Argentina: Macri Government learns wrong lessons from the past
The Macri government appears unready to take the tough economic reforms needed to right the Argentine economy.
Faced with the classic national dilemma of increasing public spending in conjunction with managing the fiscal deficit, Macrismo confronts problems and dilemmas that are already well known to Argentines over the course of recent history.
While the government remains on its path of gradual reforms, the economist Roberto Cachanosky warned about the risks. He proposes an alternative reading of what was the brief ministry of Ricardo López Murphy in the midst of the economic turmoil of December 2001.
A little history
In 1999, after two consecutive administrations of president Carlos Menem, Peronism was defeated for the second time in history in a presidential election. An alliance headed by the radical Fernando de la Rúa rose to the presidency of Argentina.
Compared with the country that Menem had inherited a decade ago, de la Rúa had advantages and disadvantages. The “Convertibility Law” had banished hyperinflation and the Argentine state had already privatized its inefficient companies. However, the inherited problems revolved around a fiscal deficit, which during the Menem era had been financed with external debt.
The International Monetary Fund in those days had a very tough policy with regard to debtors, very different from the concessions that several European countries enjoyed of late.
Unimpressed with the performance of José Luis Machinea as Minister of Economy, de la Rúa decides to call Defense Minister, Ricardo López Murphy, to get out of the complex situation. Murphy had a solid career as an economist, a favorable image abroad and, sufficient fortitude to enact the tough reforms that were necessary.
After preparing a plan to balance the budget, the new minister presented the program on national television, with a lesson for the Argentine people:
Although the fiscal problem (like the size of the state) was not even remotely what it is today, the announcement made a big part of the government of that time nervous. They did not greet the news of austerity measures and fiscal reforms with enthusiasm.
Thus began the pressure for the president to take away his support of the new minister who was simply doing what he had to do.
The story ended with the departure of Lopez Murphy from the Ministry of Economy, after a management that lasted 15 days. The political class turned into dogma an interpretation of what happened: “If you want to say and do what you have to do, you will last two weeks like López Murphy.”
What followed in Argentina, which sought to look for painless magic solutions, was a catastrophe that brought the government to its knees, ended currency convertibility and wiped out bank deposits, and led to massive civil unrest that generated 39 deaths, and five presidents in a week.
“It was the other way around”
Facing a new problem due to high public spending and fiscal deficit (much more worrisome than in 2001) and a similar attitude of trying to find magical solutions that avoid the necessary cuts to state spending, economist Roberto Cachanosky warns: “Macri’s government has not learned the lesson from the Lopez Murphy case.”
In the economist’s view, while the Cambiemos party considers the possibility of spending cuts to be unviable due to fear of the events that followed the Lopez Murphy case, the correct reading should be the exact opposite:
“For not having made the logical reforms at the time proposed by Lopez Murphy, we ended up with the corralito, the default, the devaluation, the confiscation of the deposits, a fall of 15% of the GDP, and a big explosion in the poverty indices. The cost of not getting your fiscal house in order is significantly greater than any political cost you can have.”
According to Cachanosky, the model chosen by Macrismo “is similar to what La Rúa did”, with strong tax incentives to try to reduce the deficit and a high level of indebtedness to avoid reducing public spending. “We have to take into account that today the total spending is much higher than what Argentina had in 2001,” he warned.