Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue No. 1 - Evidence - Meeting of February 4, 2016
OTTAWA, Thursday, February 4, 2016
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 10:36 a.m. to study foreign relations and international trade generally (topic: Argentina: political, economic and international prospects).
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, we are here under authority to examine such issues as may arise from time to time relating to foreign relations and international trade, generally. Under this mandate, the committee will hear today, as it did during its previous hearing yesterday, from witnesses on the topic of Argentina: political, economic, and international prospects. We have two witnesses, one by video conference and one before us. We are going to hear from our witnesses, and then we will put questions to both witnesses.
As I indicated yesterday to our witnesses and to you now, we are concentrating on Argentina, but we are very well aware that the implications for the region are just as important — the regional implications to Argentina and vice versa. So if you have anything to say in that context, it would be helpful.
But we are concentrating on understanding and being updated about the situation in Argentina as it is now, particularly given that there has been a presidential change that will probably have some implications for parliament, also. We're studying it in a broad context.
I welcome both witnesses. We are going to start with Dr. Pablo Heidrich, Adjunct Research Professor at Carleton University. He's no stranger to this committee. His field of specialization is international trade and investment policies in commodity-exporting developing countries, with an emphasis on Latin America. Before working at Carleton University, he was a senior researcher at the North-South Institute in Ottawa and a researcher in the Latin American Trade Network in Argentina.
Dr. Heidrich, I'm going to start with you. Welcome to the committee. Please make your presentation, and I will turn to our next witness.
Pablo Heidrich, Adjunct Research Professor, Carleton University, as an individual: Thank you, Madam Chair. Good morning everyone, and thank you very much for the invitation.
I will be talking mostly about what this transition might mean in economic terms. I'm going to be speaking especially about Argentina. I think the transition that's taking place in Argentina that the chair referred to is a transition that may happen in several other Latin American countries in this year and over the next two years.
There is also a transition that the whole region is making from a commodity boom that has accelerated economic growth in the last decade and that will not happen in the current decade. There is also a transition from centre-left governments to centre-right or full right-wing governments that will take place in several other countries. From that point of view, Argentina is, in some ways, a canary in the mine.
Let me start with what has been the inheritance that the new president, Mauricio Macri, is managing currently in Argentina. President Néstor Kirchner and then President Cristina Fernández were in power from 2003 until last year. Their administrations gradually moved economic policy in Argentina toward the left.
Their administrations were not the same. In particular, the second administration of Cristina Fernández took a more radical turn than her first one and was very different from her husband's presidency. She followed the political- economic arrangement of what is known in the literature as populism. She generated an increasing amount of controls on the economy, and she designed a system to try to maintain economic growth in Argentina. She was concerned with the global economic crisis in 2008-09 and grounded those policies for growth on providing a strong expansion of the public sector and increasing subsidies for domestic private consumption, as well as energy and transportation subsidies. Eventually, she moved into providing salary supplements for the manufacturing industry to reduce any possibilities of unemployment. She also brought in higher and higher levels of trade protection.
The economy didn't react that well to these measures; however, she maintained some levels of economic growth. These policies have had diminishing returns and, most importantly for her administration — and this explains to a very large extent the electoral result, or the defeat of her party — they had increasing costs for abandoning them. Her reforms generated a progressive loss of confidence from the main economic actors in Argentina. That triggered capital flight, which reduced the reserves of the central bank, to which she reacted, imposing very strict currency controls, which added up to more trade controls and an increase in the subsidies that the government had to give to maintain the economy just so as not to go into a recession.
As you can imagine, the situation was not sustainable over time, and the government resorted to more and more radical measures to try to maintain it. That's how they got to the election period, in which there was an apparent calm in the economy. Unemployment was around 6 per cent, and poverty levels were around 20 per cent. However, to obtain these figures, the government manipulated the statistics office.
They lost the election, and Mauricio Macri, who won, came in with a fairly different plan. He has promised to maintain some of the Kirchner-Fernández extensive social-welfare programs and to maintain the state ownership of companies that the populist administration of Cristina Fernández nationalized, such as the national oil company, national airline and pension system.
However, he has also promised to make corrections, and he has started to do these corrections very quickly — unwinding the system of controls that Kirchner and Fernández had set in place. The first thing he has done is eliminated the currency controls, which triggered an immediate devaluation of 30 per cent, which is now moving toward 40 per cent. He eliminated trade controls, especially export taxes. That is going to increase the government deficit, since those were important sources of fiscal income, by approximately $6 billion, or 1 per cent of GDP. The devaluation will also increase inflation.
They also eliminated government subsidies on energy, increasing energy rates that small businesses and households have to pay by up to 300 per cent.
In these very few days that he's been in power — approximately 50 days — Macri's government also reduced government employment by approximately 500 people per day. He has fired already 25,000 people and is promising to fire approximately 50,000 more. He has eliminated credit financing for food, household appliances and other consumption items. Consumption in Argentina has gone down in the first month of his administration by 20 per cent. According to the IMF, the economy is projected to shrink by 1 per cent. Other independent analysts say it might be reduced by 3 per cent. Poverty will increase to 30 per cent, and unemployment will go up to 9 per cent, just in this year.
I think that Macri's administration is moving very fast to try to do these adjustments because he feels the current situation was unsustainable. However, the way the adjustments are being done implies that the majority of the population is going to bear the brunt of these sudden adjustments, while there are groups that will benefit enormously, such as commodity exporters and the banking system, which is going to have much more freedom of operation.
Macri's party has a minority in the congress and is very slowly trying to construct a legislative majority. For that, he has to negotiate with the main political party in Argentina, the Peronist party, which controls most of the provincial administrations.
In order to do that, it is anticipated that he will continue to have a government deficit for his whole presidential period, only gradually reducing it. Deficit-funded government spending will facilitate the construction of a legislative alliance that would allow it to make the structural reforms that he wants to do.
In terms of relations with Canada, I think the Macri administration is going to have a favourable impact on Canadian economic interests in Argentina. The largest ones are in mining; companies such as Barrick Gold and others have several mines in operation there and several projects for future extraction.
