Argentina, Rule of Law and the Implications of Debt Default Hudson Institute September 23, 2014

Kirchnerism: 2003 / 2015

Kirchnerism: mandate, coalition and circumstances •

Kirchner’s mandate – consolidation of power and restoring the authority of the presidency. – promoting growth.

•

Coalition. Kirchnerism mounted a loose coalition between traditional peronism (specially provincial governors); chunks of the urban poor underclass through new social movements; and most of the left-ofcenter intelligentsia through its human rights policies.

•

Circumstances – The depth of the crisis gave a social carte blanche; – Best international economic scenario for Argentina in decades.

Some achievements 2003-2015

2003-2007 NK

2007-2011/2011-2015 CFK

•Supreme Court renewal

•Audiovisual Communication Services Legislation

•Presidential authority reconstituted •Avoided the use of force to restrain social protest which could have caused governance difficulties •Strong symbolic Human Rights policies •Maintained fiscal and trade surpluses •Recovered public investment and State funcionality •Increased investment in Education

•Polítical Reform Law •Universal Child Allowance •Social Security coverage increase

Significant shortcomings 2003-2014 (other than debt default) •No long term nor structural policies in crticial areas such as Energy, Transport and Housing •Tactical use of public investment = growth of discretionary power •Lack of policies to increase structural competitiveness and institutional quality •Inflation (as of 2007) •Continued labor informality and low productivity •Use of the presidential bully puplit to attack media, companies, NGOs, etc •Freedom of Information Legislation (lost parliamentary status in 2012) •Political intervention of professional public institutions: INDEC, SIGEN, Regulatory Agencies, etc. •Obstruction and confrontation with Judicial Branch

GDP growth rate in constant terms 10% 9% 8% 7% 6% 5%

Néstor Kirchner 2003-2007 Average growth: 8.8%

4%

Cristina Fernández de Kirchner 2007- 2012

3% 2%

Average growth: 5.5%

1% 0% 2003 Source: INDEC

2004

2005

2006

2007

2008

Growth rate

2009

2010

2011

2012

Anual Inflation rate 30% Cristina Fernández de Kirchner 2007- 2012

25%

Néstor Kirchner 2003-2007

20%

2007 17.16%

15% 10% 2007 8.47%

5% 0% 2003

2004

2005

2006

2007 2008 Inflation (INDEC)

Source: INDEC and Direcciones Generales de Estadística de las

2009

2010

2011

2012

Fiscal balance and current account (% GDP) 7% 6% 5% 4%

Néstor Kirchner 2003-2007

Cristina Fernández de Kirchner 2007- 2012

Average growth Financial result: 1,7% Current account: 3,6%

Average growth Financial result: -0,9% Current account: 1,4%

3% 2% 1% 0% -1% -2% -3% 2003

2004

2005 2006 Financial result (% GDP)

2007 2008 2009 2010 Current Account (% GDP)

2011

Fuente: INDEC Oficina Nacional de Presupuesto (ONP) and International Monetary Fund (IMF)

2012

The economic mandate: promoting growth • Macro: one-eyed Keynesianism: it only knows how to stimulate growth, never how to stifle inflation. • Micro: increasing intervention with gross malpractice (energy, beef, dairy…) • Bigger and bigger role of the State as a distributor but increasingly stifling investment

1983-2013: public expenditure

Source: BS Consult from Mecon.

1991-2013: tax pressure

Source: BS Consult from Mecon.

1990-2013: tax and spend Evolución de la presión tributaria, 1990‐2010 40 Selección ALC (15)

OCDE (34)

Argentina

35 30 25 20 15 10 5 Source: BS Consult from Estadísticas Tributarias en América Latina, OECD.

0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

State vs Market •

By 1990, huge chunks of the economy where State-run, including most oil and energy, telecommunications and utilities. Inefficiency and fiscal deficits.

