Black holes and the theory of the lesser evil

What’s better for Argentina and its people? A return to the populist years of the Kirchnerite era, with Alberto Fernández in charge, or four more years of Mauricio Macri’s emotional populism, coupled with crippling austerity? According to Columbia University economist Guillermo Calvo – who few would catalogue as a supporter of said populism – Cristina Fernández de Kirchner would actually guarantee belt-tightening would occur as she would be able to cut spending with popular support, pinning the blame on the Macri administration.

A research note by Morgan Stanley’s economics team notes that, regardless of the electoral outcome, “the next administration will have to walk a narrow path dealing with liquidity risks, sizeable funding needs, high inflation, and poor growth performance.” They go on to conclude that while a scenario of “moderate policy change” could pursue the goal of reducing the deficit, while trying to give some reprieve to the general population (“consumers” in econo-talk), it would inevitably lead to a vicious cycle where lower interest rates translate into a weak peso, which in turn raises the cost of servicing the debt, leading to price controls and the drying up of external financing. Game over. Thus, the only way out is more “fiscal consolidation” or austerity, with inflation closing out this year at 38.2 percent and slowing to 25.1 percent by December 2020. In other words, more of the same, assuming Macri wins (and/or Alberto and Cristina fit in the Calvo scenario).

If, as one of Bill Clinton’s advisors famously made clear, “It’s the economy, stupid,” then Macri’s re-election would be a chimera, according to economic journalist Marcelo Zlotogwiazda. In a strong column this week he explained that 270,000 jobs were lost in the past 12 months, wage growth has lost out to inflation for 12 consecutive months, that consumption has plummeted, inequality has grown, and that structural poverty is even more ingrained than ever before. Zlotogwiazda cites a study by public policy think tank CIPPEC, the United Nations Development Programme, and labour and social issues research centre CEDLAS: “With one percent growth in GDP per capita, poverty would fall to 27 percent in five years, to 24.5 percent in 10 years and to 20 percent in 20. A three-percent rate per annum would reduce poverty from 30 percent to 25.8 percent in five years, to 16 percent in 10 years and nine percent in two decades. With an extremely high five-percent growth rate poverty could drop to 20 percent by 2023, and if those rates were sustained for another period, poverty could fall to 10 percent in 2028, while an additional decade of growth would take it to four percent. In other words, only in a scenario of sustained high rate growth for two decades would income poverty be reduced to a small portion of society.”

Most political analysts agree that Macri’s re-election hopes are directly correlated with the value of the peso vis-à-vis the US dollar. Given Argentina’s bi-monetary system, where prices are “anchored” in dollars, exchange rate stability has allowed the government to show a deceleration in inflation. While consumption has been completely annihilated by last year’s violent devaluation and the successive recession, the trade balance has turned positive (because imports have tanked) and the agricultural sector had a good harvest. Given the International Monetary Fund’s influx of greenbacks, and the Central Bank’s monetary tourniquet, it seems plausible that Macri will be able to keep a lid on the exchange rate at least until October, maybe November if there’s a run-off vote. This is one of the main reasons why the president has grown consistently across polls, putting him at technical parity with the Fernández-Fernández ticket and allowing the markets to rally. Another one is that Alberto has begun to show his true colours — that of a violent and vengeful man — along with CFK’s campaigning, pushing undecided voters away given massive levels of rejection for anything ‘K.’

What makes this entire situation worse is that neither candidate has proposed a plan to get the country out of the black hole it’s in. On the Kirchnerite side they’ve taken a page from the playbook of Macri’s political adviser, Jaime Durán Barba, and their strategy is to criticise everything the Cambiemos/Juntos por el Cambio ruling coalition has done. With extreme cynicism they talk about the economic mess, claiming they will magically fix it just because “things were better with Cristina.” They know, though, the populist consumption party they enjoyed was fuelled by a commodities super-cycle that will not return for the foreseeable future, as China’s economy continues to cool.

From the Casa Rosada, things aren’t that different. The winning strategy of antagonising with the Kirchneristas has never failed, and it shouldn’t this time around, Cabinet Chief Marcos Peña reckons. Add to that the aforementioned emotional populism – telling Argentines to have hope, to keep up the hard work. To a certain extent, it’s the opposite of what the Donald Trump campaign has done: instead of tapping into people’s fears, they are spooking them with tales of the Ks while seeking to reach the electorate’s hearts. Interestingly, the country’s most popular politician, Buenos Aires Province Governor María Eugenia Vidal, has never revealed what her ideological convictions actually are. Equally as baffling, polls had shown her trailing former economy minister Axel Kicillof.

Dubbed the “mother of all battles,” it appears impossible to win the general elections without taking Buenos Aires Province. According to a July poll by BTG Pactual, if provincial voters had to choose between the Macri-Vidal duo and Alberto-Kicillof, 39.9 percent would vote for the latter. Yet, Vidal has a clear lead over Kicillof in the scenario where voters are asked to choose their preferred candidate for provincial governor: 43.6 percent over 36.1 percent. Given Mrs. Fernández de Kirchner’s strength in the Province, Maci and Vidal must rely on ballot splitting, meaning snatching voters that will never support the president but have sympathy for the governor. This scenario, which looked quite different just a few weeks ago, has the electoral strategy team raving.

Nothing sounds worse than a return to leftist populism, yet few things feel as excruciating as four more years of this. With any third alternative essentially ruled out – be it Roberto Lavagna or José Luis Espert – it seems like we don’t have a choice. Durán Barba, who recently noted the election could be decided in the first-run vote, put it clear: it’s about the “lesser evil.”