Macri has eliminated currency controls and export taxes, which will very positively increase the profit margins of these operations. The same is going to happen with other Canadian firms that operate in dairy, such as Saputo, and agricultural imports, such as Agrium, to the extent that they are linked to the supply of exports from Argentina.
The domestic market, as I said before, will very much shrink.
Will Argentina be an easier partner for Canada under Macri? Yes, most likely. Macri has indicated that he's interested in associating Argentina with the Pacific Alliance, and he has joined the Davos World Economic Forum with pro-market messages. He is also interested in fighting drug trafficking more than the previous administration.
However, his administration has a strong critical attitude of having any negotiations with indigenous peoples in Argentina, and it doesn't have any interest in advancing the climate change issues in Argentina. Those might be areas of disagreement with the Trudeau administration.
I can later provide some possible ideas as to what Canada should have as a policy toward the Macri administration, but I and anticipate that the politics and economics in Argentina during his presidential period will be rather conflict- ridden. I think it will be a very difficult situation, so I think Canada should move with caution.
Thank you.
The Chair: Thank you. We're now going to turn to our next witness, Susan Kaufman Purcell, who is an independent consultant on Latin American issues, based in Miami, Florida. Until recently, she was Director of the Center of Hemispheric Policy at the University of Miami. We have an extensive biography, and that has been circulated to you. I wanted to highlight, however, that Dr. Purcell was Vice-President of the Council of Americas in New York, a group we're familiar with. Prior to these posts, she was a member of the U.S. Department of State, Policy Planning Staff, serving under presidents Carter and Ronald Reagan.
Thank you, Dr. Kaufman Purcell, for coming before us on short notice. We hope that the video conference works well and that you can give us your opening statements from your perspective in Miami.
Susan Kaufman Purcell, Former Director, Center for Hemispheric Policy, University of Miami, as an individual: I very much appreciate the opportunity to speak to the committee. I was going to say some of what Mr. Heidrich said, but I will try not to repeat too much.
As we know, Mauricio Macri inherited a difficult situation. Among the things that Mr. Heidrich mentioned was currency controls. The inflation rate — between 20 and 25 per cent — is, as he said, going to go up now. When I worked in Mexico in the 1970s, I said to somebody, "There seems to be more corruption now than before," and he said, "The corruption is fairly stable; it's a given percentage of whatever there is to steal." To a certain extent that's what was going on with Kirchner, too: There was much more to steal during the commodities boom, and that greatly benefited the major commodity producers of South America, in particular.
There was also almost no foreign investment after they defaulted on the bonds and had very inflammatory discussions with the bond holdouts. As a result, Argentina has been starved for foreign investment. Protectionism didn't help; the fiscal deficit was nearly 7 per cent of the GDP, and their whole subsidy system was out of whack. In the case of electricity subsidies, it would have been one thing if they had gone to poor people, but all my middle-class friends said they were all profiting greatly because they were blanket subsidies that didn't necessarily target the poor — a terrible waste of money in that sense.
Since Macri was inaugurated, he has acted quickly. The lifting of the currency controls resulted in a devaluation of 30 per cent. That is a serious business, but at the same time it makes exporting more possible, plus the fact that he lifted many of the export controls, particularly on agriculture, and eliminated the dual currency system, which made it difficult. The dollar was kept strong artificially by depleting the country's reserves, so Macri is taking over with almost no reserves and is trying to figure out how to build them up.
He has an impressive economic team. The two main members are finance minister Alfonso Prat-Gay, whose background is J.P. Morgan, while Juan José Aranguren, the new head of the mines and energy ministry, was the CEO of Shell in Argentina for 20 years. That is a very interesting appointment as well.
Argentina's shale deposits are extensive. I think they have the second-largest deposits of natural gas, and the fourth- largest deposits of shale oil. Foreign investors are interested in that, despite low oil and gas prices, but no one expects that to last forever.
The government has already begun negotiating with holdouts, not only in the United States, but also with the Italian banks.
I mentioned that they scrapped the export taxes on agriculture. The fact that the peso has gone down helped the strength of the agriculture sector. It was one of the few that remained under the ownership of mainly private producers. The government made it very difficult for them to operate as members of a market economy because Argentina's market economy was highly regulated and distorted.
The other problem Macri is facing is that Argentina's main trade partner in the hemisphere has been Brazil, and the Brazilian economy is in shambles. Argentina is lucky: It has many resources and good land, but bad government has been a big problem for Argentina.
Let me speak about foreign policy issues, including some trade. President Macri's foreign policy signal so far is that he's going to pursue almost an opposite foreign policy from Cristina Fernández de Kirchner's. He's not going to drop the Falklands issue because he cannot totally do that: He needs to broaden his support within the congress and the country. He has said explicitly that he will not pursue a confrontational policy with Great Britain on the Falklands; what he wants are respectful negotiations, but I don't think it is necessarily a very high priority item right now. He has many other things to do.
There will be a total reorientation of the Argentinian partnerships, in an informal sense, away from the so-called ALBA countries of Latin America. This is a group that was headed by Hugo Chávez and is composed of the left-of- centre, statist, anti-American countries with populist, authoritarian rulers. There is a difference between what I call the real democracies and the dicey ones: Just because a regime is elected doesn't mean it's democratic. The ALBA countries are governed by elected authoritarians. That doesn't mean they don't have popular support; unfortunately, some of the supporters seem happy with authoritarian rule, but these are governments that have used the democratic rules of the game to help undermine democracy. That's what Fernández de Kirchner was doing. She was not officially a member of ALBA, but she kind of went along with their policies.
What you will see is a switch from the close relations that Fernández had. Her close relations were with Iran, Venezuela, China and Russia, and he wants improved relations with the United States, whereas Fernández de Kirchner was extremely anti-American — in part because of the American holdouts in the bonds.
Macri made a point of saying he wants to be in the Pacific Alliance but wants to go in with Brazil, which has been a holdout in terms of both the Pacific Alliance and the TPP for reasons we can go into later. It's interesting that he purposely signaled that he doesn't want to be competitive with Brazil; he wants to go into to the Pacific Alliance — that's Chile, Colombia, Peru and Mexico — with Brazil.
