International Economist Lisa Frumin on Argentina and Venezuela

Adios, sanity

A month ago, I was talking to a Venezuelan friend and I said, “Argentina seems to be the basket case of Latin America.”

He looked at me. Smiled. Then said, “Argentina plays at it. It really does try. But Venezuela is the true winner.”

We began discussing why he believed this to be the case, especially since many journalists are not reporting on Venezuela, at least relative to Argentina. As the conversation continued, I began drawing some parallels between the two countries and noting some differences as well.

These are just a couple insights:

1. Leadership

In both Venezuela and Argentina, a very popular leader implemented rather unsustainable and populist policies. In both cases, a less popular president replaced said leader, but remained committed to his or her predecessor’s ideas.

Venezuelan President Nicolas Maduro suffers from the negative consequences of chavista policies that are unraveling quicker than they did during previous-President Hugo Chavez’s lifetime. Furthermore, Maduro lacks the charisma or explosive energy of Chavez, making it difficult to rally the support of Venezuelans—at least at the level Chavez once easily maintained.

Cristina Fernandez de Kirchner succeeded her husband, Nestor Kirchner, as president of Argentina in 2007. She maintained many of the fiscally loose policies that made Nestor so popular. But Nestor had a good bit of luck. He rode the wave of a great commodity boom that buoyed Argentina in the aftermath of its financial crisis. Cristina inherited an economy that began to feel the strangle of decline in 2008.

Maduro and Cristina struggle to maintain the popularity of Chavez and Nestor

The difference between the two countries lies in their democratic institutions. Chavez drastically reoriented democracy within the framework of the Venezuelan constitution, consolidating his power, and when he was popular and politically strong enough, he rewrote the constitution.

Despite her party holding the majority in Congress, Cristina could not even amend the Argentine constitution to allow her to seek a third presidential term. She has done plenty to shock political scientists who want to see a deeper democratic process form in Argentina, but she has not caused nearly the same level of damage to Argentina’s institutions that Chavez managed to inflict in Venezuela.

2. Natural Endowments and Dicey Relationships with the US

Both sets of leaders blame countries like the US in order to deflect the economic mismanagement and near-sighted policies they have implemented, but the power of their words hold different weights mainly due to distinct circumstances.

Venezuela posses a commodity that all countries crave, giving it a bargaining chip until it runs out of oil (which is not expected to happen any time soon). Yet, history has shown time and again that countries that depend on a single commodity squander their natural endowments.

Exhibit A: Venezuela. Nationalizing the oil industry and using the profits towards social programs has prevented PDVSA, the Venezuelan oil company, from reinvesting in itself. Oil production has been falling for years as a result.

Nonetheless, the commodity emboldened Chavez who used it to build a regional bloc to challenge the US, the capitalist behemoth that figuratively shackled all of Latin America, condemning the region to economic dependency to its northern neighbor.

Chavez formed the Bolivarian Alliance for the Americas (ALBA is the Spanish acronym) with the goal of creating an alternate international coalition opposed to the US trade agenda in Latin America. Members include Cuba, Ecuador and Bolivia; those that feel they received the short end of the stick with US economic policy.

ALBA – One way to burn through a commodity boom

Additionally, Chavez started programs like PetroCaribe, which exchanges oil partially for foodstuffs and partially as loans with small, energy-starved Caribbean countries.

On the other hand, the US does not need Argentine exports, and Argentina’s trading partners can go elsewhere for soyabeans and beef. In fact, Argentina relies on Brazil to buy Argentine exports for its survival. Argentina’s relative irrelevance on world markets was clear when the International Monetary Fund (IMF) pulled the plug on its financial package to Argentina in 2000-2001.

The Argentine economy went down the tubes and was shut out of financial markets, and yet the global economy hardly rattled in comparison to the near meltdowns that occurred when the Mexican, East Asian, Russian and Brazilian crises of the 1990s hit.

But Buenos Aires never forgot how the IMF (and by extension the US) let Argentina collapse, and so it became a target for Nestor. Cristina continues to point fingers when convenient. Most recently, Argentina has been fighting a number of “vulture capitalists”, as Cristina likes to say, in US courts over a set of bonds that the holders refused to exchange on a deep discount in the wake of the 2001 crisis.

Chavez, Maduro and both Kirchners blame the US, the IMF and capitalist policies for the economic woes of their respective countries. Cristina cannot rail against the United States to the extent that Chavez did and Maduro does now. Sometimes she will go after the UK instead. Given the insatiable demand for Venezuelan oil, Maduro can get away with much harsher rhetoric directed at the US.

3. Economic Turbulence

Both Venezuela and Argentina suffer from high inflation, runaway fiscal budgets, and poor economic management. Both Presidents Maduro and Kirchner have made major changes to their cabinets in order to deal with their troubled economies.

We do not know how much of Maduro’s fiscal budget goes to the social policies implemented under Chavez, often known as misiones. This off-the-books public spending has caused inflation to skyrocket. Officially, Venezuela considers its inflation rate to be over 54 percent, one of the highest in the world today, but many economists believe it might be way higher than that.

Inflation has incentivized Venezuelans to spend today rather than save for tomorrow; their bolivares will be worth less in the future.

Meanwhile, Venezuela’s main source of revenue, oil production, has been falling since 1998 (when Chavez first took power and nationalized the oil industry). Finally, Maduro has implemented currency controls to keep the bolivar-dollar ratio at 6.3 to 1. The black market is trading at rates that are possibly ten times that.

Cristina is in dire straits herself. Unable to control fiscal spending, the inflation rate in Argentina has been spiking, but Cristina refuses to let economists working for her government announce the true figures so as of right now, the official rate is 11 percent.

Independent analysts believe it is closer to 30 percent.

In terms of GDP, Argentina seems to be doing better than Venezuela. It has a larger variety of primary products to export including beef and soyabeans and as long as Brazil hums along (well that is in question at the moment, too), Argentina has a major market, to which it can export.

But Cristina is in need of cash. In an attempt to garner more profit-making enterprises within the government, she nationalized the energy industry in 2012. She also replaced the central bank president with one loyal to her government, thus making it no longer independent and giving her the power to print money as she sees fit.

Like Caracas, Buenos Aires also maintains currency controls. The black market rate is definitely higher than the official figure, but not at the level that Venezuela is currently experiencing.

So perhaps Argentina is right on schedule: It has seemed to hit a crisis every 11-12 years since the early 1940s. But it is not alone. Venezuela, once a highly affluent country in the region (some even considered it a model), has its fair share of economic problems recently.

Both countries seem destined for economic crisis. It is a matter of when and how many other countries could go down with them.

I am willing to bet Venezuela goes first and it will take down at the very least all the small Caribbean countries while rocking a few other Latin American economies along the way.

I guess my friend was right: Venezuela won…if you can consider being a basket case winning.

Winning

Lisa Frumin is an international economist specializing in financial regulatory policy. She lives and works in New York City.

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