BY CLAUDIO LOSER
WASHINGTON, DC — In late October, Argentina elected Cristina Fernandez de Kirchner president. The voting process was open and clean. The support was overwhelming and her mandate is strong, but her tenure may be far from easy.
It is not my intention to discuss politics, fascinating as they may be. However, I believe that the economic numbers surrounding Mrs. Kirchner's victory are worth reviewing, as they confirm my working Clintonian hypothesis that "it's the economy, stupid."
Why Cristina won, other than because of a divided and cacophonous opposition:
- During 2003-2007, the Argentine economy grew by a cumulative 51 percent, and by 44 percent on a per-capita basis. This followed the worst recession in recent Argentine history—a decline of 22 percent on a per-capita basis from 1998 to 2002.
- The rate of unemployment declined from 20 percent in 2002 to about 9 percent now, and poverty dropped sharply, while real wages rose by between 19 percent and 38 percent, depending on whether unofficial or official data are used.
- Fiscal policy has been strong, a reflection of initial spending controls, a favorable external environment, and the tough renegotiation of Argentina's debt.
- Strong external demand for Argentina's exports led to an increase in export prices—some 90 percent since 2001—and, helped by a competitive peso, strengthened the balance of payments and reserves.
Some reasons why her honeymoon may be very short, even with a solid majority in Congress:
- Strong aggregate demand on account of exports, an expansionary fiscal policy, and an insufficiently tight monetary policy have resulted in an acceleration of inflation to some 9 percent on the basis of official numbers. Price controls, pressures on producers, and data tampering make these numbers dubious, with most independent estimates suggesting a rate of more than 20 percent a year.
- The electricity sector is working at full capacity and, with no margins, it is highly sensitive to water conditions in reservoirs and to extreme climactic events.
- While external conditions remain favorable, they may reverse in 2008, with adverse effects on the economy. This will make an already weakening fiscal position untenable.
- The government's borrowing requirements—some $7 billion next year—will become increasingly difficult in an illiquid financial market and with increasing risk premiums for Argentine debt.
- Moreover, Argentina remains in default with respect to official creditors organized under the Paris Club for some $7 billion, making access to guaranteed credits virtually impossible. A deal may require the intervention of the demonized IMF.
- Views about Argentina's friendliness to foreign investors remain some of the worst among larger Latin American countries, surpassed only by Venezuela. For example, Argentina is ranked 85th of 131 in the recent Competitiveness Index (World Economic Forum) and also ranks low on economic freedom and high on corruption perception.
Clearly, there is need for action: adjusting tariffs, reducing inflation through better macroeconomic policies, improving the investment climate, and dealing with the energy shortage. These actions may go against existing populist tendencies, and may create political problems. However, if the marriage is to last, it is much better to tackle existing problems right away, rather than keeping them shrouded in a cloud of mystery and romance. A cold front will eventually dissipate the cloud.
Claudio Loser is a senior fellow at the Inter-American Dialogue and former head of the Western Hemisphere Department at the International Monetary Fund. Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.