He's also broken with just about all of what I call the real democrats in Latin America, who have been silent about the behaviour of the Chávez and Maduro regimes. There's been this thing about non-intervention in the affairs of other countries, and the democracies have been cowardly in terms of sticking up for human rights and the rule of law. He wants Mercosur to condemn human rights abuses by Venezuela, and he wants to begin with well-known political prisoners in Venezuela, such as Leopoldo López and Antonio Ledezma, being released. It looks like he has some aspirations to take over leadership. The democratic countries of Latin America haven't had an active leader, and it looks like he sees a vacuum there, and he might be willing, anxious — eager, actually — to play this role.
In terms of the outlook, this was already mentioned, there are going to be difficulties in putting together enough votes for some of the new legislation he wants because he does have only 30 per cent from his coalition. Of course, he's taking over not only with a bad Argentine economy in terms of the wreckage of the Fernández de Kirchner years, but with a global economy that is in rather bad shape.
You have the whole issue of the commodity bust now, and what's going on with China. Just reading The New York Times' lead story this morning, China is looking worse and worse every day I read a story about it. Now they're talking about the high indebtedness of China. They're giving out figures that China's economy is growing at 6.9 per cent.
First of all, I never trust economic figures from authoritarian regimes, where there's no transparency at all. Some of the analysts say China's growth may already be as low as 4 per cent. I have no way of knowing that or not. In any case, it's going to continue to affect the demand for commodities, which I think will remain low for a while. There's a big debate about what's going to happen with oil prices. I should disclose that I'm a director of Valero Energy Corporation, and I've been following these things for a while. I'm not speaking for the company. This is my own conclusion. I don't see oil prices going up very soon, quite frankly. I don't see what would drive them up, except for some kind of unexpected type of explosive event in the Middle East or elsewhere.
But thinking in terms of supply and demand, we are oversupplied with oil now, and even with gas. You're going to see a continuous slowdown in South America. In a sense Argentina is in a bad neighbourhood, not that all the countries are bad, but that South America's economy is slowing down because it has become more integrated into the global economy, and the global economy isn't doing very well. Who knows what will happen to the U.S. economy. I don't have any more insight than any of you as to who will be our next president, and whoever it is, what kinds of policies will be implemented. I think the United States economy could be growing much faster, but it's been tremendously overregulated and continues to be, and that's a problem which may or may not be tackled, depending on who wins next time.
Basically, I think Argentina looks better to me on a whole variety of indicators than it did under Cristina Fernández de Kirchner; on the other hand, she did her best to hand Macri a wrecked economy, I think. As I said, the global economy is unfortunately in a slowdown and may enter into recession.
To end on a slightly more positive note, when Macri was elected, Moody's changed Argentina's outlook right after that from stable to positive on the expectation of a "major market-friendly break with Cristina's policies." Up until now, Macri has been moving fast, and we will see how fast he will be able to continue going.
The Chair: Thank you to both witnesses.
Senator Downe: Both witnesses mentioned corruption, the high levels of poverty, unemployment. I'm wondering what your personal sense of the mood of the country, of the population, is. They've gone through this horrendous governance problem, as one of the witnesses mentioned as well, military governments, left, right. Is the middle class staying in the country? Do they have a personal commitment to the country, or are they looking to leave? Are the children being encouraged to leave? How do they see the future of their country?
Mr. Heidrich: It's very interesting to research the subject of perceptions about the future and whether people feel committed to staying in the country or they wish they could leave. The Pew Research Center in the United States has very interesting statistics on this, with several cases of Latin American countries. These are statistics from 2014. Argentina has the lowest rate of any country in Latin America in terms of people wanting to leave Argentina. It's actually highly correlated with income. The middle class and upper middle class are among the people wanting to leave less. Those who do want to go somewhere else would rather go to Europe than to North America, for example.
I think the perception of corruption is terrible. There is a very strong and accurate perception that corruption is really high. If I could summarize how I think a majority of the public opinion in Argentina perceived the Cristina Fernández administration, I would say, "Yes, we agree with many of the things she's doing, but she's terrible at doing them."
This is a very important distinction. Many people did not object to these policies of intervening heavily in the markets, or having social policies that are much more generous than what has been historical in Argentina; they just objected because she was terrible. Her administration was incredibly incompetent, and they would make one mistake, and in order to fix it, they would make three more.
Apart from that, as Dr. Kaufman Purcell mentioned, the opportunities with the commodities boom for corruption increased, and especially in the public sector, her administration became increasingly more corrupt, but not unprecedented. When Argentina made a lot of neo-liberal market reforms in the 1990s under another Peronist administration, but this time from the right, the levels of corruption and perception of corruption were even higher.
Ms. Kaufman Purcell: It's very interesting that many people didn't leave, or that the people who would like to leave don't have the resources to leave. A lot of capital left, billions and billions of dollars. Capital flows out of Argentina have been very high, which raises the issue of whether or not a significant portion of those flows will come back.
I tend to think that if people become convinced that Macri will be able to achieve the kinds of goals or the reorientation of the economy he wants, the money will come back. Not all of it, necessarily. I live in Miami. The people haven't been coming as much to the United States as to Europe. There's a lot of Argentines in Miami, and Brazilians and Venezuelans, et cetera. The recent statistics on the Miami economy, of Florida's economy, are not so good. The reason is that we're not receiving as many people who are able to come now that the U.S. dollar is high.
The other thing about Cristina Fernández's policies is that I think that throughout Latin America, because there are so many poor people and so many class differences, populism gets a great audience these days, particularly because of the new advances in technology. Twitter — even if you don't own an iPhone or computer, you can go to the village square. There are some kinds of connections. You see it all over the world now. Almost anybody who wants to take a stab at being a leader, elected leader or otherwise, can build a following very quickly. These kinds of things have begun to affect Latin American politics.
But the other thing you need for populism is money to give out, and that is why the so-called pink tide that enveloped much of Latin America during the commodities boom has kind of gone out. Because with the commodities bust, these authoritarian-, populist-style governments that wanted the big spending that made lots of people very happy ran out of resources. During the last few years of Cristina Fernández's administration, the economy was growing under 1 per cent, and even less than that, because that high-spending model could not be sustained without the commodities boom.
