The election of Mauricio Macri for the Argentine presidency under the coalition of parties “Let’s Change,” marks the end of a populist era in Argentina and brings hope that similar changes might spread to other countries in the region.
Under populism, Argentina lost its international political and economic weight. Outgoing President Christina Kirchner (2007-2015) and her husband, President Nestor Kirchner (2003-2007), who preceded her mandate, embraced populist policies that increased state intervention in the economy and undermined democratic institutions such as the media and the courts. For the past decade, the Argentine economy was stagnant largely due to heavy government subsidies and stringent market regulations, while the political landscape became highly polarized.
The economic and institutional decline of Argentina, however, did not begin with the Kirchners. To put it into historical perspective, once among the richest countries in the world with a GDP per capita almost ten times that of South Korea in the 1950s, the Argentina of today has almost half of South Korea’s per capita income. Populism under the Kirchners only exacerbated existing problems in Argentina: its economy went from the third largest in Latin America to the fourth, being surpassed by Colombia; the country became ineligible for credit after its debt defaults in 2001 and 2014; and the government has not been able to produce any reliable official statistics for several years.
All hopes for change are now embodied in president-elect Macri, son of a business tycoon and former mayor of Buenos Aires. He defeated, in a run-off election, the Peronist candidate Daniel Scioli, a divisive populist that would have been the heir of President Kirchner, with less than a three percent vote difference. In the first round, Macri was a close second to Scioli, and made a comeback by maintaining a small lead in the run-off campaign.
Both candidates promised some changes in how Argentina will be governed, but Macri seemed more credible to carry out the much awaited economic reforms that Argentina desperately needs. However, the euphoria of the markets and some segments of the Argentine electorate must be met with realism. Tackling Argentina’s economic fragilities requires tough measures. These measures can make Macri, who has yet to gain trust from several popular segments, very unpopular. Furthermore, Macri faces an unfriendly National Congress, where his newly created center-right party, “Republican Proposal,” has a small representation.
Among the reforms, the elimination of exchange rates and export controls, as well as the balancing of fiscal accounts, will prove particularly challenging. Under Kirchner’s government, the Argentine peso was kept artificially overvalued against the US dollar. By gradually allowing the peso to freely float, the currency will slide, putting further pressure on a double-digit annual inflation. However, a devalued peso will increase incentives to remove export restrictions and will have a positive impact on the agricultural export sector, an important driver of economic growth. In attempting to reduce the fiscal deficit, the new government must first eliminate the generous government subsidies in the energy and transport sectors. Then, Macri’s government must make Argentina more attractive to international capital by implementing sustainable reforms. Part of the process of restoring confidence includes granting independence to the Central Bank and to statistics agencies.
An important economic reform measure that will help to build credibility is the release of transparent and reliable government statistics. During many years for almost all important economic official figure there has been an extra official figure that was deemed more reliable. The fiscal deficit in 2015 has been officially announced as 3.5% of GDP, but market specialists estimate it will be around 7%. Current unemployment is 23% based on official statistics, while experts reckon to be around 30%.
On the foreign policy front, Macri represents the reemergence of Argentina onto the world stage. The cozy relationship that Argentina built with other populist countries in the region pushed the country into isolation over the past decade. Under the new government, however, Argentina will need to reevaluate its close relations with China, Iran, Russia, and Venezuela. We should expect a more internationally engaged Argentina that will prioritize relations with countries and regional blocks that value market capitalism, as well as strengthen its ties with countries that have more consolidated democracies.
Macri’s election also brings some reservations despite the aura of optimism that it is generating. First, there is a fear that the new president will end the social programs that have been critical to reducing poverty and inequality in Argentina (see graph below). Hopefully, Macri understands that the best tool against the resurgence of populism is keeping poverty reduction as a priority. Second, Macri’s inability to quickly address reform expectations might create distrust, which could discredit the ability of public institutions to deliver on their promises. This, in turn, could delegitimize democratic institutions, which is precisely the cycle under which Argentina has been caught in for at least a decade.
The “Macri effect” is certainly welcome in a continent that has witnessed the weakening of governing institutions under populism. The possible successes of the new Argentine government in restoring economic and institutional confidence will reverberate throughout the region under a clear message: improving governance by fostering transparent public institutions, valuing prudent macroeconomic policies, and rebuilding international financial relations has more benefits than costs.
Helder Ferreira do Vale is Professor of Latin American Studies at Hankuk University’s Graduate School of International and Area Studies.
Image: Mauricio Macri CC BY
