Argentina's stunning recovery from the economic crisis of 2001 dealt a blow to orthodox economic theories imposed by the International Monetary Fund (IMF) and other international institutions. Former president Néstor Kirchner and now his wife Cristina Fernández de Kirchner have consolidated political power on the basis of that success. But some serious problems loom on the horizon. This article argues that as Cristina takes over the nation, the lack of a real national development plan and the government's growing disregard for democratic institutions hamper efforts to address challenges like rising inflation and a serious energy shortage.

On Dec. 10, 2007 Néstor Kirchner handed over the presidential baton to his wife, Cristina Fernández de Kirchner in what was the first husband-wife handover in Argentine history. Cristina was appointed presidential candidate by her husband, with no internal party elections or debate, highlighting the crisis of the Argentine political party system. By passing presidential power between spouses, the Kirchners appear to have found a formula to perpetuate themselves in power indefinitely without the need for a constitutional reform.

Cristina Fernández de Kirchner (CFK) won the presidential elections on Oct. 28, 2007. The presidential campaign had generated the least public interest in recent decades,1 and was characterized by a lack of substantive debate and a highly splintered opposition on both the left and right.

The lack of debate is disturbing given the magnitude of some of the political and economic issues Argentina faces in the short and medium run. Many analysts have touted the success of Argentina's heterodox2 exchange rate and monetary policies and the remarkable economic growth rates since 2003. However, CFK inherits from her husband an economy that is at a crucial juncture regarding energy (gas and electricity) supply, inflation, income distribution, and institutional degradation.

Will CFK mark a break from her husband's approach in dealing with these issues? Some argue that her campaign slogan, "el cambio recién comienza" (change is just beginning) is an indication that she will take a different tack. Her actions during her first weeks as president, however, indicate that she will continue with the same policies of her husband, with only cosmetic changes.

To understand CFK's approach to economic and institutional issues, it makes sense to first understand the legacy inherited from her husband.

Kirchner's Economic Legacy

President Néstor Kirchner came to power on May 25, 2003, when Argentina was still reeling from the effects of the worst social, financial, and economic crisis in its history.3 Although the crisis is considered to have ended, the effects of almost three decades of neoliberal economic policies, corruption, and cyclical crises are still visible in indicators such as the rates of poverty (27%), indigence (9%), and unemployment (10.1%).4 Kirchner has both contributed to leaving the crisis behind and to perpetuating the nefarious legacy of neoliberalism and corruption.

The Key to Economic Growth: Heterodox Macroeconomic Policies

The main features of Kirchner's macroeconomic policy were designed one year before he came to power by then-President Duhalde and his Economy Minister Roberto Lavagna. In April 2002, ignoring substantial pressure from the IMF, Lavagna implemented a series of heterodox economic policies that, coupled with a favorable international environment, turned out to be the key to Argentina's economic recovery.

In this sense, Kirchner's main virtue was to keep both Lavagna and his policies in place. While Lavagna left the Kirchner administration in 2005, the policies he designed are still in effect:

• a competitive exchange rate policy, known as a managed or "dirty" float, such that exports and import substitution are encouraged;
• a monetary policy that supports the process of economic growth;5
• building up Central Bank reserves to avoid having to negotiate with the IMF in the event of a financial crisis; and
• a large primary fiscal surplus to be able to make very substantial scheduled debt payments.6

The first two policies are in direct opposition to policies promoted by the IMF and orthodox economists.7 Given the spectacular failure of orthodox policy prescriptions in Argentina and around the world, Kirchner and Lavagna did well to ignore pressure to implement failed recipes. As a result, Argentina's macroeconomic performance over the last five years has been quite remarkable as illustrated in Figure 1, where quarterly growth rates since 2001 show a substantial economic recovery.

Figure 1: Economic Growth Rates (quarterly)

Source: Ministerio de Economía

A key factor in Argentina's economic growth performance has been the Central Bank's "dirty float" exchange rate policy: the Central Bank buys or sells dollars in the foreign exchange market as necessary to ensure that the exchange rate stays within predetermined boundaries so Argentine exports remain competitive.8 The fixed one-to-one exchange rate policy of the 1990s had resulted in an overvalued peso which encouraged imports more than exports. The new exchange rate regime has clearly changed that (Figure 2).

