Argentina and Venezuela: Brothers in Crisis

January 31, 2014 Topic: EconomicsPolitical Economy Region: ArgentinaVenezuela

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

Political solutions to the crises are stalled in both countries.

Maduro won't be subject to recall until 2016, and the next scheduled parliamentary elections for the Venezuelan National Assembly aren't until December 2015. Maduro's mandate is still highly questionable due to the very narrow margin of his victory, the refusal of the Venezuelan election tribunal to conduct a thoroughgoing vote audit, and the unfair advantage the chavistas hold through incumbency. They control the judiciary, the military (for now), the media and the purse-strings of government—including, most vitally, PDVSA, the state oil company—and have used government funding to buy, and police power to coerce, plenty of votes in the past. Moreover, Maduro's political skills are nearly as empty as Venezuela's foreign reserves, and he lacks the political capital to launch reforms without the support of other key chavistas, such as energy minister Rafael Ramírez and the president of the National Assembly, Diosdado Cabello. Although the Venezuelan opposition has demonstrated remarkable unity over the past two years through the two presidential campaigns of Miranda state governor Henrique Capriles, cracks are appearing within the MUD, the umbrella opposition coalition, and critics like Leopoldo López are pushing for a more strident confrontation with Maduro and the chavistas.

In Argentina, Fernández de Kirchner is the very definition of a lame-duck president, and she reemerged in public view last week after a forty-day absence following her recovery from brain surgery late last year. Her peronista coalition, the Front for Victory, lost seats in last October's midterm legislative elections, to the benefit of Sergio Massa, the business-friendly mayor of Tigre, whose alternative peronista 'Renewal Front' defeated the kirchnerista Front for Victory in Argentina's all-important Buenos Aires province. Massa formerly served as Fernández de Kirchner's top cabinet minister, but broke with her in 2009, and he is now widely seen as the frontrunner for the October 2015 presidential election. Though the kirchneristas still command a majority in Argentina's National Congress, Fernández de Kirchner lacks the two-thirds majority that she once coveted to eliminate presidential term limits or enact other constitutional reforms.

Accordingly, normal political channels seem blocked through at least the end of 2015, despite the fact that both countries should be considering massive economic policy u-turns that will require significant amounts of political goodwill neither Maduro nor Fernández de Kirchner possess. But there's an even greater inertia lurking beyond even the routine political impasse—a kind of political dead-hand control in both countries, on both a short-term and long-term basis.

First, both Venezuela and Argentina remain tethered to the political ideologies of chavismo and kirchnerismo, even though their proponents, Chávez and Néstor Kirchner, are now dead. Those policies may have worked over the last decade to achieve certain goals, including greater social welfare and poverty reduction in Venezuela and a rapid return to economic growth and competitive exports for Argentina. But it should be clear by now that chavismo and kirchnerismo are unable to provide answers to their respective countries' economic woes today.

'…the truth is I never left you'

Venezuela is more fundamentally plagued by a resources curse that has, for decades, decimated the country's non-oil exports, disincentivized entrepreneurship, subjected it to commodity price jolts and transformed its political system into a competition for oil-fueled handouts, instead of a true contest of ideas. In the four decades before Chávez's emergence, two shape-shifting political parties, Democratic Action and COPEI, rotated in and out of office, each government expanding the net of political patronage ever wider.

Chávez's ad hoc expropriation of Venezuelan businesses accelerated that trend by discouraging both domestic and foreign investment. Maduro pulled a similar stunt last November, just prior to crucial municipal elections, when his government 'occupied' the Daka electronic goods store and forced it to sell products at cheaper prices. After Chávez channeled PDVSA's profits into political projects for the past twelve years, Venezuela's oil capacity is now just one-third of its pre-Chávez level. Instead of reinvesting revenue, chavismo has instead stunted PDVSA's ability to develop technologies to explore new energy deposits or refine the extra heavy crude oil from the Orinoco Belt.

Similarly, Argentina is shackled to the peronismo ideology that coincided with Argentina's century-long economic decline. It's hard to believe that Argentina was one of the world's ten wealthiest countries at the turn of the twentieth century and, excepting the United States, the top destination of European emigrants throughout the nineteenth. In Argentine politics today, everyone claims the peronista mantle to some degree, including both the Kirchners and Massa. Though that means peronismo is more an attitude than an ideology, it still retains instinctive policy preferences toward statism and protectionism.

For example, Mexican president Enrique Peña Nieto is opening Pemex, Mexico's state oil company, to greater foreign investment, a landmark reform for a politician who represents the PRI, the party that originally nationalized Pemex and many other Mexican industries during its first 71-year stint in power. Brazilian president Luiz Inácio Lula da Silva, wildly popular throughout the region, facilitated the semi-privatization of Petrobras, Brazil's state oil company. In contrast, Fernández de Kirchner pulled Argentina in the opposite direction in 2012 when she expropriated and nationalized YPF, the Argentine state oil company, from Spain’s Repsol. The Argentine state gobbled up YPF only after raiding additional central bank reserves and its private pension system—and only after Argentina's farmers inflicted so much political pain upon Fernández de Kirchner in summer 2008 that she backed off plans for new taxes on agricultural products, which represent over half of the country's exports. Furthermore, six coups in the twentieth century, including one in 1945 that led to Perón's election, another that overthrew Perón in 1955, and the 1976 coup that led to Argentina's tragic, seven-year 'Dirty War'—retarded the growth of stable democratic institutions and undermined the rule of law.