The other thing that characterizes South America in particular now, because that's where the commodities boom was focused, and it's one of the unfortunate traits which I can't begin to give one explanation for, is that during this whole period the only country that made formal plans for the so-called rainy days, if the money would stop flowing, was Chile. Everybody else spent like there was no tomorrow, and not only that, they took advantage of low interest rates to spend and even borrow more money. And now public and private debt has escalated as a result of the behaviour during the commodities boom of living for the moment and taking advantage of a good thing and pushing it as far as possible.
I don't know specifically about Argentina, but I've looked a lot into Mexico, and particularly Brazil, and when the economy starts declining, a lot of what we've heard of the great expansion of Latin America's middle class, particularly over the last decade or so, was the result of the commodities boom. This was a commodities boom built on consumer spending using debt.
When I was in Brazil about two years ago, I was startled. You could buy anything with debt, including a pair of shoes, a dress, whatever. The cars weren't moving in the street because you could buy all these cars with loans that had endless years to pay. I don't really have the data on Argentina at my fingertips, but I would guess a lot of Argentina's middle class, particularly the lower middle class, were on shaky ground and were benefiting initially from the commodities boom and Cristina Fernández de Kirchner's policies. I wouldn't be surprised that a significant portion of them fall out of the middle class now.
Senator D. Smith: Sometimes the words "corruption" and "elections" overlap a bit, but I want to separate them a bit, if possible, and get a report card from you on how the democratic process is going.
Let's take the last election as an example. To what extent would you regard that election as having been a bona fide level playing field? Was there much corruption with the election? For example, how would you compare it to the standards of countries that are in NATO, which are all pretty well democratic elections on a bona fide level playing field? How would you rate Argentina's last election on a report card about that issue?
Mr. Heidrich: I would rate it as a NATO average minus X — so below that NATO average, for sure.
In terms of having been run in a level playing field, the incumbent party, with Scioli as the candidate, had a significant advantage with the use of government-funded propaganda. Also, the government funded its own groups of supposedly independent media or privately owned media but that depend on government subsidies.
Argentina is a federal country with 24 provinces. Those provinces have a great variation in levels of economic and political institutional development, and especially in the northwest of the country they have been run as chiefdoms. Peronism, the party of Cristina Fernández, represents a very large arc from the left, where Cristina Fernández was, to the right, where a lot of those chieftains were. They made a tactical alliance to try to defeat this right-wing candidate, Mauricio Macri; however, they failed. The strength of Mauricio Macri has been that he had the support of the two largest media conglomerates in Argentina, which control about 70 per cent of the media that is not supported by the government. So you're getting a picture of a very polarized society and politics where nobody plays particularly clean. The electoral rules are there; however, I think the respect for the rules is much less than complete.
In the Latin American context — or to be precise, in the South American context — I don't see the elections in Argentina to be more corrupt than the average. Actually, I think Argentina has one of the cleanest systems, together with Uruguay and Chile. It's much cleaner than what you would find in Brazil, for example, or in Colombia or certainly in Mexico.
Ms. Kaufman Purcell: I agree with the conclusion. I think they were very clean elections, for the reasons that Pablo mentioned, except that I think any of the wrongdoing was probably overwhelmingly on the Peronist side.
Peronism has been described to me by many Argentines as a mafia organization. We have to remember it's been in power almost constantly over the last many decades, with a few brief periods of the Radical Party, the other traditional party, which usually ended up not finishing its term, for a variety of reasons.
No one expected Macri to win this election, and what happened was he ended up getting more votes than Sergio Massa, who was a dissident Peronist, and it turned out almost all of his votes, through a mechanism that Massa suggested without saying it that way, that he would be happy if these votes went to a force for change or something like that, which obviously was Macri in the context in which this was going on.
If the commodities boom had not ended, maybe not Cristina Kirchner, but clearly Daniel Scioli, who was the Peronist candidate and a former race car driver who had a certain degree of popularity but who ran a poor campaign, Scioli could have won. Everybody thought Scioli would win, including Scioli. The big change was that in the second round, once Massa was out, Macri got all his votes, and that was the change candidate, and his coalition was called Cambiemos — "let's change." The fact that the economic situation in Argentina was unravelling rapidly and was unsustainable, and I also think Cristina Fernández — this isn't something that I would write in an article, but it did appear on the cover of one of the Argentine magazines that she's bipolar. She was a totally unpredictable kind of person. I think a lot of people lost confidence in her ability to continue governing, particularly when the inflation was just going out of control. So I think she got the votes of several poor people.
It's different but similar in some ways to the fact that the opposition was just able to win control of the congress in Venezuela, because finally a lot of poor people went against the Chavistas because the economy was disintegrating — and it could even collapse, more people are saying now. I'm speaking about Venezuela, not Argentina.
Senator Ataullahjan: My question is to both witnesses. A witness yesterday said that Canada should build personal relationships with Argentina at all levels and was suggesting visits from political leaders.
Should Argentina be a priority for Canada, given Argentina's history of social and political unrest? Will we see change under the new leadership, or should Canada take a wait-and-see attitude?
Mr. Heidrich: It depends what alternatives there are for Canada in the region. That would be my first point. In that context — and then we could grade Argentina as a possibility for Canada.
Right now, yes, the neighbourhood is not doing very well. Actually, Argentina may be a good possibility. I wouldn't invest too many diplomatic resources into a relationship with the Macri administration because, as I said before, his four-year presidency is going to be a very difficult period. I am not particularly convinced that he could confront in an effective way the challenges that are coming toward his administration. His political experience and capacity, to me, remain fairly limited.
I have to say, at the personal level, Mauricio Macri doesn't impress me as someone particularly interested in foreign relations, either — actually, maybe even less than Cristina Fernández. Also, Mauricio Macri is not someone who likes to make big diplomatic statements of any kind. He prefers to speak through his actions. He makes very few speeches and very few statements. So if you want a spokesman in the region, or if you want someone who will accompany representatives of the Canadian government through the region, Mauricio Macri will not be that interested.
