Markets welcomed the International Monetary Fund’s (IMF) $50 billion rescue stabilization package last week, which seems to be stabilizing the peso. But the financial umbrella will be costly. Rightly or wrongly, Argentines blame the IMF for precipitating their country's worst economic crisis. In the eyes of many voters, the mere association will damage President Mauricio Macri’s standing.
As detrimental, the IMF entrance means an end to the economic gradualism of the last two-and-a-half years: Macri's strategy of trying to right the policy wrongs of more than a decade of mercurial rule by his predecessors while avoiding the political pain of austerity. Despite the public messaging that Argentina will make the decisions, and that social policies will remain in place, the new economic constraints accompanying the package threaten the political future of one of Latin America’s most market-friendly leaders.
Macri’s fate shows how hard it is to recover from economic populism. Despite a deep bench of technocrats and broad societal support for change, Argentina’s structural flaws remain, hampering growth, productivity, and competitiveness.
Gradualism achieved some real results. Macri freed the exchange rate, eliminated capital controls, and reduced agricultural export taxes. He rebuilt the statistics agency, gave the Central Bank back its autonomy and opened up infrastructure projects to private investment. He began to tackle the gaping budget deficit by hiking utility prices, re-calculating pension benefits, and resolving a protracted dispute over financial transfers to the provinces.
All of these market-affirming steps were incremental—slowly reducing distortions of quotas, subsidies and other taxes, and trimming or re-orienting government spending. And they were complemented by millions more in social assistance and by billions more in public investments.
The economy bounced back. By the second half of 2017 construction was flourishing and manufacturing recovering. Inflation finally started to decline.
What didn’t change was the government’s need for cash, as economic gradualism required lenders to keep it afloat. After resolving claims from Argentina’s debt default saga, Macri’s administration swiftly became one of the most active international emitters—placing more than $100 billion in debt.
Yet now, hit by a global investor pullback from emerging markets, the worst drought in three decades and a few homegrown political stumbles, Argentina is again being forced onto a more orthodox economic and financial path.
With the IMF back in the picture, inflation will have to come down faster. This means the Central Bank will keep interest rates higher for longer, choking the incipient economic recovery. The deficit, too, has to be cut more drastically. Infrastructure spending that might otherwise spur growth will take a hit. But the real budget-buster is public sector employment, which grew under the Kirchners to represent nearly one in three jobs. To balance accounts, Macri will have to take on government workers.
And voter patience is finally wearing thin. Since his victory in the October 2017 midterm elections, polls show Macri losing ground; fewer than half of Argentines approve of him or his government. Economic austerity will further erode this base.
The crisis has become a rallying point for a deeply divided opposition. For the first time since Macri came to office, Peronist and Kirchner congressional delegates have teamed up, passing a bill that lowered utility tariffs back to November 2017 levels and forcing the president into an uncomfortable veto.
Macri and his team still have 16 months before the next presidential election. The economic pain could fade before voters truly contemplate their vote. A push for concessions and other infrastructure partnerships could let private investors pick up some of the public-sector slack, lessening the cost to jobs and growth. And while the opposition shows signs of coalescing, it is far from uniting around a candidate to challenge Macri in the 2019 election.
Macri’s stumbles also highlight the systemic destruction economic populism reaps. Debt can be renegotiated, currencies devalued, and other one-time shocks absorbed and overcome. But the entrenched political clienteles created by subsidies, quotas, bloated public payrolls, and other forms of political patronage are much harder to break up. Public largesse in the form of expanding benefits and entitlements become both unassailable and unsustainable. Even the ways of doing business change the calculus of the profit-minded, at least in some sectors, to favor rent-seeking over market-based competition.
To reverse these pernicious shifts requires more than one presidential term. Sadly, Argentines may not grant Macri’s Cambiemos coalition the benefit of the doubt.