Kenneth Mitchell is an associate professor of political science and Robert H. Scott is an associate professor of economics, both at Monmouth University.

In his 1990 autopsy of the Cold War world order, written just after the fall of the Berlin Wall, the political scientist Adam Przeworski declared that “all that is needed is a state that will organize efficient markets, tax those who can afford it, and use the revenue to ensure the material well-being of everyone. Yet somehow states almost nowhere succeed in this simple task.”1 More than a quarter-century later, little has changed.

Argentina is emblematic. A world-class agricultural exporter since the mid-nineteenth century, the country has long been plagued by cycles of economic mismanagement. Its radical IMF-sanctioned restructuring during the 1990s caused an epic economic depression in 2001–02, prompting what was then the world’s largest sovereign default. By 2001, Argentina’s tax-to-GDP ratio ranked last among middle-income countries; its elected government collapsed amid urban riots and mass protests; and its rates of poverty, inequality, and unemployment soared to historic levels.

In the years that followed, progressive presidents Nestor Kirchner (2003–07) and Cristina Fernández de Kirchner (2007–15) engineered a socioeconomic recovery. Taxes were immediately raised: the country’s tax-to-GDP ratio averaged a paltry 9.9 percent between 1975 and 1998, yet it surpassed 25 percent after 2007, and by 2014 reached 32.2 percent. Progressives spent this new revenue generously and wisely, prioritizing income redistribution in the form of public jobs plans, conditional cash transfers (CCTs) to poor households, and popular pensions, with the latter two the best-funded programs of their kind in Latin America. A center-left consensus emphasized employment over strict inflation targeting, domestic production over imports, domestic consumption over tax cuts, and taxing agricultural-export profits over borrowing from abroad. By all measures these policies worked. From 2002 to 2015, unemployment fell from an all-time high of 22.5 percent to a record low of 5.9 percent, and the poverty rate fell from around 50 percent of households to less than half that. Inequality, as measured by the Gini score, declined from 0.54 in 2002 to 0.43 in 2014.

Neoliberal analysts attribute these gains made under progressive governments to sheer luck, maintaining that such expansive social provision was made possible only by a fortuitous global boom in commodity prices from 2002 to 2008. IMF analysts go even further, arguing that neoliberal policies—strict limits on deficit spending, lower taxes, inflation controls, and the like—would have produced even stronger socioeconomic gains. The actual performance of such policies in a country like Chile suggests otherwise. According to the World Bank, Chile’s Gini score fell by 50 percent less than did Argentina’s during the boom.

Such arguments recall the IMF’s postmortem of the 2001 crisis, which blamed Argentina’s economic collapse on the country’s own dysfunctional governance, rather than any policy promoted by the IMF itself. This despite the fact that IMF loans underwrote Argentina’s neoliberal reforms throughout the 1990s, and President Carlos Menem (1989–99) even delivered the keynote address at the IMF and World Bank annual meetings in Washington, D.C. in 1998. While it is true that governments like Menem’s did not benefit from a comparable commodity boom, neoliberal governments of the era binged on foreign debt, while the progressive governments of the 2000s did the opposite. Argentina’s external debt stood at $62.3 billion in 1991 before ballooning to $146.3 billion in 2000. In 2014, Argentina’s foreign debt dropped to $111.5 billion, after successful debt renegotiations in 2005 and 2010—meaning progressives managed to slash billions in accumulated neoliberal debt. Moreover, rapid economic growth under progressive governments caused Argentina’s foreign debt-to-GDP ratio to fall significantly by 2014.

The IMF miscasts the role of external finance in recent economic management in Argentina. Both neoliberals, by amassing foreign debt owed to the IMF, Paris Club, and Wall Street, and progressives, by taxing high-priced commodity exports, in effect relied on outside finance to fund their respective policies of liberalization and domestic consumption support. Of course, the former ended in a depression, massive foreign debt, and political collapse, while the latter resulted in low unemployment, reduced poverty, and minimal foreign debt (nothing was owed to the IMF or Paris Club by 2014), and fostered the political conditions for a peaceful and orderly transfer of power. (It is worth noting in passing that Argentina’s earlier IMF-backed neoliberal experiment, undertaken during the military rule of 1976–1983, also depended on unsustainable levels of foreign debt. Despite high commodity prices, in 1975 Argentina owed $4 billion, and by 1982 the debt bill swelled to $40 billion, causing rampant inflation and massive capital flight similar to that of 2001–02.)

