Economy and campaign What's wrong with Mauricio Macri, according to The Economist

If you can not beat them, join them. This seems to be Mauricio Macri's response after his crushing defeat in the August 11th presidential election. He got 32% of the votes against 48% who got the Peronist list of Alberto Fernández and Cristina Fernández, a former populist president.

Mr. Macri initially criticized the results of his results for "believing that going back to the past is an alternative", a challenge for which he later apologized. He then accused his finance minister, Nicolás Dujovne, who had cut the budget in accordance with the $ 57 billion deal negotiated by the government with the IMF last year. Dujovne resigned on August 17, after Macri removed VAT on staple foods, increased subsidies and temporarily frozen gas prices, in a desperate effort to calm the Argentines.

Macri is not yet completely defeated. The presidential election is only on October 27th. But in the particular Argentine system, primaries are a general test. Few people believe that it is possible to reverse a difference of 16 points in nine weeks. The fact that the peso sank after the result of increasing primary inflation, which has already reached 50% per year, makes its task even more difficult. These electoral coups were a surprise, but they probably should not have been.

The search for a second period by Macri has always been considered a bit risky, given that the economy had problems last year. Argentines are worse than four years ago. It is expected that during this period, the economy will have fallen by about 4%, prices will have risen by more than 250%, the peso will have gone from 15 to a dollar to nearly 60, while the wage real would have decreased by 10% The last 15 months. Many have high hopes in Macri, a former businessman who became mayor of Buenos Aires.

After years of economic debauchery under the mandate of Cristina Fernández, Macri promised that Argentina would return to the world as a normal country. He has appointed a team of brilliant technocrats. So what went wrong?

One of the hypotheses is that he did not try to stabilize the economy gradually. This decision was political: growth was expected to mitigate the consequences of budget cuts and sharp increases in electricity and transport tariffs, when the huge subsidies of Cristina Fernández were removed. This meant that the government should finance a still high deficit, mainly with debt. In 2018, investors were alarmed by Argentina, forcing the government to fall into the arms of the IMF and put the economy into recession. The alarm responded, in part, to the rise in the US interest rate.

A severe drought has also reduced Argentina's agricultural exports, aggravating the current account deficit. But the main blow was self-inflicted: the government's decision, in December 2017, to soften its inflationary target, which compromised the credibility of the Central Bank. According to Federico Sturzenegger, then president of the bank, who opposed this decision, he did so because other officials were concerned about the relatively restrictive monetary policy of the bank; Some did not want inflation to fall so quickly because of the fiscal costs.

Tax collection would increase less in nominal terms, but a large part of spending (for example, pensions) would continue to rise rapidly as they were indexed to past inflation. As shown, the government had too many inexpensive chefs with different recipes. They wanted to drastically reduce inflation, increase economic growth and adjust the budget. Some wanted a lower weight (in favor of growth) and others a stronger weight (to fight against inflation). They should have accepted that the monetary adjustment was the price of fiscal gradualism.

Populist politicians often have the ability to explain economic setbacks and persuade voters that they are sensitive to their suffering. It's more difficult for technocrats. Macri's reelection campaign was based on the fear that the return of Cristina Fernández would turn Argentina into Venezuela. She used that skillfully. After choosing to run for the vice presidency, behind Alberto Fernández, a more moderate Peronist, the elections turned into a referendum on Macri's economic results.

Macri consultants trusted social networking and marketing and failed to capture the prevailing sentiment on the streets of Argentina. "What happened is that the government was found without politics and could not explain anything," said Alberto Fernández to the newspaper Clarín. Everything suggests that Argentina will end up with him in the government. Many fear the worst. But the current situation in Argentina leaves little room for populist excesses. And Alberto Fernández is not Cristina.

Gabriel Zadunaisky Translation

IN ADDITION