increased pressure on tax payers in an effort to reduce Argentina’s
historically high levels of tax evasion.
Figure 4: Primary Fiscal Surplus (quarterly, millions of Argentine pesos)
Source: Ministerio de Economía
While the overall macroeconomic picture looks quite good, there are two interrelated and troublesome
groups of issues that are cause for grave concern and may eventually affect the macroeconomic picture
described above. First, the Argentine government has lacked a development program or an explicit vision
of the direction the country should take in the medium and long-run. In this sense, it is reminiscent
of the neoliberal framework of the 1990s. Second, key aspects of Argentina’s institutional and policy
frameworks dealing with inflation, energy, and income distribution are dealt with in an improvised manner
and without a long-term strategy.
Inflation and the National Statistics Institute (INDEC)
Argentina has a long and sordid history with inflation. Starting in the mid 1970s with the military
dictatorship’s neoliberal reforms, moderate to high inflation became a hallmark of the Argentine economy,
culminating in several traumatic episodes of hyperinflation in 1989-1990. In 1991, then-President Menem
and his finance minister Domingo Cavallo implemented the "Convertibility Plan," a neoliberal
reform package that included pegging the peso to the dollar on a one-to-one exchange rate. The Plan succeeded
at eventually eliminating inflation (Figure 5). However, it also introduced a series of profound imbalances
that resulted in the spectacular crisis of 2001-2002.13
Figure 5: Annual inflation rate
Source: Instituto Nacional de Estadísticas y Censo (INDEC) and private estimates
Following the crisis, the fixed exchange rate regime was abandoned in favor of the "dirty float" exchange
rate policy described above.14 Since then, and following an inflationary
spike in 2002, Argentina has experienced low to moderate levels of inflation, but considerably above
those of the 1990s (Figure 5).
There is considerable debate about whether current levels of inflation constitute a problem that policy
makers should be worried about. There are two fundamental issues in Argentina today that play into this
debate. The first is a theoretical debate over how to deal with inflation. The second is that nobody
knows what actual inflation is due to government manipulation of the consumer price index. We will deal
with each in turn.
Orthodox vs. Heterodox Inflation Policy Debate
Orthodox and heterodox economists diverge on how to deal with inflation. The orthodox approach emphasizes
keeping inflation as low as possible, even at the cost of economic recession and high rates of unemployment.15
Heterodox economists, citing substantial empirical evidence,16 maintain
that moderate levels of inflation do not necessarily impact negatively on economic growth. In the case
of Argentina, given the phenomenal crisis and its resulting poverty and unemployment rates, it seemed
logical to prioritize high growth rates over low inflation. In this sense, the government’s monetary
and exchange rate policy, criticized by the orthodoxy, is the appropriate policy mix.
While Kirchner’s monetary and exchange rate policies were heterodox, his rhetoric did not match his
practice. Rather than challenge the mistaken premises of orthodox macroeconomic policy prescriptions,
he tried to make reality look like the orthodox economists would have wanted.
Official Distortion of Statistical Data: The Destruction of INDEC
Throughout 2006 the government faced slowly accelerating inflation. In response, it implemented a
policy of negotiating with key economic players to agree to limits on price increases. Guillermo Moreno,
an economist close to Public Works Minister Julio de Vido,17 was
appointed secretary of interior commerce and charged with the price negotiations. Moreno managed to get
key players to keep price increases under control for a while. However, toward the end of 2006 it became
clear that the government’s approach to controlling price increases was not working and inflation was
on the rise again.
Rather than taking a deeper look at the causes of inflation,18 the
government resorted to altering the statistical methodology used by the till-then widely respected Instituto
Nacional de Estadísticas y Censo (INDEC). In other words, having failed to change the inflationary
reality, the government resorted to changing the way this reality was officially presented.