Having said that, there are areas where Canada could cooperate with Argentina. Macri is very perceptive of the existing political consensus in Argentina — also in regard to foreign relations. One consensus, apart from the issue in the Falklands — I can later mention that briefly — is that, in Argentina, there's a strong consensus that human rights and democracy should be supported throughout the region. It's up to different governments to interpret the consensus that exists through most of society. I think he has taken a very interesting tack on this by, for example, confronting Maduro openly and saying that his regime is violating human rights in a brutal way. There are many people who think that way in Argentina, and not only his voters — many people who didn't vote for him. That could be a good thing.
Argentina could be a good ally of Canada, if Canada wanted to involve itself more on the support for human rights and democracy. That's a positive one.
The other issues of free trade and so on might be, but you have to keep in mind that Argentina is, perhaps, the country closest to Canada in terms of its trade profile. So Canada and Argentina are trade competitors, for the most part. They do not have as high of levels of compatibility as, for example, Canada and Mexico.
The Chair: Dr. Kaufman Purcell, any comment?
Ms. Kaufman Purcell: I wouldn't encourage people to invest money until they think it makes sense to invest money. This is a different kind of regime and a different kind of period. So I don't necessarily think there's going to be as much of a kind of repetition of the past as there has been.
When you get a president — and you can wait and see a little bit more if you want — who is committed to democracy and human rights and, to a certain extent — this is a region now that has been split in two for over a decade, between sort of the pro-democratic, Western-oriented or market-oriented economies and the so-called ALBA bloc.
When you get a president who is willing to be outspoken, even if he hasn't been — he's new as president — I would try to be as supportive as possible in strengthening Argentina's democratic institutions. Canada is good at this and has done things like this before, including the protection of human rights. I just think it would be helpful to Macri if a country like Canada took — they don't have to be expensive initiatives — but sort of wave the flag a little bit and say, "We support you, and we would like to be of help in whatever kinds of pro-democratic, pro-human rights initiatives that you would like to undertake."
Senator Housakos: I have some observations as follow-ups to the question that my colleague Senator Ataullahjan put forward in regards to what the opportunities are to Canada to expand upon with Argentina. I have to say that I'm rather pessimistic, from the perspective that Argentina right now has a very fragile economy. They have a number of governance issues that, at best, would have Canadian investors and Canadian enterprises running for cover.
We have not been known to be Wild West-type explorers and investors, as a people. We like to explore our commercial interests in places where there's solid governance and strong opportunity. We're a trading nation that has built a strong reputation on trading commodities and natural resources. We're less of a player in regard to financial investors around the world. We've explored opportunities in the EU and with our biggest trading partner, the United States, and we continue to explore opportunities in the Pacific Rim countries. In all three of those cases, there are people-to-people connections in addition to trading opportunities.
Unfortunately, there have been very few people-to-people connections between Canada and the Latin American nations, Argentina in particular. As a result, there's obviously stagnation between our two countries commercially. That's not going to get better in the short term.
As a parliamentarian, I'm starting to wonder what we can do to turn the tide. I expect the biggest challenge — and I'd like your point of view on it — is to find a way to try to build bridges culturally between our people in Latin America and Canada. I think the disadvantage we have, when that cyclic economy does turn north, as it has at times in Latin America in places like Brazil and Argentina, the net benefactors are always the EU and the United States, because they have that strong people-to-people connection. Of course, Argentina, like Canada, is a benefactor from those parts of the world of concrete capital investment — Canada is not a major player when it comes to capital investment.
I made a long preamble here, but at the end of the day I'm wondering if it's worth our time and effort in terms of our private sector companies and as a government to realistically think that the preconditions there would allow us to become players in Latin America, like we have become — and we found a niche — in Europe and in the Pacific Rim countries.
I know that's a broad question, but maybe our guests can weigh in on that.
Mr. Heidrich: I think Canada has become a very important — actually, Canada is the dominant investor in the mining sector in Argentina. Argentina did not have a history of modern mining until Canadian capital came there in very large quantities in the 1990s and 2000s. Canadian capital, I have to say, regarding Argentina and mining has proven to be politically very adaptable.
So you can speak with Mr. Munk and ask him about his friendship with Ms. Fernández. They know each other. They have been friends. They have been to each other's houses. I'm sure they don't agree politically on many things.
There have been a lot of people-to-people connections not only at the level of the elites. There are some significant exchanges that happen at the level of migration, for example. Argentina has opposite seasons from Canada, so a lot of Canadians go there during the winter here in spite of the distances.
The other issue is that Argentina, unlike most countries in Latin America, is a country of immigration, and if you go down the streets in most cities of Argentina, you will find the people there are much more similar physically to Canadians than you would find in other parts of Latin America, so there are some similarities in the culture and the connections among people and the way people behave.
In terms of future investments and whether Canada should make a strong effort, I think there are forces that are stronger than that, and that has to do with global commodity prices. Most Canadian investment in Latin America is linked to commodities, mostly mining, and mining prices are low, so it's not going to happen. It's not going to happen very much in Argentina or anywhere. However, the mines that are there will continue to operate. They have to recover the costs, and if they are going to sell, they don't want to sell at a loss.
I think much of what Canada can do towards Argentina depends on what assets or what capacity Canadian investors have. Canada, just like Latin America, has gone through these commodity booms, and it has come out of them very much a changed country. It does not have the manufacturing power it had 15 years ago, and it has a huge oil sector that was much smaller before, and now the price of oil is between $25 and $30 a barrel, so it is a problem for Canada that will affect its relations towards Argentina.
There was one program that Canada used to have, and I observed that it was very successful in increasing the positive visibility of Canada there, and it had to do with academic exchanges and supporting Canadian studies in Latin America and also in Argentina. That program was unfortunately phased out, and I think it has been a great loss. In terms of reputation and goodwill, it was constructing a lot of goodwill.
Another positive thing about commodity and mining prices going down is that the identification of Canada with mining interests to the rest of the population in Argentina will decrease. Canada started to have a very negative reputation as a country where miners came from and caused a lot of environmental and social conflicts. That hopefully will be less the case. It doesn't mean that Canada shouldn't take further efforts to make sure that Canadian companies comply with human rights and environmental rules in the future.
