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Populism’s sad tango

Sept 28,2018
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Argentina’s Treasury Minister Nicolas Dujovne, right, and International Monetary Fund Managing Director, Christine Lagarde, left, listen to questions during a press conference in New York on Sept. 26. Dujovne said that Argentina has secured an additional $7.1 billion in funding from the IMF to tackle a currency crisis and double-digit inflation. [AP/YONHAP]
Lee Jong-wha
The author, a former chief economist at the Asian Development Bank, is a professor of economics at Korea University.

The tango is passionate and romantic, but tango in Buenos Aires is dancing sadness in the tango scene from director Wong Kar-wai’s “Happy Together.”

Argentina, the country of the tango, is struggling to get out of an economic crisis. This year’s economic growth is negative and inflation is nearly 30 percent. The fiscal deficit amounts to 5.5 percent of GDP. Exports are sluggish and the trade deficit is growing. External debt is more than five times foreign currency reserves. In June, Argentina received rescue financing from the International Monetary Fund, but the value of the peso continues to fall. To defend the currency, the central bank raised interest rates to 60 percent, the highest in the world.

President Mauricio Macri, elected in 2015, has pursued economic reforms, including fiscal spending cuts, pension reform, reduced subsidies, relaxing import rules and labor market reform. But labor groups fiercely opposed retrenchments. As import costs increased as a result of rising oil prices, foreign capital fled — particularly after interest rates rose in the United States. It was hard to pursue reforms thanks to the populist measures of the previous administration. Because structural reform was neglected, the government was more vulnerable to external shocks than in earlier years.

Nestor Kirchner (2003 to 2007) and his wife Cristina Fernandez (2007 to 2015) were in power in Argentina for 12 years. Nestor Kirchner had high approval ratings when he left office in 2007, but he did not seek reelection, perhaps with the idea of alternating terms with his wife. He was de-facto leader as the head of the ruling party even after leaving office. But in 2010, he died of a heart attack.

From 2003, when he first took office, Argentina boomed with rising world grain prices. He raised the minimum wage, expanded pension payments and increased subsidies for electricity, gas and transportation. His wife also expanded welfare spending. The state intervened in the market by increasing public jobs and nationalizing private companies in a big way.

Along with Hugo Chavez and Nicolas Maduro of Venezuela and Dilma Rousseff of Brazil, Cristina Kirchner was a South American populist. They all criticized the establishment and expanded pork barrel spending. Their nationalist tendencies led to diplomatic friction with the Western world, including the United States.

But the Kirchners also allegedly took bribes during their terms. Recently, Cristina Kirchner was indicted for bribery after a ledger showing illicit payments was discovered and made public.

The 12-year rule of the Kirchners left a sad feeling, like the Argentine tango. People got used to pork barrel policies and did not want painful reforms. Prices continued to rise because of fiscal and currency abuse. Argentina relied on abundant resources, neglected developing new industries and did not reform the economy, so the country became very vulnerable to external shocks. Global grain prices fell sharply beginning in 2014, leading to larger fiscal and trade deficit and lower growth. As the economy ran out of foreign reserves and foreign capital left, the country was faced with a crisis of national default and asked for the IMF’s help.

Korea has a larger economy than Argentina and has advanced export industries. But its growth potential continues to fall and government spending is rapidly increasing. Just like Argentina, Korea is dependent on trade and is very sensitive to changes in the international economic environment. Korea needs to prepare for external shocks as there could be a major crisis in the global economy.

The leaders of South and North Korea held hands at Mount Paektu. As U.S.-North relations improve and expectations grow about easing economic sanctions on North Korea, Seoul’s funding for inter-Korean economic cooperation will be considerable. West Germany invested about 4 percent of its gross domestic product in East Germany for more than 10 years.

We don’t know how much future generations will suffer if populist policies increase spending and hurt fiscal health while structural reform is neglected and growth potential declines. Sound economic policy is necessary, not immediate popularity. If Korea raises growth potential, lowers debt, secures national reserves and improves its economic flexibility, we can avoid the tragedy of Argentina.

Translation by the Korea Joong Ang Daily staff.

JoongAng Ilbo, Sept. 27, Page 31