Argentinean President Maurico Macri’s defeat in the country’s national open primary augurs ill for the beleaguered reformer’s program of fiscal responsibility, which Macri himself has already dispatched with a technical default on the country’s bonds as well as the reimposition of capital and currency controls. Macri’s looming loss to challenger Alberto Fernández and vice-presidential candidate Cristina Fernández de Kirchner — a Peronist former president whose policies are largely responsible for the country’s current economic predicament — has prompted a slew of postmortems recounting exactly how Macri’s reform program went off the rails. The latest (and perhaps most comprehensive) comes from Marta Dominguez-Jimenez, who dissects Macri’s failure for Bruegel.
- In fairness to Macri he inherited a real mess, Dominguez-Jimenez notes, prompting skepticism even as his term began in 2015: in her final years in power Fernández de Kirchner had resorted to printing money to finance yawning fiscal deficits, inevitably triggering runaway inflation. Fernández de Kirchner had solved the inflation problem by preventing the national statistics agency from printing the real figures — easy!
- Macri started off with some good moves, including ending capital controls and reaching a deal with foreign bondholders with whom Fernández de Kirchner had been warring, reestablishing Argentina’s access to foreign capital markets. He also aimed to reduce deficits by cutting spending and tax reforms.
- However Macri, leery of triggering a popular backlash, also opted for a policy of “gradualism,” which left both deficits and inflation still too high by the end of 2017, prompting a warning by the IMF that Argentina was heading back to dangerous waters. The problem was aggravated by borrowing in foreign currencies, leaving it vulnerable if the peso devalued.
- Argentina also had some bad luck, with a drought last year hitting agricultural exports that are one of its main sources of dollars, making it even more difficult to pay back dollar-denominated debts — compounded even further by the appreciation of the dollar as the U.S. Fed raised interest rates.
- In May 2018 Macri had no choice but to ask for another $50 billion guarantee from the IMF, while further delaying inflation and deficit targets. This didn’t stop capital outflows as the economy weakened, sending the peso tumbling again. Despite more assistance from the IMF inflation reached 48% in 2018, beginning the final countdown to the collapse of reforms.
- Macri’s reforms also failed to deliver on the basic promise of economic growth: in fact the economy contracted in three out of four years of his presidency, making the job of managing the country’s finances all but impossible in light of a declining tax base and spiraling inflation.
- Some economists conclude that Macri’s policy of “gradualism” was a mistake in hindsight: according to this view a more aggressive approach at the beginning, while delivering shocks in the short term, would have cleared some of the underlying problems in the first years of his presidency, allowing the country to return to stability and growth in the second half of his term.
- The full post, including Dominguez-Jimenez’s review of different economists’ perspectives on Macri’s strategy, is available here.