Ms. Kaufman Purcell: I don't really have much to add because I agree with a lot of what Pablo has said. I would point out that in 2018, Brazil will have an election, and the odds are probably good that they will go somewhat in the direction of Argentina just now because the Brazilian labour party is sort of a wasted kind of party right now and has a terrible reputation. Bachelet in Chile is doing badly now because she was moving in a big state-spending direction, and that has been slowed down. I mention this because if you are looking to establish more contacts, I think that Argentina would be an interesting place to do it because it's going to have close relations. I understand that your country and Argentina are not exactly ideal trading partners, but you're going to have a very big trade market down there in terms of the Pacific Alliance countries. If or when Brazil changes course, you're going to have a big market there. You're going to have a group of the largest democracies in the region, and, of course, the commodities boom doesn't last forever. So if you're concerned — or maybe you're not concerned — or maybe somebody has observed that Canada doesn't have a lot of contacts down there, it seems now with your new prime minister it would be a perfect time to start forging these contacts not only in Argentina but in some of the surrounding countries, so that you will have these contacts when things start improving. It's a resource-rich region that is also more highly educated than many of the other countries of the region.
Senator Cordy: When we look at the reforms being brought in by President Macri, I think we all say they are much better for the country. I am wondering whether or not the reforms have affected relationships with other South American countries.
One of the things that we've been reading about has been the human rights disagreement with Venezuela, where the president has pushed for the release of the Venezuelan political prisoners. I understand there was an election in December, and the government has changed, but have the relationships remained stable, or are there irritants because they are moving quickly on reform?
Mr. Heidrich: On the issue of human rights, I have to say Mauricio Macri brought that up more forcefully than anyone had done it before. But he wasn't the first one. The first questioning against the Maduro human rights record — I remember it was clearly spelled out — came from Uruguay, which also has a centre-left administration, and they just grew tired of the way Maduro is handling protests and the opposition, and they objected to his authoritarian tendencies.
Maduro reacted very aggressively against Uruguay's complaints. The Uruguayan foreign minister followed up, and I think there has been questioning, for example, from the Chilean parliament, which a few months ago presented a statement endorsed by the majority of the members of the parliament there condemning the Venezuelan government for its incarceration of the opposition leaders and so on.
Macri is not alone in his questioning of Venezuela. I think he's probably the strongest leader and the one with the highest position to spell it out. I have to say that with the price of oil so low, ALBA doesn't really exist, because ALBA existed because of the subsidies that Venezuela could provide to the other members of ALBA. Maduro doesn't have those possibilities anymore, so the other members of ALBA are starting to look at Maduro as a liability. There were no strong endorsements of Maduro from Correa or Evo Morales at the last CELAC meeting in Quito, and everyone tried basically not to talk to him. It's shocking, compared to the times of Chávez.
Things are going to change in Latin America, and as I tried to say in the beginning, it is important that we put very much into context what is happening in Argentina. What is happening in Argentina is going to happen with different characteristics in the other countries in Latin America, and we can learn from what's going on in Argentina. Some of the reforms in Argentina are going to have a huge social cost. Inflation will accelerate tremendously. Inequality will grow incredibly fast in Argentina. Poverty levels will increase, and that will produce a lot of social upheaval.
In Argentina, 70 per cent of the working population is unionized — 70 per cent. In Canada I think it's about 15 per cent, and in the U.S. it must be below 10 per cent. Unions will not take easily to the fact that real wages are going to drop so dramatically. From that point of view, the countries about to make a transition to a post-commodity-boom economic regime are going to look carefully at what Macri is doing in Argentina to learn what he is doing right, but also to avoid his mistakes.
Ms. Kaufman Purcell: I agree totally with what Pablo said. I would add that it depends on your ideological point of view as to what needs to be done. I think everyone would like to help the poor. I'm of the group that believes you can't help the poor just by basically taking from the rich and giving to the poor and that will equalize things. My view is that you have to get the economy growing. I see no way, given the current economic situation in Argentina, for the economy to get growing unless some of these basic reforms are made.
Pablo is right: I agree that they will hurt the poor. The way I would deal with that is I would make sure that there were enough policies in place that would help the poor during this difficult period of adjustment, in the same way that we had to put in policies aimed at job training when we were pushing for expanded free trade. The problem is that these things haven't been targeted. Money has been thrown at everybody, and money has been taken by everyone including crony capitalists, particularly in the more statist regimes.
Prat-Gay has said that in 2016 they're expecting negative growth but are expecting 3 per cent growth in 2017. They could be wrong, obviously, but a transition, by definition, can't keep things the same. I don't see an easy way of making this transition, and making sure that everyone wins a lot. The economy has been totally damaged and is out of whack. It needs to be brought around to where it starts looking attractive to outsiders and even domestic Argentines who could bring some of their money back. Also, let the productive sectors of the economy start being able to make more money. You can tax it efficiently, but I don't see how you get out of this hole without making these kinds of adjustments.
Senator Johnson: You both alluded to what we can expect their approach to foreign affairs to be in the coming years, but what about Mercosur and Argentina's membership in organizations such as OAS, UNASUR, CELAC and the Rio Group? To what extent will membership in these regional organizations figure in the Macri government's domestic and foreign policy priorities?
Mr. Heidrich: My knowledge of this aspect of foreign policy is relatively limited. The consensus in the Macri administration is that Mercosur is not particularly useful but that life without it would be worse. They will continue to work with Brazil and the other partners in Mercosur, but they would like to push Mercosur, for example, to have closer agreement with the Pacific Alliance or to finish up a free trade agreement on which they had negotiations with the European Union. Argentina had actually been an obstacle to signing that agreement in the past under Fernández; that will change with Macri. I don't know if the same will is there at the European Union. There was another agreement with India under negotiation.
With respect to CELAC, Macri sent his vice-president to a recent meeting in Quito, saying that he had injured his back. Meanwhile, his back was not a problem to fly to Davos, in Switzerland.
With regard to the Rio Group, I can really not add anything.
With regard to OAS, it is in Washington, D.C., and from Buenos Aires it is as far as Moscow is from Washington, D.C. Let me put it that way.
