October 17, 2016

Argentina: Graduating from Populism after One Too Many Spring Breaks


After years of turmoil, Argentina’s economy seems to be getting on its feet: According to Finance Minister Alfonso Prat-Gay, “Argentina is graduating from populism after one too many spring breaks.”

Prat-Gay visited SIPA on October 10 to discuss policy changes in the South American nation. His talk was sponsored by the Official Monetary and Financial Institutions Forum, SIPA’s Initiative on Central Banking and Financial Policy, and the Program in Economic Policy Management.

What is the cause for Argentina’s transition away from populism? Not the government, said Prat-Gay.

“Do not think for a minute that President [Mauricio] Macri is the engine of change,” he said. “It is the people. They voted for this change. They voted to end populism. And because of that, change, this time, is for real.”

Prat-Gay went on to explain that the Macri administration inherited policies that were not sustainable: Argentina was running out of reserves due to an overvalued exchange rate; fiscal deficit was close to 6 percent of GDP; the economy had not grown for the previous five years but still ran 25 percent average annual inflation, and poverty impaired 32 percent of the population. 

In order to turn the economy around, he said, the government had to make major changes to its financial, monetary, fiscal, and trade policies, including rapidly dismantling exchange rate controls and disentangling debt disputes fairly.

Among other goals, the government is working to launch inflation targeting and eliminate subsidies to the rich to reduce its fiscal deficit. Regarding trade, they are working at dismantling tax distortions and administrative barriers. At the same time, they are empowering the statistics agency and increasing ties with the rest of the world.

The ability to receive credit also proved essential because it allowed the government to cover its debts.

“Had we not had access to credit, we would have had to cut spending or increase taxes to cover debt,” Prat-Gay explained.

While access to credit was an important factor in Argentina’s recovery, Prat-Gay emphasized that restoring public faith in the government was key to recovery.

“Our plan was to tidy up the mess by establishing macroeconomic consistency, care for the vulnerable by assuring social sustainability and, most importantly, restore credibility by laying the ground for sustainable growth,” he said.

OMFIF Managing Director David Marsh and Professor Guillermo Calvo joined the finance minister for the post-lecture Q&A session.

Asked how he would ensure the success of his reforms for the next four years, Prat-Gay said that it was “still a learning a process but whatever change we make will be more robust, legally and socially.”

Prat-Gay also said that one of the government’s goals is to end subsidies to the rich.

“People demanded this,” he said. “So we are going to cut subsidies to the point that we no longer subsidize the rich.”

Prat-Gay closed the event with explicit advice for policy students.

“Credibility is the matter around which you build your policies,” he said. “It’s what makes it work. Other people have to believe in what you are doing. Deliver on your promises. Don’t overpromise if you are not going to overachieve.”

— Serina Bellamy MIA ’17 with Estefania Lotitto PEPM ’17