•

Menem (89-99) led a huge privatization wave, partly reverted under the Kirchners (03-13). Some examples: – YPF, Oil and gas, #1 firm; renationalized in 2012 (trials pending with Repsol); – Agua y Energía Eléctrica, water utility, renationalized in 2006 (Suez); – Aerolíneas Argentinas, airline, renationalized in 2008; – Correo Argentino, postal services, renationalized in 2004; – Pension funds, renationalized in 2007; – Segba, electricity distribution, current firms under check due to rates freeze; – Gas del Estado, natural gas distribution, current firms under check due to rates freeze; – Transener, Central Puerto, Central Costanera and others in electricity production and transport, under check due to rates freeze; – Entel, telecommunications; still running as private.

Political mandate: restoring authority • All power to the… president! – Concentration of power in the federal government vis a vis the provinces. – Increasingly intervening in business and society. – Destruction or intervention of institutions. – Fiscal scavenging (whatever its costs). – Increasingly tilting the balance towards the Executive Branch vis a vis Congress and the Judiciary.

Concentration of power: federal and state govt

Source: BS Consult from Mecon.

Institutional breakdown •

Lies, damn lies and statistics, 2007-2013 – Inflation, intervention of the statistics institute (INDEC). – Private indexes, fines, courts. Central Bank independence? – From Alfonso Prat Gay, to Martín Redrado, to Mercedes Marcó del Pont. – Review of its Chart: from “preserving the value of money” to mixed aims. 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Inflación en Argentina como % de va. i.a.

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

•

Fuente: Elaboración propia en base a INDEC e IPC Congreso.

Judicial reform • •

•

•

The last and most dangerous initiative. A broad judicial reform initiative. The three most important issues: – reform of the judicial nomination and confirmation process (significantly increasing the power of the presidency and the ruling party); – significant limitation to precautionary measures in cases involving the State; – creation of new “circuit courts”. As a whole, the reform would significantly increase the power of the State and government against ordinary people, businesses, etc., affecting property rights, rule of law and due process. All bills enacted by Congress, currently under judicial review.

Problems Inflation anual rate y-o-y

39

Argentina Chile Uruguay

34 29

Brazil Peru

24 19 14 9

Fuente: Elaboración propia en base a MECON. Nota: desde 2007 se descuenta rentas de la propiedad.

2012

2011

2010

2009

2008

2007

2006

2005

2004

Superávit financiero /PBI

2003

2002

2001

2000

1999

1998

1997

1996

1995

Superávit primario / PBI

1994

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%

Resultado primario y financiero de la admministración central. Como % del PBI.

1993

Source: IMF.

1997

1996

1995

1994

-1

1993

4

Market capitalization of local firms

Source: Cruces and García-Cicco, 2012.

Argentina’s economy in the long term “Suppose someone in 1945 had asked: ‘What part of the world do you expect to experience the most dramatic take-off in the next three decades?’ Probably I would have given an answer something like the following: ‘Argentina is the wave of the future. It has a temperate climate. Its density of population provides a favorable natural resource endowment per employee. By historical accident its present population is the fairly homogenous progeny of Western European nations. And Argentina is in 1945 at that intermediate stage of development from which rapid growth is most easily expected.’ How wrong have I been. (…) Their sickness, Shumpeter would claim, is political and sociological rather than economic. It has to do with the breakdown of social consensus. It has to do with the workings out of the logic of populist democracy.” Paul Samuelson, The World at Century’s End

Poverty 36% 35% 41% 29% 44% 35% 43% 40% 32% 23% 35%

41%

21% 31%

29% CABA 8%

27% 18% 18% 22% 10%

3%

3%

%19

• By the end of 2010, poverty in Argentina was at 21%, affecting 8.4 million people. 43% of those are under 16 years of age and 60% under 25: that’s 5 million young people. • Important regional dispersion: – Buenos Aires Metro: 17%. – Northeast: 41%. – Northwest: 32%. – Cuyo: 28%. – Pampean: %. – Patagonia: 13%.