Moreno, whose price policies had failed, was put in charge of INDEC. A year-long series of firings,
strikes, and altered statistics followed. At the time of this writing, the INDEC crisis is still deepening
with no solution in sight. With INDEC’s technical capacity severely hobbled and its reputation all but
destroyed,19 as of January of 2007, nobody knows the actual inflation
rate in Argentina. While the official inflation rate for 2007 is 8.5%, economists estimate that the actual
inflation rate is anywhere from 12% to 24%,20 with the most credible
estimates between 16-18%.
As Figure 5 shows, knowing the true value of inflation is key, since economic policy needs to be considerably
different if inflation is accelerating, as most economists believe is the case, or dropping, as the government
The Energy Crisis
At the time of this writing, during a record-setting heat wave, Buenos Aires is under the effect of
rolling blackouts. Neighbors are in the streets, staging protests reminiscent of the 2001 "cacerolazos," demanding
to have electricity restored. As with inflation, the government’s approach to the energy shortage has
been to deny it exists. As recently as Dec. 18, 2007, Public Works Minister Julio De Vido stated that
energy supply for the summer was guaranteed.21 Perhaps as an indication
that the government itself did not believe its rhetoric, in late December it implemented a widespread
energy-saving plan that, for the first time in years, included a daylight saving time change.
Argentina’s energy insufficiency reached critical levels in 2007 and is predicted to continue through
2008. The problem can be traced back to privatizations in the 1990s. When all major utilities and the
national petroleum company were handed over to private concessions, privatization contracts required
that contractors carry out investment in infrastructure to expand production and distribution capacity.
They failed to make these investments, and since government regulatory agencies were stacked with privatized
enterprise cronies, the contract violations persisted with almost complete impunity.
When Kirchner, who had openly supported the privatizations, came to power in 2003, his fiery rhetoric
led some to believe that breaches of contract by the privatized utility companies and impunity would
come to an end. Over time, his practice revealed that the neoliberal-era privatization structure, contractual
violations, and crony regulatory agencies were to remain essentially intact.22
When the strong post-crisis consumption and economic activity reactivation led to a steady growth
in energy demand (electricity, gas, fuels), the system all but collapsed. Climactic conditions that deviate
slightly from the norm result in insufficient gas for industry and electricity blackouts causing factories
to shut down and business persons to lose tens of thousands of dollars when they fail to fulfill production
contracts. Figure 6 shows the effect on industrial activity of the gas shortage during the Southern winter
of 2007. Due to an unusually cold winter, many industries had gas cut off for as much as eight hours
daily.23 The drop in industrial activity in July clearly reflects
Figure 6: Monthly Industrial Activity Estimator (quarterly inter-annual variations)
Source: Instituto Nacional de Estadísticas y Censo (INDEC)
Who benefits from this state of affairs? Privatized enterprises clearly do, since they continue to
make substantial profits by operating at full capacity.24 Given
the government’s continued lack of a strong regulatory presence, it makes perfect business sense for
enterprises not to undertake costly infrastructure investments.25 As
a result, since July 2007 Argentina has become a net importer of electricity and fuels for the first
time in decades, with the obvious results on the trade balance.26
By the mid 1970s, after three decades of import substitution industrialization and strong labor legislation,
Argentine workers received 47% of national income. At the time of the 2001 crisis and after two and a
half decades of neoliberalism, worker participation in national income had dropped 20 percentage points.27 While
crisis peak levels of poverty and unemployment undoubtedly worsened income distribution, it had been
steadily worsening throughout the 1990s as a direct result of the neoliberal economic model.
How has income distribution fared under the Kirchner administration? Government statistical manipulations
make it difficult, if not impossible, to know the current levels of poverty and unemployment.28 The
poverty line is calculated as the cost of a basic bundle of goods and services needed to survive. Households
whose income is below this amount are considered poor. The cost of this bundle is updated every month
according to the official inflation figure. Since official data substantially underestimates price increases,
the cost of the bundle of goods is also underestimated, resulting in an underestimation of poverty as
well. Despite these manipulations, most economists and observers would agree that poverty has declined
significantly over the last four years.
