Rafael Pampillón. Director of the Economic Environment Area at Instituto de Empresa
23 June 2003
What will Argentina’s new government do to right the nation’s chaotic financial situation?
Néstor Kirchner has become Argentina’s new president, after Carlos Menem’s withdrawal from the presidential race and probable defeat, forecast by opinion polls. This cancelled the second round of the elections. Consequently, it seems Roberto Lavagna, economy minister under Eduardo Duhalde, will be named finance minister to manage the country’s economy for the next few years. What policy will he follow? Will this change the country’s economic situation?
Perhaps yes, though at first sight it does not seem likely. The initial observation that must be made is that the country’s political and economic situation leaves little margin for manoeuvring or taking decisions, making it difficult for earlier economic policy failures to be repeated. Kirchner and Lavagna (a realistic and pragmatic economist, who is only too aware of these policy limitations) will have to face the hard economic reality with responsibility.
Argentina needs to solve the problem of its debt and reach a new agreement with the IMF. It also must raise utility tariffs, recapitalize and restructure the financial system, reform the tax code, bring order to profligate public spending managed by the trade unions, restore confidence in the country’s economic policy and tackle corruption - which affects all echelons, from the Supreme Court to the last member of Parliament (with a few honorable exceptions). Some program. Corruption among politicians has undermined confidence in Argentina’s democratic structures.
It is as though the State has been overtaken by a network of politicians and businessmen out for their own ends. Was this the cause of Menem’s virtual defeat? Argentina appears at the bottom of political transparency indices, while in economic freedom indices it is moving further away from the norm. Therefore, the new president’s overriding challenge is to achieve a favorable climate of governability, by reducing the corruption and economic uncertainty that for the last few years have weighed heavily on national and foreign investors.
The most positive aspect is that the economy is reacting favorably to the strong devaluation, in 2002, of the peso (the exchange rate went from 1 to 3.5 pesos per USD), which has boosted exports and made it easier to compete with imports. It would seem that the beneficiaries of this depreciation are producers of exportable goods who have successfully opened business niches abroad, as well as producers of national goods and services that, with the higher cost of imports, have increased their margins by substituting national for imported products. The Monthly Industrial Estimator for first quarter 2003 has grown 18 percent over first quarter 2002.
It is true that the nation’s currency has again appreciated (2.7 pesos with respect to the dollar), a result of the entry of currencies from exports. But it doesn’t seem like this is going to endanger economic recovery, at least for the moment. Data point to economic growth in excess of 5 percent for both 2003 and 2004. The economy is embarked on healthy growth and seems likely to continue.
Fiscal balance, a key matter
But for the recovery to be consolidated and gain speed, greater budgetary balance must be achieved. The last six decades of Argentina’s economic policy have been marked by severe fiscal indiscipline. On too many occasions governments resorted to the money-making machine to finance public-spending deficits, thereby causing hyperinflation. In the ‘90s, Menem’s Convertibility closed that spurious source of financing, and greater fiscal discipline seemed inevitable. Unfortunately, it was not to be. Menem condoned a level of expenditure far above current income through his policy of privatizations and indebtedness. Privatizations were accompanied by increased, not reduced, spending and public debt.
It should not be forgotten that a good privatization policy ought to contribute to reduction in part of the public debt and trim the public deficit. Menem forgot this principle and consequently lost support of the voters. If one adds that the State had to bear the cost of withdrawal from Convertibility, the result was an astronomical growth in public debt: nearly 90 percent of GDP, even after negotiations with external creditors.
This burden places a large question mark over the State’s solvency in the long term. However, the necessary renegotiation and restructuring of this enormous debt, which will be one of the new government’s first tasks, requires creditors to accept low interest payments. The problem is less serious than it may seem, but pay it must. One of the unknown factors is whether the new government will be prepared to generate a primary superavit of 3.5 percent of GDP with which to service its debt and recover a much-needed image of responsibility and fiscal solvency. If this turns out to be the case, Kirchner could be a second Lula - a sheep in wolf’s clothing.