When constitutional term limits required the election of a new president in November 2015, the basic Przeworski blueprint would have called for maintaining taxation and redistribution, but with more commitment to containing inflation, which had by then reached 20 percent. Unfortunately, Argentines chose another path by electing Mauricio Macri, a former mayor of Buenos Aires, by a scant 2 percent of the popular vote. Macri ran as an anti-establishment right-wing populist, and likely benefited from cyclical voter desire for partisan change after twelve years of Peronist rule. Voters were promised “zero poverty in four years”—one of three official Macri campaign pillars along with fighting drug trafficking and lowering political polarization—if the country reversed kirchnerismo and resurrected neoliberalismo. Pent-up foreign investment eagerly awaited this shift, and by election day the theme of zero poverty tied to foreign investment dominated Macri rallies and advertising.

Argentines may have voted, albeit by a slim margin, for a market-friendly version of the Przeworski blueprint, but they got something altogether different. In his first month, Macri instituted an IMF-style supply-side shock program—lifting currency controls, slashing agro-sector export taxes, announcing the end of utility subsidies, firing public sector workers, and devaluing the peso by around 40 percent. The economy was hardly in dire straits, yet Macri acted as if it was 1990 again—without, of course, any threat of hyperinflation, mass unemployment, or heavy foreign debt.

Though courtship of foreign finance was conspicuously absent from his 2015 campaign, once in office, Macri exceeded Wall Street and IMF expectations. Export tax cuts instantly transferred wealth to the richest segment of society, while public jobs cuts and peso devaluation ravaged average Argentines. But not to worry: January’s economic pain, Macri promised, would soon be forgotten. By the second half of 2016, Argentina’s citizens would be enjoying resumed economic growth, an export boom, lower inflation, a smaller budget deficit, and less poverty. Since then, has the new neoliberalism outperformed the old neoliberalism?

Economic Headwinds

Wall Street analysts must squint hard at the relevant economic indices to convince themselves that Macri’s policies have been successful and sustainable. The administration’s January 2016 forecast predicted that by year’s end, GDP growth would rise to 1.5 percent; instead, it dropped by 2.5 percent. The government projected that inflation would fall below 20 percent; it rose above 40 percent. The budget deficit, it was said, would shrink by 1 percent (it grew), export revenue would flood the central bank (still waiting), and poverty would plunge (it rose).

Far from fostering robust growth and popular prosperity, Macri’s first year in office has left Argentina mired in stagflation. Several influential voices predicted this outcome from the beginning.2 By October 2016, the government could no longer ignore its own dismal record: the trade deficit had ballooned, with imports falling by 2.1 percent and exports by 6.3 percent compared to October 2015, and the primary monthly fiscal deficit reached $4.08 billion, a significant rise over the previous month. Days after the release of the October data, with unemployed workers protesting in the streets of Buenos Aires, Macri scrambled to sign a pact with the country’s largest umbrella union, mandating no further layoffs until March 2017. At a subsequent press conference, Macri confessed that his rosy predictions for 2016 had been overly optimistic; 2017, he assured his audience, would be the year of Argentina’s comeback.

With the 2017 elections approaching, even Macri’s supporters fret over rapidly accumulating foreign debt, plunging industrial production, and mounting social unrest. Argentines will elect their entire lower house of congress in October. Currency devaluation, trade liberalization, cuts in utilities subsidies, and a large budget deficit have together caused inflation to double. Export tax cuts worsened the budget deficit. Income from export taxes, which Macri has slashed, fell as a percentage of total tax revenue from 7 percent in 2015 to just 3 percent in 2016, yet Macri has maintained public spending.

While Macri’s government has managed to contain runaway inflation, this can be largely attributed to advantageous domestic and international circumstances. First, a court temporarily halted utility subsidy cuts, causing household and commercial utility bills to stabilize immediately, at 0.2 percent for the month of August. Second, the economy fell into recession, causing unemployment and restraining wages. Finally, two critical external factors dampened inflation: oil, Argentina’s most expensive import, stayed cheap, and U.S. interest rates remained low, allowing Macri to cover his growing budget deficit with unprecedented foreign borrowing. Today oil prices are slowly rising again, and markets anticipate steep U.S. interest rate hikes in 2017. Macri’s run of good luck appears to be over.