Senator Johnson: One of witnesses yesterday said the most important relationship we could work through was OAS.
Mr. Heidrich: And this person was based in Buenos Aires?
Senator Johnson: No, they were based here.
Ms. Kaufman Purcell: I have a different take on it. For many years I've been calling Mercosur a highly dysfunctional organization. First of all, Argentina and Brazil were always slapping tariffs on each other and weren't exactly good buddies. It was part of their ideological outlook to emphasize south-south trade instead of north-south trade. That may sound good, but there's a lot of overlap in terms of what the south countries produce, and there was very little value added in that kind of trade compared to the value added in trading with the United States, Western Europe and Canada. It had degenerated into a highly politically and economically dysfunctional arrangement, with Uruguay trapped and wanting to get out of it. Then they invited the fox into the chicken coop by asking Chávez to join. The whole thing was a sad joke.
Whether it can be revived now when the Brazilian economy is doing so badly — that's a big chunk of what Mercosur is. I don't put it as a high priority until things improve. If I thought it could help things improve that would be another case, but I'm not sure I see a way through that.
I've been very critical of the OAS. While Insulza, the former Secretary General of the OAS, is a smart man, he didn't do very much and was too keen on winning Venezuela's approval under Chávez in particular. That's not all his fault. The problem is that the OAS votes with consensus, and when the region split in two, there was no way to get any kind of significant consensus.
This new secretary general, although he is a left-of-centre person, turned out to be very pro-democracy and is one of the first people who talked about Venezuela needing to obey the democratic charter. I'm reserving judgment on the OAS, but it's not going to be valuable until they get rid of the consensus rule, and maybe that's not possible.
UNASUR, CELAC and the Rio Group were all part of Brazil's project to become a big actor in foreign policy. It was going to be wealthy: it had all this oil and was moving up in the world. There is this unfortunate joke about Brazil that says, "Brazil is the country of the future — and always will be." Lula said, "That is not true, the future is here." That's because they thought the commodity boom would last forever. All of these organizations were created to weaken the United States' leadership position in these kinds of organizations at a time when the U.S. position had already been weakened and many Americans didn't care.
I think Latin America has too many organizations, they have too many meetings, and the point of all these things is not clear. So I think it would be good if some of these organizations just died quietly, and maybe they should hold back a little on all of these excessive ceremonial meetings and tend more to their own economies and try to get them working again.
[Translation]
Senator Rivard: President Macri is at the head of a majority government. Is candidate Fernandez actually the Kirchners' son? What was the outcome? Was he second or third?
[English]
Ms. Kaufman Purcell: No. Macri won the presidential election in the second round, but he does not have control of the congress because the parties in his coalition account for only 30 per cent, so he's going to have to broaden his support within the congress.
The person he ran against, if I understood your question well enough — no, not the son of Fernández. He actually had been Fernández's vice-president in her first term, and he is a member of the Peronist party. Interestingly, both Macri and Scioli, who was the other candidate, come from very wealthy business families and were old friends. I'm not sure of the extent of their friendship now. No, Fernández's son was not involved in the election.
[Translation]
Senator Rivard: We discussed earlier the currency's devaluation by 30 per cent, and you will recall that it is not the first time that has happened in 40 years. The currency was devalued by nearly as much about 15 or 20 years ago.
Can you tell me what kind of an impact that can have from a commercial standpoint? My understanding is that lenders lend either in euros or in U.S. dollars, or protect themselves by doing an exchange to ensure that they will not lose out in terms of currency. Does that have an impact on the interest rate lenders give? What are the benefits of such devaluation for the local population?
[English]
Ms. Kaufman Purcell: Is that for me or for Pablo?
The Chair: We'll start with Pablo and then go to you.
Mr. Heidrich: I'm sorry; I will have to answer in English.
The devaluation was clearly expected because Cristina Fernández's administration had been using the nominal exchange rate as an anchor to reduce expectations of future devaluation and inflation.
Once the government basically released the exchange rate, that 30 per cent devaluation — now it's close to 40 per cent, actually — triggered acceleration in the inflation rate. That is reflected in an increase in the loss of purchasing capacity for most of the population. Will it be reflected in more competitiveness for Argentine exports? Maybe so. It depends on how labour-intensive or domestic-input-intensive those exports are compared to the imports.
Argentina was running almost a trade deficit at the end of the Fernández administration, and it would have had a very big trade deficit if not for the controls on imports. For example, all imports into Argentina had to go through a process of certification, and that worked as a non-tariff rule. Now all those systems have been eliminated. So I think there will be a lot more competition, which is going to perhaps neutralize the standard effect that we would expect from devaluation.
However, if the economy doesn't grow and the expectations don't play out that well — for example, in negotiations with the bondholders that have refused to accept other previous debt deals — the devaluation of the Argentine peso might continue. We will see how much of that continues to translate into higher levels of inflation.
The government is trying to suck as many pesos out of the economy as possible, so it's using highly positive interest rates to absorb the excess levels of currency. That is going to be reflected, sooner or later, in a very quick acceleration of the interest rate.
I just read that the interest rate for Argentina, for example, for small businesses had moved up, from November to January, from 20 per cent to 47 per cent — currently 47 per cent for small businesses — and for consumer consumption it has reached 64 per cent, up from 28 per cent. Yes, you can expect a very sudden stop in the economy with those levels.
At the same time, you can compare that to what's going on in Brazil, which doesn't have a centre-right administration. It has supposedly a centre-left administration, and it's doing just the same policies.
The Chair: Dr. Kaufman Purcell?
Ms. Kaufman Purcell: I'm fine. That was a very complete answer.
[Translation]
Senator Rivard: I would like to make one last quick comment. I saw a film about how Canadian mining companies are acting in Argentina. Of course, seeing that kind of a report makes us sad. We are almost ashamed of the way our Canadian companies are behaving in terms of environmental protection.
However, if other countries were to comply, there would be a risk of Canada following the environmental standards that apply in Canada, while its competitors would not be respecting anything. A happy medium would be preferable, but it is certain that, if Canada was the only country to behave appropriately, it would be taken out of the market. Do you agree with me?
