The Cost of Populism in Argentina, 2003-2015

This paper studies the historical context, and economic and institutional impact of the Néstor Kirchner and Cristina Fernández de Kirchner presidencies (Kirchner-Kirchner administration) in Argentina. The effects of major economic policies during their presidency are explained as well as the fall in indices of institutional quality. The challenges of stepping out of populism are also mentioned.

The second one is not following a one-to-one pass-through between changes in reserves and changes Peso circulation.  forbidden, allowing only for small amount of cash to leak from the banks. Due to social unrest and still facing the economic consequences of the crisis, Duhalde calls for early elections and turns the Presidency to Nestor Kirchner on 2003, May 25 th (a national holiday), before this term was due on December 10 th of that same year. Nestor Kirchner receives a broken country, in default, after a currency crisis and with an increased poverty rate. A perfect scenario for a populist government to gain public support and carry unsustainable policies.

Fiscal Policy
The 2001 crisis only brought temporary relief to Argentina's fiscal deficit. The default, currency depreciation, and tax increases brought surplus to the treasury ( Figure 1). This surplus, however, starts to deteriorate immediately when Nestor Kirchner starts his presidency, falling from a peak of 3. 1-percent (2003) in term of nominal GDP to 0.6% (2007).
The speed in the fall of the budget coincides with the change of presidency from Nestor to Cristina Kirchner. Given the rapid fall in surplus with respect to GDP, it would be inaccurate to argue that NK was concerned with having a fiscal deficit while CFK did not. Since 1961 to 2017, there were four debt defaults and the "Rodrigazo" crisis. 3 The 2001 crisis was the only one preceded by a temporary fiscal surplus.    Yet another two issues drove the high deficit of the Kirchner administration. With the impact of the crisis, social welfare spending expanded significantly. The inefficiency of the social plans is shown by the fac that such transfers do not go down on time. If these plans were successful in reducing poverty, then its amount should fall. But, this is not what happened.
In real terms, social welfare transfers increased 1.7 times between 2007 and 2015. In 2004 these transfers amounted for 28-percent of total outlays, in 2015 this number raised to 38percent. 4 The other variable that increased the fiscal deficit is subsidies to utility firms. To mitigate the impact of the crisis on families and firms, the government decided to freeze the cost of utilities such as water, electricity, and gas. To compensate firms for freezing prices below equilibrium, the government decided to increase the subsidies given to utility firms. In the It should be noted that this poor fiscal performance occurred at par of record high price of soy, an important export commodity in Argentina, as well as with record high tax pressure.    inflation, the government launched a new CPI with a broader base (CPI Urbano/Urban CPI at the National level). As this new CPI is launched, higher inflation rates are reported. The fact that the higher inflation rates are not due to a better measurement of inflation can be observed with a similar increase in the inflation rate reported by private firms. There is another spike on inflation rates at the beginning of the Cambiemos administration, in early 2016. This is due to an increase in the expansionary monetary policy during the last months of Cristina Kirchner's administration. Before leaving office, the kirchner administration executed an expansionary policy that would affect the prices after they leave office. Inflation rates fall to a similar level to the Kirchner administration to start rising again in early 2017.
The tampering of official data went beyond inflation rates. The fiddling of inflation rates had effects on other official measures such as poverty and real GDP. It is harder in the case o GDP to point to an exact start date of GDP tampered data, because the problem was not only using wrong price level data, but also quantities. According to an estimation by ARKLEMS, by 2014 official GDP was overestimating its real value by 24-percent ( Figure 4). For the government, between 2007 and 2014 the economy grew in real terms at an average rate of 3.5-percent.
But, private estimations points to an average growth rate of 1.8-percent. The booming economic of the Kirchner-Kirchner administration was built in a statistical effect more than on sound economic policy.
Electronic copy available at: https://ssrn.com/abstract=3249775 Electronic copy available at: https://ssrn.com/abstract=3249775  At par of high inflation rates, the central bank managed the exchange rate letting the peso appreciate with respect to the U.S. dollar. The appreciated policy resulted in a loss of reserves through imports of goods and services, and also through import of energy. Recall that the price control on utility services produced a shortage that required to be fill with imports. The loss of reserves became significant enough for the government to impose capital controls.
