How Argentina Can Rebuild Its Economy

When Mauricio Macri was inaugurated president of Argentina last December, he announced that his biggest goal was to regenerate the economy of his country. Where should he lead his efforts? Experts believe that it is crucial to restore the confidence of foreign investors in Argentina in order to attract the capital that the country needs to improve its infrastructure, production volumes and competitiveness. However, that will be only the beginning of a long road that is bound to be full of challenges and headaches for Argentina.

Argentina, Trade Policy, Argentina Economy
Photo by Diego3336

Macri’s election ended twelve years of populist “Kirchnerism” in the country — an era that began in 2003 with the first administration of President Nestor Kirchner, and continued during the two terms of his wife, Cristina Fernández de Kirchner. Macri entered the Casa Rosada [“Pink House”] – Argentina’s equivalent of the White House – with promises of transforming his country into an economic model for Latin America. Macri said he aims to turn Argentina into a prosperous nation that attracts the attention of international investors who are eager to do business in that resource-rich nation.

The first and foremost step in that direction was taken on April 21, 2016, when the new chief executive delivered the $9.3 billion that Argentina owed to the so-called “vulture funds” — the 7% of Argentina’s creditors who had rejected the negotiated restructuring of the country’s debt in 2004 and 2010, and then decided to claim their funds in New York courts. In deciding to deliver those funds, Macri put an end to fourteen years of default and returned Argentina to international debt markets.

The Macri government’s next goal is to return to complete competitiveness in a globalized world. After six months in power, and an analysis of the situation, Macri’s economic team estimates that in order to reach that goal, Argentina needs investments worth some one hundred billion American dollars.

Mauro Guillen, director of Wharton’s Lauder Institute, explains that Macri has been “trying to unblock the situation internationally by reaching agreement with the various bondholders while at the same time trying to keep the opposition in Argentina under control. The various unions in Argentina are deeply divided.” Recently, however, “the three major union groups have come together [because] they want to oppose what the [Macri] government is doing.”

The international situation is particularly troubling, given that until three or four years ago, “Argentina was benefitting big time from China’s growth in terms of exports of soy and soy beans and so on,” Guillen notes. “It is a difficult situation, but Macri has the support of the business community and of the international community. When he came to power, I predicted that the [opposition party known as the] Peronists were going to make his life nearly impossible. So let’s see if he can survive his first year in office without any major problems.” According to the Buenos Aires Herald, no democratic non-Peronist leader has managed to complete his term as Argentine president since Marcelo T. de Alvear did so in 1928.

“Macri is very committed to making a difference in Argentina, and I don’t think he is going to shy away from the challenges.”  –Mauro Guillen

When it comes to the new investments that Macri hopes to attract, “Beyond the [dollar] amount of the investments, the most important thing is how those funds will be applied,” notes Enrique Lucio Kawamura, professor at the University of San Andrés in Buenos Aires. The dollar value of such investments is debatable, since the exact figure usually depends on many assumptions that can almost never be perfectly known in advance, says Kawamura, who has been studying both the productive sectors where those investments will be realized as well as the kinds of investments involved. “It is not the same thing to invest a certain amount to acquire new ‘know-how’ about production processes that discretely increase productivity as it is to invest that same amount simply in replacing depreciated machinery, for example.”

Guillen notes that Macri is not only a successful business person but also someone who has been in the public eye in Argentina for a very long time. Son of a prominent Italian businessman in the industrial and construction sectors, Macri gained national recognition in 1995 when he became president of Boca Juniors, one of the two most popular football clubs in the country. In 2005, he created the center-right electoral front Republican Proposal, known as PRO. Explains Guillen, “I think he is very committed to making a difference in Argentina, and I don’t think he is going to shy away from the challenges or give up. He understands the stakes and he knows that no matter how tough the situation gets, he needs to persevere, to be very forceful. He has a lot of enemies; everybody does in Argentina. I think he is keenly aware of that; he understands the Argentine political system, not just as a business person but as a politician.”

Strong Support from the U.S. and Europe

“Macri has the support of the business community and of the international community,” notes Guillen. “Both Europe and the United States are very supportive. Europe and the United States have long been suspicious of the Peronists and the Kirchnerists. Everybody outside of Argentina – in Europe and the United States as well as in Mexico and Chile – was hoping that Macri would win, so he has a lot of political capital” in those countries. “At the same time, he is seen as an enemy by Bolivia and Venezuela and Ecuador,” whose populist governments are opposed to Macri’s free-market reforms. In any case, “Europe and the U.S. matter much more now, especially in terms of reaching financial deals and insuring that there will be more foreign investment in Argentina. That is one of the key advantages that he has.”

In July, the German-Argentinian Chamber of Commerce announced that “German companies in Argentina welcome the change in economic policy by Macri’s government,” which should improve the competitiveness of Argentine industry and lead to “a sustainable economic recovery.” The Chamber said that German companies plan to invest about $3 billion in Argentina over the next four years as they welcome changes in economic policy. That month, Macri and German Chancellor Angela Merkel met in Berlin, marking Macri’s first visit as president to Europe’s biggest economy. At a joint news conference, Merkel said, “Nothing stands in the way of closer German-Argentinian cooperation.”

“Beyond the amount of the investments, the most important thing is how those funds will be applied.” –Enrique Lucio Kawamura

Rather than focus on specific numerical targets for foreign investment in Argentina, Martin Simonetta, professor of political economics at the University of Business and Social Sciences (UCES) in Buenos Aires, and director general of the Atlas Foundation for a Free Society, stresses the critical role of building confidence in the country. “It is an enormous challenge to reform decades of economic, political and institutional disorder as well as the resulting disinvestment that the Argentine economy has experienced,” says Simonetta. For this reason, it is fundamental “to recover the lost confidence in the country.” It is also

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