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Argentina imposed capital controls in 2002 and in November tightened them again, requiring all currency transactions to be authorized by the tax agency on a discretionary basis. Then came the dollar-sniffing brigades, and not only at the airport. Beachcombers traveling by car ferry across the Rio de la Plata this summer are being met by four-legged inspectors on the prowl for greenbacks leaving the country.
For democracies in the region it is large sums of dollars carried into the country from drug sales in the U.S. that signal criminal activity. But countries like Venezuela, and now Argentina, search for cash on its way out. This, the Argentine daily La Nación explained on Dec. 23, has nothing to do with national security. It is instead about "the preservation of [international] reserves which are being eroded through the deterioration of confidence and through undue official use."
Mrs. Kirchner cannot stop the capital flight. But her overt attempt to intimidate the population with guard dogs signals an important shift in the government's attitude toward civil liberty. Having won a second term in October, la Presidenta is now making it clear that she considers police-state tactics fair play, and not only on the monetary front. A package of laws passed by the Kirchner-controlled Congress in December targets the press and free speech.
As kichnerismo enters its ninth year, the populist economic model is beginning to fray. Price controls and contract abrogation have damaged foreign investment flows. Government expenditures increased last year by 40% while revenues were up by only 30%, according to Universidad Torcuato Di Tella economist Pablo Guidotti. "If the economy slows it will aggravate this fiscal weakness," he told me in a telephone interview last week.
Normally deficits can be financed in the international capital markets. But Argentina has been cut off since 2001 because it is in default to the Paris Club governments and to private creditors. Mr. Guidotti says the central bank has been "printing" money to close the gap. Inflation estimates by other private-sector economists of over 21% in 2011 support his claim.
The central bank insists that annual inflation is only 10%, and it has used capital controls and market intervention to limit peso devaluation to a similar level. Markets know better. The truth is showing up in the drag on Argentine competitiveness in export markets, i.e., Argentine products are too expensive. It is clear that the peso will eventually face a much larger devaluation and Argentines therefore prefer to hold dollars. But experience tells them that holding dollars inside Argentina isn't real protection, and tighter capital controls have increased fears of confiscation. This is why Mrs. Kirchner has employed sniffer dogs.
On the fiscal side trouble is also looming. Even with generous central bank accommodation, Mr. Guidotti says, fiscal accounts are "deteriorating." The government has recognized this and announced that it will reduce subsidies in gas, electricity and water and will stop subsidizing the Buenos Aires subway. While the administration claims the utility cutbacks will only hit the wealthy, Mr. Guidotti says "it will affect almost everybody except the very poor," who will have to apply for an exemption. Last week ticket prices on the subway in the capital went up by more than 100%. But by all accounts the belt tightening has only just begun.
How will Argentines react to what are certain to be painful fiscal and monetary adjustments? Mrs. Kirchner is not waiting to find out. Instead she is moving pre-emptively to control information and broaden her power to silence dissidents.
Crushing the independent media has long been on the Kirchner to-do list. Since 2003 the government has used the distribution of official government advertising to reward its friends and punish its critics, even though the Supreme Court has ruled the practice illegal. A 2009 law rammed through Congress gives state and state-preferred nongovernmental organizations two-thirds of the television and radio spectrum. The government has also tried to force the Clarin Group to reduce its cable-television market share on antitrust grounds, even though the state's share of the market faces no such restrictions.
In December Congress passed a new law that will allow the state to control domestically produced newsprint, channeling dictator Juan Peron of yore, who did the same. The cyber world will not escape the crackdown: There is also a new broad, vague antiterrorism law that some government officials have warned will be used against media critics. Hugo Chávez has employed a similar law. This threat and the fiscal persecution that some media owners are already experiencing could spark self-censorship.
The government has come under sharp criticism for all this from press organizations around the region, but apparently it puts a higher value on stifling dissent. It must have something to do with the official economic outlook.