Argentina and Venezuela: Brothers in Crisis

There are deep parallels between the two beleaguered states.

There's a tidy parallelism to the dual economic crises currently unfolding on either end of the South American continent in Venezuela and in Argentina.

In many ways, Venezuela and Argentina represent the final two pillars of populist socialism in South America. Venezuela lays claim to one of the two great libertadores of nineteenth-century South America, Simón Bolívar, and Argentina lays claim to the second, José de San Martín. Argentina's Juan Perón and his wife Evita were more than just national leaders—they captured the imagination of an entire continent and spawned a new leftism rooted in the workers movement of the twentieth century.

Similarly, Venezuela's Hugo Chávez reinvigorated Latin American socialism in the twenty-first century, mixed with a dose of anti-American imperialism, that also holds sway in Nicaragua, Ecuador, Bolivia and elsewhere.

Both countries are experiencing remarkably similar economic crises that have global markets worried about which country will collapse first into chaos. But the similarities eclipse the economic realm into the political and the historical as well, in ways that illuminate how Venezuela and Argentina found themselves in their current state—and how they might (or might not) emerge from them.

A double-helix South American financial crisis

Despite the introduction of currency controls long ago, capital is leaking out of both countries, leaving the official value of the Venezuelan bolívar and the Argentine peso vastly higher than their unofficial values. That has spurred demand for US dollars and, accordingly, Venezuela's foreign currency reserves have dwindled to just $20 billion (despite over $100 billion in annual oil exports), and Argentina's reserves have fallen to $29 billion. Thousands of Venezuelans are now engaged in bizarre, too-good-to-be true arbitrage scams, and the currency crisis has bifurcated the country into an elite ‘boligarchy’ with access to dollars at the unofficial rate and a population that finds it increasingly difficult to make ends meet. In Argentina, the crisis meant government controls to prevent citizens from engaging in commerce through foreign websites and otherwise taxing or inhibiting transactions abroad, at least until last Monday, when the government announced a new policy allowing the purchase of up to $2,000 per month. Meanwhile, inflation rates of 56 percent in Venezuela and 28 percent in Argentina threaten to take things even further out of control.

Both governments have vehemently denied that devaluations are in the works. That resolve, however, is slipping. Last week, Argentina essentially devalued the peso to around 8 per dollar when the central bank scaled back its intervention to keep the peso's value artificially elevated. In real terms, the peso's value has plunged by around 25% in just over two months, and it may still be overvalued compared to its black-market value of around 12.5. Likewise in Caracas, where the government has strained to avoid the 'd-word,' and claims it is maintaining the bolívar's official rate of 6.3 per dollar. But last week, its government announced a new floating rate (currently at around 11.3) for travel allowances, airlines and other investments. Last year, CADIVI, Venezuela's currency commission, introduced a new auction procedure ('Sicad') designed to facilitate the sale of dollars to importers, also at higher prices than official rate, but the process hasn't distributed nearly enough dollars to avoid embarrassing shortages of basic goods, including foodstuffs and toilet paper. Meanwhile, the unofficial rate has cascaded from around 25 at the time of last year's April 2013 presidential election to around 75 today.

Venezuelan president Nicolás Maduro earlier this month replaced his finance minister Nelson Merentes, a pragmatic former central banker, with Rodolfo Marco, an army general, a somewhat unorthodox choice to set economic policy. Argentine president Cristina Fernández de Kirchner last November appointed economic Axel Kicillof, whose views fall somewhere between Marxist and paleo-Keynesian, as her new finance minister, and he is grabbing international headlines for his charismatic style and his central role in the current crisis. It's safe to say that neither Marco nor Kicilloff have so far managed to assuage global markets.

Political ennui in Buenos Aires and Caracas