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.

What's more, ill-conceived attempts to rupture those dominant paradigms through orthodox 'Washington consensus' reform processes led to economic and political disaster. In both countries, leaders experimented with neoliberalism, facilitated by the misguided zeal of the International Monetary Fund, without enacting any corresponding safety nets or shock absorbers. The resulting crises led both countries to double down on their prevailing ideologies, thereby, ironically, making economic reform today even more difficult.

Carlos Andrés Pérez (known in Venezuela as 'CAP'), who had previously served as Venezuela's president between 1974 and 1979 when oil prices were at record-high levels, won the December 1988 presidential election on a campaign based on the premise that he could lead the country back to the golden days of the 1970s. In reality, those days were long gone and Venezuela, much like today, faced serious economic headwinds. Almost immediately upon his election, CAP instituted a series of IMF-backed economic reforms to liberalize Venezuela's economy, including an adjustment to the gasoline subsidies that, even today, keep Venezuelan gas prices the lowest in the world. The result? A massive series of riots on February 27, 1989 in the capital, known as the Caracazo, which undermined CAP's reforms and paved the way for Chávez's botched 1992 coup and his eventual 1998 election as president. Even today, as Maduro, Ramírez and their advisors consider clawing back the gas subsidies that keep prices at less than a penny per gallon, they are treading lightly, and the more market-friendly opposition is even warier.

In 1991, Argentine president Carlos Menem and economy minister Domingo Cavallo unveiled a 'convertibility' policy to peg the Argentine peso to the US dollar at a 1:1 ratio. Though that policy brought Argentine inflation under control and boosted growth in the mid-1990s, Argentina faced increasing pressure to maintain the currency peg under a growing debt burden. After the 1997 Asian economic crisis, the 1998 Russian default and the January 1999 Brazilian devaluation, investors began to doubt Argentina's capability to maintain convertibility (for many of the same reasons that critics worry today that the eurozone isn't an optimal currency zone), leading to a spiral of sharp economic recession, a series of increasingly desperate IMF loan packages and harsh budget austerity measures. As in Venezuela, you can draw a line from the painful 1999-2001 Argentine crisis to the political rise of Néstor Kirchner in 2003 and his unorthodox approach to Argentine debt repayment, which has largely frozen Argentina out of global credit markets for the past decade.

It's important to remember that Venezuela and Argentina are outliers in the region. In Colombia, Peru, Brazil and Chile, governments tamed hyperinflation and the boom-bust cycles of the twentieth century, and they turned firmly from coups and military dictatorships and toward increasingly deep-rooted democratic traditions. Those same countries continue to pacify or subdue the drug cartels, guerrilla movements and other criminal elements that have jeopardized economic and social progress in the past. They liberalized markets and opened industries to greater competition and investment, while enacting progressive policies to forge a growing middle class and reduce poverty through basic income supplements and wider access to health care, education and public services—a process that contrasts deeply to the 'all-stick-no-carrot' IMF approach in Venezuela and Argentina two decades ago.

The overarching narrative of South America in the past two decades is largely one of success, and Venezuela and Argentina, despite their respective economic and historical cycles, can look to their neighbors' examples for a broad roadmap to guide them of their current woes.

Kevin A. Lees is an associate attorney at Latham & Watkins LLP in Washington, D.C. and editor of the foreign policy blog

Image: Wikimedia Commons/ CC BY-SA 2.0.