Argentina: Economic Change with President Macri

Argentina is well known for salsa, meat, and Messi. But the country has also been dealing with serious economic problems, including a tough recession and government corruption. In December 2015, the country elected President Mauricio Macri—the country’s first democratically elected leader in the last hundred years to not be either a populist or a militarist. During his term, he has instituted many free-market policies that have benefited investors, but these policies have also had harmful effects on small businesses. Argentina’s economy has been shrinking in the last year, and unemployment is almost at 10 percent. Macri’s approval rating has gone down 18 percentage points to 54 percent, and Argentine citizens are now protesting in the streets. In order to accurately explain this political instability, one needs to understand the short-term economic losses and long-term economic gains behind his policies.

Macri took office with a lot on his plate. The tumultuous history of Argentina includes dictatorships and failed socialist regimes. The country was in default from 2001 to 2016 and reached 21 percent unemployment in 2002. Cristina Fernandez de Kirchner, the previous president, instituted protectionist policies that squashed foreign competition and implemented currency controls that overvalued the peso. In addition, Argentina has been experiencing high inflation for over a decade and has underinvested in infrastructure. Krichner’s administration was filled with multiple corruption scandals, including fraud, and was notorious for manipulating statistics. Although a regional power in the 1980s, Argentina’s last decade has been one of isolation and economic loss.

Once in office, Macri implemented policies, ranging from infrastructural upgrades to major improvements in the quality of government statistics, to stimulate the economy and cater to businesses. Importantly, Macri also cut the export tax, ended currency controls, and lowered subsidies. Despite how sensible many of these reforms sound, the average Argentine has not yet seen the benefits—in fact, for many, things have gotten much worse. The economy shrank 4.3 percent from June 2015 to June 2016, unemployment hit 9.3 percent in the second quarter, and in July, industrial production had a 7.9 percent loss.

Given the lack of immediate progress, Argentines are angry. With the lowering of subsidies, heating bills have soared as much as tenfold for consumers in greater Buenos Aires. According to France’s 24now documentary, the club Francisco Pienovi, dedicated to get kids involved in sports, has had its electricity bill increase by a factor of sixteen in under a year. To voice their concerns, tens of thousands of protesters rallied outside of the presidential palace in August. Recently, Aerolineas Argentinas shut down flights in a protest for better compensation, the Union of Argentine Educators publicly voiced their concerns for workers’ rights, the Confederation of Education Workers organized protests, and the Land Workers’ Union handed out twenty thousand kilograms of free vegetables to draw attention to the high price of fertilizer. Even members of the government have shown their discontent; the Supreme Court forced Macri to reinstate certain subsidies in August 2016, claiming that he had to hold public comment hearings before lowering them.

However, Macri’s policies of cutting the export tax, ending currency controls, and lowering subsidies will have positive implications in the long run. In order to understand the economics behind his three main policies, we will explore their short-term consequences and long-term benefits.

For the past decade, Kirchner’s administration had levied an export tax. The tax was put in place to fund Kirchner’s social programs and to allow Argentinean producers to compete more easily. One of the first things Macri did in office was cut the export tax for certain goods. Under the tax, foreign consumers had to pay 15 to 23 percent more for meat than domestic consumers did, but this is no longer true since Macri slashed the export tax on grain, beef, and corn. With a lighter tax on their goods, Argentine companies will sell more products abroad because their goods will be less expensive for foreigners to buy. As a result, foreign businesses will, in theory, finance more ventures in Argentina, which will further boost the Argentine economy.

Despite the loss in short-term government revenue that will result from these tax cuts, Macri promises to keep many of Kirchner’s programs running. To do this, he chose to maintain the export tax on soy, only lowering it from 35 percent to 30 percent and delaying plans to abolish it until 2018. Argentina is the world’s biggest producer of soy, so this tax is a tremendous source of government revenue that will keep many social programs running. In the long run, the lowering of the soy tax may help Argentine companies. However, in the short run, this tax hurts Argentine consumers by increasing the prices of their purchases.

