World Economy

Argentina Needs to Change Course

Argentina Needs to Change CourseArgentina Needs to Change Course

The package of economic reforms that business-friendly President-elect Mauricio Macri is preparing could increase societal tensions by stalling the social gains made under outgoing leftist President Cristina Fernandez de Kirchner. But despite the likelihood of short-term hardship, Macri’s market-oriented strategy is needed to kick-start an imploding economy, business leaders and analysts say.

The current model, based on so-called heterodox or neo-Keynesian policies, is running on legs of lead. The annual fiscal deficit—the amount by which a country’s spending exceeds its revenue—is the highest in three decades, and this year’s inflation is estimated at 25%, according to non-government calculations (the official numbers are widely doubted). Fortune reports.

And the bad news continues: Locked out of global lending markets, the Central Bank is running out of money. Growth is anemic. And investment is waning.

Even supporters of the government’s methods have long been warning of economic paralysis. “Argentina kept being heterodox too long, and is now experiencing classic developing-country problems,” economist Paul Krugman wrote in the New York Times last year, referring to the inflation rate and the shrinking reserves at the Central Bank.

As the situation grows more critical, the Central Bank has clamped down on outflows of its foreign currency reserves. American Airlines stopped selling tickets in pesos because it couldn’t convert those sales into US dollars. And acquisitions by the state-run oil company, YPF, seem to have been thwarted by the lack of dollars.

These problems have cornered policymakers into charting a different course for Argentina, economists say. Macri is expected to devalue the peso and remove currency restrictions soon after taking office on Dec. 10. Even the candidate for Fernandez’s party, Daniel Scioli, was expected to make similar changes if he won, though at a slower place in order to ease the pain.

Macri’s reforms will most likely trigger a spike in prices, eroding the purchasing power of working-class Argentines. As real incomes fall, the economy will shrink by 1.1% next year, according to a Nov. 24 report by Barclays research economists Sebastian Vargas and Pilar Tavella.

But business leaders say the moves are needed to increase the competitiveness of Argentine producers and remove barriers to investment in order to bolster growth. Vargas and Tavella estimate that Macri’s moves will lead to growth of 3.5% in 2017.

The agricultural sector, especially the export of grains like soy, is the keystone of the Argentine economy. It generates around 60% of foreign income. But farmers say they have been discouraged by high export tariffs and domestic price controls, which reduce profits, and import restrictions, which put replacement parts and productivity-enhancing technology out of reach. Imports have plunged by nearly 10% this year, according to Argentina’s Chamber of Commerce.

“Today, we’re in last place in the region for competitiveness,” says Ernesto Ambrosetti, chief economist at the Argentine Rural Society, the country’s largest farming association.

Macri has promised to address these problems by slashing export tariffs and removing import restrictions.