As Daniel Kerner of the Eurasia Group observed, the two presidents viewed “whatever happens in the economy or foreign policy [as part of] a conspiracy against them,” and their usual “response to economic problems was to increase state intervention rather than make policy adjustments.” She doubled spending as a percentage of GDP over the last four years, ran up large annual deficits, nationalized private pension assets, oversaw a 20–25 percent inflation rate, and imposed exchange and currency controls. Her government also defaulted on debt payments going back to a 2001 debt restructuring—at nearly $100 billion, the largest in history. (Argentina started early: its first default came in 1828!) Defying a U.S. court judgment which required payment to the “holdout” creditors has forced Buenos Aires to evade debt collection efforts worldwide. Overall, the economic results were predictably disastrous.
In 2013, the last year for which full data is available, Argentina tied with Algeria at 151–152 of 157 countries measured by the “Economic Freedom of the World Report.” Below it were only impoverished, unstable Chad, chaotic, war‐torn Congo, Libya and Syria, and hyper‐socialist Venezuela. Argentina is particularly bad in freedom to trade, legal system and property rights, labor market regulations, and business rules. Overall countries have been growing freer over time, but while Argentina made significant improvements in the 1990s, its rating has fallen steadily since 2007, during the Kirchner/Fernandez years. Argentina’s international rating has fallen accordingly. It was 110 in 2005, 135 in 2010, 144 in 2012, and 151 in 2013.
But the political vultures suffered a surprise election loss last month. Center‐right Buenos Aires Mayor Macri defeated moderate Peronist Daniel Scioli in a close race. However, Peronism retains a strong hold over Argentine politics. Macri won with just a three percent margin. Noted Juan Cruz Diaz of the Cefeidas Group, “With a fatigued government and an erratic campaign, it’s a good performance [for the Peronists]. They are far from dead.” Macri is only the fourth non‐Peronist president elected in the last half century and third since the restoration of democracy in 1983; the others all failed to complete their terms. Macri will face a congress still controlled by Peronistas, who “are fierce in the opposition,” noted former finance minister Rubens Ricupero.
Macri’s post‐election meeting with Fernandez focused on the ceremonial rather than substantive transition. She has tried to lock in policy and her appointees have refused to quit. Former foreign minister Dante Caputo opined that “it’s not a transition that protects the well‐being of the nation. Rather, Mrs. Kirchner seems irritated about having to hand over power, and she’s expressing it by taking decisions that jeopardize Argentina’s delicate economic situation.”
Macri has, however, forged a working relationship with Peronist Sergio Massa, who broke with Fernandez and also ran for president. In the run‐off he endorsed Macri. After the election Massa explained: “We’ll support those measures that are good and we’ll signal those we think are bad.” Macri’s incoming cabinet chief, Marcos Pena, argued: “We think there is a high level of agreement over the challenges that Argentina faces, and that is the base of our ability to build a governability agenda distinct from what we have had until now.” Macri, who said Ayn Rand’s The Fountainhead is the one book he’d take if stranded on an island, nevertheless insisted that he is no radical, backing public schools, government‐funded health care, and social programs. After winning he promised that he would work to win people’s confidence.
In fact, Macri appeared undaunted though he recognized that he faces an enormous challenge. He observed: “Argentina’s big problem today is that for four years there has been no growth, for four years no jobs have been created and now we have to get the country moving.” That will require dramatic and systematic reform. He reportedly plans to begin by ending currency controls and the prohibitive agricultural tax. His change agenda should include improving economic policy‐making, imposing fiscal discipline, restoring central bank independence, ending export quotas, bolstering foreign exchange reserves, killing export taxes, lifting import controls, restoring international creditworthiness, combating corruption, publicizing honest economic statistics, and streamlining/ending economic regulation.
One of the latter’s aides anonymously told the Financial Times: “To say we feel swamped may be the understatement of the year.” Nevertheless, Andrew Stanners of Aberdeen Asset Management observed that Macri is “saying all the right things and demonstrates a clear understanding of the issues.” Macri has a reputation as a bit of playboy, but he impressed as mayor even facing a local council controlled by the opposition. Moreover, he put together a group of well‐respected technocrats for his administration, headlined by Alfonso Prat‐Gay, former head of the central bank, as finance minister. Of Prat‐Gay and other presumptive appointees, said Martin Redrado, Prat-Gay’s central bank successor: “On a technical and intellectual level [they] have certainly got what it takes. Let’s just hope that they do from a political perspective too.”
Investors are hopeful, if wary. Stanners opined: “Macri understands what the country needs to do to regain the confidence of international investors and get the economy back on its feet.” Emily Fletcher of Frontiers Investment Trust said simply: “Argentina has an unparalleled opportunity.”
Macri also indicated his intent to break with at least some of Fernandez’s leftist foreign policies. He said he planned to push to suspend Venezuela from the Mercosur trade bloc for its abuses of human rights. Moreover, he plans to improve ties with the U.S. Such steps should move Buenos Aires closer to the globe’s most productive nations.
However, the incoming government’s most important task remains domestic economic reform. Austerity of any kind will be painful. It must be counterbalanced by expanding economic opportunities for all Argentines, allowing them to grow the economy from the bottom up. Capitalism requires genuinely free markets, with open access and competition. The government must protect the rule of law, treat market participants equally, and allow companies to fail as well as succeed. Moving to such a system won’t be easy (it doesn’t really exist even in America!).
But making the effort is why Macri was elected. It is the only reform path to prosperity. It could, as Robert Noriega of the American Enterprise Institute suggested, “blaze the trail for other countries whose economies have been stunted by socialist policies.” And it’s certainly what Howard Roark, hero of The Fountainhead, would advise.