A century ago, Argentina was set to join the global elite. It was richer than France, Germany and Italy. Its income per head stood at 92% of the average of 16 rich, developed states at the time. But “it never got better than this”, says The Economist. Income per head is now 43% of the same 16, and Argentina is an object lesson in how poor governance can squander potential. A succession of coups ended 30 years ago, but relative stability has not helped growth, because governments have succumbed to protectionism and populism, resulting in constant crises, recessions and a bout of hyperinflation in the late 1980s.
Things may be looking up. Over the last month, the stockmarket has risen by 25% to a record high ahead of last weekend’s presidential election victory by Mauricio Macri. The centre-right, market-orientated mayor of Buenos Aires aims to deliver a dose of orthodox economics after 13 years of interventionism and overspending by Christina Kirchner, and husband Nestor.
In the 2000s, Argentina rode the commodities boom, with high prices for soybeans, its chief export, helping to finance lavish public spending: 40% of the population gets a pension, salary or welfare from the government, notes The Economist – a share that has doubled since 2007. But as the boom subsided, the budget deficit grew; it is set to hit 6% this year. All this spending, plus loose monetary policy, drove up inflation. The official figures deliberately underestimate this, under government pressure, but private economists say it’s about 30% a year. The official exchange rate is overvalued as a result, but the government props the peso up, because it doesn’t want to fuel inflation further or admit the economy is in trouble.
As a result, foreign-exchange reserves are falling. Strict capital and exchange controls hinder money from fleeing the country, while restrictions on trade are choking growth and productivity. High taxes hurt competitiveness further, and the country can’t attract international money until it reaches a deal with its bondholders, because it has been frozen out of debt markets after stiffing foreign creditors.
So voters have opted for “realism over the magical thinking” of the Kirchners, notes BreakingViews.com’s Martin Langfield. But achieving more sustainable growth will hurt. Interest rates will have to rise to squeeze out inflation as the peso declines. Necessary spending cuts will also hit growth. But as exchange controls are dismantled and a deal with creditors is reached, confidence and money should return. But Macri faces “an unfriendly Congress and may struggle to carry out all the reforms”, warns Langfield. The Argentinians could tire of his medicine and elect another populist in a few years. “The temptation of magic is powerful. Investors should exercise caution.”