President Mauricio Macri of Argentina
Last November, Republican Proposal nominee Mauricio Macri won a landmark victory over Justicialist Daniel Scioli in Argentina’s presidential election. At a time of economic and political difficulty, Argentines entrusted the presidency not to another Peronist populist, but to a center-right advocate of economic liberalism and international engagement. This dramatic shift in Argentine politics underscores the severity of the problems facing the country and the necessity for substantive policy changes. Indeed, Macri is tasked with reforming the country’s struggling economy and developing domestic and foreign policies to improve Argentina’s international stature. He has demonstrated a willingness and ambition to confront these challenges, but he must continue to navigate the fallout from the Kirchner administrations in order to position Argentina for enduring prosperity.
Argentina faces a wide variety of problems, but certainly the most pressing issues relate to the country’s faltering economy. Following Argentina’s sovereign default and associated recession in 2001-2002, its economy expanded rapidly by virtue of growing commodity exports. In recent years, however, Argentina has struggled to avoid recession amid a bearish commodity market and slowing economic growth in China and Brazil, its largest trading partners. Policies adopted by former Peronist president Cristina Fernández de Kirchner exacerbated these issues and are a primary cause of Argentina’s present economic woes.
Foremost among Kirchner’s economic transgressions was her mismanagement of the government’s budget. Throughout the past seven years, the Argentine government expanded its budget deficit in an effort to maintain its extensive subsidy and social welfare programs. Although this deficit spending was actually stimulative, Argentina lacked the revenues to cover persistent budgetary shortfalls. In addition, ongoing disputes with international creditors following its 2001-2002 default precluded any possibility of obtaining foreign credit to finance the deficits. Confronted with the prospect of bankruptcy, Kirchner’s government resorted to printing money to close the budget gaps.
Printing money to finance budget deficits is an egregious violation of normative economic principles. A government that engages in this divorces monetary policy from its proper goal of economic stability and subordinates it to political pressures. Poor monetary stewardship and attendant economic dysfunction typically result, as was the case in Argentina. A drastic expansion of the supply of pesos spurred inflation that most likely reached 25 percent in late 2015. (Accurate figures are not yet available because of Kirchner’s manipulation of Argentina’s official statistics.) Instability and capital flight resulting from skyrocketing inflation hindered the Argentine economy and undoubtedly eclipsed the expansionary effects of government spending.
Unfortunately, Kirchner’s economic irresponsibility extended beyond the budget and inflation. In a shortsighted effort to stem capital outflows, Kirchner established currency controls designed to halt the devaluation of the peso. The Central Bank of Argentina was able to defend the unrealistic official exchange rate for a short time, but its foreign currency reserves quickly dwindled. Importers faced shortages of dollars needed to purchase goods, while exporters of commodities and manufactured goods were naturally hurt by the overvalued peso. In this manner, the capital controls hobbled Argentina’s weak Central Bank and placed further contractionary pressures on its economy.
By the end of 2015, Kirchner’s reckless policies had begun to seriously impact Argentine economic growth. Official GDP figures have not been published, but an IMF analysis indicates that Argentina’s economy is contracting and will see a mild recession in 2016. If Mauricio Macri is to reverse Argentina’s fortunes and promote long term economic growth, he must quickly dismantle Kirchner’s backward policies and encourage stability, foreign investment, and competition. Since he took office on December 10, 2015, he has worked to those ends.
Only eight weeks into his presidency, Macri has already adopted a number of reforms needed to address economic dysfunction in Argentina. On December 16, finance minister Alfonso Prat-Gay removed Kirchner’s harmful currency controls and allowed the peso to float freely in markets. Although the corresponding depreciation of the peso may stoke inflation, the long term benefits derived from an honestly valued currency are compelling. The depreciation, as well as the removal of certain tariffs, should encourage export growth and Argentine economic competitiveness. The removal of the currency peg and a foreign currency loan from international banks will also benefit the Central Bank’s ability to fight inflation and encourage stability.
In addition to monetary reforms, Macri has sought to improve the fiscal standing of the Argentine government. He has begun to cut Argentina’s massive government subsidies for electricity as part of a plan to reduce the primary fiscal deficit from 5.8 percent of GDP to 3.3 percent by 2017. His resumption of talks with holdout creditors also bodes well for a return to international credit markets, a positive sign for fiscal stability. Collectively, these fiscal and monetary measures provide the necessary conditions for successful private investment and growth. Indeed, foreign multinationals have recognized Macri’s promising policies and have begun to consider investment in Argentina. Foreign direct investment and growing trade with the United States and Europe will only serve to improve Argentina’s fortunes.
Although these reforms are significant, Mauricio Macri has only begun to address the myriad economic, social, and political issues that plague Argentina. Thirteen years of kirchnerismo and two centuries of governmental instability have left many roadblocks in Argentina’s path to prosperity and influence. Nonetheless, Macri’s ambitions for a competitive democratic state, as well as the actions he is taking to realize those ambitions, offer reason for optimism.
Todd Lensman is a freshman in the College of Arts & Sciences at Cornell University, majoring in Mathematics and Economics.