Figure 7: Size distribution of income (deciles)
Source: Lozano et al. (2007c) based on INDEC data
The highly regressive income distribution pattern inherited from the 1990s, however, has not changed
significantly since 2003. Figure 7 shows the evolution of individual income between 2003 and the first
quarter of 2007 by deciles. For the 40% of income earners at the low end of the scale, things have not
changed: they continue to receive only 12.5% of total income. On the upper end of the income scale, there
has been a slight redistribution from high to middle income deciles.29
Clearly this does not represent a reversal of the tendency observed during the 1990s. It should not
come as a surprise, since there have been no policies aimed at altering the distributive patterns inherited
from the 1990s. Furthermore, much of the Menem-era economic structure (as discussed above) remains intact,
making it clear that a more equal distribution of income was not a policy objective of the Kirchner administration.
Institutions and Development
The second troubling legacy of the Kirchner era is the deepening disregard for the country’s democratic
institutions. Kirchner’s trampling on the statistics agency’s methodology and technicians is but a small
example of what has occurred institutionally in Argentina over the last four years. Here are some other
The national budget: a presidential slush fund. Every September 15th, the government sends
the national budget bill to congress for discussion and approval. All budgets are based on projections
of total fiscal revenue, which in turn depends on the rates of economic growth and inflation and the
exchange rate, among other factors. In what has become a hallmark of the Kirchner years, economic growth
rates are underestimated by as much as 50%.30 The result of this
is that, with higher actual growth rates, fiscal revenue is also substantially higher. These extra funds,
estimated in 75 billion pesos since 2004, are not accounted for in the budget and serve as a huge slush
fund for the president to spend at will, with no congressional control or oversight.31
Super-powers: discretionary spending changes. The "súperpoderes" (super-powers)
grants extraordinary powers to the executive in the wake of the 2001-2002 crisis to provide greater flexibility
to deal rapidly with unexpected situations. Although the crisis is over, Kirchner’s allies in Congress
granted his administration super-powers each year, and next year will be no exception. Among other powers
granted to the executive is the ability to reassign budget funds at will and by decree, with no congressional
debate, participation, or oversight. In this way, Congress essentially votes for a total spending cap,
but none of the budget’s line items are relevant since the chief of staff can reassign them at will.
Governing by decree: who needs a Congress? Another characteristic of the Kirchner administration
has been that, for the most part, he has governed by decree, showing a profound disregard for the people’s
elected representatives. Despite having had a majority in both houses of Congress, Kirchner still preferred
to act autocratically, preempting public debate on laws and issues. In one term in office, Kirchner signed
249 decrees (an average of 55 per year) surpassing Menem’s record of 37 per year.32 A
further example of Kirchner’s autocratic presidential style is that, according to a recent Anticorruption
Office report, 75% of government purchases were contracted without a competitive bidding process.33
A servile justice system. Early in his administration Kirchner sponsored the renewal of the
widely criticized and servile Supreme Court. Kirchner put in place an open process to make sure that
new justices appointed to the high court had the right qualifications and were not political cronies
as those appointed by Menem. This led many to believe that Argentina would finally have an independent
justice system. However, in February 2006 a law was passed modifying the Council of Magistrates Body,
the judicial body in charge of appointing and removing judges. The Kirchner-sponsored modification gives
the executive a much greater weight in the Council’s decisions and appointments, seriously compromising
the justice system’s independence.34
Corruption. There have been several major cases of corruption that have come to light during
the Kirchner administration. Two of the most suspect government officials are Public Works Minister Julio
De Vido and Transportation Secretary Ricardo Jaime. Despite well-founded allegations and several pending
legal cases, Kirchner firmly supported both officials.35
CFK: Change? What Change?
