Once More unto the Breach, Wall Street Friends
In fact, the economic mismanagement of Ms. Fernández de Kirchner’s administration led to a sharp decline in exports. Policies such as capital controls, trade restrictions and high taxes caused investment to plummet. From 2011 to 2015, 40 percent of Argentina’s small and medium-sized firms stopped exporting, and nearly 1,200 shut down entirely. In 2015, Argentina’s export volume was only 16 percent higher than in 2000, whereas both Brazil and Uruguay had doubled exports in the same period.
In the energy sector, Argentina’s anti-competitive policies, such as subsidizing prices, were particularly counterproductive. Under the three Kirchner administrations, consumers paid a mere 14 percent of the market price for energy, as the share of an average salary spent on energy fell from 4.5 percent in 2001 to 0.6 percent in 2015. As a result, production of oil and gas dropped sharply, even as consumption increased, and Argentina soon became a net energy importer. Though Ms. Fernández de Kirchner attempted to compensate by attracting investment to Vaca Muerta, one of the world’s largest deposits of unconventional oil and gas, Argentina grew even more dependent upon costly energy imports.
Macri’s Mixed Legacy
The election of the conservative Mauricio Macri in 2015 came as a surprise. Argentine voters were the first to deliver a defeat to a leftist government in Latin America since the “pink tide” dawned in the mid-2000s. Mr. Macri promised to reintegrate Argentina into the global economic order, and reduce the size of the state to make the economy more competitive. Unlike Mr. Menem, however, Mr. Macri was cautious in his approach to reform. Though he liberalized manufacturing inputs, for example, he moved slowly in “sensitive sectors in which many jobs – particularly in politically sensitive electoral districts – would be at stake,” according to a recent IDB report.
Nevertheless, Mr. Macri reversed the decline in export volumes, but it failed to translate to an economic windfall. That was in part due to the uncooperative global context, including a recession in Brazil, China’s slowdown and the U.S.-China trade war, which lowered commodity prices. Mr. Macri ended his term with a large trade surplus, but that was mostly thanks to the crushing recession that started in 2018. The devaluation of the peso and economic crisis produced a $16 billion surplus in 2019, but that was almost exclusively caused by a collapse in domestic demand that depressed imports.
Though Mr. Macri paid a political cost for the import compression, he bequeathed the current government better fiscal and balance of payments conditions than he received, even as he left Argentina heavily in debt and with higher poverty. Should prices for Argentina’s exports increase over the next four years, Argentina will be well positioned to harvest the windfall. The biggest challenge will be the government’s own policies.
Hard Way Out
So far, Mr. Fernández’s approach is to replicate the cheap peso strategy of the Néstor Kirchner administration to incentivize exports and compress imports. The steep devaluations at the end of the Macri period boosted exports, but given high inflation in Argentina, these benefits will quickly fade. As production costs – such as wages – rise, exporters will see lower profits. This will be particularly true for producers who rely upon imported inputs and foreign loans, which are costlier after a devaluation. Meanwhile, the initial surge in exports from the devaluation again allowed firms to avoid costly investments to boost productivity.
Should Mr. Fernández negotiate an amicable debt restructuring, Argentina might get another chance to correct the mistakes of its past. As a Peronist, he has the political capital to persuade recalcitrant protectionists in his coalition to accept pro-trade reforms. He has already proposed a framework for negotiations between businesses, unions and the government – the Economic and Social Council – that could be used to advance structural reform.
The reform path would not promise immediate results, and the transition costs for important sectors of the economy would be politically costly. That said, it might be the only opportunity to begin to address Argentina’s underperforming export sector and chronic dollar shortage.
About the Author
Latin American Program
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The Argentina Project of the Latin American Program, aspires to be the premiere institution for policy-relevant research on the political and economic reforms underway in Argentina. The project will be a valuable resource for senior officials in the U.S. and Argentine governments, lawmakers, investors, diplomats, and journalists. Read more