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Argentina’s Uncertain Prospects

SHANGHAI – Mauricio Macri’s election as Argentina’s president brought to an end 12 years of government led by Néstor and Cristina Fernández Kirchner. Macri’s administration inherits a delicate economy. If he is not careful, Argentina could face a balance-of-payments crisis, owing to deteriorating external conditions and macroeconomic mismanagement, especially since 2011.

Some aspects of Argentina’s economic situation, however, are highly desirable – not least its low debt-to-GDP ratio. As a result, Macri’s government faces a much less daunting task than the one confronting Kirchner in 2003, after a decade-long experiment with Washington Consensus policies (financial deregulation, trade liberalization, and privatization), together with the peso’s peg to the US dollar, ended in disaster. When Kirchner took office, Argentina had just experienced its most severe economic crisis ever. Unemployment, inequality, poverty, and the national debt had all risen. Massive deindustrialization and deep weaknesses in its education system did not bode well for the future.

Following devaluation and default, Argentina experienced a spectacular recovery. In a severely demand-constrained economy, the Kirchner government pursued policies that led to a massive reduction in unemployment, poverty, and inequality. A deep debt restructuring greatly contributed to the restoration of macroeconomic sustainability.

In a favorable global environment, the more competitive exchange rate set the stage for reindustrialization, creating jobs for many who had been excluded from labor markets during the previous decade. As a result, from 2003 to 2008, GDP growth averaged more than 8% per year.