Figure 2: Exports, Imports, and Trade Balance (monthly, millions of dollars)

Source: Ministerio de Economía

The Central Bank purchases foreign exchange with newly printed money, which is then re-absorbed ("sterilized") by the Central Bank through bond issues.9 Since the crisis, the foreign exchange market has tended to have an excess supply of dollars, which means that the Central Bank has been mostly buying dollars and accumulating record levels of international reserves (Figure 3).

Figure 3: Central Bank Reserves (quarterly, billions of US dollars)

Source: Banco Central de la República Argentina

International reserve accumulation has become a widespread practice among Asian and Latin American countries. High levels of international reserve provide breathing room for domestic economies in the eventuality of a financial crisis and, more importantly, the ability to avoid having to submit to harmful IMF policies and conditions.

Another component of Kirchner's macroeconomic policy package has been a historically unprecedented primary fiscal budget surplus,10 in order to be able to meet Argentina's very substantial debt service schedule.11 While Argentina had a relatively small primary surplus for much of the 1990s, the surplus has become dramatically larger (Figure 4) due to several factors:

• High economic growth rates and high levels of economic activity, coupled with moderate inflation, have resulted in increasingly higher revenues from the 21% value-added tax.
• Following the devaluation of the peso in 2002, the government imposed export taxes on many of the primary commodities which have also resulted in high levels of fiscal revenue.12
• The government has increased pressure on tax payers in an effort to reduce Argentina's historically high levels of tax evasion.

Figure 4: Primary Fiscal Surplus (quarterly, millions of Argentine pesos)

Source: Ministerio de Economía

While the overall macroeconomic picture looks quite good, there are two interrelated and troublesome groups of issues that are cause for grave concern and may eventually affect the macroeconomic picture described above. First, the Argentine government has lacked a development program or an explicit vision of the direction the country should take in the medium and long-run. In this sense, it is reminiscent of the neoliberal framework of the 1990s. Second, key aspects of Argentina's institutional and policy frameworks dealing with inflation, energy, and income distribution are dealt with in an improvised manner and without a long-term strategy.

Inflation and the National Statistics Institute (INDEC)

Argentina has a long and sordid history with inflation. Starting in the mid 1970s with the military dictatorship's neoliberal reforms, moderate to high inflation became a hallmark of the Argentine economy, culminating in several traumatic episodes of hyperinflation in 1989-1990. In 1991, then-President Menem and his finance minister Domingo Cavallo implemented the "Convertibility Plan," a neoliberal reform package that included pegging the peso to the dollar on a one-to-one exchange rate. The Plan succeeded at eventually eliminating inflation (Figure 5). However, it also introduced a series of profound imbalances that resulted in the spectacular crisis of 2001-2002.13

Figure 5: Annual inflation rate

Source: Instituto Nacional de Estadísticas y Censo (INDEC) and private estimates

Following the crisis, the fixed exchange rate regime was abandoned in favor of the "dirty float" exchange rate policy described above.14 Since then, and following an inflationary spike in 2002, Argentina has experienced low to moderate levels of inflation, but considerably above those of the 1990s (Figure 5).

There is considerable debate about whether current levels of inflation constitute a problem that policy makers should be worried about. There are two fundamental issues in Argentina today that play into this debate. The first is a theoretical debate over how to deal with inflation. The second is that nobody knows what actual inflation is due to government manipulation of the consumer price index. We will deal with each in turn.

Orthodox vs. Heterodox Inflation Policy Debate

Orthodox and heterodox economists diverge on how to deal with inflation. The orthodox approach emphasizes keeping inflation as low as possible, even at the cost of economic recession and high rates of unemployment.15

Heterodox economists, citing substantial empirical evidence,16 maintain that moderate levels of inflation do not necessarily impact negatively on economic growth. In the case of Argentina, given the phenomenal crisis and its resulting poverty and unemployment rates, it seemed logical to prioritize high growth rates over low inflation. In this sense, the government's monetary and exchange rate policy, criticized by the orthodoxy, is the appropriate policy mix.

While Kirchner's monetary and exchange rate policies were heterodox, his rhetoric did not match his practice. Rather than challenge the mistaken premises of orthodox macroeconomic policy prescriptions, he tried to make reality look like the orthodox economists would have wanted.