In Argentine politics there is a longstanding tradition of what is locally known as gatopardismo:36 to
make apparently significant changes that are actually superficial, in order to preserve political and
economic structures intact. To what extent does CFK represent a break with Kirchner’s policies described
above? Indications from her administration so far suggest that changes, if any, will be mostly cosmetic:
- Despite continued outrage, CFK has affirmed that the statistically distorted inflation
reported monthly by INDEC is accurate.37 Furthermore, her newly
appointed economy minister, Martín Lousteau, also publicly says that there is no problem with
INDEC. To cap it off, CFK confirmed Secretary Moreno has kept his position as the guarantor that prices
will not go up more than the government wants, and if they do to continue to make sure that INDEC tells
the story the government wants.
- CFK kept 75% of Kirchner’s political appointees in their posts, including five ministers
with substantial allegations of corruption.38
- By keeping Minister De Vido in place, CFK ensured that it is unlikely that the energy
situation will find a lasting solution soon.
- Institutionally, CFK was a strong promoter, from her seat in Congress, of the 2008 budget
law and the super-powers bill, maintaining Kirchner’s legacy.
As revealing as what CFK has done so far, is what she has not done. For example:
- CFK has not mentioned eliminating, or substantially reducing, indigence (hunger) in Argentina,
a country that produces food for hundreds of millions of people.
- CFK has not acknowledged Argentina’s record high levels of inequality nor has she proposed
policies to deal with it.
- CFK has not proposed policies to deal with Argentina’s still high poverty levels.
- CFK has not addressed Argentina’s still high unemployment, hoping, like her husband before
her, that economic growth will take care of it in due time.
While it is too soon to know what changes CFK will introduce, if any, her actions so far indicate
that, despite having a new president, not much will really change for the better in the country.
In other words, gatopardismo is alive and well in Argentina.
- See Alvarez and González (2007) for an analysis of electoral
- "Heterodox" is a term used to describe economic policies
that diverge from the orthodox or neoliberal policies promoted by the International Financial Institutions,
the U.S. Treasury, and the G7. There is not one uniform set of heterodox policies, but typically they
have more of a focus on national development, the domestic market, state intervention, and occasionally,
- For an account of economic causes and consequences of the economic
crisis, see Cibils et al. (2002).
- This data corresponds to INDEC’s last believable information
(INDEC, December, 2006). As explained below, government alteration of INDEC’s statistics and methodology
as of January 2007 has made its inflation, poverty, and other data not believable.
- This policy is known as "monetary targets," and consists
of targets for the growth of money in circulation (technically, the target is M2 which encompasses money
in circulation and current and savings accounts deposits in banks).
- See Cibils (2006) for a description of Argentina’s current debt
situation, including the restructuring of the defaulted debt.
- The latter insist on completely freely floating exchange rates
and a monetary policy that gives priority to keeping inflation at the lowest level possible (known as
inflation targeting), even at the cost of economic recession and high unemployment.
- The Central Bank does not make its exchange rate target publicly
known. However, a pretty good idea can be obtained from observing the CB’s actions. At the time of this
writing, the Central Bank target exchange rate is approximately 3.15 ± 0.05 pesos to the dollar.
- This is done to prevent currency in circulation from growing
disproportionately to economic activity. This is known as a "monetary or quantitative targets" monetary
- A fiscal surplus results when government revenues exceed expenditures.
When the opposite occurs we have a deficit. A primary fiscal surplus or deficit is the fiscal accounts
result when debt service payments are excluded.
- As indicated below, the primary surplus is subject to considerable
manipulations and presidential discretion. See Cibils (2006) for an analysis of Argentina’s debt service
schedule and the restrictions it imposes on Argentina’s fiscal accounts
- Export taxes have two main purposes. First, since Argentina
consumes many of the products it exports (beef, grains, etc.), export taxes lower the price exporters
get internationally for those goods, thus keeping domestic price increases in check. Second, the government
is able to capture some of the export sectors’ extraordinary profits since the devaluation, since their
costs in pesos were reduced by two-thirds.
- See Cibils et al. (2002) for an account of the causes and
immediate results of the crisis.
- In reality, at the insistence of the IMF, Argentine officials
first implemented a freely floating exchange rate policy. When the peso and inflation began to spiral
out of control, then-minister Roberto Lavagna implemented the dirty float still in place today.
