Source: Financial Times

Repsol “pursued a policy of pillage, not of production, not of exploration”, the Argentine president thundered on Monday. “They practically made the country unviable with their business policies, not resource policies.” Such was Cristina Fernández’s sulphurous stance as she announced her government was renationalising YPF, the country’s largest oil group.

There are of course many convoluted reasons behind the Argentine government’s contentious decision to reverse the privatisation of a few years ago. But objective observers will agree that this was not part of an overarching development strategy, nor a manifestation of resource nationalism – nor indeed any other carefully crafted initiative forming part of a broader design. Rather, cronyism, rifts between rival oligarchs, political expediency, populism and the wish to please a public resentful of the privatisations of the 1990s all played into the decision.

Given Argentina’s record with nationalisations, there is widespread scepticism that the government will run YPF efficiently. In the past decade, the Buenos Aires water company, the national airline, Aerolíneas Argentinas and several electricity companies that had been privatised in the 1990s have been renationalised with politically charged arguments similar to those used to justify YPF’s takeover.

As Jorge Colina, an economist at the Institute of Argentine Social Development in Buenos Aires, explained to the journalist Charles Newbery, these government-run companies are accumulating colossal losses. Last year the state subsidy for them was 80 per cent larger than the spending on a child welfare programme.

Perhaps one of the most surprising and permanent traits of Argentina’s politics is what I would call a systemic learning disability. The public and Argentina’s leaders seem unable to learn from past experience. Ms Fernández’s brand of populism is not new in Argentina and has a well-known legacy of failure. Yet the same policies known to have failed in the past are still alluring for voters. And politicians such as Ms Fernández are more than happy to exploit the public’s thirst for initiatives that promise to restore the success that once defined their nation – even if the promises never materialise and the country has suffered from a long decline only interrupted by periodic booms that usually end in tears, or busts.

Under-investment, mismanagement, limited access to new technologies and the mistreatment of foreign partners are some of the ills that YPF shares with the Mexican oil group Pemex and Venezuela’s state oil company PDVSA. These are, of course, manifestations of the politicisation that has infected them. The political meddling goes beyond the cronyism and patronage that undermine their operations. Their governments impose crippling taxes and price controls and, in some cases, force them into activities that have nothing to do with their core mission.

Ms Fernández decided to nationalise YPF in the context of a rapidly deteriorating economic and political outlook. Economic imbalances have been accumulating and will inevitably force painful adjustments that the government has so far been able to avoid. Eliminating popular but unaffordable and regressive subsidies, the price controls that inhibit much-needed investment and bottlenecks that stifle competitiveness are only some of the changes that are necessary.

Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors. It has had limited access to the international financial system since defaulting on its debts in 2001. Many of the president’s erstwhile supporters are abandoning her and labour unrest is becoming more frequent.

The question is whether Argentina will at last make the changes in its economic policies that will put the nation on a more sustainable path. Sooner or later the situation will surely become unsustainable and force the government to undertake what will be unpopular reforms.

If Ms Fernández keeps postponing the reforms, her last years in office will be a political and economic nightmare. At that point, nationalising yet another company will achieve nothing and YPF will be the least of her problems.

This article originally appeared in the Financial Times.