Monday, June 29, 2009

The Defeat of the Kirchners - A Comment on Argentina

According to exit polls, the government has lost the majority in congress. The new congress will take power on December 2009. In the absence of majority in the congress, the government will need to negotiate in the Congress. This in turn, is an opportunity for the opposition to insert a new policy mix in the whole Kirchner-Kirchner term. Mrs. Kirchner's popularity has declined sharply since she took office in December 2007, because of a weak economy and a bitter dispute between the government and farmers over a grain tax.

It is hardly possible that the Kirchners lost the election because of their ´populist´ government. It is more likely that elections were lost due to the absence of resolution of the farmers´strike during the whole 2008. In any case, the recession in Argentina is already extremely significant and is eroding tax collection, and public spending is still rapidly growing. It seems that the Kirchners sensed the magnitude of the current crisis (and how it would affect Argentina)

When the administration sensed the scope of the crisis, three months back, it moved the original Election Day (October 25) forward, as early as possible for June 28. This means that the authorities foresee that the second half of the year will be more difficult and especially with the late crisis effects, i.e., the unemployment rate is expected to rise. In other words, the strategy of the government was to have the elections as soon as possible as a way of minimizing the negative impacts of the recession on the electoral vote. Still, it didn´t seem that this was winning strategy given the defeat for the Kirchners.

Business climate in Argentina is extremely negative. This year, people have been increasing their holdings of dollars, considering the ongoing rumors that government may let the peso weaken to bolster economic growth. Indeed, deposits in dollars increased by $1.3 billion this year until May. In order to improve the business climate and to attract more FDI Argentina needs transparency and needs strong institutions. For example, it tends to be impossible to believe in the country´s inflation index. What about monetary policy? Why doesn´t Argentina set interest rates and their monetary policy committee have regular meetings with online proceedings? What about the Paris Club and the IMF, will they be ever solved? What about the holdouts? In other words, there are many relevant issues that are yet to have a final answer. These issues, the lack of an answer suggest for an outside observer that policies in Argentina are not guided by rules and regulations. Instead, it seems that the current government prefers to use discretion than rules. We learned a while ago the advantages of rules over discretion as a way to enhance the credibility of the government. Why does Argentina need to reinvent the wheel?

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