South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Breaking with more than a century of economic mismanagement in one of Latin America’s most dysfunctional polities is a daunting task. Mauricio Macri, the mayor of Buenos Aires who was elected Argentina’s president on Sunday, will have to attempt to ditch the populism of the Peronist legacy amid an economy battered by falls in commodity prices and isolated by aggressive investor litigation.
Mr Macri’s liberalising instincts are sound, and the failure of the economic model of his predecessor Cristina Fernández, president for eight years, will allow him to argue that there is no alternative. But the history of Argentina’s attempts to move towards a more stable market-oriented economy has been marked by repeated false starts and swerves into the ditch.
The president inherits an economic shambles. Amid her fiery interventionist rhetoric, Ms Fernández’s wrong-headed policies — instituting capital controls, running down foreign exchange reserves, in effect having the central bank print money to finance a public deficit — were somewhat hidden by the long commodity boom. Now the prices of Argentina’s farm exports have collapsed, the severe weaknesses of its economy have been exposed.
Some of the policies that Mr Macri will need to follow are clear. As he has already promised, he needs to end capital controls, which should allow the exchange rate to find its own level. He should allow the central bank to do its job, and tighten policy to get a grip on inflation, currently around 20 per cent.
Yet even for those Argentines who grasp the depth of the crisis already pervading the country, a major economic adjustment will be politically unpalatable and take a long time to work. The last Argentine president who came to power promising widescale liberalisation was Carlos Menem, who privatised a swath of the economy during the 1990s. The experiment ended in catastrophe as the macroeconomic anchor, the currency board-type arrangement Mr Menem implemented in 1991, collapsed a decade later under the pressure of Argentina’s traditional inability to control public spending.
However, Argentina deserves some sympathy for one of Mr Macri’s trickier tasks. Holdout bond investors, still suing the Argentine government after the 2001 sovereign default, have in effect shut it out of capital markets.
The case relies on a jurisprudentially original — not to say eccentric — ruling by a New York judge based on an unusual reading of pari passu clauses in government bonds. The US government has filed amicus briefs to the courts supporting Argentina’s interpretation of the law. But international sympathy alone will not remove the problem. Mr Macri’s best hope is to build goodwill by instilling some kind of economic normality and then, if necessary, to come to a deal with the bondholders. He would have more chance of support from other governments and the International Monetary Fund, despised though it is in Argentina, to help finance a difficult transition.
Argentina has tested to destruction time and again the Peronist approach of high public spending financed by fiscal deficits, politicised state intervention in the economy and choking off cross-border flows of goods or capital when the inevitable current account shortfalls get out of hand.
Mr Macri represents the best chance the country has to abrogate that habit since the currency and debt crisis of 2001. That, though, is not saying much. Argentina’s new president must grapple not just with a specific series of painful policies but with a national tradition of resorting to populist short-term fixes in times of hardship.