Argentina: From Gradualism to Shock Therapy

By Arturo C. Porzecanski*

Argentine President Mauricio Macri

Argentine President Mauricio Macri. / Wikimedia / Creative Commons

The austerity measures that President Mauricio Macri announced yesterday to deal with the sharp depreciation of the Argentine peso and acceleration of inflation in the past couple of months are a belated but entirely appropriate effort to stem the country’s massive capital flight.  His administration intends to lower government spending and reimpose taxes on exports to reduce the fiscal deficit faster than envisioned in May, when a three-year economic program was agreed with the International Monetary Fund (IMF).  This is in addition to a previously announced government hiring freeze and cuts to subsidies for electricity and other services.

  • Specifically, the goal now is to minimize the public sector’s financing requirement for 2019, limiting it to rolling over debt maturities coming due plus borrowing $15 billion mostly from the IMF, World Bank, and Latin America’s development banks (CAF and IADB), to cover the interest payments coming due next year. All told, the fiscal deficit contraction that would be achieved between 2017 and 2019 is equivalent to about four percentage points of GDP, compared to the previously pledged 2¾ percent of GDP in savings embodied in the IMF program.
  • In return, Macri’s government has requested the IMF to speed up disbursements under the $50 billion loan facility, which had envisioned a $15 billion up-front payment in June, made on schedule, plus installments of about $3 billion per quarter through June 2021, depending on performance and need. The Fund’s Managing Director, Christine Lagarde, has instructed IMF staff to work with the Argentines to reach a rapid conclusion of discussions to present to the Executive Board for approval.

Macri’s announcement was an admission that what had been advertised in May as a strictly “precautionary” loan must now be amended to provide emergency financing full-throttle.  While a number of emerging-market currencies have come under downward pressure in recent months, the sell-off in Argentina is only comparable to that in Turkey: both the Argentine peso and the Turkish lira currently buy about half as many U.S. dollars as they did at the start of the year (now 100 pesos = $2.60 vs. $5.40 then).  The currency downdraft has dragged Argentine stocks and bonds down when measured in dollar terms; the probability of a debt default in Argentina, as deduced from bond yields, currently ranks highest of all in the emerging markets but for Venezuela, in default since late 2017.

  • Last December, the central bank of Argentina (BCRA) committed itself to achieving an inflation rate of 15 percent during 2018, but prices rose more than that just in the first six months of the year. Given the cost-push pressures unleashed by the peso’s sharp depreciation since May, Argentina would be lucky to end the year with inflation cumulating less than 40 percent.  The patent failure of monetary policy to stabilize the currency and curb inflation thus far will probably be hotly discussed during the government’s negotiations with the IMF.  Last week the BCRA hiked its target interest rate to 60 percent from 40 percent in early August, which is more than double the level that prevailed through May.  Chances are that the IMF will pressure the central bank to keep interest rates significantly above expected inflation until the fever breaks.

We wrote in mid-May that we were witnessing in Argentina the demise of President Macri’s cherished – and popular – gradualism in tackling the poisoned inheritance left after 12 years of populism under presidents Néstor and Cristina Kirchner.  Now we are beholding the embrace of “shock therapy” in fiscal and monetary policies by the Macri administration.

  • Macri and his economic team keep blaming adverse circumstances, such as the worst drought in 30 years, which has delivered the poorest harvest since 2009; risk aversion among investors because of the tightening of U.S. monetary policy; and uncertainty generated by the “corruption copybooks” scandal involving Kirchner government officials and construction industry businesspersons. Their diagnosis is patently wrong.  Despite the poor harvest, Argentine export earnings through July have increased in the best performance in several years.  The tightening of U.S. monetary policy has been very gradual and well telegraphed in advance; it has not caused problems in prudently managed countries.  And the recent scandal is tarnishing Macri’s opposition in the legislature and has not reached the scope of the “carwash” scandal in Brazil.
  • Macri and his team are reaping what they sowed. In 2016-17 they claimed that they could do little to address the inherited fiscal and monetary problems because otherwise they would lose precious seats in midterm congressional elections and end up as lame ducks.  And then, after Macri’s party Cambiemos did well in the October 2017 contest, they claimed that in 2018-19 they could do little to address the inherited fiscal and monetary problems because otherwise they would lose the presidential elections in October of next year.  Up until February, local and foreign investors were willing to give the Macri administration the benefit of the doubt, but then they got impatient, started to pare their positions especially in short-term government bonds, and subsequently decided to exit on a large scale when the central bank failed to tighten monetary conditions sufficiently to keep the peso from depreciating rapidly.