Official Distortion of Statistical Data: The Destruction of INDEC

Throughout 2006 the government faced slowly accelerating inflation. In response, it implemented a policy of negotiating with key economic players to agree to limits on price increases. Guillermo Moreno, an economist close to Public Works Minister Julio de Vido,17 was appointed secretary of interior commerce and charged with the price negotiations. Moreno managed to get key players to keep price increases under control for a while. However, toward the end of 2006 it became clear that the government's approach to controlling price increases was not working and inflation was on the rise again.

Rather than taking a deeper look at the causes of inflation,18 the government resorted to altering the statistical methodology used by the till-then widely respected Instituto Nacional de Estadísticas y Censo (INDEC). In other words, having failed to change the inflationary reality, the government resorted to changing the way this reality was officially presented.

Moreno, whose price policies had failed, was put in charge of INDEC. A year-long series of firings, strikes, and altered statistics followed. At the time of this writing, the INDEC crisis is still deepening with no solution in sight. With INDEC's technical capacity severely hobbled and its reputation all but destroyed,19 as of January of 2007, nobody knows the actual inflation rate in Argentina. While the official inflation rate for 2007 is 8.5%, economists estimate that the actual inflation rate is anywhere from 12% to 24%,20 with the most credible estimates between 16-18%.

As Figure 5 shows, knowing the true value of inflation is key, since economic policy needs to be considerably different if inflation is accelerating, as most economists believe is the case, or dropping, as the government claims.

The Energy Crisis

At the time of this writing, during a record-setting heat wave, Buenos Aires is under the effect of rolling blackouts. Neighbors are in the streets, staging protests reminiscent of the 2001 "cacerolazos," demanding to have electricity restored. As with inflation, the government's approach to the energy shortage has been to deny it exists. As recently as Dec. 18, 2007, Public Works Minister Julio De Vido stated that energy supply for the summer was guaranteed.21 Perhaps as an indication that the government itself did not believe its rhetoric, in late December it implemented a widespread energy-saving plan that, for the first time in years, included a daylight saving time change.

Argentina's energy insufficiency reached critical levels in 2007 and is predicted to continue through 2008. The problem can be traced back to privatizations in the 1990s. When all major utilities and the national petroleum company were handed over to private concessions, privatization contracts required that contractors carry out investment in infrastructure to expand production and distribution capacity. They failed to make these investments, and since government regulatory agencies were stacked with privatized enterprise cronies, the contract violations persisted with almost complete impunity.

When Kirchner, who had openly supported the privatizations, came to power in 2003, his fiery rhetoric led some to believe that breaches of contract by the privatized utility companies and impunity would come to an end. Over time, his practice revealed that the neoliberal-era privatization structure, contractual violations, and crony regulatory agencies were to remain essentially intact.22

When the strong post-crisis consumption and economic activity reactivation led to a steady growth in energy demand (electricity, gas, fuels), the system all but collapsed. Climactic conditions that deviate slightly from the norm result in insufficient gas for industry and electricity blackouts causing factories to shut down and business persons to lose tens of thousands of dollars when they fail to fulfill production contracts. Figure 6 shows the effect on industrial activity of the gas shortage during the Southern winter of 2007. Due to an unusually cold winter, many industries had gas cut off for as much as eight hours daily.23 The drop in industrial activity in July clearly reflects this.

Figure 6: Monthly Industrial Activity Estimator (quarterly inter-annual variations)

Source: Instituto Nacional de Estadísticas y Censo (INDEC)

Who benefits from this state of affairs? Privatized enterprises clearly do, since they continue to make substantial profits by operating at full capacity.24 Given the government's continued lack of a strong regulatory presence, it makes perfect business sense for enterprises not to undertake costly infrastructure investments.25 As a result, since July 2007 Argentina has become a net importer of electricity and fuels for the first time in decades, with the obvious results on the trade balance.26

Income Distribution

By the mid 1970s, after three decades of import substitution industrialization and strong labor legislation, Argentine workers received 47% of national income. At the time of the 2001 crisis and after two and a half decades of neoliberalism, worker participation in national income had dropped 20 percentage points.27 While crisis peak levels of poverty and unemployment undoubtedly worsened income distribution, it had been steadily worsening throughout the 1990s as a direct result of the neoliberal economic model.

