Argentina: One More Step toward Venezuela

This week the Argentine Congress is likely to pass legislation that would bring that country one step closer to suffering the economic disaster that currently besets Venezuela.

First, let’s keep in mind that when it comes to the economy, Argentina is already the country that comes closest to following Venezuela’s flawed policies (expansionary monetary policy, arbitrary expropriations and nationalizations, price controls, etc.).

High inflation remains the country’s number one problem. According to private consulting firms, year-to-year inflation in August was 40.4%. The black market exchange rate is 70% higher than the official rate, which has led to a growing shortage of dollars. We have seen this movie before in Venezuela.

President Cristina Fernández now wants to tackle inflation by having Congress pass an amendment to the “Supply Act” of 1974 that would allow her government to go after businesses that are deemed to be raising prices “unjustifiably or artificially,” or that enjoy “abusive profits.” In those cases, the bill authorizes the Secretary of Commerce to regulate and establish profit margins in each stage of production and commercialization, set price controls, and force companies to continue producing even though they are incurring losses. The bill also empowers the Secretary of Commerce to raid, fine and temporarily close businesses, and also to confiscate merchandise. (In fairness, the bill also aims to eliminate the prison sentences, massive confiscations and permanent closing of businesses that are stipulated in the original law —although they have been rarely implemented.)

The Argentine bill is very similar to Venezuela’s “Just Prices and Costs Act” passed in July, 2011. That law has greatly contributed to the country’s further decimation of the private sector and to widespread shortages of basic goods. The last time the Venezuelan Central Bank published its scarcity index in March, it reached 29.4%, meaning that over one out of four basic products is out of stock at any given time.

Since the Fernández administration enjoys a comfortable majority in the House of Deputies (the Senate already passed the bill), it’s very likely that the legislation will be approved this week. If that happens, Argentina will be one step closer to becoming the next Latin American basket case.