A Promising Start (but Big Challenges Ahead)
In just two weeks, Mauricio Macri has already followed through on his first electoral promise: to eliminate the exchange rate controls and the main taxes and restrictions on foreign trade.
The realignment of relative prices that started with the exchange rate unification and the elimination of export taxes will continue with the increase in electricity and natural gas prices and the gradual dismantling of price controls.
Labor unions and employers will be engaged in collective bargaining between March and May to set wages for the coming year. Given the changing inflation dynamics, it will be crucial that the government convince the parties to base their agreement on a much lower expected inflation rate than the one observed through February 2016. Otherwise, keeping the inflation rate on a decelerating path will require a very restrictive monetary policy that will curtail economic recovery in 2016.
President Mauricio Macri inherits an economy plagued by inflation, recession, extreme relative price distortions and sector bottlenecks due to insufficient and misallocated investment. The fiscal situation is awful, with record high levels of spending, tax pressure and deficits.
The current crisis is similar to the crisis that followed the Peronist experiences of 1946-1955 and 1973-1976. After the first Peronist experience in Argentina, it took three years of accelerating inflation to reach the point at which President Frondizi decided to launch a courageous stabilization and growth plan in December 1958. After the second Peronist episode, it took 13 years of stagflation and two years of hyperinflation to reach the point at which the Convertibility Plan of 1991 was able to defeat inflation and inaugurate eight years of rapid growth and modernization of the economy.
With the benefit of the historical experience and with the help of a very capable and honest team, President Macri has a chance to succeed in finding the road to stability and growth of the economy more rapidly than in the past.
With a correct diagnosis, and taking fast and credible measures, returning to stability and growth is achievable, but timing and accuracy is of the essence.
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