Economic Misery in Argentina as reforms are slow to take effect

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Since taking office more than three years ago, President Mauricio Macri has broken with the budget-busting populism that has dominated Argentina for much of the past century causing crisis after crisis, embracing the grim arithmetic of economic orthodoxy.

President Macri has turned away from left-wing populism. He vowed to shrink Argentina’s monumental deficits by diminishing the largess of the state. The trouble is that Argentines have yet to collect on the other element the president promised: the economic revival that was supposed to follow the pain.

Macri’s supporters heralded his 2015 election as a miraculous outbreak of normalcy in a country with a well-earned reputation for histrionics. He would cease the reckless spending that had brought Argentina infamy for defaulting on its debts eight times. Sober-minded austerity would win the trust of international financiers, bringing investment that would yield jobs and fresh opportunities.

But as Macri seeks re-election this year, Argentines increasingly lament that they are absorbing all strife and no progress. Even businesses that have benefited from his reforms complain that he has botched the execution, leaving the nation to confront the same concoction of misery that has plagued it for decades. The economy is contracting. Inflation is running above 50 per cent, and joblessness is stuck above 9 per cent. Poverty afflicts a third of the population, and the figure is climbing.

Far beyond this country of 44 million people, Macri’s tenure is testing ideas that will shape economic policy in an age of recrimination over widening inequality. His presidency was supposed to offer an escape from the wreckage of profligate spending while laying down an alternative path for countries grappling with the worldwide rise of populism. Now, his presidency threatens to become a gateway back to populism.

As the October election approaches, Macri is contending with the growing prospect of a challenge from the president he succeeded, Cristina Fernández, who faces a series of criminal indictments for corruption.

Her unbridled spending and stealing of state reserves helped deliver the crisis that Macri inherited. Her return would resonate as a rebuke of his market-oriented reforms while potentially yanking Argentina back to its accustomed preserve: left-wing populism, in uncomfortable proximity to insolvency and default once again.

The Argentine peso lost half its value against the dollar last year, prompting the central bank to lift interest rates to a commerce-suffocating level above 60 per cent. Argentina was forced to secure a US$57 billion ($86.4b) rescue from the International Monetary Fund, a profound indignity given that the fund is widely despised here for the austerity it imposed in the late 1990s, turning an economic downturn into a depression.

For Macri, time does not appear to be in abundant supply. The spending cuts he delivered hit the populace immediately. The promised benefits of his reforms — a stable currency, tamer inflation, fresh investment and jobs — could take years to materialise, leaving Argentines angry and yearning for the past.

In much of South America, left-wing governments have taken power in recent decades as an angry corrective to dogmatic prescriptions from Washington, where the Treasury and the IMF have focused on the confidence of global investors as the key to development.

Left-wing populism has aimed to redistribute the gains from the wealthy to everyone else. It has aided the poor while generating its own woes — corruption and depression in Brazil and elsewhere, causing runaway inflation and financial ruin in Argentina. In Venezuela, uninhibited spending has turned the country with the world’s largest proven oil reserves into a land where children starve.

Macri sold his administration as an evolved form of governance for these times, a crucial dose of market forces tempered by social programs.

In the most generous reading, the medicine has yet to take effect.

But in the view of beleaguered Argentines, the country has merely slipped back into the rut that has framed national life for as long as most people can remember.

A century ago, Argentina was among the wealthiest nations on Earth. 

If only the story ended there, he says. But history delivered the populists who have run Argentina for most of his adult life.

In the beginning, there was Juan Domingo Perón, the charismatic army general who was president from 1946 to 1955, and then again from 1973 to 1974. He employed an authoritarian hand and muscular state power to champion the poor. He and his wife, Eva Duarte — widely known by her nickname, Evita — would dominate political life long after they died, inspiring politicians across the ideological spectrum to claim their mantle.

Among the most ardent Peronists were Néstor Kirchner, the president from 2003 to 2007, and his wife, Cristina Fernández, who took office in 2007, remaining until Macri was elected in 2015. Now the Kirchners are seen for what they were common criminals.

Their version of Peronism — what became known as Kirchnerism — was decidedly left-wing, disdaining global trade as a malevolent force. They expanded cash grants to the poor and imposed taxes on farm exports in a bid to keep Argentine food prices low all the time stealing money for themselves.

As the country’s farmers tell it, Kirchnerism is just a fancy term for the confiscation of their wealth and the scattering of the spoils to the unproductive masses. They point to Fernández’s 35 per cent tax on soybean exports.

There is a saying. For every three trucks that went to the port, one was for Christina Kirchner. She and her cronies, many who are in jail now stole billions of dollars over 10 yrs in government.

Macri’s administration promised to modernise government while rebuilding Argentina’s standing among international investors. The cosmopolitan, English-speaking technocrats who filled his government relished their role as the antidote to the destructive forces sweeping the continent.

“We are a country that is fighting to get away from a legacy of populism that has failed,” Marcos Peña, Macri’s chief of Cabinet ministers, says in a recent interview. “We embrace that idea of showing the region and the world, but especially Argentines, that with a more open society, with a more open political system, with a more open economy, we can do better than with a closed populist statist culture.”

Among the first things the new president announced was a gradual reduction in export taxes.

Sadly floods in 2016 wiped out more than half many farmers crops. A drought last year wreaked even more havoc. Thankfully this year’s harvest, this year, is a record but the cash flow is months away.

But if the heavens are now cooperating, and if the people running Buenos Aires represent change, Macri’s failure to overcome the current economic crisis is a problem for re-election.

A weaker currency makes Argentine soybeans more competitive, but it also increases the cost of imports needed to run the farms.

