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36 The Americas The Economist May 5th 2018
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WHEN he was unexpectedly elected
Argentina’s president in 2015Mauri-
cio Macri faced a task that was about as
simple as walking a tightrope across the
Iguazú falls while grilling a steak. His pre-
decessor, Cristina Fernández de Kirchner,
had bequeathed a make-believe econ-
omy. Inflation of 30-40% a year was offi-
cially covered up. The peso was wildly
overvalued, exports were taxed and
many imports were banned. The govern-
ment provided energy and transport al-
most free. The resulting fiscal deficit was
financed by the central bank, which
printed money to the tune of 5% of GDP.
In a country traumatised by past eco-
nomic shocks, Mr Macri promised to
straighten all this out gradually.
He has done a pretty good job. The
economy has grown at an annual rate of
around 3% for the past 18 months, even
while the government has ended most of
Ms Fernández’s distortions. It has gradu-
ally trimmed the fiscal deficit, partly by
raising energy and transport prices. The
central banknowonlyhands overmoney
worth 1% of GDP . The government has
bought itself time by issuing debt.
The problem is that stabilising the
economy is taking longer than the govern-
ment had hoped and investors have be-
comemore reluctant to lend to Argentina.
This first became apparent in December,
when the government changed its infla-
tion target for this year from 12% to 15%. It
put off from 2019 to 2020 its goal of reduc-
ing inflation to 5%. The original targets
were fixed in 2016 amid much uncertain-
ty. The newones are supposed to bemore
realistic. Even so, this year’s target is un-
likely to be met. Inflation has run at a rate
of 25% over the past 12 months, and the
market consensus is that it will end the
year at 20%. In hindsight, it might have
been wiser to have delayed introducing
inflation targets until the economy was
closer to being stable. But that is academic.
Fairly or not, the change in the targets
hurt the credibility of the central bank. It
came as the rise in interest rates in the Un-
ited States is prompting investors to pull
money out of riskier assets. The spread on
Argentine bonds (the premium over the
yield on United States Treasury bills) has
risen from 3.4% to 4.2% this year, and the
peso has depreciated steadily. The govern-
ment responded by saying that it will raise
domestically the $8bn it still needs to cover
this year’s deficit.
Nevertheless, in the last week of April
money flooded out of Argentina. After the
central bank spent $4.3bn in five days to
propup the peso, onApril 26th it unexpect-
edly jackedup itsminimum interest rate by
three percentage points, to 30.25%. This
week the peso kept falling; further interest-
rate risesmay be needed.
It was responding to a fact of political
life: Argentines worry even more about
the price of the dollar than about inflation.
That is why in recent decades the peso has
so often been overvalued, killing the com-
petitiveness ofmanybusinesses and stunt-
ing the country’s exports. It doesn’t help
that a severe drought this year has cut ex-
ports of soyabeans and maize. A weaker
pesowill curb the current-account deficit,
which has expanded to 5% of GDP. But it
will add to the cost of servicing the gov-
ernment’s foreign debt, and in the short
termwill boost inflation.
The government is trying to control in-
flation while also trimming the fiscal def-
icit and keeping the economy growing.
Doing all three things at once is hard. For
example, eliminating energy and trans-
port subsidies is essential for reducing the
fiscal deficit. But hikes in regulated prices
added eight points to inflation last year.
And the interest-rate rise may dampen
growth aswell as inflation.
The rise in energy and transport prices
has hit themiddle class hard (the poor are
largely protected). That has taken a toll on
Mr Macri’s approval rating, which stands
at around 40%, the lowest since he was
elected. The rumblings of discontent are
starting to alarm his coalition partners.
The biggest worry is that stubbornly high
inflation expectations will keep inflation
from falling, and that only a recession can
bring it down to the target level.
April’s rise in regulated prices is ex-
pected to be one of the last. Officials are
confident that inflation will now start to
recede. They are also likely to try to pla-
cate investors by slashing non-essential
spending in order to lower the primary
fiscal deficit (ie, before interest payments)
to below this year’s target of 3.2% of GDP.
Even ifthe economy slows, their calcu-
lation is that economic growth and the
real value ofwageswill pickup againnext
year ahead of a presidential election in
October. They are probably right, and Mr
Macri still has a good chance ofwinning a
second term. But it is a closer-run thing
than it looked a fewmonths ago.
The crisis of Argentine gradualism Bello
Theworld economymakesMauricioMacri’s job harder
nomic justice. The root cause of violence,
he argues, is a lack of opportunity. But that
explains neither its nationwide rise nor its
surge in prosperous Guanajuato.
The candidate’s new idea for reducing
crime, apart from fighting poverty, is to of-
fer an amnesty to low-level drug traffick-
ers. In the debate he spoke of inviting Pope
Francis to mediate between gangs and the
state. “We cannot put out a fire with fire,”
said Mr López Obrador. His rivals accused
him of blessing the impunity that plagues
criminal justice. “You want to forgive the
unforgivable,”MrMeade said.
Conciliation of some sort could help as
part of a well-designed law-enforcement
strategy. Benjamin Lessing, a political sci-
entist at the University of Chicago, argues
that gangs have no incentive to behave bet-
ter ifthe state subjects themto “full, uncon-
ditional pressure”. The state should crack
down hard when gangs overstep defined
boundaries, he says. Using data to focus
policing on the most violent areas, as Co-
lombia has done, would also help. But
such tactics require sophistication as well
as toughness. It is not clear that Mr López
Obrador has either quality.
In Guanajuato, still shocked by the re-
cent spike in murders, his velvet-glove
ideas are met with scepticism. “We cannot
solve this in a nice way,” says Mr Ortiz,
Irapuato’s mayor. Three-quarters of voters
oppose the idea of amnesty. But in areas
with bloodier histories they may be more
receptive. “It is very different if you live in
Tamaulipas, Guerrero, Michoacán or some
state that is very affected by drug-traffick-
ing,” said FranciscoAbundis, a pollster, in a
recent television interview. Mr López
Obrador thinks he can persuade gangsters
to lay down their arms, and voters to for-
give them. After the bungled crackdowns
by previous governments, Mexicans may
give hima chance. 7
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