Argentina’s Uncertain Prospects
By Martin Guzman and Joseph E. Stiglitz – January 29, 2016
SHANGHAI – Mauricio Macri’s election as Argentina’s president brought to an end 12 years of government led by Néstor and Cristina Fernández Kirchner. Macri’s administration inherits a delicate economy. If he is not careful, Argentina could face a balance-of-payments crisis, owing to deteriorating external conditions and macroeconomic mismanagement, especially since 2011.
Some aspects of Argentina’s economic situation, however, are highly desirable – not least its low debt-to-GDP ratio. As a result, Macri’s government faces a much less daunting task than the one confronting Kirchner in 2003, after a decade-long experiment with Washington Consensus policies (financial deregulation, trade liberalization, and privatization), together with the peso’s peg to the US dollar, ended in disaster. When Kirchner took office, Argentina had just experienced its most severe economic crisis ever. Unemployment, inequality, poverty, and the national debt had all risen. Massive deindustrialization and deep weaknesses in its education system did not bode well for the future.
Following devaluation and default, Argentina experienced a spectacular recovery. In a severely demand-constrained economy, the Kirchner government pursued policies that led to a massive reduction in unemployment, poverty, and inequality. A deep debt restructuring greatly contributed to the restoration of macroeconomic sustainability
In a favorable global environment, the more competitive exchange rate set the stage for reindustrialization, creating jobs for many who had been excluded from labor markets during the previous decade. As a result, from 2003 to 2008, GDP growth averaged more than 8% per year.
During Fernández’s presidency, the country navigated the global financial crisis with relative success. But, after 2011, instead of carefully designing macro and micro policies to favor a consistent increase in supply and demand, most policies fostered sustaining aggregate demand in a context that was no longer purely Keynesian.
Demand grew, but supply didn’t keep up. Some sectors (particularly energy) experienced bottlenecks, causing inflation to accelerate. (Given political intervention in the National Institute of Statistics, official reports are not credible; but all estimates suggest that before the recent devaluation, inflation exceeded 20%.) As a result, the exchange rate continued appreciating, undermining Argentina’s post-2003 development strategy. Exports and real activity stagnated. Exchange controls and import restrictions were imposed to fight capital flight and shore up the trade balance. Nonetheless, foreign reserves continued to fall.
Argentina had followed a successful policy of debt reduction (including full repayment to the International Monetary Fund, thereby increasing the government’s policymaking autonomy). But the fiscal surplus during Nestor Kirchner’s presidency turned into a sizable deficit under Fernández. Her leadership brought about significant improvements in the lives of many, a more egalitarian income distribution, an economy close to full employment, and a much lower debt-to-GDP ratio; but the erosion in the external balance (and the even greater imbalance that would have occurred, had distortionary measures to control the imbalances not been undertaken) now threatens to reverse part of that progress.
Read the full article by clicking here.