Analysis & Opinions - Wall Street Journal

A Lesson in Crony Capitalism

| August 9, 2012

Jorge Luis Borges used to say that the Argentine people suffered under "too many messiahs." Their current president, Cristina Kirchner, certainly preaches like one. At U.N. meetings she berates America and Europe for the global financial crisis, and at the last G-20 summit in June she attempted to reignite the Falkland Islands dispute with Great Britain.

At home, Mrs. Kirchner's turned a law intended to broadcast key announcements into a permanent political platform. She's constantly on TV speaking on issues both important (like her seizure of the oil company YPF from Spain's Repsol), and banal (videoconferences featuring zealots on the government payroll). A routine debt payment last Friday presented an opportunity for yet another televised tirade against global capitalism, and a chance to extol the virtues of her own government, one "built on equity and human rights."

As the U.S. gears up for an important presidential election, Argentina is a sad reminder of how government takeovers and crony capitalism are the enemy of genuine development.

Leftist economists relish pointing out that Argentina's GDP has grown fast since the Kirchners came to power in 2003. Mrs. Kirchner is the widow of former President Néstor Kirchner and succeeded him as president in 2007. Under the Kirchners, a global commodities boom provided tailwind for an Argentine economy geared toward food production.

Amid the boom, the Kirchners denounced corrupt "neoliberalism," promising to "free the people" through revitalized government. So while Peru and Colombia deepened structural reforms, Argentina expanded bureaucracy and eschewed liberalization. This led to decreased independence for institutions like the national statistics agency, Indec, which has lied about inflation so blatantly that The Economist magazine now refuses to print its cooked numbers. Indec's falsified low inflation reports minimize indexed payments to retirees, as well as underrating poverty figures. Yet children starve in the rural provinces regardless of what the government chooses to print. Civil organizations that have spoken up about the lies have seen their funding cut and their leaders threatened. So much for freeing the people.

These lies help cover up more pernicious government meddling. In March, Mrs. Kirchner destroyed the Argentine central bank's independence, rewriting its charter to allow the government unlimited use of the bank's reserves to pay its debts—a surefire recipe for still more damaging inflation and a debased currency.

At a time when some argue the current "unchartered waters" of monetary policy call for more political oversight over the Federal Reserve and the European Central Bank, the Argentine experience is testament to how important price stability remains in unstable times. Particularly in developing countries, the rich find ways to protect themselves against inflation, while pensioners and the poor suffer the most.

The institutional deterioration permeates far and wide and is only getting worse. This week, the Kirchner government announced plans to expropriate the company that prints its currency, the Argentine peso.

Middle-class Argentines have sought to save in dollars to protect themselves. But as of late last year, the government introduced draconian currency and trade controls. This has alienated key trading partners like Brazil and led to routine shortages of essential supplies. Sadly, no company that relies on global supply chains can now produce in Argentina. Manufacturing survives only through inefficient import tariffs. So, predictably, productivity lags. An iPad in Argentina, for instance, costs more than anywhere else in the world.

Even worse, authoritarian controls have bred multiple exchange rates: If you are a friend of the government, a dollar costs 4.5 pesos. For anyone else, it is more than six. Instant arbitrage makes cronyism profitable.

Argentine pensioners have been especially hard hit. Shunned by global credit markets, private pensions were nationalized in 2010. If the private system lacked proper oversight, the new system is unambiguously designed to raid funds for political ends. How else can one explain a plan unveiled last month to offer housing at 20% negative real interest rates—funded by social security and to be built by Kirchner cronies—when a majority of pensions are below subsistence levels?

Social security funds have also been funneled into nationalized businesses like the seized YPF. But when management is trusted to cronies rather than experts, the unfortunate mix of corruption and ineptitude guarantees losses for both social security and company employees. Not surprisingly, no foreign oil company—not even Russia's Gazprom or China's Sinopec—has invested in YPF. Last week, the government's handpicked CEO even threatened to quit YPF because of how little control he has over the company.

With a toxic mix of inflation, authoritarianism and corruption bringing the economy to a standstill, Mrs. Kirchner has been touring the world for new friends. For a government that focused on prosecuting the genocidal crimes of the 1970s military junta, it is rather surprising that the latest trade missions have been to dictatorial Azerbaijan, where democracy advocates are regularly imprisoned, and Angola, where a corrupt ruling family has maintained power for 30 years by perpetrating violent crimes against dissenters.

The architect of Argentina's economic radicalization, neo-Marxist Axel Kicilloff, often labels critics as "reactionaries" while praising Keynesian aggregate demand management. Given that his policies have now brought about stagflation in Argentina, it should come as no surprise that Mr. Kicillof's writings on Keynes are picked up from other, long-discredited academics. And yet Mr. Kicillof's friends—now in leadership positions in newly nationalized businesses and throughout company boards because of social-security investments—have benefited handily from this "revitalized government."

Back in the 1960s, situationist philosopher Guy Débord coined the phrase "the society of the spectacle" to describe the farce of Soviet bureaucrats pretending to defend the proletariat while benefiting only themselves. At a time when most of Latin America is implementing promising institutional reforms, Argentina needs less televised lecturing and more action to address the crony capitalism that pervades its government. Like other false prophets, the Kirchner government has come to represent the very evil it purported to fight. Argentina deserves better.

Mr. Barbieri is a fellow at Harvard's Kennedy School. His book, "Hitler's Shadow Empire: Nazi Economics and the Spanish Civil War," will be published by Harvard University Press in 2013.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Barbieri, Pierpaolo.“A Lesson in Crony Capitalism.” Wall Street Journal, August 9, 2012.

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