September 4, 2018

*Dr. Arturo C. Porzecanski is Distinguished Economist in Residence at American University and a member of the faculty of the International Economic Relations Program at its School of International Service.

Brazil’s Prison Violence Reflects Deeper Social Problem

By Andrew Johnson*

pinheiros_iii_05

An interim detention center in São Paulo, Brazil. / Rovena Rosa / Agência Brasil / Wikimedia / Creative Commons

It has been a horrific start to 2017 in the Brazilian prison system, and reversing the trend will take much more than increased public funding.  A wave of violence began on New Year’s Day when 56 inmates were killed during a riot inside of a penitentiary in Manaus.  A series of deadly inmate uprisings followed that massacre, bringing the number of inmates killed this month to 120.  Macabre images of inmates’ decapitated corpses strewn about prison yards captured on cellphone cameras and posted to the internet reminded Brazilians that overcrowding, a weak state presence, and institutionalized gang power have combined to make Brazilian prisons – with over 600,000 inmates – tinderboxes ready to ignite at almost any time.

  • During a year I spent conducting fieldwork inside jails and prisons in Rio de Janeiro for a book and documentary film in 2011, I saw inmates crammed into cells at three and four times their intended capacity. On the worst nights, men unable to find space on the floor or a concrete bunk tied their torsos to the steel gates with t-shirts and attempted to sleep while standing.
  • The Comando Vermelho and other gangs controlled entire cellblocks and used smuggled cell phones and strategic visitors to maintain regular contact with leadership. This communications capability and weapons caches inside the cellblocks enabled them to act as the de facto government. Prison guards knew that they were outgunned and outnumbered, and they knew their off-duty lives could be easily extinguished by an order initiated inside the prison.  January’s riots revealed how thin the veneer of state control really is inside.

Impassioned pleas, prompted by the riots, to reduce overcrowding and provide more resources to Brazil’s prison system are being launched in a time of austerity.  The Brazilian Senate recently approved legislation that could freeze public spending for the next 20 years.  Public investment would certainly reduce the likelihood of future riots, but the crisis in Brazil’s jails and penitentiaries is not caused simply by underfunding.  It is the result of decades of the state treating inmates, and the residents of the neighborhoods where most of them were born, as less than full citizens.  Pastor Antonio Carlos Costa, leader of the human rights organization Rio de Paz, told me the state and public’s reactions to the many thousands killed by the police and hundreds murdered in prisons each year were limited because “they are poor people, people with dark skin, people considered killable.  These are deaths that don’t shock us, they don’t make the Brazilian cry.”

There is no excuse or justifiable defense for the inmates involved in the 120 murders that occurred inside Brazilian prisons this month.  It was an inhumane slaughter propelled by gangs, greed, and a power grab.  But the solution to Brazil’s profoundly troubled prison system lies much deeper than increasing public spending or reducing overcrowding.  Refusing to treat people as killable, gang-affiliated or not, is a goal that may take decades and will require a commitment that is much costlier than any public spending intervention or new legislation.  Laws protecting human rights would have to be enforced for all Brazilians, including prisoners.  Law abiding middle and upper-class citizens would have to push back and no longer tolerate some of the world’s highest murder rates and jails where 80 men squeeze into a cell built for 20.  Transformation this profound would be a difficult message to sell on the campaign trail, but anything less than that sort of social and cultural change from the government and the public will fall short of fixing the deeply rooted problems with Brazil’s prison system.

January 27, 2017

*Andrew Johnson is a Research Associate with the Center for Religion and Civic Culture’s Religious Competition and Creative Innovation (RCCI) initiative at the University of Southern California.

