Mauricio Macri Was Bound for Disaster

Mauricio Macri thought he had more time. Argentina’s president, who is widely expected to lose Sunday’s election, took office four years ago with grand plans to remake the country, a perennial economic underperformer famous for tango, soccer—and economic chaos. After 12 years of free-spending populism, he opted for slow and steady reforms that he imagined a public accustomed to a generous welfare state could stomach. International investors, thrilled by his pro-business agenda, would give him a long leash, he thought.

He was wrong on both counts. Midway into Macri’s term, lenders grew tired of paying for Argentina’s overspending and abruptly cut off financing. At home, a relatively modest pension reform sparked violent protests, while cuts in public utility subsidies sapped Macri’s popularity. On Sunday, the opposition is expected to win handily.

Though it ended in disaster, however, Macri’s plan was not so far-fetched, and he arguably had no politically viable option other than a reform program designed to play out over several presidential administrations.

In the short term, the recovery from populism often slows economic growth, but Macri figured he could weather a rocky transition. After all, you have to try hard to lose reelection in Latin America, where incumbents enjoy a particularly strong advantage. A study of 137 presidential elections held between 1953 and 2012 shows presidents retained power 83 percent of the time.

Argentina’s peculiar election system includes an open and mandatory primary held in August before the quadrennial October election. This year, the Peronist opposition candidate, Alberto Fernández, pummeled Macri, drawing 48 percent of the vote—an advantage of 16 percentage points. Polls show his lead widening to between 17 to 24 points in advance of the Oct. 27 election. While Macri crisscrosses the country chanting “Sí se puede” (Yes we can) at rallies, his opponents are measuring the curtains in the Casa Rosada presidential palace. For Fernández’s running mate, former President Cristina Fernández de Kirchner, it would be a swift return to power—her term ended only four years ago.

Macri narrowly won Argentina’s 2015 election on a platform that emphasized crime fighting and anticorruption. Voters, worn out by eight years of divisive rule by the populist firebrand Fernández de Kirchner, opted for Macri’s center-right coalition—known as Cambiemos (Let’s Change)—over her preferred successor, a former vice president and governor named Daniel Scioli. Term limits prevented Fernández de Kirchner from running for a third four-year term.

In office, Macri was “faced with a ‘mission’ that, to many economists, must have seemed close to being ‘impossible,’” Vito Tanzi, author of Argentina, from Peron to Macri: An Economic Chronicle, has observed. The economy was stagnant, inflation was high, dollar reserves were low and the budget deficit was colossal. When Macri took power, Argentina remained exiled from global credit markets, thanks to a bitter dispute with holdout bondholders who refused any debt restructuring after Argentina’s epic $100 billion default in 2001, the largest in history at the time. The default followed a prolonged economic crisis that swept populists into power after then President Fernando de la Rúa fled the Casa Rosada in a helicopter amid widespread rioting.

Macri also had to tackle a tangle of price controls, export taxes, and capital controls that throttled economic activity, not to mention a bloated public payroll and unaffordable subsidies for public utilities, including natural gas, electricity, buses, and subways. Many of these policies had been in place since Argentina’s 2001 economic collapse—costly emergency measures that Argentina’s populist leaders never unwound.

In some ways, Macri moved swiftly. In his first months in office, he settled with bondholders, lifted capital controls and floated the overvalued peso. Though he lacked congressional majorities, he promised ambitious reforms to the country’s rigid labor code and costly pension system. But he balked at budget cutting, instead adopting a program of “gradualismo.” In doing so, Macri sought to break the vicious cycle of non-Peronist presidents who sacrifice public support by abruptly reversing the country’s habitual overspending. “The political team thought it was essential to undo this stigma,” Federico Sturzenegger, the first of Macri’s three central bank presidents, wrote in a recent economic autopsy report for Brookings.

That gamble succeeded, for a time. Creditors rushed back into Argentina, lending its market-friendly government tens of billions of dollars. (At one optimistic point, the country sold $2.75 billion in so-called century bonds, which would not mature for 100 years.) Macri regaled CEOs at Davos, toasted then U.S. President Barack Obama at a Buenos Aires state dinner, and hosted last year’s G-20 summit. In the 2017 midterm election, his Cambiemos coalition triumphed, attracting 41 percent of the vote compared to 21 percent for Fernández de Kirchner’s leftist Peronist faction.

But as always in Argentina, the debt-fueled euphoria did not last. Last year, a series of missteps and misfortunes shattered Macri’s economic model. These included the worst drought in decades, which depressed the soy harvest and deprived the government of badly needed dollars from farm exports; interest rate hikes in the United States that raised the cost of Argentina’s foreign borrowing; and economic troubles in Turkey that spooked emerging market investors. Seemingly overnight, investor tolerance for Argentina’s chronic deficits disappeared. Though Macri remained a Wall Street favorite, he had not erased memories of Argentina’s turbulent economic history. In addition to repeated defaults, Argentina logged 14 recessions between 1950 and 2016, the second-most time spent in recession in the world after the Democratic Republic of the Congo, according to a World Bank study.

