What Cristina Is Doing Right

Argentine President Cristina Fernández made a lot of mistakes in her first year in office, but she has recently made several moves that could help Argentina stay above water even as the global financial crisis threatens to push the world into a recession.

After six years years of gangbuster growth, Argentina’s economy is showing signs of cooling and could suffer a hard landing this year. As for 2008, it was the first year since the Kirchners have been in power that retail sales actually fell.

Sales declined 6.1% from 2007, according to fresh data from the Argentine Confederation of Medium-sized Companies, or CAME. Meanwhile, pre-Christmas holiday retails sales fell 5.8% on the year. But the negative numbers came with a subtle silver lining. Things could have been much gloomier.

“We had thought this was going to be even worse,” CAME Spokesman Ivan Damianovich told me last week for a story I did for Dow Jones. “We thought the decline in December sales would be around 15%.”

CAME said sales soared in the three days before Christmas. The reason: new policies announced in December by President Fernández. ”The policies designed to spur consumption, the changes in income taxes and deep discounting by retailers pushed sales,” CAME said. “With that, sales fell by only 5.8% against December, 2007, making it the smallest decline in four months.”

Among other things, Fernández announced plans to give 200 pesos ($58.3) to retirees. She later extended the benefit to the unemployed and minimum-wage workers. She also got Congress to cut income taxes on upper-income workers and urged the social security agency, ANSES, to provide comparatively inexpensive credit to consumers and small companies. All of these measures were steps in the right direction and, according to CAME, at least, had a real effect on the economy. Moreover, Damianovich said the policies might even reverse the downward trend in sales and help underscore a recovery in 2009.

It remains to be seen what kind of long-term impact the policies will have. After all, a high percentage of minimum-wage employees work in the underground economy and will never get the 200-peso bonus. And it’s unlikely that banks and shopping malls will be able to offer 30% discounts indefinitely. Put differently, there’s no such thing as a free lunch. But doing nothing would have been worse. In some ways, Fernández enacted the same kind of pro-growth policies that her counterparts in other countries are doing.

Argentina’s fiscal resources are extremely limited. The country can’t really borrow money. But given the confined power of its purse, these measures have been positive signals. They seem to show the government is eager to use whatever instruments are at its disposal to prevent a recession. One could easily argue that other policies remain counterproductive and continue to impede investment. But for the reasons CAME highlighted, the president’s recent policy proposals – which include major infrastructure spending – are positive steps.

As the author of this excellent local economics blog put it recently: “It’s a pity that fiscal policy and its financing restrictions have their problems, because if this weren’t so we could be an example to the world.”

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