Argentina Enters a New Age

At the dawn of the 20th century, Argentina outperformed Germany and France in per-capita Gross Domestic Product, and the country was growing at a faster pace than the United States. Yet, state-led economic meddling, and the lavish public spending introduced in the 1940s by General Juan Domingo Peron - a political icon whose party still pervades Argentina's life and way of thinking - thwarted that upward trend. Since then the country's economic trajectory has since been one of decline.

To describe the idiosyncrasies of his fellow countrymen, the novelist Jorge Luis Borges defined the Argentinian as being "an Italian who speaks Spanish, thinks in French, and wishes to be a Brit." The link to France doesn't actually stop at the way of thinking: it pervades other, less inspiring features.
 
For starters, both countries - one more than the other - have shed a great deal of their past splendor.
 
At the dawn of the 20th century, Argentina outperformed Germany and France in per-capita Gross Domestic Product, and the country was growing at a faster pace than the United States. Yet, state-led economic meddling, and the lavish public spending introduced in the 1940s by General Juan Domingo Peron - a political icon whose party still pervades Argentina's life and way of thinking - thwarted that upward trend.
 
The country's economic trajectory has since been one of decline. Argentina is wrestling with the double scourge of inflation and recession. Per-capita GDP has not grown for the past four years, and Argentina no longer ranks with the world's leading economies on that measure; it now barely competes with the economies of middle-income neighbors Chile and Peru.
 
France has taken a similar downward path. During the past few decades, it has gone from the fourth to the sixth place in the ranking of countries by GDP. In France, the unemployment rate unrelentingly revolves above 10 percent, whereas it has just reached a 24-year low in Germany at 6 percent.
 
In the stream of economic erosion runs deep a shared anti-market vision - represented in Argentina by Peronism and in France by an infatuation, shared in different degrees by left- and right-wing parties, for strong regulation and fiscal profligacy.
 
The result thereof is that - apart from some ephemeral bouts of market-friendly policy stances - political leaders hardly dare to stand up against conventional wisdom. In order to stay popular, they eschew badly needed supply-side reforms and public-budget streamlining. In both countries, governments tend to bequeath to their successors problems they have the possibility, and responsibility, of tackling and solving.
 
The art of procrastination attained recent peaks during the presidential terms of of Jacques Chirac in France (1995-2007) and the Peronist Kirchner couple - Nestor and Cristina - in Argentina (2003-2015).
 
At the time of Chirac's presidency, labor market rigidities, punitive taxes, and lavish public spending were crippling France's international competitiveness. Yet President Chirac passed over true reforms, and allowed - even encouraged - public deficits to grow.
 
Under the Kirchners, Argentina's economy has fallen into a similar, indeed worse, public-spending craze. The budget deficit is equivalent to 6-7 percent of GDP, and welfare programs have reached unsustainable levels: Forty percent of Argentinians receive a pension, a salary or a social-welfare benefit from the government - a proportion that doubled during the three-term reign of the Kirchner family.
 
The inflation rate is at 25 percent (the region's highest after Venezuela's), and Ms. Kirchner's best solution to the problem was to doctor statistics.
 
Taxes, including on exports, and capital controls have put a break on productivity growth, thereby hampering Argentina's international competitiveness.
 
Ms. Kirchner, whose mandate expired Dec. 10, thus leaves an economy in shambles to her successor.
 
One critical problem that Kirchner left unresolved relates to the standoff with foreign creditors who refused to accept the discount value of Argentina's sovereign bonds that was negotiated by the government with 93 percent of bondholders following Argentina's nearly $100 billion default declared in 2001.
 
The standoff with holdout creditors has impaired Argentina's ability to raise fresh money on international markets at a moment when the country needs to beef up its depleting foreign-exchange reserves, which are at a nine-year trough, and create an environment propitious to foreign investment in critical economic sectors - not the least for the exploitation of recently discovered shale gas reserves.
 
What is more, a few days before her departure, Ms. Kirchner pushed a Peronist-controlled Congress to approve a further expansion of public spending and the issuance of $1.15 billion of public debt.
 
Had she wished to make the task of her successor still more difficult, she would not have behaved in a different manner.
 
Presidential elections held on Nov. 22 resulted in the election of the market-friendly opposition candidate Mauricio Macri. That outcome has been described by more than one analyst as apolitical earthquake - if only because it marks the first time that a candidate from outside the two establishment political parties wins a presidential election since democracy was restored in 1983.
 
However strong Macri's intention to carry out pro-market reforms may be, the constraints he will be facing are anything but negligible.
 
For starters, Macri won by a narrow margin of less than 3 percent, which shows the public's limited approval to his reform program. In addition, more provinces voted for the Peronist candidate than for Macri - and Macri will lack a majority in the Congress.
 
Does this mean that Macri's presidency is doomed to procrastination as usual? Not necessarily, for there are a few glimmers of hope.
 
First of all, the fact that Macri does not come from the political establishment makes him an atypical president, less prone to the traditional procrastination game.
 
Add to this the fact that, under Kirchnerismo, state dirigisme has wreaked havoc on the economy. Argentinians may therefore be more willing than in the past to give a try to the pro-market policies advocated by their new president.
 
Last but not least, the defeat of the Peronist candidate is expected to create turmoil and scapegoating within Peronism. That could make it easier for Mr. Macri to strike deals with the less ideological or more pragmatic factions of the opposition in Congress.
 
To succeed, President Macri must deploy not only political determination, but also the shrewdness needed to negotiate with Congress, and the pedagogic skills necessary to galvanize public support to his reforms.
 
Though not impossible, the mission is colossal.

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