Argentina’s President Looks for Easy Midterm Wins

Argentina just went through one of Latin America’s more interesting political exercises. Two months before each legislative election, the country holds what it calls Simultaneous and Obligatory Open Primaries (known by their Spanish acronym PASO). Candidates from all parties run against each other in districts with open legislative seats (half of the Chamber of Deputies and one-third of the Senate comes up for reelection every two years). The only practical purpose is to remove from the ballot any minor or fringe parties that fail to gain more than 1.5 percent support. However, these primaries have proved to be a reasonably good predictor for parliamentary elections, and thus may provide a useful guide for what we can expect from the actual vote on October 22, 2017.

When President Mauricio Macri came to power at the beginning of 2016, he was convinced that his government would be “transformational,” that Argentina was about to enter the finest 20 years of its history, and that a “rain of investment” would fall upon the country. None of that has come to pass. Mr. Macri, having discovered significant limits on his ability to govern, now refers to his strategy for curing Argentina’s ills as “gradualism” – as if he had any other option. Furthermore, the president has learned that his optimistic view of how globalization would lift the Argentine economy was seriously exaggerated.

Political turn

Confronted with this reality, and with the economy stuck in slow motion, Mr. Macri shifted his rhetoric away from structural reform in early 2017 and started attacking the opposition instead. He placed nearly all his political chips on the August primaries, or PASO. His goal was to split the Peronist opposition and weaken his main rival, former President Cristina Fernandez de Kirchner (2007-2015), by exposing her as a corrupt populist whose message no longer resonated with the Argentine public.

Mr. Macri’s strategy contained three elements. The first was to focus on the Senate and on Buenos Aires Province, which contains 37 percent of the electorate, by campaigning personally and with the hugely popular governor of Buenos Aires, Maria Eugenia Vidal. The second was to accelerate public works projects, particularly near the federal capital, even though that would increase the fiscal deficit. The third element was to put the spotlight on coalition partners in Cambiemos, who are strongly represented throughout the country.

This strategy reaped rewards, as seen in the primary election results. In the federal capital, Buenos Aires City, President Macri picked a charismatic member of the Radical Party, Elisa Carrio, to head the ticket. She won in a landslide. Nationwide, Cambiemos was the only political force to win representation in all 24 of the country’s electoral districts – 23 provinces and the federal capital. It also won the popular vote by a clear plurality of 36 percent, 15 percentage points ahead of its closest competitor, the Peronist Justicialist Party (PJ), but still fell well short of an outright majority.

Distribution of seats in Argentina’s lower house based on August primary elections

Cambiemos beat the Peronists in key districts such as Cordoba, Mendoza, and Entre Rios. In addition, political bosses who sided with the Peronists and had relied on their personal charisma to govern in San Luis and La Pampa were defeated. Given the complex federal system in Argentina, where the federal government provides financial subsidies to the provinces, winning these gubernatorial primaries bodes well for October and could also help President Macri pick up seats in the Chamber of Deputies and the Senate.

The senatorial primary in Buenos Aires Province ended up as a dead heat between Education Minister Estaban Bullrich and Mrs. Fernandez de Kirchner (35.4 percent vs. 35.6 percent). While a clear-cut victory for Cambiemos would have been welcome, the results were better than President Macri could have hoped for in the country’s largest electoral unit. The primary results showed that Mrs. Kirchner’s support is limited to a tiny, densely populated suburban belt between the capital city and outlying Buenos Aires province. This zone is where her populist message resonates best with the blue-collar, card-carrying labor constituency that benefited most from her two presidential terms.

Just as significantly, Mrs. Kirchner’s two principal rivals for leadership of the Peronists, Florencio Randazzo and Sergio Massa, fared poorly and were shown to have very little nationwide support. Split as they are, neither the Peronists nor Mrs. Kirchner’s followers will be able to organize a coherent opposition campaign to the government in the October elections. Moreover, we can anticipate many defections from the Peronist opposition in the two legislative chambers, even though the distribution of seats in the current National Congress does not yet favor the government.

Estimated distribution of seats in the Argentine Senate based on August primary vote totals

Buying time

With his political support buttressed in key districts and spread widely across the national territory, President Macri now can afford to persist in his gradual approach to economic reform. If the primary elections are any guide to the October results, he has won time to clean up the economic mess inherited after Mrs. Kirchner’s two terms as president. The government can thus press on with its unpopular effort to eliminate the subsidies and fixed prices that distorted the economy, as well as fight inflation, which remains just above 20 percent per year.

Interested foreign observers – the banks, international corporations, multilateral agencies and the financial press – have made it clear that the minimum they want from Argentina in the short run is responsibility and predictability. This makes institutional stability an important aspect of government policy. For the international market, President Macri’s political victory is very good news. Whether it is enough to bring the shower of investment that he promised in his presidential campaign is another matter entirely.

It is possible that Cambiemos’ success in the primaries helped President Macri engineer the removal of Eduardo Freiler, the most Kirchnerite judge on the Federal Court of Appeals and widely considered to be the most corrupt. The Council of Magistrate’s decision in mid-August to impeach Mr. Freiler came just months after the president failed to get Congress to remove another Kirchner associate, former Minister of Planning Julio De Vido, long regarded as Mrs. Kirchner’s “bag man.”