How has income distribution fared under the Kirchner administration? Government statistical manipulations make it difficult, if not impossible, to know the current levels of poverty and unemployment.28 The poverty line is calculated as the cost of a basic bundle of goods and services needed to survive. Households whose income is below this amount are considered poor. The cost of this bundle is updated every month according to the official inflation figure. Since official data substantially underestimates price increases, the cost of the bundle of goods is also underestimated, resulting in an underestimation of poverty as well. Despite these manipulations, most economists and observers would agree that poverty has declined significantly over the last four years.

Figure 7: Size distribution of income (deciles)

Source: Lozano et al. (2007c) based on INDEC data

The highly regressive income distribution pattern inherited from the 1990s, however, has not changed significantly since 2003. Figure 7 shows the evolution of individual income between 2003 and the first quarter of 2007 by deciles. For the 40% of income earners at the low end of the scale, things have not changed: they continue to receive only 12.5% of total income. On the upper end of the income scale, there has been a slight redistribution from high to middle income deciles.29

Clearly this does not represent a reversal of the tendency observed during the 1990s. It should not come as a surprise, since there have been no policies aimed at altering the distributive patterns inherited from the 1990s. Furthermore, much of the Menem-era economic structure (as discussed above) remains intact, making it clear that a more equal distribution of income was not a policy objective of the Kirchner administration.

Institutions and Development

The second troubling legacy of the Kirchner era is the deepening disregard for the country's democratic institutions. Kirchner's trampling on the statistics agency's methodology and technicians is but a small example of what has occurred institutionally in Argentina over the last four years. Here are some other examples:

The national budget: a presidential slush fund. Every September 15th, the government sends the national budget bill to congress for discussion and approval. All budgets are based on projections of total fiscal revenue, which in turn depends on the rates of economic growth and inflation and the exchange rate, among other factors. In what has become a hallmark of the Kirchner years, economic growth rates are underestimated by as much as 50%.30 The result of this is that, with higher actual growth rates, fiscal revenue is also substantially higher. These extra funds, estimated in 75 billion pesos since 2004, are not accounted for in the budget and serve as a huge slush fund for the president to spend at will, with no congressional control or oversight.31

Super-powers: discretionary spending changes. The "súperpoderes" (super-powers) grants extraordinary powers to the executive in the wake of the 2001-2002 crisis to provide greater flexibility to deal rapidly with unexpected situations. Although the crisis is over, Kirchner's allies in Congress granted his administration super-powers each year, and next year will be no exception. Among other powers granted to the executive is the ability to reassign budget funds at will and by decree, with no congressional debate, participation, or oversight. In this way, Congress essentially votes for a total spending cap, but none of the budget's line items are relevant since the chief of staff can reassign them at will.

Governing by decree: who needs a Congress? Another characteristic of the Kirchner administration has been that, for the most part, he has governed by decree, showing a profound disregard for the people's elected representatives. Despite having had a majority in both houses of Congress, Kirchner still preferred to act autocratically, preempting public debate on laws and issues. In one term in office, Kirchner signed 249 decrees (an average of 55 per year) surpassing Menem's record of 37 per year.32 A further example of Kirchner's autocratic presidential style is that, according to a recent Anticorruption Office report, 75% of government purchases were contracted without a competitive bidding process.33

A servile justice system. Early in his administration Kirchner sponsored the renewal of the widely criticized and servile Supreme Court. Kirchner put in place an open process to make sure that new justices appointed to the high court had the right qualifications and were not political cronies as those appointed by Menem. This led many to believe that Argentina would finally have an independent justice system. However, in February 2006 a law was passed modifying the Council of Magistrates Body, the judicial body in charge of appointing and removing judges. The Kirchner-sponsored modification gives the executive a much greater weight in the Council's decisions and appointments, seriously compromising the justice system's independence.34

Corruption. There have been several major cases of corruption that have come to light during the Kirchner administration. Two of the most suspect government officials are Public Works Minister Julio De Vido and Transportation Secretary Ricardo Jaime. Despite well-founded allegations and several pending legal cases, Kirchner firmly supported both officials.35

CFK: Change? What Change?

