Kirchner’s Task: Abandon Demagoguery and Face Facts

May 22, 2003 • Commentary
This article appeared in the Financial Times, May 22, 2003.


Your editorial, “Argentina’s choice by default” (May 16, 2003) sketches some of the daunting challenges facing Argentina’s president‐​elect, Néstor Kirchner.

You conclude that these will be more difficult to overcome because Carlos Menem denied Mr Kirchner a resounding electoral victory by pulling out of the race at the 11th hour. However, you fail to mention Mr Kirchner’s biggest handicap: his embrace of a neo‐​populist economic “model”.

This model, which has been followed with reckless abandon by the Duhalde government, consists of ad hoc interventionist policies designed to generate short‐​term gains at the expense of long‐​term benefits. Thanks to Argentina’s nascent recovery, the neo‐​populist model has been applauded by some local businesses and consumers, and has even won approving nods from the International Monetary Fund. It’s all a fool’s game, however.

In addition to defaulting on its debt, Argentina defaulted on its currency. This occurred when it abandoned the peso’s redemption pledge under the “convertibility system”, devalued the peso and asymmetrically “pesified” the economy. Argentina’s double default shifted the burden of economic adjustment away from the domestic economy, transferred wealth from creditors to debtors and shifted wealth from future generations to current ones.

The economy shows signs of recovery. But this has been achieved at the cost of future growth. Neo‐​populist policies have promoted capital consumption. In 2002, depreciation exceeded investment by 6.5 per cent of gross domestic product and is expected to do so by at least 4.5 per cent of GDP this year. While capital consumption might give temporary relief, it spells trouble down the road.

And what about the peso? Even though its exchange rate with the dollar has stabilised, few Argentines trust the peso. In addition to capital flight, the economy continues to unofficially dollarise. In 2002, the stock of greenbacks in Argentina rose by more than the dollar value of the peso stock, and now exceeds $35bn.

Unless Mr Kirchner gets serious and abandons demagoguery, he has little chance of meeting Argentina’s enormous economic challenges.

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