Ruin redux: Argentina’s Economy under Mauricio Macri

President Macri promised ‘change’ instead he repeated mistakes made before

President Mauricio Macri has not been a good President.

In 2018, after receiving laudatory press coverage since his election, Argentina went into an economic tail spin. Argentina, which had paid back its debt to the IMF under President Nestor Kirchner in 2006, was forced to seek a stand-by agreement with the International Monetary Fund (IMF) of first $50 billion, then $57 billion. It was widely acknowledged to be the largest financial rescue programme in Argentine history. The scale of the disaster was such that the IMF revised its growth projections for Argentina from 0.4% in June 2018 to -2.8% in December 2018. And even that prediction may be optimistic.

How did Argentina get to this place? Once again how can one of the best developed, best educated, most resource rich countries in Latin America be in such high crisis?

The answer does not lie with the administrations of Nestor Kirchner or Cristina Fernandez de Kirchner. In 2015, the last year of Cristina Kirchner’s administration, Argentina – despite a default forced on it by a New York based US federal judge – grew by 2.7%. Real incomes were up over 50% from where they had been in 2002 at the beginning of the post-Menem era. Renewable energy production, particularly under Cristina Kirchner, had shot up. It was true that, since 2011, Argentina’s economy had gone nowhere in particular. It was in a muddle, and that muddle in large part was due to the Kirchner administration.

Nonetheless, Cristina Kirchner handed her successor a stronger hand than Nestor Kirchner had had in 2003 when he donned the Presidential sash. Thanks to persistent efforts to bring workers into the formal economy, championed by the Kirchners, total government tax revenue had increased from 19.3% of GDP in 2001 to 32.1% in 2015. Education spending had been substantially increased since 2003, revitalising Argentina’s education system. Substantial resources, 3.6% of GDP, were being diverted to politically popular, but incentive distorting and economically wasteful energy subsidies. The way forward seemed to be clear. Redivert energy subsidies into investment expenditure and improve tax collections to close the general government deficit. Only once has such a programme even been close to properly attempted, under the Economy Minister Adalbert Krieger Vasena from 1966-1969. It is also precisely what Macri did not do.

In fact, Macri proceeded to squander every advantage and make every macroeconomic trend worse. He did so by enacting policies that were applauded but anyone with a decent knowledge of Argentine history could have known immediately would go badly wrong.

Macri claimed to want to restore Argentina’s competitiveness.
Macri began with a 40% devaluation of the Peso – albeit a necessary measure to boost competitiveness – that made imports more expensive even as he eliminated import duties on everything from computers to champagne. The resulting rise in the import bill was supposed to be offset by Macri’s cutting or elimination of taxes on agricultural exports. Certainly agricultural interests were pleased by the move. However exports failed to offset the rising import bills in 2016 and 2017 and Argentina’s trade account moved from being in balance to deficit. This also meant that Macri had failed to bring Argentina’s trade into balance.

Macri also claimed to want to balance the government budget but increase investment expenditures. The temporary increase in exports that was achieved came at significant cost to the Treasury. Macri either outright eliminated or cut taxes on agricultural exports. He also slashed business taxes. This drained the Treasury of substantial revenues. Macri tried to make up the difference by slashing investment expenditures, slashing government wages, firing civil servants, slashing energy subsidies, and slashing pensions. As could be expected, the deficit did not greatly decline. Worse, to finance the deficit Macri decided to borrow abroad instead of domestically, despite there being no need to do so. As a result, the ratio of foreign debt relative to GDP went from being 35% of GDP in January to 60% of GDP in April 2018. This is astonishing given that it took seven years for the last Argentine military dictatorship to run up the foreign debt from 20% of GDP to 45% of GDP and much of that was from bailouts from 1980 – 1983. Far from being ‘gradualism’ this was right wing economic policy that had been tried and implemented since 1955 in one form or another. Each time it had failed. The only notable achievement of Macri on the budget has been, since a limited reintroduction of export taxes and further budget cuts, that the 2018 deficit was lower than called for under the standby agreement. But even then this was not due to Macri’s policies, but policies introduced by the IMF.

One of Macri’s main objectives was to tackle inflation. Due to the enforced default in 2014 and the subsequent devaluation, along with continuing capital flight, inflation in Argentina reached 40.5% in 2014. While inflation fell to 27.0% in 2015, it remained high given the low level of economic growth. Macri’s policies only exacerbated inflation. Macri’s devaluation raised the prices of imports, even as he lowered trade barriers. By cutting energy subsidies for both households and businesses, he pushed inflation up still higher. Finally the fall in the peso this year, combined with tighter austerity pushed inflation higher than even its nadir under Cristina Kirchner in 2014 to 47.6%. This is even worse when you consider Cristina Kirchner was reviled by foreign investors and the governments of many wealthy countries, whereas Macri was feted by both.

Other factors, such as poverty and joblessness have also increased. The only things that have kept things from becoming worse are the Peron era labour laws. While an increase in joblessness from 7.2% to 9.0% might normally be damning enough, what is striking about Macri is how he has failed on the three macroeconomic indicators his administration said it cared about.

It is worth concluding by highlighting how Macri’s economic policies do not differ substantially from those of the Economy Minister of the last Military Dictatorship, Jose Alfredo Martinez de Hoz. Like Martinez de Hoz, Macri slashed or eliminated export taxes, increased foreign borrowing, and favoured agroexporting and finance over ensuring Argentina’s export basket remained diverse. Like Martinez de Hoz, Macri was hailed for pursuing these policies in the name of increasing Argentina’s trade with the world, reducing inflation and reducing the public deficit. Like Martinez de Hoz, Macri has failed on his own terms.