In Argentine politics there is a longstanding tradition of what is locally known as gatopardismo:36 to make apparently significant changes that are actually superficial, in order to preserve political and economic structures intact. To what extent does CFK represent a break with Kirchner's policies described above? Indications from her administration so far suggest that changes, if any, will be mostly cosmetic:

• Despite continued outrage, CFK has affirmed that the statistically distorted inflation reported monthly by INDEC is accurate.37 Furthermore, her newly appointed economy minister, Martín Lousteau, also publicly says that there is no problem with INDEC. To cap it off, CFK confirmed Secretary Moreno has kept his position as the guarantor that prices will not go up more than the government wants, and if they do to continue to make sure that INDEC tells the story the government wants.
• CFK kept 75% of Kirchner's political appointees in their posts, including five ministers with substantial allegations of corruption.38
• By keeping Minister De Vido in place, CFK ensured that it is unlikely that the energy situation will find a lasting solution soon.
• Institutionally, CFK was a strong promoter, from her seat in Congress, of the 2008 budget law and the super-powers bill, maintaining Kirchner's legacy.

As revealing as what CFK has done so far, is what she has not done. For example:

• CFK has not mentioned eliminating, or substantially reducing, indigence (hunger) in Argentina, a country that produces food for hundreds of millions of people.
• CFK has not acknowledged Argentina's record high levels of inequality nor has she proposed policies to deal with it.
• CFK has not proposed policies to deal with Argentina's still high poverty levels.
• CFK has not addressed Argentina's still high unemployment, hoping, like her husband before her, that economic growth will take care of it in due time.

While it is too soon to know what changes CFK will introduce, if any, her actions so far indicate that, despite having a new president, not much will really change for the better in the country.

In other words, gatopardismo is alive and well in Argentina.