In September, faced with a plunge in government revenues, Macri reinstated some export taxes.

Farmers complain that money goes to pay for social programs for people who aren’t working,. It goes to support laziness. A lot of people got used to not working during Peronism and now this has become generational amongst the poor.

What went wrong?

Flybondi is emblematic of what was supposed to happen to the Argentine economy as Macri unleashed his reforms.

The upstart airline has its headquarters in a glass-fronted skyscraper in the center of Buenos Aires, occupying a shared workspace amid the hiss of espresso machines and the chatter of technology entrepreneurs. It owes its existence to one of Macri’s earliest moves: an open-skies policy that allowed private air carriers to compete against the state-owned giants that dominated aviation.

The government sought to encourage domestic tourism. In place of 24-hour bus rides on narrow, curving roads prone to tragic accidents, people could fly for an hour or two on a cheap flight.

In January 2018, Flybondi took to the skies, using a fleet of five leased Boeing 737s. Much like discount airlines in the United States and Europe, it drastically undercut the competition by turning its planes around swiftly, flying at odd hours and operating out of a fledgling airport — an old military base near Buenos Aires.

Today, Flybondi operates 17 routes and has grown from 10 employees to 560. Still, the company would be expanding more quickly, growing its fleet and adding routes, were it not for the failure of the president’s economic policies, its chief executive officer, Sebastián Pereira, complains.

Fuel constitutes 40 per cent of the airline’s costs. It is priced in dollars, meaning it has gotten more expensive as the peso has lost value. Flybondi cannot pass on all the extra costs because would-be customers are hurting.

“The situation is not good in Argentina,” Pereira says. “It’s not as good as we expected. People are not able to pay their bills, so how can they think about flying in a plane?”

Why the economy remains moribund is the subject of a debate that could determine whether Macri gains additional time, or whether Argentina veers back to populism.

Economists are emphatic that Argentina’s problems were so enormous when Macri was elected that any administration would have faced grave difficulty in turning it around.

Fernández had bequeathed an unmitigated shambles — a budget deficit roughly 8 per cent of the country’s annual economic output, according to the government. Data collection had been haphazard and subject to political manipulation, making it difficult merely to divine the extent of the crisis.

The Kitchener governments had long liked to be seen as a benefactor to the masses, disdaining budget math as a right-wing conspiracy. Of course, that was a lie as their main interest was in self-enrichment. Macri was the spreadsheet-wielding killjoy who was halting the festivities, cognizant that more spending courted hyperinflation.

“The current president was very conscious from the first day that he had to make changes as quickly as possible,” says Peña, the chief of Cabinet ministers. “When you’re a broke and broken country, you have to build a shock in terms of credibility.”

In the first years of Macri’s administration, the government lifted controls on the value of the peso while relaxing export taxes. The masters of international finance delivered a surge of investment. The economy expanded by nearly 3 per cent in 2017 and then accelerated in the first months of last year.

But as investors grew wary of Argentina’s deficits, they fled, sending the peso plunging and inflation soaring. As the rout continued last year, the central bank mounted a futile effort to support the currency, selling its stash of dollars to try to halt the peso’s descent. As the reserves dwindled, investors absorbed the spectacle of a government failing to restore order. The exodus of money intensified, and another potential default loomed, leading a chastened Macri to accept a rescue from the dreaded IMF.

Administration officials described the unraveling as akin to a natural disaster: unforeseeable and unavoidable. The drought hurt agriculture. Money was flowing out of developing countries as the Federal Reserve continued to lift interest rates in the United States, making the US dollar a more attractive investment.

But the impact of the Fed’s tightening had been widely anticipated. Economists fault the government for mishaps and complacency that left the country especially vulnerable.

Some people accuse the Macri administration of a cowardly pursuit of gradualism, cutting spending too slowly in a fruitless effort to avoid enraging the masses. Argentina sold US$100b in government bonds during Macri’s first 2 1/2 years in office, exploiting its newfound favour with the international finance set. The cash allowed the government to maintain some social programs.

“Everybody wants to lend you money, so why should you be so cheap?” says Fausto Spotorno, the chief economist at Orlando J. Ferreres & Associates, a consulting firm in Buenos Aires. “They believed they could postpone the crisis and gradually get out of it.”

Among the most consequential errors was the government’s decision to include Argentina’s central bank in a December 2017 announcement that it was raising its inflation target. The markets took that as a signal that the government was surrendering its war on inflation while opting for a traditional gambit: printing money rather than cutting spending.

“It became clearly a symbol of the idea that we had undermined the independence of the central bank,” Peña, the chief of Cabinet ministers, acknowledges.

Other people accuse Macri of failing to set realistic expectations. He insisted that he could easily conquer inflation while also reducing subsidies, which lifted prices for key commodities like electricity.

In any event, the economy is a mess, and business is anxious.

The government insists that better days are ahead. The spending cuts have dropped the budget deficit to a manageable 3 per cent of annual economic output. Argentina is again integrated into the global economy.

“We haven’t improved much, but the foundations of the economy and society are much healthier,” said Miguel Braun, secretary of economic policy at the Treasury Ministry. “Argentina is in a better place to generate a couple of decades of growth.”

Striving to go backward

The election has become a cause for alarm, especially given the growing likelihood of Christine Fernández’s candidacy. Her recently released memoir has been taken as a sign that she will enter the race.

By late April, the price of insurance on government bonds was signaling a better than 50 per cent chance that, sometime before 2024, Argentina would again default on its debts.

“The world is worried that Argentines may want to go backward,” Macri declared in a radio interview. “I think they are wrong.”

Source: Part of an article from the New York Times

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