AMIA and Iran: What’s the Logic?

On July 18, 1994, a bomb was detonated from a van parked outside the headquarters of the Asociación Mutual Israelita Argentina (AMIA) in Buenos Aires, destroying the building and killing 85 people. After a prolonged, and irregular investigation, prosecutors eventually accused the Iranian government of orchestrating the attack. Since that time, the Argentine government has been calling for the extradition of senior Iranian officials it claims were responsible to stand trial in Argentina. However, beginning in early 2012, reports began surfacing that Buenos Aires and Tehran were in talks regarding the bombing, eventually culminating in the announcement of a memorandum to begin a new, joint investigation into the attack. The memorandum signed by the two countries, though controversial, is set to be approved by the Argentine Congress. The motives behind the about-face are opaque as Iran is unpopular in Argentine with Pew Global Indicators finding in 2008 that only 10% of Argentines had a positive view of Iran’s government compared to 52% who had a negative view. While it’s possible these attitudes have changed, Iran has likely not made up a 42% game in 4 years, so why is the Argentine government making such a concerted effort to get closer to Tehran?

In general, I fail to see a tangible benefit for Argentina from such a move. Regarding the AMIA case, the quality of the initial investigation seems to have been, at best, substandard, but it seems extremely unlikely that an investigation conducted in conjunction with the accused party will be any better. So arguments that this makes justice more likely (both regarding actually trying the guilty and doing so in a way that is viewed as legitimate by Argentines in general) seem either deeply cynical or hopelessly naïve.

Similarly, an increasingly important economic relationship could have led to a moment of realpolitik by Argentina; deciding that potentially allowing the guilty parties to point the finger at someone else was worth the economic benefits. The problem is, Iran is not a major trading partner for Argentina, even after a surge in exports in the last half-decade. Even during that time, exports to Iran have never been more than 2.13 percent of total exports. That certainly isn’t nothing, but that still represents less than its exports to Germany and a third less than those to the United States, both countries that are in the process of applying economic sanctions against Iran. However much trade with Iran is growing, the geography and the sheer sizes of the US and EU economies relative to Iran would dictate that it’s not a relationship worth fighting too hard for.

Argentina Trade

In the end, I think that the main purpose of any move to achieve closer ties with Iran has to do with symbolism. Specifically, the symbolism of standing up to the United States. Cristina Kirchner has long expressed her desire for a more multipolar world and is a product of the ardently anti-American leftist wing of the Juventud Peronista in the 1970s, so in that sense, it’s hardly surprising. Iran essentially represents the epitome of resisting the United States but it also has virtually nothing to offer to oil producing countries that support it (Venezuela, Ecuador and, to a lesser degree, Argentina) and everything to gain from the diplomatic cover the provide it. However, symbolism can only go so far, and Iran’s conservative theocracy has little in common with countries like Argentina, which have a decidedly secularist and Marxist flair to them. From a more pragmatic position, bandwagoning with a rising power like China has way more to offer a country like Argentina if it is looking to be more in opposition to the West. However, China’s self-interest leads it to pragmatically associating with countries outside its neighborhood based on their economic value (and, in some places their position on Taiwan) and is less easily courted. It also is only indirectly in opposition to the US and therefore lacks the powerful symbolic value that siding with Iran offers.

Basically, Cristina Kirchner has calculated that the benefits of playing up her anti-American credentials to her base will outweigh the negative domestic effects regarding the AMIA case while any rebuke by the US will draw to the surface the latent distrust of the US.

Don’t Crash on Me, Argentina

Over the weekend, La Nación reported from sources within Cristina Kirchner’s government that the president was considering soliciting advice from economists outside el modelo to help tame the country’s rampant inflation. Ostensibly, this advice would largely be orthodox methods (reducing the fiscal deficit, freeing up exchange controls, ending subsidies, etc.) that the president has heretofore vehemently opposed. Moreover, nearly any program relying on orthodox reforms would, in the short-term, have significant, negative effects on the population (cuts to popular programs, increased basic costs without subsidies, higher import costs) that would make any such measure extremely unpopular. There is, of course, no guarantee that any of this will happen—considering asking for advice is a long way from implementing said policies—but I think that the Kirchner government may be seeing itself in the situation I outlined in my last post; caught between a looming economic crisis on one side and the potential fallout from the restructuring necessary to avoid it.