[English]
The Chair: This committee actually has in the past — as a new member here, Senator Rivard — talked about corporate social responsibility and the efforts that Canada has made. There are also international movements to bring it into line. But we know some countries have not, and the willingness from the receiving country has not. But I think there is a movement to work for international standards, partly because of the civil society working on international standards now. It has been a great debate, and perhaps I can point out some of our reports where that issue has been highlighted. You've underscored an issue that we have wrestled with before.
I should also say at this break that I had asked yesterday about mining in Argentina from Canada, and I received a little chart. It will be translated and circulated to all of you, just for interest, of Canada's involvement, only in the mining.
I intend also to ask on immigration. We have had patterns of immigration, like into Manitoba, and that may be of interest as a background piece for the committee.
I have Senator Beyak next.
Senator Beyak: I had two concerns, but they were answered by Professor Heidrich to Senator Housakos, and by Dr. Kaufman Purcell to Senator Ataullahjan. So thank you.
The Chair: I have Senator Smith on a second round.
Senator D. Smith: Just before I do that, I just wanted to note: Maybe you're not aware of this, but we do have quite a distinguished Canadian MP who was born in Argentina, Pablo Rodriguez, who came to Canada when he was seven years old. I just think it's nice for us to recognize that and note it.
I'm curious: When I think of Argentine exports to Canada, what do I ever encounter? I know I've had a couple of fine filet mignons that they would say came from Argentina. The Chilean wine exports to Canada are really significant, and I am noticing more bottles of Argentine wine.
Is this a growth area of your exports, Argentina to Canada? Because I'm very keen on Argentina and I would like to be able to identify areas of Argentine exports that are coming to Canada. I'm seeing more wines. What can you tell us about growth opportunities for Argentine products in Canada?
The Chair: Perhaps Professor Heidrich wants to answer that since he's in Canada. The state of Mendoza is famous.
Mr. Heidrich: That's right. Actually, I am from Mendoza. We can talk about wine later if you like. I'd be delighted to give you advice.
Let me say that, interestingly, in spite of the turn to the left and to populism in Argentina, in particular to Argentine trade with Canada, Argentine trade increased very fast in the 2000s, and it had to do with the mining investments of Canadian companies. The largest item by far exported by Argentina to Canada is unprocessed gold. I think the second one is silver. Only a very far third would be wine, mostly red wines, Malbec, but also other types of reds and a little bit of whites.
Yes, fresh fruits, such as apples and pears in counter-season, are important. Argentina is a significant car producer and auto parts producer. The thing is that most of the plants in Argentina belong to European and Asian companies. Not that many American, or just a couple of American firms, are there. There is also trade in auto parts.
What I expect to grow, however, now that Macri is in power, is Canadian exports to Argentina. There was a very significant amount of trade protectionism in capital goods and intermediate goods, so that might grow. But the issue on wine, I will leave it for later.
The Chair: Dr. Kaufman Purcell, do you have anything to add to the Canadian perspective, or is there a perspective with the United States that might be interesting?
Senator D. Smith: Have you sampled their wines?
Ms. Kaufman Purcell: Yes. I've had Malbec. That's the most popular recently. I know their red wine is better than their whites, and I like them. Malbec is doing extremely well; and their prices, at least in the United States, are very moderate compared to some of the others.
I was going to mention another area, which is not exactly an export, but I think tourism might be a nice industry to look at. It's going to take some kind of an economic revival, but Argentina, for those of you who have not gone, is an absolutely stunning, beautiful country.
Senator D. Smith: Air Canada flies there.
Ms. Kaufman Purcell: I actually would hope that that would increase, and I think that would make for happiness on all sides.
Senator D. Smith: Our trip will improve that.
The Chair: I'm being pitched from the corner here about trips.
I wanted to put to both witnesses one question. In my studies of foreign policy into Latin America, it was always Mexico into South America and the leadership that Mexico attempted to exercise, and in fact did at some points. Then, of course, Lula came along much later and has taken up a lot of air, and seemed to be speaking for South America in many ways, with some healthy competition from Mexico.
With Argentina, and with Brazil's problems now — and Mexico, with a lot of internal problems — what is the relationship between Argentina and Mexico?
Dr. Kaufman Purcell, we can start with you, please.
Ms. Kaufman Purcell: I have to admit that I don't see it looming very large at this point, in part because why would the Mexican government want to have close relationships with Fernández de Kirchner when there are so many other alternatives? Under the Lula period, they kind of pushed, and the ALBA countries pushed the fact that Mexico is really part of North America and therefore it's not even clear that it's part of Latin America anymore. But that was an ideological position.
I do think that Mexico's relations with Argentina, and vice versa, will probably increase during the Macri years, and perhaps even the trade, but this is speculation. Mexico's big market, obviously, is the United States and then Canada. Argentina has more traditionally traded — aside from Brazil and the region — with Western Europe. On the other hand, Western Europe's economies are not looking so great either. So who knows exactly what the trade patterns are going to look like, given all of the different difficulties, both domestically, regionally and globally?
The Chair: Professor Heidrich, any comment?
Mr. Heidrich: No, I do not have anything to add on that account.
Senator Ataullahjan: Just a comment, while we're talking about Argentinian wines. Argentina is, I think, one of the top exporters of halal beef to the world, followed by Australia. That's just an interesting fact.
The Chair: Argentina exports a lot of meat, and obviously they understand the market and the changing market, so that's interesting.
I think we've exhausted the questions on the first round of our discussions with you. I want to thank both of you for coming to us, in person and by video conference. It's been extremely helpful. You both have a slightly different perspective, so that has enriched our time here with you.
We are looking for different perspectives on foreign policy. We've had a change of government here in Canada. I think our task has always been to find new opportunities for Canada and to assess the foreign policy, and it would appear that great changes are occurring in Argentina. They may go positive or negative; we're not totally sure yet. We want to be in a position to make recommendations to our government if we find some opportunities for a new look at South America. We have studied in the past, with great intensity, Brazil and Mexico, as a gateway in some ways. Therefore, we want to enrich our studies by looking at Argentina, and you've certainly done that for us today. Thank you, on behalf of the committee, to both of you.
(The committee adjourned.)