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What will happen with the reforms after the government’s electoral victory?
Mauricio Macri has good reason to celebrate: Argentines just gave a strong endorsement to his reform agenda. The economic and political challenges facing the president suggest that he will implement changes gradually, although with renewed momentum after his unquestionable electoral triumph. To capitalize on these results, Macri will need to pick his battles carefully, resolve inconsistencies in his economic program, and show concrete results to maintain the trust of investors and citizens alike.
A national victory, and a defeated Kirchner
Only two years after its creation, the ruling coalition (Cambiemos, or Let’s Change) is the main political force in the country: it obtained more than 40% of the national vote and won in half the provinces, including those with the largest populations. Perhaps as important, Cambiemos won in the decisive Province of Buenos Aires, where former President Cristina Fernández de Kirchner was defeated, although she secured a seat in the Senate. The main figure of the government’s campaign in that province was María Eugenia Vidal, the popular governor who today is one of the country’s most important political leaders.
Cambiemos benefited from growing divisions within Peronism—between kirchnerist and several moderate factions—and expanded its influence in Congress: the ruling coalition obtained 107 of 257 seats in the lower house (it had 86) and 24 out of 72 senators (up from 15). For Macri, there is another piece of good news: The results put an end to Kirchner’s national ambitions, but her strong showing among the poor means she will be able to impede the renovation of Peronism, the former hegemonic party. After her defeat, the former president proclaimed herself the leader of the opposition (and, implicitly, of Peronism). Until alternative opposition leaders emerge, Macri can continue to argue that the only choice facing Argentines is between the change he represents, or a return to the failed policies of the past with Kirchner.
The size of the government’s lead in the elections is surprising because the past two years have not been easy. Macri has implemented changes that, although probably needed, have been socially painful, such as the reduction of subsidies, a partial liberalization of the economy, and some control of public spending. Argentines seem to believe that the reforms will pay off, and after a recession in 2016 the economy shows signs of improvement: the IMF expects 2.7% growth for this year. An influential presidential adviser summed it up: “Argentines are more patient than we had anticipated.” Macri made a reference to this sentiment of hope in his victory speech, when he announced that “the worst is over.”
The future of the reforms
After winning the midterms, the time has come to transform that political support into concrete results. Abandoning gradualism for shock therapy is not an option, but it is likely that the government will use its renewed electoral mandate to accelerate the pace of the reforms. For many voices within the administration, Macri has gained valuable political capital, and he must use it in coming negotiations with labor unions, provincial governors, Congress, and businessmen. Cambiemos, however, will still be in the minority in both houses, which will force it to seek consensus and moderate some of the reforms. It will be key, therefore, to balance demands of change—coming both from within the country and abroad—with what is politically and socially possible to achieve.
How the government manages the first two items on its reform agenda will provide clues of its future strategy. The Ministry of the Treasury is expected to present a tax reform plan within days. Argentina has one of the highest tax rates in Latin America, and potential investors demand that the government move to simplify an archaic and complex system where federal, provincial, and municipal taxes overlap. The government knows that reducing the tax burden on businesses is essential to improve competitiveness, but labor unions also demand a reduction of payroll taxes paid by workers, and a fiscal deficit of over 3% of GDP leaves little room for maneuver. The key will be the negotiations between Macri and the governors: the president will offer a more balanced distribution of taxes between the federal and provincial governments, but in exchange he will demand the support of lawmakers for his reforms. The need for support from the governors will be another moderating influence over coming changes.
The second imminent area of reform is labor regulations. The memory of Raúl Alfonsín, a former president who tried and failed to limit the power of Peronist labor unions in the 1980s, still looms large. Alfonsín’s failure unleashed a rise in social tension, and 13 general strikes during his time in office. To avoid a similar fate, Macri is expected move on two fronts. First, he will probably promote German-style reforms, with agreements between workers and businesses to reduce costs without jeopardizing jobs. The government has already done this successfully in some sectors, such as oil production. Further, Macri will present a plan to regularize millions of informal workers, a move that has the support of the General Workers’ Confederation, the country’s largest union group.