In the months leading up to the 2015 election, wealthy grain exporters starved the Kirchner government of tax revenue by hoarding a reported one-third of the national harvest. Did Macri’s neoliberal shock then spark an export boom in 2016? The record is mixed. Argentina’s annual export revenue cycle peaks in June and July, and measured in U.S. dollars, the two-month total in 2016 fell to the lowest level since 2009. At the same time, the international price of soya beans, Argentina’s largest export commodity, climbed from $323 per metric ton in January to $421 in June—a 23 percent rise in six months—and the price of soya bean oil, of which Argentina is the world’s largest exporter, rose slightly from $660 per metric ton in January to $704 in June. Moderate price gains thus prevented export revenue from deteriorating further.

Industrial production plummeted throughout 2016, especially in the automotive and construction sectors. Overall, between January and October 2016, export revenue fell by 1.6 percent, despite currency devaluation, massive export tax cuts, and relatively favorable international prices. Falling export revenue has drawn little attention, however, since the import bill through October 2016 fell 8.9 percent, producing an overall annual trade sector surplus. Macri in January 2016, of course, promised a trade surplus linked to an export boom, rather than a recession-linked decline in imports. Had he cut export taxes slowly (or better yet, maintained them) and relied on currency devaluation alone to boost the competitive position of the country’s exports, the resulting additional tax revenue could have stimulated domestic consumption to avoid recession, or have been used to close the budget deficit and lower inflation and foreign borrowing.

Falling consumption is dangerous. Slashing of export and other taxes means the government relies even more than usual on consumption tax revenue to fund public spending and foreign debt servicing. Macri appears trapped: public spending cuts would only further depress consumption and consumption taxes, while interest rate cuts to spur consumption are off the table, as Macri’s Argentina competes with Trump’s United States to attract foreign finance.

Wall Street and President Obama lauded Macri’s policies of currency and trade liberalization, and U.S. investors continue to loan money to Argentina at an impressive clip, as evidenced by the country’s rising external debt. In January 2016, Macri borrowed $5 billion, and in April he borrowed a record $16.5 billion. Cutting taxes, raising government spending, and paying the difference with foreign borrowing is the same approach tried in the 1990s. International finance has apparently forgotten the country’s disastrous neoliberal experiment and meltdown of 2001–02, but wealthy Argentines, who continue to pull their money out of the country, clearly have not. Consider the following scenario. Argentina will once again run an annual trade surplus, due to collapsing imports, but it will also, unexpectedly, rack up an annual current account deficit. Since trade is the largest component of a country’s current account, other factors must be at work. One possibility, hinted at by the government, is the “unusual rise in foreign travel” in 2016, despite recession and currency devaluation. Wall Street’s faith in the virtues of currency and trade liberalization and tax cuts is so far not shared by middle and upper-class Argentines. The latter were hard to find in 2016, given their frequent visits to Uruguayan, Caribbean, American, and Swiss banks. (In April, Macri himself turned up in the Panama Papers.)

Macri’s administration is clearly more committed to appeasing foreign investors and toeing a neoliberal ideological line than to any reasonable assessment of the country’s strengths and weaknesses. Macri took office in a highly volatile international economic environment, and chose to ignore it. Ominous clouds loom on the horizon. In addition to expected U.S. interest rate hikes, Brazil’s GDP has shrunk by over 11 percent in two years, and forecasters anticipate more of the same in 2017. Argentina depends on exports to Brazil: in 2014, Argentine trade with Brazil totaled $14 billion, dwarfing its next two most important trade partners, China ($4.51 billion) and the United States ($4.15 billion). Brazil’s currency depreciated by more than 18 percent between September 2015 and September 2016, blunting the competitive advantage tied to Macri’s devaluation in January. No evidence points to an appreciation of the Brazilian real in 2017.

Blame Game

Today Macri is under fire. He and his international financial backers insist that the mess he inherited was bigger than expected, and will take time to fix. In a country that has had more than its share of crises in recent decades, it is worth putting such a claim in perspective: President Menem (1989–99) turned to a neoliberal model only after heterodox policies, which he campaigned on in 1989, failed to contain an inherited hyperinflationary crisis that threatened property rights and democracy a mere decade after the Dirty War (1976–83) that tore the country apart. Likewise, the neoliberal catastrophe of 2001–02 saw the country cut off from international finance and roiled by mass street protests. These were real crises. No comparable situation existed in December 2015, when Macri enjoyed a peaceful democratic transfer, no threats to the national governability, a low debt-to-GDP ratio, low international interest rates, a low international oil price, a friendly government in Washington, and a full third of the national grain harvest hoarded and ready for immediate export to aid his first months in office. This was hardly the “mess” he and his supporters claim.

