December 28, 2017. Cabinet Chief Marcos Peña, flanked by Economy Minister Nicolás Dujovne, then-Finance Minister Luis “Toto” Caputo, and then-Central Bank President Federico Sturzenegger, leads a press conference to announce that inflation targets would be relaxed from 12 percent to 15 percent to bring them closer to “real” projections, indirectly suggesting that lowering interest rates — which hovered near 29 percent — would boost economic activity. The confidence with which the Cabinet chief spoke was matched by the reassurances of Dujovne and Caputo, who would go on to become Central Bank chief for just three months before leaving the government. Inflation would continue to fall, they said, and the economy was on a sustainable path to real growth. Our floating exchange rate acted as an automatic balancing system and Argentina’s indebtedness was absolutely sustainable. Sturzenegger, who was being publicly humiliated, said very little, his tired countenance foreshadowing what was to come. The previous day, ruling coalition Cambiemos (Let’s Change) managed to get the Senate to approve a 2018 budget with average inflation of 15.7 percent and a dollar-peso exchange rate of 19.30. The economy was projected to grow 3.5 percent.
A year on, it’s easy to point out the mistakes in the government’s economic policy which, added to the the worse drought in half a century and a tough global environment that includes rising rates in the United State, coupled with a trade war with China, resulted in nearly 50 percent inflation and a contraction that could come in at 2.8 percent. One such mistake was the lack of an economic plan, as evidenced by the destruction of the Central Bank’s independence, piecemeal policy decisions like foreign indebtedness to finance a fiscal deficit, which expands the monetary supply while looking to tackle inflation, increased social spending, and the unintentional creation of a ticking time bomb of short-term debt known as Lebac. The lack of preparation for the Federal Reserve’s continued interest rate hikes, which had been communicated well ahead of time, and the subsequent lack of financing alternatives which resulted in a shotgun wedding with the International Monetary Fund (IMF), could be another. Not to mention President Mauricio Macri’s single focus on deficit reduction, without any measures to invigorate the productive sector aside from promising a “downpour of investments” that never materialised.
Rather than focusing on previous mistakes, it seems more reasonable, and productive, to look forward. The intention is not to try and predict the future, a task for which we as a species are incredibly ill-prepared for. In Dante’s Inferno, in the eight circle of hell, fourth bolgia, are the fortune tellers, soothsayers, astrologers and false prophets who have their heads twisted backwards, so that they must walk in the wrong direction for the rest of eternity.
It’s clear that the government will continue to focus on reducing the deficit in order to comply with the IMF and receive fresh disbursements of money, yet austerity cannot be Macri’s only policy. At the same time, relying on investments into high-potential sectors like the Vaca Muerta shale formation, the agroexporters, mining, and lithium, for example, does little to increase employment as these are capital and not labour intensive sectors. Therefore, it is hightime for Macri’s economic team, and for Production Minister Dante Sica, to come up with a productive plan for small and medium-sized businesses (pymes) which represent 98 percent and two-thirds of formal sector jobs. Not only are these companies being crushed by steep interest rates, but they are also the least capable of competing given poor levels of productivity, which in part is caused by costs caused by, for example, an asphyxiating tax burden and rigid labour laws.
On the political front, it would send a strong message to the electorate if, instead of seeing Macri in election mode, he showed himself in governing mode. It is well known that Peña and star Ecuadorean advisor Jaime Durán Barba have become experts at winning elections by antagonising with former president Cristina Fernández de Kirchner. Assuming they won’t change a winning strategy, 2019 promises to be another year defined by the grieta or polarisation between Mauricio and Cristina. Instead, the president should chose to become a statesman, convening his political opponents publicly and in private – including Cristina – to a national dialogue that could become the basis for a broader social and political pact aimed at solving the most important problems including a bankrupt education system, an unsustainable pension and retirement plan, income inequality and extreme poverty (particularly in the Conurbano), and corrupt institutions from the Judiciary to the State.
It will by no means be an easy task to garner everyone’s support, particularly the Kirchnerites and those with more radicalised positions that respond to ideology. Pragmatically, though, Macri should take advantage of the more politically inclined members of his coalition in order to reach agreements with the more rational Peronists, particularly in Congress. Emilio Monzó, president of the Chamber of Deputies, and Interior Minister Rogelio Frigerio will be key in this structure if President Macri really wants a shot at passing deep reforms which will require the Peronist opposition’s votes.
Throughout the Cold War, particularly toward the end, the global psyche was severely distorted by the constant threat of nuclear war and global destruction. Discussions circled around the concept of mutually assured destruction and a missile gap due to the escalating arms race. In a brilliant parody released in 1964 titled Dr Strangelove Or: How I Learned to Stop Worrying and Love the Bomb, Stanley Kubrick laughed at all these concepts by picking apart the ongoing preconceptions and potential doomsday scenarios. Somehow, with tens of thousands of nuclear warheads aimed at targets across the globe, humanity avoided the worst possible outcome. In Argentina’s much less terrifying situation, Macri holds the keys to narrowly escape the worse.