End Notes

1. See Alvarez and González (2007) for an analysis of electoral results.
2. "Heterodox" is a term used to describe economic policies that diverge from the orthodox or neoliberal policies promoted by the International Financial Institutions, the U.S. Treasury, and the G7. There is not one uniform set of heterodox policies, but typically they have more of a focus on national development, the domestic market, state intervention, and occasionally, income distribution.
3. For an account of economic causes and consequences of the economic crisis, see Cibils et al. (2002).
4. This data corresponds to INDEC's last believable information (INDEC, December, 2006). As explained below, government alteration of INDEC's statistics and methodology as of January 2007 has made its inflation, poverty, and other data not believable.
5. This policy is known as "monetary targets," and consists of targets for the growth of money in circulation (technically, the target is M2 which encompasses money in circulation and current and savings accounts deposits in banks).
6. See Cibils (2006) for a description of Argentina's current debt situation, including the restructuring of the defaulted debt.
7. The latter insist on completely freely floating exchange rates and a monetary policy that gives priority to keeping inflation at the lowest level possible (known as inflation targeting), even at the cost of economic recession and high unemployment.
8. The Central Bank does not make its exchange rate target publicly known. However, a pretty good idea can be obtained from observing the CB's actions. At the time of this writing, the Central Bank target exchange rate is approximately 3.15 ± 0.05 pesos to the dollar.
9. This is done to prevent currency in circulation from growing disproportionately to economic activity. This is known as a "monetary or quantitative targets" monetary policy.
10. A fiscal surplus results when government revenues exceed expenditures. When the opposite occurs we have a deficit. A primary fiscal surplus or deficit is the fiscal accounts result when debt service payments are excluded.
11. As indicated below, the primary surplus is subject to considerable manipulations and presidential discretion. See Cibils (2006) for an analysis of Argentina's debt service schedule and the restrictions it imposes on Argentina's fiscal accounts
12. Export taxes have two main purposes. First, since Argentina consumes many of the products it exports (beef, grains, etc.), export taxes lower the price exporters get internationally for those goods, thus keeping domestic price increases in check. Second, the government is able to capture some of the export sectors' extraordinary profits since the devaluation, since their costs in pesos were reduced by two-thirds.
13. See Cibils et al. (2002) for an account of the causes and immediate results of the crisis.
14. In reality, at the insistence of the IMF, Argentine officials first implemented a freely floating exchange rate policy. When the peso and inflation began to spiral out of control, then-minister Roberto Lavagna implemented the dirty float still in place today.
15. Orthodox economists promote a monetary policy known as "inflation targeting," with the main objective of preserving the value of financial assets. Since inflation redistributes income from lenders to borrowers, orthodox economists promote policies that keep inflation as low as possible, regardless of what happens in the "real" economy (i.e., production, employment, growth).
16. For a technical discussion of the issues see Epstein (2003) and Cibils and Lo Vuolo (2004) and the works there cited.
17. Julio de Vido, a close friend and associate of Néstor Kirchner, is arguably the most widely suspect minister of the Kirchner administration. There are wide allegations of corruption in public works funding, the most notorious case being the Skanska affair, described in great detail in Abiad (2007).
18. Inflation is usually a complex process with multiple causes. In Argentina, an important cause of inflation is the highly concentrated (oligopolistic) structure of key sectors of the economy, many linked to widely consumed food items.
19. See "Denuncian que el Indec está totalmente desmantelado," La Nación, Dec. 14, 2008, for an account by INDEC directors and technicians of the government's intervention in the institution.
20. See "La inflación real ya se ubica este año entre el 17 y el 18%: Las estimaciones privadas por lo menos duplican las cifras que difundió el Indec," La Nación, Dec. 9, 2007. Economists have used different methods to estimate actual inflation: GDP deflator, value added tax revenue, provincial inflation indices, and their own calculations. The main problem is that the absence of credible officials makes many of the alternative estimates plausible, regardless of how far-fetched they may seem; Zaiat (2007).
21. "De Vido sueña con gobernadores petroleros y un verano sin sofocones," Página/12, Dec. 19, 2007.
22. See Barbeito and Lo Vuolo (2006) for an in-depth overview of the state of energy production in Argentina.
23. Since 2007 was an election year, the government gave priority to maintaining the gas supply to households, which resulted in insufficient gas for manufacturing and industry.
24. See Zaiat (2008).
25. See Barbeito and Lo Vuolo (2006, 2007).
26. Zlotogwiazda (2007).
27. This data comes from estimates of Argentina's functional distribution of income. The functional distribution looks at how much of total national income goes to the main factors of production, namely labor and capital. There are no official statistics on the functional distribution of income after the mid 1970s, however, Lindenboim et al. (2005) rebuilt the series through 2005 based on available data.
28. See Lozano et al (2007b).
29. See Lozano et al. (2007a, 2007c).
30. See Barbeito et al. (2007) for an analysis of the 2008 National Budget. For similar analyses of previous years' budgets, see www.ciepp.org.ar.
31. "Hubo mucho dinero fuera del presupuesto: Alrededor de $75,000 millones desde 2004," La Nación, December 9, 2007.
32. "Los récords del Presidente," by Sebastían Iñurrieta, La Nación, Dec. 2, 2007.
33. "Revelan que el 75% de las compras de Kirchner fueron sin licitación," by Daniel Santoro, Clarín, Jan. 10, 2008.
34. For more information on the justice system reforms see the Asociación por los Derechos Civiles's (ADC, Association for Civil Rights) web site: www.adc.org.ar and related links. The ADC and the Asociación Civil por la Igualdad y la Justicia (ACIJ, Civil Association for Equality and Justice, www.acij.org.ar) jointly presented a legal protection appeal alleging the unconstitutionality of this reform.
35. See Abiad (2008) and "Corrupción: cinco ministros tienen causas en la justicia," La Nación, Dec . 9, 2007.
36. The reference is from Italian novelist Giusseppe Tomasi Di Lampedusa's (1896-1957) novel Il Gattopardo(The Brown Cat), where the paradox was originally expressed as, "If we want everything to continue as is, we must change everything."
37. "La inflación que da el Indec es la real," La Nación, Oct. 25, 2007.
38. "Corrupción: cinco ministros tienen causas en la justicia," La Nación, Dec. 9, 2007. See also, "Cristina ratificó al 75% de los funcionarios," La Nación, Dec . 13, 2008.

For More Information

Abiad, Pablo, El club K de la obra pública: Skanska, un caso, Buenos Aires, Argentina: Grupo Editorial Planeta, 2007.

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