The Persistence of Populism: Re-Nationalizing YPF in Argentina

17 April 2012


Argentine President Cristina Fernández de Kirchner had a large color photograph on the cover of today’s Financial Times — not, like the last time, when she had just won a landslide reelection victory, but because she is initiating a process of nationalizing (or, rather, re-nationalizing) the largest oil company in Argentina, YPF. The Financial Times reported this as follows:

A visibly angry Ms Fernández made the announcement on live television to a cheering audience at the government palace. Rejecting recent criticism from Spain, Ms Fernández said she would not bow to foreign pressure. “I am a head of state and not a hoodlum,”’ she told business, union and political leaders in the audience.

The visible anger may have been due, according to another story in the FT (Fernández takes her revenge), to the Malvinas/Falkland Islands dispute not having been taken up by the Sixth Summit of the Americas which just concluded in Cartegena. President Fernández left the summit early, and, reportedly, disappointed. While it seems like stretch to me to attribute the re-nationalization of YPF to a desire for revenge over the Malvinas (since it is Spain that is being punished by this, rather than the UK), this FT piece is nevertheless well worth reading for its account of the economic and political vicissitudes experienced by YPF, which apparently had better arrangements with the president’s deceased spouse than with her.

Not surprisingly, the re-nationalization move has great popular appeal in Argentina, as evidenced by the cheering audience mentioned above. Since the global financial crisis, and indeed since before the crisis, it has become fashionable (especially in Latin America) to fix the blame for all problems on “neo-liberalism,” and it is understood that one of the key features of neo-liberalism is privatization. Thus re-nationalization is seen not only as an intrinsically good thing for the people of Argentina to have control over their resources (what President Cristina Fernández de Kirchner has called, “recovery of sovereignty and control”), but also as a blow for “economic justice” that will reverse the perceived errors and injustices of privatization and neo-liberalism.

Even while the president was being reelected by a landslide there were many articles in the media about the financial difficulties that the president was inheriting from her previous term, and not a little speculation on how exactly she would go about handling it. Well, now we know. After squeezing the country’s once-legendary agricultural industry and nationalizing pension funds in order to get state hands on more resources, the president will now turn to further nationalizations, and with oil prices rising YPF is a very tempting target. Because Argentina has been frozen out of international credit markets since its debt default ten years ago, the Argentinian economy has been forced to operate on a cash basis vis-à-vis the rest of the world. This absence of the irresponsible use of credit has resulted in the economy growing for the past decade, which has in turn resulted in some superficial economists learning the wrong lesson from Argentina’s default (cf. Incommensurable Defaults).

Nationalizing YPF has strong parallels with the policies pursued by Cristina Fernández de Kirchner and, before her, by her husband (since deceased) Néstor Kirchner in regard to agriculture. The FT’s front page article claimed:

Ms Fernández accused Repsol of “emptying” YPF. But analysts and industry executives said the real culprit for Argentina’s loss of energy self-sufficiency and ballooning imports bill was the government’s failed energy policy, which set domestic prices at well below international levels.

Simon Romero and Raphael Minder wrote in Argentina to Seize Control of Oil Company in the New York Times:

Seizing YPF appears to be a popular move in Argentina, where caps on residential energy prices and a growing economy have helped push energy demand to new highs. Argentina’s oil production has declined in the last decade as regulatory uncertainty persisted over price caps and the policies over profit remittances. Many Argentines still resent the privatization of state-owned companies in the 1990s, so taking on YPF gives Mrs. Kirchner the opportunity to go after a symbol of that time.

With Argentina’s formerly profitable agricultural industry, the Kirchner’s kept prices below market rates internally and created high export tariffs. Not surprisingly, agriculture become unprofitable in Argentina, and many Argentinian producers moved their operations to neighboring Uruguay. Now little Uruguay exports more beef than spacious Argentina. Like most populist economic measures, the short-term feel-good benefits come at a very high long-term cost.

President Cristina Fernández de Kirchner has continued populist policies with the oil industry, and with petrochemicals priced below market rates they are being used unsustainably. Now that Spain’s Repsol management has been ousted, and even banned from the YPF building, not merely the prices but the actual operations of YPF will be politicized. The model for this is the politicization of the administration of PDVSA after the failed coup against Hugo Chavez, which latter oil company has declined in efficiency continuously since the ouster of its experienced management.

Given how disastrous this move will likely be for Argentina and its economy in the longer term, and the negative diplomatic fallout that will result, one must ask why the president is doing this. The short answer is Peronist populism, which has been entrenched in the Argentine political system since the middle of the twentieth century. The longer answer would include many factors, including the fact that, while popularly elected (and by a wide margin), Cristina Fernández de Kirchner can appeal to David and Goliath themes. One need not be an unelected tyrant in order to make a show of one’s defiance and claim to represent the underdog.

Argentina’s century-long decline will not be arrested by populism or re-nationalizations. People may cheer in the short term, but the Argentine economy will stagnate in comparison to other economies in the region — especially in comparison to Brazil, Chile, and Peru, which are experiencing robust growth on sustainable foundations. And in this context I do not necessarily mean “stagnation” as a complete absence of growth, as it is more likely that Argentina will experience unsustainable growth followed by repeated crashes when reality catches up with the market. This has the effect not only of immiserating the people, but also of creating an unstable and unpredictable business climate.

Argentina’s decline will not be dramatically visible over a year or two, just as steady but small economic growth is not obvious over a year or two, but over a decade or two these things add up. And in addition to not being immediately evident, one must compare the reality with the counter-factual conditional of what the Argentinian economy might have been if more sustainable economic management had been practiced. Since human beings have short and imperfect memories, and cannot usually grasp what is counter-intuitive, there is very little penalty paid by a political regime for its foolishness, especially when a given regime is out of office by the time the consequences of its actions must be paid for. While all systems of popular sovereignty suffer from this weakness, the effect is exacerbated by irresponsibility.

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Grand Strategy Annex

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