International politics

Argentina: A great country in dire straits

What a great country it is - well, it was: 100 years ago. Richer than most continental European nations, including France and Germany; a magnet for immigration and foreign investment; a second United States of America, but perhaps a more charming one, with strong Italian and Spanish roots. And with a wonderful capital, Buenos Aires, beautifully situated on the River Plate, with a bustling port and a fertile hinterland where the cattle grazed and the wheat was grown, making the country rich through integration into world markets.

Gone - and remembered with nostalgia by the people of Buenos Aires, a city that, despite its economic decline and even decay, still boasts beautiful buildings and magnificent boulevards from the turn of the 19th and 20th centuries. The grandezza is still there, along with an admirable sense of humor and self-deprecation that characterizes Argentinians in the face of their economic plight, for which they increasingly blame themselves rather than others.

Beyond the economy, Argentinians have much to be proud of: Their country has successfully overcome a cruel dictatorial past (a bit like Germany); it has been a stable parliamentary democracy with a strong president for decades (a bit like France); it has a completely free press with a lively academic and intellectual as well as cultural and scientific discourse; it is an open society in the best tradition of an immigration country; and - not to forget - it is currently world champion in football (soccer), for the third time in this sport's history (only Brazil and Germany have been that more often!).

The problem is that, given the country's huge potential, the current economic situation is terrible. GDP is expected to shrink by almost 4 per cent in 2023; consumer price inflation is over 100 per cent (and rising); the budget deficit is close to 5 per cent of GDP; the currency has lost almost 50 per cent of its value against the dollar in the last 12 months (the worst devaluation in the world, surpassing even Egypt, Pakistan and Turkey). In short, a complete macroeconomic mess.

The immediate cause of this mess is easy to identify: a persistently high government deficit financed by the printing of money by a central bank that is anything but independent. Balancing the budget is the first key to improvement. But that is easier said than done. Then comes the long list of necessary reforms: making the central bank an independent institution; fighting corruption and broadening the tax base by bringing the huge informal economy - estimated at around 1/3 (!) of GDP - within reach of the authorities; liberalising labour laws and cutting red tape to make the supply of goods and services more elastic and reduce the burden of paying for public employment; investing more in modern infrastructure instead of feeding the consumption and subsidy demands of privileged lobby groups; and opening up the economy to global markets and moving to full convertibility of the peso - without the current absurd combination of export taxes, capital controls and multiple exchange rates.

All this means: implementing a comprehensive reform program, moving from the traditional principles of left-wing (and corrupt!) Peronism to a potentially dynamic true market economy within a solid institutional framework. This is a very conventional liberal prescription. And note: it has been partly applied in Argentina before - in the 1990s with Finance Minister Domingo Cavallo and President Carlos Menem. But then it was done within an overly rigid currency board framework against the US dollar, which led to a massive overvaluation of the peso that eventually triggered a dramatic balance of payments crisis. This time, such a mistake must be avoided. Again, this is easier said than done, because starting with a deliberate undervaluation of the peso to make Argentine goods cheap enough on world markets to achieve a current account balance or surplus could lead to another destabilizing bout of new inflation. A knife-edge dilemma!

Clearly, all of this adds up to an enormously ambitious policy program that - at best - can be carried out in one big stroke at the beginning of a new legislative period, a classical shock therapy that visibly starts a new economic regime for the plagued country. Only thus exists a realistic chance that the macroeconomic fruits of the liberal regime change will emerge fast enough, well before the next parliamentary election four years later.

A huge challenge! But there is no time for pessimistic procrastination. And the political opportunity for liberal shock therapy may come with the parliamentary and presidential elections this autumn. Polls suggest that people may be ready. At present, only 13 per cent of all Argentines favour a left-wing (Peronist) government like the current one, which is rightly blamed for the mess; 21 per cent favour a centrist one, and 32 per cent lean to the right, implying a remarkably large potential support for reform. Of course, all polls on "political leanings" must be interpreted with caution, not least because right-wing politicians in particular often couch their promised economic medicine in terms that make it seem painless, simple and straightforward - such as a complete "dollarisation" of the economy, which would in fact be a particularly drastic, contractionary and painful way of fighting inflation. Be that as it may, the poll results at least show that people want stability - and may be willing to make sacrifices for it.

Clearly, then, Argentina stands at a crossroad of politics as it has not done for a long time. If it does not find the turn towards economic reform, it may tumble into a very serious further accelerating spiral of decline. After all, due to demographic reasons, there will be a growing labour scarcity in Western Europa and North America in the next years and decades. And given the cultural proximity of Argentinians to the OECD-countries of the Atlantic and Mediterranean hemisphere, young Argentinians may decide to search for employment there - even more so than they have done in the past. A massive brain drain may set in, much more massive than the one that already exists. And that may well mean a final disaster for a country whose richness in resources and human potential is impressive, even after decades of decline.

To avoid this nightmare, Argentina needs to focus all its domestic energy on working through the inevitable reform agenda. And it needs external support to do so. To be sure, most of the homework must be done at home, in Argentina itself. But the EU, the US and the International Monetary Fund should not stand on the sidelines. They should help: by opening markets to Argentine products - for example, through the conclusion of an EU-Mercosur trade agreement; and by providing adequate credit support - subject to progress on reforms in Argentina. A cynical reference to the country's terrible record in the past does not help. There must be another attempt, this time serious and thorough. If it succeeds, it will be a leading example for the whole of Latin America.