- Orthodox economists promote a monetary policy known as "inflation
targeting," with the main objective of preserving the value of financial assets. Since inflation
redistributes income from lenders to borrowers, orthodox economists promote policies that keep inflation
as low as possible, regardless of what happens in the "real" economy (i.e., production, employment,
- For a technical discussion of the issues see Epstein (2003)
and Cibils and Lo Vuolo (2004) and the works there cited.
- Julio de Vido, a close friend and associate of Néstor
Kirchner, is arguably the most widely suspect minister of the Kirchner administration. There are wide
allegations of corruption in public works funding, the most notorious case being the Skanska affair,
described in great detail in Abiad (2007).
- Inflation is usually a complex process with multiple causes.
In Argentina, an important cause of inflation is the highly concentrated (oligopolistic) structure of
key sectors of the economy, many linked to widely consumed food items.
- See "Denuncian que el Indec está totalmente desmantelado," La
Nación, Dec. 14, 2008, for an account by INDEC directors and technicians of the government’s
intervention in the institution.
- See "La inflación real ya se ubica este año
entre el 17 y el 18%: Las estimaciones privadas por lo menos duplican las cifras que difundió el
Indec," La Nación, Dec. 9, 2007. Economists have used different methods to estimate
actual inflation: GDP deflator, value added tax revenue, provincial inflation indices, and their own
calculations. The main problem is that the absence of credible officials makes many of the alternative
estimates plausible, regardless of how far-fetched they may seem; Zaiat (2007).
- "De Vido sueña con gobernadores petroleros y un
verano sin sofocones," Página/12, Dec. 19, 2007.
- See Barbeito and Lo Vuolo (2006) for an in-depth overview
of the state of energy production in Argentina.
- Since 2007 was an election year, the government gave priority
to maintaining the gas supply to households, which resulted in insufficient gas for manufacturing and
- See Zaiat (2008).
- See Barbeito and Lo Vuolo (2006, 2007).
- Zlotogwiazda (2007).
- This data comes from estimates of Argentina’s functional distribution
of income. The functional distribution looks at how much of total national income goes to the main factors
of production, namely labor and capital. There are no official statistics on the functional distribution
of income after the mid 1970s, however, Lindenboim et al. (2005) rebuilt the series through 2005 based
on available data.
- See Lozano et al (2007b).
- See Lozano et al. (2007a, 2007c).
- See Barbeito et al. (2007) for an analysis of the 2008 National
Budget. For similar analyses of previous years’ budgets, see www.ciepp.org.ar.
- "Hubo mucho dinero fuera del presupuesto: Alrededor de
$75,000 millones desde 2004," La Nación, December 9, 2007.
- "Los récords del Presidente," by Sebastían
Iñurrieta, La Nación, Dec. 2, 2007.
- "Revelan que el 75% de las compras de Kirchner fueron
sin licitación," by Daniel Santoro, Clarín, Jan. 10, 2008.
- For more information on the justice system reforms see the
Asociación por los Derechos Civiles’s (ADC, Association for Civil Rights) web site: www.adc.org.ar and
related links. The ADC and the Asociación Civil por la Igualdad y la Justicia (ACIJ, Civil Association
for Equality and Justice, www.acij.org.ar) jointly presented a
legal protection appeal alleging the unconstitutionality of this reform.
- See Abiad (2008) and "Corrupción: cinco ministros
tienen causas en la justicia," La Nación, Dec . 9, 2007.
- The reference is from Italian novelist Giusseppe Tomasi Di
Lampedusa’s (1896-1957) novel Il Gattopardo(The Brown Cat), where the paradox was originally
expressed as, "If we want everything to continue as is, we must change everything."
- "La inflación que da el Indec es la real," La
Nación, Oct. 25, 2007.
- "Corrupción: cinco ministros tienen causas en
la justicia," La Nación, Dec. 9, 2007. See also, "Cristina ratificó al
75% de los funcionarios," La Nación, Dec . 13, 2008.