5%

Source: Fundación Pensar through Indec.

Challenges: basic infrastructure Déficit de acceso a cloacas, desagües pluviales, pavimento y alumbrado público CLOACAS

45

DESAGUES PLUVIALES

41,80

40,60

30

ALUMBRADO PÚBLICO

40,90

40 35

PAVIMENTO

36,40 33,90 32,00 28,50

29,50

31,60

29,70 27,70

26,80

25

27,20 24,40

21,50

22,20

21,20

20,70

20 15 10

7,70

3%

5,70

5,30

4,00

5

3,70

3,80

0 2004

2005

2006

2007

2008

2009

Source: Fundación Pensar through INDEC.

Challenges: infrastructure

3%

Source: Fundación Pensar through WB.

Challenges: consensus building 2013 mid-term elections

Left Peronism (50%) Non-peronism (40%)

Center

FPV (33%) Left (7%) FAUNEN (24%)

FR (17%) PRO (11%)

Fragmented party system.  Few examples of coalition building (and not succesful).  Presidential system.  Regional dispersion 

3%

Right

Challenges: consensus building

3%

Opportunity: low debt Deuda pública consolidada como % del PBI

180 160 140 120 100 80 60 40 20 0

Fuente: MECON y OJF.

Opportunity: terms of trade

Opportunity: shale gas & oil reserves Technically recoverable shale oil & gas reserves by country

Vaca Muerta reserve

65 60 55 50 45 40 35 30 25 20

Source: UTDT. Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14

Jul-98 Apr-99 Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13 Apr-14

Looking forward: winds of change

UTDT Consumer Confidence Index, 19982014

Government Confidence Index, 03-14

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Thank you very much

How many geometric shapes are there in the following picture?

How many geometric shapes did you count?

1. How many children on the bus? 2. What time did the clock indicate? 3. What color was the rectangle?

“The most common source of mistakes in management decisions is the emphasis on finding the right answer rather than the right question.”

CIPPEC

“The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question.” ° • C1022AAA Buenos Aires, Argentina - Tel: (54 11) 4384-9009 • Fax: (54 11) 4371-1221 • [email protected] • www.cippec.org

Reframing Questions: Considering the situation and prespectives for Argentina  Traditional question – “Why does Argentina fail to produce sustainable development?”  A better approach – “What makes Argentina resilient and capable of positive change despite unfavorable leadership?”

° • C1022AAA Buenos Aires, Argentina - Tel: (54 11) 4384-9009 • Fax: (54 11) 4371-1221 • [email protected] • www.cippec.org

perspective

The importance of the with which we observe reality

The immense value of

conviction and perseverance to overcome the obstacles we face

En 1885 the President of the Dutch Royal Science Academy said: “Machines

that are heavier than air will never be able to fly”.

”The horse is here to stay, the automobile is only a novelty, a passing fad”. President of the Michigan Savings Bank to Henry Ford’s lawyer recommending that they do not to invest in the Ford Motor Company.

In 1946, Daryl F. Zanuck, director of 20th Century Film Studios, commenting on the potential for TV

“After the first six months, this equipment will not sustain itself in any market. People will soon enough get tired of looking at a box every evening”.

In 1960, the General Manager of the first record studio that the Beatles submitted their music to, rejected the possibility of a contract saying:

“¿Who could ever like this kind of music?”.

Lessons Learnt

1. Ask the right questions 2. Appreciate the positive and build upon that 3. Overcome external obstacles, negativity and cynicism 4. Dare to overcome your own internal limitations 5. Plan, invest and commit 6. Persevere 7. If this works, great. If it doesn’t, still do what you can to help improve the wellbeing of someone in need

“Never doubt that a small group of

committed citizens can change the world. In fact, it is the only thing that ever has.“ Margaret Mead

Thank you very much