In a calculated move, Cristina Fernández de Kirchner (CFK) announced that she will run in the upcoming presidential elections, however not as the presidential candidate for her party Unidad Ciudadana but as vice-president. In order to benefit from her name recognition, she chose Alberto Fernández, former chief of staff under husband Nestor and in the first months of her reign up to July 2008, to be her president. It is highly likely that CFK will dictate what Alberto, not the strongest politician that Argentina has known, must do should he be elected the next president in October. This arrangement looks rather odd but has been employed before by Juan Perón, who in 1973 asked Héctor Cámpora to be his placeholder. According to some polls, there is a non-negligible probability that the Fernándezes will succeed. In the run-up to the elections, CFK published a new book, implausibly titled Sinceramente, in which she defends herself against multiple corruption charges (referred to as “judicial terrorism”) and where she touts her governing skills, claiming that Nestor and she presided over the longest period of economic growth since Argentina’s independence (i.e. 1816 for good measure).
More successful as author of fantasy stories than as leader of her country…
It is rather surprising that Argentine voters would consider CFK to run the country once more, given her poor track-record in office. Argentina generated a pitiful GDP growth per capita (measured in current dollars) of only 1.2% per annum over last 20 years. Brazil, not a paragon of good governance either, managed +4.6%. Brazil’s GDP per capital was only 45% of Argentina’s in 2000 but now is at 88%. What went wrong? Many Argentines blame incumbent president Mauricio Macri for the dire situation but, on a purchasing power basis, growth per capita already stagnated since 2011 and in any case is very low.
In December 2015, Macri was handed a bad deck of cards. Under CFK spending was out of control due to unsustainable growth of an already bloated public sector, poorly targeted welfare payments and expensive subsidies for fuel and transport. She resorted to printing money, raiding pension funds and taxing exports and, to keep her voter base happy, introduced distorting price controls. The country did not have access to international capital markets, thanks to her signature obstinate behaviour, and eventually CFK had to introduce stringent foreign exchange controls in order to battle capital flight. A balance of payments crisis was just around the corner.
Macri clearly understood the earnestness of the situation and expeditiously started to address the most pertinent issues once in office. He restored access to capital markets by making up with hold-out investors (even enabling the country to issue a “century” bond in 2017), cut back ineffective government spending, reinstated a credible statistics office, gradually reduced subsidies and abandoned price and exchange controls. Mr. Macri also reduced export taxes, thereby stimulating investments in the neglected agricultural sector, and introduced a new regulatory framework that attracted much-needed capital for power generation projects. With hindsight, his mistake was that he did not reduce the fiscal deficit quicker and more rigorously and instead chose for a more gradual adjustment program, weighing political support against macro-economic prudence. In mid-2018, foreign investors abruptly declared that their romance with Argentina was over and decided that fiscal and current account deficits were no longer tolerated. The peso lost more than 50% of its value and a balance of payment crisis eventually could not be thwarted any longer. Macri had to go cap in hand to the IMF to secure funding. A deep economic recession followed as overdue measures were implemented to address the growing fiscal and external imbalances.
Cristina’s next book will be a horror story (herself starring as “La Madre de Dragones”, her favourite character of Game of Thrones)…
Initially, respected economists thought that Argentina’s economy would have recovered by now. Unfortunately, inflation remains inexplicably high at 55% per annum despite hiking interest rates to over 70%, which threatens to prolong the recession. Although probably hard to swallow, trade unions will need to agree to lower wage demands, slowly cutting real wages and thereby making Argentina more competitive, whereas structural reforms should be implemented to increase Argentina’s ultra-low productivity (by liberalizing labour markets and instilling more competition), another big handicap of this otherwise beautiful country. The current economic malaise is tough and Argentines understandably are angry and disappointed. However, presenting the keys of the Casa Rosada to CFK and her sidekick (or any other Perónist, for that matter) would be a mistake. Argentina still has the opportunity to become a vibrant economy and can avoid another decade of sub-par growth. The country has valuable resources (shale oil & gas, lithium and fertile land, just to name a few), competitive sectors (for example, tourism and agriculture) and well-educated people with an entrepreneurial spirit (witness, for example, the many start-ups in agricultural technology). In order to capitalize on these strengths, (foreign) funding will be needed. This requires credible and trustworthy macro-economic policies as well as structural reforms to increase productivity. Given a pressing shortage of sensible politicians, Mauricio Macri and his Cambiemos party are best-placed to deliver these. That’s the only sincere answer to Argentina’s woes…