Dilma – and Brazil – in Crisis

By Eric Hershberg

Photo Credit: Ministério da Ciência, Tecnologia e Inovação / Flickr / Creative Commons

Photo Credit: Ministério da Ciência, Tecnologia e Inovação / Flickr / Creative Commons

Brazil’s corruption scandals and deepening recession have raised doubts about not only the viability of President Dilma Rouseff’s government, but also about the national renaissance and global role that Brazilians have long strived for and seemed only recently to have achieved.  The commodity boom of the past decade propelled Brazil to become the world’s sixth largest economy and make major inroads against its historically obscene levels of poverty and inequality.  Often working in tandem, Brazil’s leading public and private enterprises, assisted by the generous state development bank, prospered immensely and fueled growth in Brazil itself and elsewhere in Latin America, building infrastructure from Ecuador to Cuba.  Four Partido dos Trabalhadores (PT) presidential victories in a row (two each for President Lula da Silva and for Dilma) appeared to validate a development strategy built upon government alliances with ambitious large firms and generous cash-transfer programs for needy segments of the population, which became reliable sources of electoral support.  Brazil, the country that skeptics considered unlikely to ever fulfill its aspiration of becoming more than “the country of the future,” seemed to have turned a historic corner – until it all came crashing down.

With the commodity boom now over, the economy is contracting at an annual rate of more than 2 percent, and a Central Bank survey released last week forecast that the recession will continue into 2016.  The past decade’s extraordinary gains in formal sector employment and wage rates are being rapidly eroded.  The dire macro-economic situation forced Dilma to shift course earlier this year, when to the dismay of her PT base, she appointed pro-austerity economist Joaquim Levy as Finance Minister.  His mandate – to tackle fiscal deficits – required dealing with the end of the commodity-driven cycle of growth and problems with the state capitalist model pursued by the PT since 2004.  Levy’s strategy will take time to bear fruit, probably through most of Dilma’s term, and will be painful.

But the President’s biggest challenges stem from the vast corruption scandals that have devastated her credibility and the reputation of the enormous companies that were the protagonists of Brazil’s latest miracle.  Although Dilma has not been charged with any wrongdoing, the scandalous actions at state oil firm Petrobras, which at its height accounted for as much as 10 percent of Brazil’s GDP, were in full flourish when she was Lula’s Energy Minister and nominally in charge.  Prosecutors have filed evidence of bribery and kickback schemes that bilked billions of dollars from the company’s coffers, and officials in both the PT and allied parties have been charged with serious crimes.  Dilma’s popularity ratings are now in single digits, with little prospect of improvement.  Street protests calling for her impeachment are more focused than those that tormented her in 2013 and 2014, when popular discontent focused less on corruption than on the poor quality of transportation, education, health care, and other public services at a time when the government was making huge investments to prepare for the 2014 World Cup and the 2016 Olympic games.

Further damaging revelations are likely as investigations continue, and they will affect an ever-wider array of political actors and major economic enterprises.  Many of the president’s political foes support either impeachment or resignation, while others are inclined to let her government wither in place.  The key alternative parties – the PSDB of former President Cardoso and the PMDB (the latter rumored to be closer than ever to breaking its tenuous alliance with the President) – are not aligned in a way that establishes a clear path to push Dilma out.  The most optimistic scenario for the President entails remaining, terribly wounded, in office, but this could change if, as many observers believe, the Auditing Court (TCU) determines that Dilma has misused public funds, or if the TSE should press forward with investigations of illegal financing of Dilma’s campaign.  

If two or three years ago it seemed plausible that history would credit the PT for having transformed Brazil into a high-quality democracy with improved social inclusion, today that appears to have been a pipe dream.  Beyond the immediate factor of Dilma’s ineffectual leadership, there are broader, systemic reasons for this tragedy.  Brazil’s fractured party system and the coalition-building it requires engenders corruption-fueled legislative bargaining, as evidenced by the Mensalão scandal.  Brazilian state capitalism has blurred lines between state economic policies and corporate beneficiaries, further fueling a culture of corruption evident by the fact that roughly 40 percent of members of Congress are under investigation, according to the New York Times.  Regardless of whether Dilma survives in office, the current moment has drawn Brazilians’ attention to the deep political and economic roots of their current situation, and dashed their hopes of soon becoming “O País do Futuro.” 