As the peso collapsed in 2018, Macri turned to the International Monetary Fund (IMF). He returned with a $56 billion bailout, the largest in IMF history. In exchange, he traded gradualismo for rapid and deep spending cuts. As he accelerated reductions to public subsidies, prices skyrocketed and stoked inflation. Economic activity slowed. Inflation will reach 55 percent this year, according to the central bank. The IMF forecasts a 3.1 percent economic contraction.

The political fallout was predictable. The IMF is loathed in Argentina, and the government saw its popularity plummet, forcing it to shelve planned reforms as it focused on crisis management and political survival.

Given Argentina’s tumultuous political record, Macri’s ability to remain in office through the economic drama is a promising development. After all, no non-Peronist leader has finished his term since Argentina returned to democracy in 1983, following a seven-year period of dictatorship known as the Dirty War. Had he undertaken faster and deeper spending cuts, it is not clear Macri’s government would have lasted this long. In December 2017, as Congress debated modest pension reforms, protesters pelted police with stones and threw explosives. Lawmakers passed the bill, but Macri’s broader pension overhaul never materialized, and he dropped a promised labor reform.

But Macri’s failed attempt to liberalize one of the world’s most closed economies will have far-reaching consequences, and not only in Argentina. In neighboring Uruguay and Bolivia, for example, leftist candidates in this year’s presidential elections have compared their center-right opponents to Macri—describing him as a new emblem of destructive capitalism.

That caricature is unfair. Despite an image as an out-of-touch multimillionaire, Macri—the son of the late business magnate Franco Macri—is a buttoned-up engineer and former chief of government of Buenos Aires who has maintained the country’s expansive social programs. From the start, he has invited voters to judge him by his success reducing poverty. Initially, Macri made impressive progress on his aspirational “pobreza cero” pledge; thanks to a targeted utility subsidy, known as the tarifa social, and minimum wage increases, Argentina’s poverty rate fell from 32 percent to 26 percent, despite double-digit inflation. But his failure to sustain early gains in fighting poverty, undermined by galloping inflation and recession, reinforced the worst fears of voters about Latin America’s pro-market conservatives.

Worse still, Macri’s stumbles occurred just as Latin American voters seemed willing to forget the neoliberal era, when sweeping pro-market reforms in the 1980s and early 1990s produced high levels of unemployment and income inequality, catalyzing a wave of leftist victories known as the “pink tide.” Conservatives won the last presidential elections in Brazil, Chile, and Colombia. But now, Macri’s failures are being used as evidence that the best path to development is through heavy government economic intervention, which in the past has led to high debt and corruption throughout the region.

Not everything in Argentina is Macri’s fault, and not everything went wrong over the past four years. External factors—such as slow growth in Brazil, the trade war between the United States and China, low global commodity prices, and bad weather—all dampened Argentina’s export earnings. Meanwhile, Macri made strides cleaning up Argentina’s government and improving governance. He restored independence to the national statistics agency; increased public access to government records; pursued membership in the Organization for Economic Cooperation and Development; and pledged greater transparency in extractive industries. Under Macri, Argentina’s score on Transparency International’s Corruption Perceptions Index has improved every year for the past three years.

That’s not a minor achievement. Fernández de Kirchner and her husband, Néstor Kirchner, who served as Argentina’s president from 2003 to 2007, were notoriously corrupt. In 2016, police arrested a former senior official in Fernández de Kirchner’s public works ministry after he was spotted tossing bags of cash over the wall of a monastery in the middle of the night. Last year, the Argentine newspaper La Nación unearthed a diary from a longtime government chauffeur that detailed millions of dollars in bribes collected by officials he drove during the Kirchner administrations. Fernández de Kirchner, as well as her son and daughter, face numerous criminal charges, including money laundering

Argentina’s economic headaches, however, have overshadowed any progress on corruption and good governance, and seem to have driven voters to the polls in support of Macri’s opponents, despite the scandals of the Kirchner governments, for which Alberto Fernández, the current presidental candidate, served as chief of staff.

For his part, Fernández—a moderate Peronist who was little-known before Fernández de Kirchner announced his surprise candidacy in May—has declined to spell out proposed solutions to the country’s economic disorders.

Though Fernández’s platform is vague, businesses do not expect a return to kirchnerista populism. That does not mean Fernández de Kirchner will not wield power. Despite an intentionally low profile during the campaign, she has shown interest in the energy sector and sharply criticized the country’s worsening poverty. Her base is fiercely loyal, anxious for greater social spending and capable of disruptive protests, giving her far more leverage than the average vice president.

But local and international conditions would complicate a populist agenda. Argentina is broke, unable to borrow, and constrained by IMF rules. A Peronist government would have few friends; U.S. President Donald Trump is a close ally of Macri’s, and the leaders of Brazil and Colombia have expressed unease over the prospect of a leftward turn in Argentina.

Still, even if Fernández is more moderate than his running mate, Argentina’s pro-market reform program would assuredly not survive Macri’s expected defeat. Fernández, a favorite of Argentina’s powerful unions, has attacked the IMF, assailed austerity, and questioned Macri’s signature multilateral trade deal with the European Union, which still needs congressional approval in Argentina, Brazil, Paraguay, and Uruguay. That means the reform era that Macri launched just four years ago is likely coming to a rapid and inconclusive end.