An ajuste along the lines of what non-kirchnerista economists would almost certainly be very painful for the Argentine economy and could actually increase in the short-term the cost of living for many Argentines. This is mainly because subsidies make up such a large part of the fiscal deficit but also because the government would likely also need to devalue the peso, perhaps by as much as 40%. The latter factor is fairly obvious. Devaluation makes imports more expensive and therefore raises the cost of living as imported items or goods whose production depends on imported items increase in cost. The former is less obvious, since rapidly closing budget deficits is usually considered contractionary. However, much of the deficit is the result of a huge array of subsidies (estimated to be equal to 3.5% of GDP), so closing the gap will require eliminating or scaling back many of those subsidies, which include electricity and public transport. In effect, the inflationary pressures caused by the emission of pesos by the Central Bank to cover the deficit would be reduced, but the real cost of living would immediately increase for nearly the whole population.

From a political standpoint, that the government is even starting to consider these policy options is dramatic. The popularity of the Kirchner presidents has largely been a result of Argentina’s strong growth since the economic collapse of 2001-2002 and the one time growth dipped during that period (2009), the kirchnerista wing of the Justicialista party was drubbed in midterm elections. Maintaining growth at all costs has been paramount to the government, and, incidentally has led to piecemeal policy adjustments that have contributed to the current state of the economy. A full-scale paquetazo seems extremely unlikely, especially since subsidies in Argentina so disproportionately benefit Buenos Aires province and the capital, making any unpopular decisions more likely to end in government-toppling protests. However, some less dramatic changes seem more likely as it appears that the government is increasingly realizing that the global economy isn’t going to be able to prop up the domestic one as it has since the end of the Financial Crisis.

¿Para qué negarse lo obvio?

I had been working on a post discussing the current economic situation in Argentina and how the high inflation, loose fiscal policy and increasingly structural inflation expectations typify an economy that has major supply side problems as opposed to most developed countries, who are currently experiencing a severe demand shortfall, but then Matthew Yglesias wrote basically exactly what I had been thinking. I think he pretty much nails the points I wanted to make (though he does understate the degree to which the Argentine economy is distorted), so instead, I am going to talk a bit about the interesting phenomenon in Argentina where the government essentially is pretending that inflation doesn’t exist despite ample evidence to the contrary.

Essentially, the story in Argentina is that inflation is running somewhere in the neighborhood of 25% annually, but the government’s official statistical agency (Indec) pegs it at around 10%. Distrust in the official numbers is so high that the IMF recently sanctioned Argentina for its poor data, and rumors have been spreading that it might give Argentina a “red card” if it doesn’t improve them. Similarly, The Economist announced in February, 2012 that it would no longer use the Indec number but rather one produced by PriceStats under a billion price project-style measurement.

The government, meanwhile, has spent the last few years alternating between denying the inflation and trying to silence anyone who publishes figures that contradict the government numbers, to saying that any inflation that does exist is the fault of rapacious businesses out to exploit consumers. At the same time, it has implicitly acknowledged the real inflation rate via wage increases it’s given to public unions, by raising the minimum taxable income and through attempts at price and currency controls. If it’s so obvious, and if the government behaves in a way that acknowledges it, why not just admit that there is 25% inflation?

I think there are two main reasons why the Kirchner government continues on this track. The first is that the government is attempting a sort of heterodox stabilization program. As Lucas Llach at La ciencia maldita discusses here in a piece about the price freeze the government negotiated with supermarkets until April 1, the government is trying to change inflation expectations in a way that slows salary growth and starts to unwind the inflationary cycle. Refusing to acknowledge the real inflation rate could be an attempt at not feeding into these expectations. However, a look back at similar heterodox plans in the past (Plan Austral in Argentina and Plan Cruzado in Brazil) illustrates, without changing other contributing factors, like loose fiscal policy and barriers to investment, it’s nearly impossible to change inflation expectations through price and wage freezes alone.

The other reason the government would refuse to acknowledge the real rate of inflation is because it would require admitting that the current political economy (el modelo) has, at best, serious shortcomings, and at worst, is a failure. This is because, as Yglesias explained, the Argentine economy’s problems are on the supply side; the capacity of the economy to produce is below the demand for goods. Investment is low and recent state intrusions into the economy—import controls, nationalizations—will have dampened whatever enthusiasm there was. Admitting this, and more importantly, trying to control the inflation it’s producing, would entail a painful period of adjustment and abandoning some of the most important tenants of the modelo. Both would be politically painful, upsetting both the population at large (cuts to services are always unpopular) and the krichnerista base (leftist economic nationalism and stabilization programs are usually not compatible).

Luckily for Cristina Kirchner, the opposition remains without any sort of unifying leader, so there will remain a dearth of real policy alternatives in the near-term. However, if China’s (and as a result Brazil’s) slowdown gets any slower, the situation might become untenable quite quickly for the government.