August 24, 2015 

Argentina Presidential Campaign: Harbinger of Deep Change?

By Federico Merke*

Candidates, left to right: Daniel Scioli, Mauricio Macri, and Sergio Massa. Photo Credits: Cgazzo, Inés Tanoira, and Tigre Municipio, respectively / Wikimedia Commons / CC BY 2.0

Candidates, left to right: Daniel Scioli, Mauricio Macri, and Sergio Massa. Photo Credits: Cgazzo, Inés Tanoira, and Tigre Municipio, respectively / Wikimedia Commons / CC BY 2.0

As the 2015 presidential race begins to take shape in Argentina, the leading candidates – Daniel Scioli (Frente para la Victoria, FPV), Mauricio Macri (Propuesta Republicana, PRO), and Sergio Massa (dissident Peronist faction Frente Renovador, FR ) – have already begun to outline their visions, but sweeping change doesn’t yet appear on the horizon.  According to early polls, Massa had a strong start in the runup to the August 5 presidential primary, but his popularity has faded, making Scioli and Macri appear to be the real contenders.  Originally considered an unexciting three-way race, it has now become a polarized contest.  It should come as no surprise if campaign speeches start to follow a continuity-versus-change line.

Several developments suggest the presidential race will be close:

  • The fact that Scioli has named Carlos Zannini, President Cristina Fernández de Kirchner’s legal secretary, as his running mate has been a game-changer. The Scioli-Zannini effort to bridge two different factions of the FPV, namely the left-wing Kirchnerites with more business-friendly Peronists, will demand tons of rhetoric.  This ticket casts them as guarantors of continuity: el modelo with some modifications.  Yet in electoral politics, almost everything is about framing – explaining to core and potential supporters how new decisions, which for all their twists and turns, remain faithful to the flags of the party.  This is when Peronism gets real.
  • The Zannini gambit on the Peronist side prompted Macri to follow a pure PRO formula, naming Gabriela Michetti, a former deputy-major of Buenos Aires City, as his vice-presidential candidate. This ticket bets on the idea that most Argentine voters reject the government and want substantial change, while polls suggest that many just opt for moderate adjustments.  Macri’s record indicates that he would propel a more pro-business government than that of Fernández de Kirchner, but his victory would not portend a return to the neoliberal heyday of the Menem years during the 1990s.
  • Sergio Massa, on the other hand, is the plain-speaking candidate of the dissident Peronist faction who’s challenged by the FPV and PRO candidates to duke it out over the issues. Polls indicate that he will draw 15 percent of the votes in the election – making him an important powerbroker.

These early stages of the campaign reflect a recurrent pattern in Argentina’s political landscape: a tendency of ruling party candidates to move away from incumbents with lofty rhetoric but little specificity on the one hand, as opposition candidates issue harsh criticism while at the same time manifesting a reluctance to embrace radical change.  Scioli seems to be going all-out Kirchnerite, but it’s too soon to judge whether the electorate will follow, or whether once in office he would govern as if it were Cristina’s third term.  He and Macri both aspire to grab Massa’s 15 percent, as it could enable them to win the presidency in the first ballot rather than having to contest a second round of voting between the two top vote-getters.  But he hasn’t stated a credible price, and neither Scioli nor Macri seems ready yet to begin bargaining with him.   President Fernández may have avoided plunging the economy into crisis before she steps down, but her successor will definitely have to make tough choices because the country is mired in recession and cannot access foreign investment.  Macri might initially enjoy some leeway to introduce austerity measures that would clean up a good part of the macro-economic mess and reopen Argentina to international capital markets, but even he – like Scioli – is likely to be constrained by embedded Kirchnerism in Congress and in the ministries.  Those in Argentina and beyond who have dreamed that Kirchnerism’s days are numbered will have to wait to see.  Kirchnerism, Argentina’s latest “ism,” has profoundly altered the political and ideological landscape – and, at this early point in the campaign, it appears likely to continue to be part of the country’s political ethos into the future.  It could even turn out to be the dominant force in the administration that takes office in 2016.

July 2, 2015

*Federico Merke directs the Political Science and International Relations Programs at the Universidad de San Andrés in Buenos Aires.