When Commodities Crash, Populists Suffer
State policy that prioritizes insulation from the world economy and redistribution of natural resource rents is a road to instability.
A new wave of center-right political leadership in Argentina is systematically putting an end to 12 years of isolationist, leftist populism under Peronist President Cristina Fernández de Kirchner, with the latest development a judicial decision to freeze the former leader’s assets. After an inward turn that saw Buenos Aires rely on “progressive” allies like Venezuela, an election in late 2015 swept reformist Mauricio Macri into power.
Since the upset victory, Macri has made efforts to repair Argentina’s tainted image in global financial markets and attract foreign investment, settling massive debt from the Peronist era and reviving trade talks with the European Union. In February, the nation agreed to a $4.6 billion settlement with creditors, ending years of refusals by the Peronist government.
Kirchner-era Argentina was reliant on high commodity prices for the country’s exports to fund the government’s populist policies and ignore market imperatives on free trade, but falling prices have forced the country out of this self-imposed exile. The reforms sought by Macri and other centrist leaders will face a number of challenges, particularly economic ones—his administration had to reduce a budget deficit equivalent to 5.4% of gross domestic product (GDP) last year. While this move back toward the international markets will no doubt benefit Argentina in the long run, this chain of events mirrors a pattern seen in many of the world’s resource-based economies as commodity prices plummet.
The precipitous drop in oil prices in particular has forced rentier states, which were able to count on massive energy profits to fund generous state largesse up until a few years ago, to diversify their economic relationships with Europe and the rest of the world. These profits allowed states like Saudi Arabia and Iran to get by with incredibly inefficient economies, which officials in both countries are now actively restructuring in order to stimulate real growth and attract international business.
In June, Saudi Arabia announced the details of a comprehensive, widely-reported plan to boost the private sector and limit state handouts with a focus on building a non-oil revenue base. With government revenue 90% reliant on oil rents, falling prices have deeply afflicted Saudi Arabia’s finances.
In March, King Salman’s government announced Vision 2030, a reform plan to wean the national economy off this all-consuming dependence on oil. Bankers in New York and London, for their part, have responded with great interest to news that Saudi Arabia was looking into a public offering of state-owned oil company Saudi Aramco. The global financial industry apparently sees major opportunity in backing and financing these privatization reforms, and even small firms like the United Kingdom’s Verus Partners have made windfalls helping the Saudi government issue sovereign debt.
Iran’s challenges appear far more daunting, with the lingering effects of US banking sanctions giving pause to European firms that are otherwise rearing to go back into the coveted market. Nonetheless, President Hassan Rouhani is attempting to liberalize the nation’s state-heavy economy and reestablish economic ties with the rest of the world. Iran has thus far been able to repatriate about $7 billion since last year’s nuclear deal was sealed and sanctions were scaled back.
Iranian government sources (perhaps addressing concerns over Tehran’s role in the Syrian conflict) insist this money will be used for development projects and to stimulate the economy.
There have been other victories, notably prospective deals with Airbus and Boeing to update Iran’s badly dated civilian airliner fleet. Outside experts and the International Monetary Fund have echoed Rouhani’s insistence on diversifying the economy, and Iran’s extraordinarily well-educated pool of human capital has already helped it develop domestic automotive, telecommunications and aerospace industries since the 1979 revolution.
Hard-liners in Iran and some conservatives in the United States, however, are doing their utmost to dampen enthusiasm. The Islamic Revolutionary Guard Corps profited immensely from the sanctions regime to expand its own hold over the domestic economy (especially over the energy sector), while members of the US Congress are exploring ways to block the Boeing deal.
While Saudi Arabia and Iran try to open themselves up, at least one of their fellow producers is fighting tooth and nail to protect an ill-fated “socialist revolution.” Under Nicolás Maduro, Venezuela is now rationing basic goods against a backdrop of severe shortages and rampant hardship. Since the drop in oil prices, the economy has essentially fallen apart and Venezuela is on its way to becoming a failed state.
As much as falling oil prices, gross economic mismanagement is at the root of the country’s struggles. Maduro’s obstinate stance toward the US has done little to help, and Hugo Chávez’s embattled successor now faces a movement intent on ousting him from power. The opposition has begun checking signatures on a petition to begin the process, which recently amassed the 200,000 signatures it needed to move forward.
Argentina, Saudi Arabia and Iran can learn from the failure of the Venezuelan model. Opening themselves up as full, balanced participants in global trade offers improved long-term conditions and security against the worst excesses of oil dependency. As Venezuelans are learning the hard way, state policy that prioritizes insulation from the world economy and redistribution of natural resource rents is an easy road to instability and collapse.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
Photo Credit: 3DSculptor