By ending the currency controls put in place by Kirchner, Macri has also opened Argentina up to more trade. A currency control is a restriction on using foreign currencies inside a country (few countries still use them). In the short run, ending a currency control may cause volatility in the economy because the currency’s value relative to other currencies fluctuates up and down in global exchange markets. However, in the long run, the lack of a currency control allows traders to exchange weaker currencies for stronger and more stable one, which allows them to make more profitable deals. When currency trades were restricted, Argentine stock traders could trade only with the peso, which prevented trades to take place with the more stable, more valuable United States dollar. While Argentines can now make more kinds of trades, the exposure to the volatility of the currency market that results from the end of currency controls could do damage to Argentina’s economy by increasing the likelihood of huge losses and big gains. This disincentivizes trading because it is difficult to predict the future value of peso, and so the value of Argentine stocks may fluctuate wildly as the peso fluctuates. Still, developed Western countries do not use currency controls because of the positive gains for traders in the long run.

These positive gains may already be taking effect in Argentina. Argentina’s stock market has been totally revitalized for a variety of reasons, among them the ending of currency controls. Merval Buenos Aires, a major Argentine stock market, has climbed from a stagnant 3,000 in the first six years of the last decade to around 17,869 today. In addition, while the peso was overvalued at 9.77 pesos per US dollar the day before Macri stepped into office, it immediately dropped to 13.3 pesos per US dollar when he became president in December 2015. As with the ending of export taxes, a weaker and more realistic currency exchange rate allows Argentine companies to sell their goods more cheaply to other countries, thus increasing their profits if they sell more goods. The losses in the short term may be due to the fact that many of Macri’s free market policies take time to realize their full positive effects.

In addition, by trading with the rest of the world, both consumers and buyers can make use of their comparative advantage by trading what they are relatively better at doing. Opening up to free trade allows the total production of Argentine companies to increase, since they can now specialize in producing goods that are in high demand globally. And consumers can theoretically buy things like Chinese t-shirts for less under this scheme because the production of t-shirts is much cheaper in China. However, this will all occur in the long run, since Argentine businesses no longer have a cushion of subsidies and have fewer domestic consumers in the short run. Macri’s goal of opening up Argentina to trade and by ending currency controls, then, is to help revitalize the Argentine economy in the long run and help both producers and consumers.

Kirchner’s government subsidized many utilities, like gas, electricity, and potable water, so that consumers didn’t need to pay as much for them. While this gave people extra spending money, it was also a big cost to the government. By lowering subsidies for gas, electricity, and water, Macri’s government aims to decrease the high government debt from the Kirchner’s administration, even though consumers and companies now have to pay for those utilities. The Argentine government is projected to save $4 billion this year from the lowering of subsidies and promises to allocate the saved money to public services. According to Argentine ambassador Martin Lousteau, who spoke at the University of Chicago in October, Macri hopes that by diverting these savings to infrastructure projects and public services, he will help stabilize the Argentine economy. However, the obvious implications are that consumers have to pay more for their electricity bills.

Macri’s officials explain that the Argentine economy needs more time to adjust and that the populace must learn to stop depending on the government as it did during the Kirchner era. In his talk at the University of Chicago, Lousteau directly addressed Macri’s new policies and explained the difficulty in changing Argentina’s economy. His explanation focused on three aspects: the alignment of the exchange rate, covering the cost of utilities, and dealing with the deficit. He recognized that trying to balance these things while keeping citizens satisfied is difficult and that by changing one, you affect the other two. But he believes that Argentina is on the right path and argued that as long as there is transparency between the government and its citizens, all Argentina needs is the time for Macri’s policies to take effect. This time will allow many companies to invest abroad, government debt to decrease, and international trading volume to increase. Although Argentina’s economy shrank by 1.8 percent in 2016, the IMF forecasts a 2.8 percent growth in GDP for 2017.

While Argentina has an uphill battle, it seems to be on the right track for a prosperous decade of increased investment, lower government debt, and increased trading abroad. Certainly, trade-offs and sacrifices have to be made, but overall, Macri’s policies will most likely help Argentina regain its status as a prosperous nation in the world.

The image featured in this article is licensed under Creative Commons. The original image can be found here.