Argentina’s Political Earthquake Mauricio Macri, the new president, pledges to end the conflict of the Kirchner years.
http://www.wsj.com/articles/argentinas-political-earthquake-1448242782#livefyre-comment
In the midst of double-digit inflation and a stagnant economy, Argentines on Sunday handed victory in the presidential runoff election to 56-year-old Buenos Aires Mayor Mauricio Macri of the Cambiemos (Let’s Change) coalition.
With 76% of the vote counted as we went to press, Mr. Macri led with 52.87% against 47.13% for President Cristina Kirchner’s Peronist Front for Victory (FPV) candidate, Daniel Scioli.
The 58-year-old Mr. Scioli—the Peronist governor of Provincia de Buenos Aires—ought to have coasted to an easy victory. But his association with Mrs. Kirchner was a liability he couldn’t overcome. After 12 years of the Kirchners’ socialist economics, eight under this president and four before that under her late husband Néstor, Argentines want change.
Mrs. Kirchner’s uncivil rants against her political opponents, and a substantial loss of judicial independence and press freedom during kirchnerismo also contributed to Mr. Scioli’s defeat.
The big winner in this election is political pluralism. The Kirchners entered national politics in 2003, during a period of great economic hardship. Over time they tried to replicate the strategy used by the Venezuelan strongman Hugo Chávez to destroy institutional checks on presidential power and to install a one-party state. The election outcome means that the nation has managed to repel this power-grab.
But Mrs. Kirchner also hands Mr. Macri a fiscal and monetary mess in a period of global economic weakness and during a recession in Brazil, Argentina’s lead trading partner. He will have one shot at creating a comprehensive set of policies to inspire confidence, the sooner the better.
Recovery has to start with stabilizing the peso, which is pegged at 9.4 to the dollar but trades in the black market at 15:1. Mr. Macri promised to lift all capital controls and let the price of the currency settle in line with its market value. But to achieve stability he will also have to restore the rules of a market economy, and that means putting an end to the practice of printing money to finance the government. Huge deficits—6%-7% of gross domestic product this year—are unsustainable.
Mr. Scioli tried to frighten Argentines during the campaign by telling them that the peso “adjustment” would reduce the purchasing power of their earnings. The scare tactics didn’t work, perhaps because the nation is well aware that the central bank no longer has the dollars it needs to prop up the peso. The next government will face that reality.
The good news for Mr. Macri is that much of the economy is already operating at the black-market rate, and many prices for consumer goods have already adjusted. This would explain why nongovernment estimates put annual inflation at around 25%, well above the official estimate of 10%. In other words, working Argentines have already taken a cut in purchasing power.
An official recognition of the devalued peso coupled with credible tax and regulatory liberalization might even lead to capital inflows as Argentine assets become more attractive to investors. Export revenues are also likely to increase if Mr. Macri keeps his pledge to liberate farmers and ranchers from punishing export taxes and quotas, and thereby restore their incentive to produce.
Closing the government deficit won’t be easy because the Kirchners did so much to destroy investor confidence and increase the public’s dependence on the state. Regulatory strangulation and expropriation drove capital out of key markets like energy, transportation and utilities. Today Argentina is a net importer of oil and natural gas despite rich reserves. And the government heavily subsidizes transportation and energy.
Greater investment leading to more reliable energy supplies and more competition can solve this problem but not overnight. Certainly any phase out of subsidies has to be coupled with instantaneous and wide-ranging deregulation so that businesses confidence returns.
Argentina won’t be able to access the international capital markets until it resolves the long-standing dispute with creditors who hold bad debt from the 2001 default. Mr. Macri has promised a pragmatic approach, but he’ll have to sell his proposal to the Argentine congress, which he won’t control.
The president-elect has said he would denounce Venezuela before the Organization of American States for its violation of the 2001 democratic charter. He has also pledged to shred the “memorandum of understanding” signed between Iran and the Kirchner government regarding the investigation of the 1994 terrorist attack on the Buenos Aires Jewish community center because it violates international law. If so, foreign policy will change for the better.
Argentina’s recovery won’t be easy. But with the electoral overthrow of Kirchner authoritarianism, the nation already has a lot to celebrate.
Write to O’Grady@wsj.com.
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