But at the same time, Macri will likely use his new political power to pressure the unions. The government has already moved against some recalcitrant union leaders, and some of them are in jail for corruption. Most unions are Peronist and pragmatic by nature—and got the message: as long as Macri does not curtail their influence and contains businesses’ demands to make it easier to fire workers, the unions will probably support more moderate reforms. It remains to be seen, however, if this will be enough to rein in the “Argentine cost,” a series of regulatory bottlenecks that hurts the capacity of the economy to compete.
More changes (and challenges) in the horizon
Over the past decade (and even before) Argentina has accumulated a long to-do list that the government expects to tackle as soon as possible to untangle the economy and boost growth. Among Macri’s priorities is a profound reform of the bureaucracy to cut red tape and simplify administrative procedures. The government will also present initiatives to update the educational system, to improve standards and adapt schools to accelerating changes in the global economy. Finally, the president is expected to propose changes to the pension system, including incentives for people who choose to continue working after the retirement age.
Time is of the essence: the government must pass most of its reform package through Congress before the World Cup begins in July 2018. Immediately afterwards, the campaign of the October 2019 presidential election will begin. Given his recent victory, Macri is expected to run for reelection. This will make political, business, and union leaders more willing to negotiate with the government. After all, Macri could remain in office until 2023.
Throughout the reform process, the government will need to maintain a careful balance: it needs to boost competitiveness to attract much-needed foreign investment, diversify exports away from commodities, develop crumbling infrastructure, and generate jobs. But we Argentines (despite our world-renowned egos) are not used to competition, especially in market conditions. The president will need to deal with leaders from the business, union, and political spheres who are likely to resist letting go of the privileges, subsidies, and state protection they have enjoyed for decades.
An excess of pragmatism in negotiating with these actors might generate problems for Macri within his coalition. Congresswoman Elisa Carrió, a volatile leader of Cambiemos who won a decisive victory in the City of Buenos Aires, wants the president to fulfill his pledge of promoting transparency and accountability with reforms to the political and judicial system. In the next few weeks, judges will move forward with investigations of Cristina Kirchner (who already has parliamentary immunity) and some of her former ministers facing corruption allegations. So far, the government has benefited from the many corruption scandals involving kirchnerism. Now it must move from campaign strategy to actual institutional reforms.
Macri’s many challenges are compounded by an economy that is growing again but shows some worrying signs, amid growing global uncertainty. Inflation is coming down but still high at 22% in 2017 (the second highest in the region after Venezuela), higher than the Central Bank’s target of 17%. Another problem is growing public debt, which although manageable at 57% of GDP, is rising fast. To avoid hard cuts to public spending in the two years since Macri came into office, Argentina’s debt has increased by over $70 billion dollars, to a total of over $330 billion. Rising debt service payments are beginning to make promised reductions of the fiscal deficit more difficult. If the government does not manage to make ends meet without taking on more debt, the situation could become explosive. Public debt is a politically sensitive issue in Argentina, which has experienced its fair share of defaults and financial meltdowns.
Paradoxically, the government also wants to open up Argentina to the world just when the United States is moving in the opposite direction under Donald Trump. In fact, Washington has already placed restrictions over multi-billion imports of Argentine biofuels. Further, Macri’s government is looking carefully at the US Federal Reserve: a rise in interest rates could hit Argentina hard. Buenos Aires is hopeful about closing a trade agreement between Mercosur and the European Union soon, but French President Emmanuel Macron (who wants to protect France’s agricultural sector) is skeptical, and could derail the process. Meanwhile, Brazil, Argentina’s largest trading partner, is only now overcoming a historic recession and continues to experience a serious political crisis: who will win Brazil’s presidential elections in 2018 is anybody’s guess. What’s more, the Brazilian congress has recently approved a deep labor reform, which could affect Argentina’s competitiveness.
The domestic and external challenges facing Macri are daunting, but he just obtained a critical boost from the electorate. Argentina seems to be one of the few positive stories in a region plagued with unpopular incumbents, stagnant economies and political crises. Whether it continues on this path will depend on the government’s capacity to take advantage of its victory without succumbing to excesses or neglecting the long term. Curiously, both president Macri and Cristina Kirchner uttered the same phrase when they addressed their followers after the results came in late on October 22: “this is only the beginning.”