By contrast, when Nestor Kirchner assumed office in 2003, neoliberal policies had decimated the country. The subsequent shift toward progressive policies and generous social spending was soon followed by a lasting economic recovery. How did a country with record levels of poverty, inequality, unemployment and a sovereign debt default achieve such prosperity so rapidly? Though the boom in global commodity prices played a role, the country’s revival was largely an endogenous phenomenon. Both Kirchner administrations focused on supporting the lower classes with CCTs, significantly alleviating poverty. In addition, they promoted employment programs, such as Plan Jefes de Hogar, which offered stable work and a steady paycheck to communities previously excluded from the formal economy.

Macri blames unforeseeable circumstances beyond his control for the country’s ongoing economic problems. Brazil’s recession, China’s tepid growth, and low commodity prices have all hurt Argentina; true enough. Perhaps Macri alone failed to anticipate all three trends. Curiously, neoliberals’ readiness to pin their troubles on unexpected market shifts never seems to dampen their determination to further submit their countries to those same market forces. Neoliberal analysts similarly blame the 2001–02 crisis on Russian and Mexican defaults in the 1990s, and on Brazil’s currency devaluation in 1999.

Yes, liberalization exposes a country to market shifts. But a balanced accounting of unforeseen events in 2016 finds Macri a beneficiary, rather than a victim. Again, the United States did not raise interest rates, which would have quelled demand for Argentine debt; OPEC failed to cut production, which kept Argentina’s import bill low; and, finally, rising soya bean and soya bean oil prices kept Argentina’s export revenues from deteriorating further.

What Comes Next

It is of course far easier to assess Macri’s first year in office than to forecast the remaining three. One possible yardstick is to revisit the three pillars of his campaign—zero poverty in four years, taking on drug trafficking, and reducing political polarization. Designing and implementing a comprehensive strategy to counter drug trafficking requires more time, and as a candidate Macri never promised immediate progress. This issue reflects a more general anxiety among Argentines about rising violent crime, which in opinion polls they often rank as a higher priority than inflation. Crime in Argentina is closely tied to economic conditions, and higher poverty, unemployment, and inflation are bound only to make the problem worse.

With his talk of “political polarization,” Macri tapped into voter fatigue toward former president Cristina Fernández de Kirchner’s governing style, often depicted as overly confrontational. Yet Macri is no less belligerent in the eyes of his opponents. Social movements are back in the streets, and Macri has been quick to initiate judicial investigations against ex-president Kirchner, her family, and her former top aides. Specific individuals no doubt merit prosecution for corruption. But not all, and Macri’s Panama Papers revelations cast him as just another corrupt member of the elite. When the president himself is caught engaging in capital flight and tax evasion, it is hard to convince Argentines to do otherwise.

“Zero poverty in four years” served as the campaign’s central pillar, and on this score, Macri’s first year has been an unmitigated disaster. But what about the remainder of his term? As hard as it is to forecast Argentina’s economic future, clues can be found in Macri’s 2017 budget. Unfortunately, the numbers do not add up. Public spending is set to rise 32 percent, and additional tax cuts and utility subsidy cuts are scheduled. Inflation is projected to drop below 20 percent—a 50 percent reduction from 2016—even as the budget calls for public spending to outpace inflation. The combination of reduced public revenue and more public spending, plus utility rate hikes, sounds like a recipe for more, not less inflation. Of the budget’s many rosy predictions, its assumption that Wall Street’s appetite for low-interest Argentine debt will continue unabated is perhaps the most questionable. Wall Street is now betting big on Trump. Neither the IMF nor Wall Street agree that inflation will drop below 20 percent. Skeptics more familiar with Argentine electoral politics recognize that pressure on Macri will grow, and public spending will inevitably surpass the budgeted rise leading up to the midterm elections in October. If current economic conditions prevail, a Peronist revolt in Congress is likely, spooking Wall Street and disrupting Macri’s foreign financing. To avoid this scenario, Macri will turn to still more public spending. This brand of neoliberalism did not work in the 1990s, and it is not working now.

Notes