While U.S. dollars were allowed to enter the country, they were not allowed to leave. The effect was a froze on the inflow of reserves. And since capital outflows could not be completely stopped, the loss of reserves did not stop (Figure 4).     During the Kirchner's era, the central bank was comfortable with letting the treasury reduce the liquidity of its asset composition. But, when the Cambiemos administration took office, rather than fixing this issue, the new administration of the central bank decided to increase the sterilization through LEBACs. An easy way to increase the central banks liquidity could have been for the Treasury to swap the non-transferable bonds for transferable bonds. This way the Treasury's debt would not have increased and would have allowed the central bank to sterilize its monetization by selling assets rather than issuing its own bonds. This became a serious issue for Cambiemos. The increased issuance of LEBACs increased the nominal interest rate in pesos, incentivizing a carry-trade against the U.S. dollar. As long as the nominal interest rate in pesos is higher than the expected peso depreciation (against the U.S. dollar), then investor will be willing to keep its position in pesos to increase their U.S. dollar earnings. This situation became untenable in the first half of 2018, when Argentina suffered a run against the peso (and other argentine financial assets) producing a depreciation of the peso and a last moment fall to the IMF by the Cambiemos administration. 8  Table 1). The two components that show some improvement are Government Efficiency and Voice and Accountability. These improvements, however, should be read in the context of coming out from one the economic largest crisis in the Argentine history.   Electronic copy available at: https://ssrn.com/abstract=3249775 Electronic copy available at: https://ssrn.com/abstract=3249775 Argentina has serious serious / deep (?) economic policy problems as well as institutional problems. However, the common factor of most governments is they try to solve the institutional problems only through economic policy. The numerous economic crisis that Argentina is known for suggest that this approach is ineffective. Institutional reforms are difficult. For reasons discussed above, a reduction of the oversized government spending is not easy. However, these difficulties do not make the problems go away.
There are three reasons that explain institutional reforms, for better or for worse. One is historical accidents. As many cases studied by (Acemoglu & Robinson, 2012) good luck or bad luck an play an important role in the rise or fall of countries in the long-run. Another way is through a supply of reform. The supply side consists of policy makers and political leaders capable of driving a change. This type of leader does more than follow polls, they are able to lead the way. The third way an institutional reform can take place is through demand. This is the case when voters demand that policymakers carry on certain changes in policy and their institutions. If we accept this set of options, this means that the way ahead and out of populism of Argentina depends on having good luck, the presence of a political leader with significant influence, or change in the median voter big enough to trigger an institutional reform.
Furthermore, the way ahead faces a number of typical public choice challenges. Voters are rationally ignorant, voters are subject to rational irrationality, voters are myopic, rent seeking by group of interest that diffuse the cost through all population, etc. Argentina offers a case where a populist government was voted out of office before a total collapse of its

Conclusion
Populist governments are known to develop a strong presence in the country, gain electoral support, but fail in terms of economic policy and to weaken the institutional framework. The case of Argentina is no exception. Many argentine scholars argue that the Argentine trend of falling economically behind is due to an underlying populist ideology in most of the political parties. While Juan D. Perón, the populist father of Argentina, is associated with the Partido Justicialista, his ideas impregnate most of the political spectrum. In this sense, the Kirchner-Kirchner administration is an exaggeration of the Argentine typical populist policies.
The Argentine case also shows that when studying the performance of populist government, a closer look to official statistics is warranted. Argentina's government did not hesitate to tamper with official data and prosecute who dared to put the government in evidence. A closer look can show that what seems to be a successful policy is either in an unsustainable path or just a statistical effect.
The Argentine case offers an opportunity for more focus and detailed research. On the institutional angle, for instance, it could be explored why populist leaders, even if democratically elected, are associated with high levels of corruption. In Olson (2000) terms, why stationary bandits behave as if they were robbing bandits. In the area of monetary economics, Argentine offers the challenge that a fixed exchange rate (the convertibility of the 1990s) is correlated with a better economic performance than a fixed exchange rate, which