These allegations proved useful to Cambiemos during the primary campaigns in Buenos Aires and the federal capital, where Mr. Macri harped on the Peronists’ reluctance to turn on their former colleagues. The president also wielded his executive authority to fire two federal officials who were closely associated with the powerful labor unions.

Reform challenges

In the short term, the challenges that the government faces at home are much more daunting than those abroad. There is a storm brewing with organized labor, which historically has enjoyed great privileges in Argentina. Breaking the stranglehold on the labor market that the unions have maintained for generations will not be easy. Yet, Mr. Macri understands that Argentina’s long-term development depends on increasing productivity. Reforming the labor market, together with a complete overhaul of the country’s infrastructure, tax system and regulatory framework, is the only way to put Argentina on the path to sustainable economic growth.

President Macri has bowed to reality in social policy as well. The safety-net programs introduced by Mrs. Kirchner’s husband and predecessor, President Nestor Kirchner (2003-2007), during the flush years of the commodity boom have been continued and even expanded. In a country where more than 30 percent of the population is below the poverty line and large, organized groups are ready to take to the streets, the president may have no choice. One of his central policies to stimulate development involves improving preschool and primary school education, which will benefit the groups that tend to be left behind in periods of rapid technological change – the same groups that tend to vote for Mrs. Kirchner.

Mr. Macri’s central dilemma is how to get the economy growing faster. Until this happens, he will not have the tax revenue to pay for his ambitious infrastructure programs. Argentina faces the same fiscal constraints as more developed countries, where most government spending goes for public-sector wages and entitlement programs that are nearly impossible to cut for political reasons. The same goes for government subsidies for energy, transportation and fuel, which can only be reduced gradually to avoid mass protests.

Argentina’s budget deficit is part of the economic nightmare inherited from the Kirchners. It is largely the product of explosive growth in government subsidies and public-sector employment, which has driven expenditures from 20 percent to nearly 40 percent of gross domestic product. The fiscal deficit also more than doubled, from 2 percent of gross domestic product (GDP) in 2004 to more than 5 percent by 2015. This flood of money has made it impossible for the government to achieve its target of slowing inflation to less than 20 percent. President Macri has promised to narrow the budget deficit by one percentage point of GDP during each of the next three years. But trimming the government payroll will not be an easy task.

The gradualist approach is making life difficult for Energy Minister Juan Jose Aranguren, who is trying to scrap the subsidies and artificial prices that were instituted by Cristina Kirchner’s government. Mr. Aranguren’s immediate goal is to stabilize the market for domestic oil and gas production in order to attract the foreign investment needed to develop massive shale deposits in the Vaca Muerta field. So crippling were Mrs. Kirchner’s policies that Argentina, a country with enormous oil and gas deposits, has been forced to import fuel to satisfy domestic demand. Even as it pays for this imported energy, the Macri government has tried to reduce consumer subsidies for heat and electricity without creating a political firestorm.

Mr. Aranguren remains hopeful. Several exploratory wells are being drilled by international energy companies, bringing their investment for the past year to nearly $1 billion. He anticipates that the annual total could reach as high as $15 billion by 2020, assuming negotiations with the provincial governments over mineral rights and production concessions can be successfully concluded.

Security dilemma

The president’s main foreign policy slogan is to “return Argentina to the world community.” Mr. Macri has been at pains to make clear his desire for good relations with the United States, which he believes are crucial to his globalization policy. Thus far, however, his professions of friendship for Donald Trump and the U.S. have borne little fruit. In August, U. S. Commerce Secretary Wilbur Ross accused Argentina of unfairly subsidizing biodiesel production. Meanwhile, the U.S. Department of Agriculture has yet to lift an import ban on Argentine lemons, despite President Trump’s public announcement that it will do so.

On top of these frustrations, Mr. Macri’s attempts to mend ties with the U.S. have created a domestic problem that he did not anticipate. The Trump administration’s understanding of U.S. security interests in Latin America focuses on curbing or eliminating international terrorist groups – including drug traffickers, or Transregional-Transnational Threat Networks (T3N), which the U.S. military regards as potential terrorist networks. In this context, security cooperation means using Latin American armed forces to protect the borders, gather intelligence on potential threats, and root out international criminal activity, particularly the drug trade.

This creates a double problem for President Macri. With anti-military attitudes widespread among Argentines after years of brutal military dictatorship, funding for the armed forces has been systematically cut over the past two decades. The result has been a shrunken, ill-equipped and badly paid military. Current fiscal constraints make the government even more hesitant to embark on a massive new program of arms procurement.

Moreover, his own government is split over how to deal with U.S. pressure. His minister of security, Patricia Bullrich, herself a hardliner on dealing with crime, has taken the position that she can handle the problem with the various provincial and national police forces under her purview. Ms. Bullrich has launched an ambitious reform program to make the police capable of dealing with issues that the U.S. considers critical to regional security. The president’s coalition partners in Cambiemos have already made clear that they regard any expansion of the armed forces’ mission as unconstitutional.

Opponents of closer security cooperation with the U.S. point to the Global Terrorism Index, which shows that Argentina, along with most of Latin America, is not a theater of terrorist activity. Not surprisingly, some retired Argentine generals have indicated that the military are ready to take on the challenge of dealing with international crime. It will not be easy for President Macri to satisfy the U.S. and his domestic constituency on this question.

Joseph S. Tulchin is a Senior Scholar of the Woodrow Wilson International Centre for Scholars.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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