Any college-level financial-history class includes at least one reference to Argentina, and potentially many more. The lesson is too tempting. Very few nations have experienced the kind of de-development that afflicted the southern republic, taking it from a wealth level comparable to those of Canada and Australia in 1900 to financial ruin a century later. And yet, after a momentous election in 2015, Argentina has made a triumphant return to capital markets: Investment is flowing in, inflation is declining, and growth is accelerating. The Economist has just celebrated Argentina as one of its “countries of the year” (though the magazine refrained from featuring it on its cover, which would surely signal a market peak). Buenos Aires will host the 2018 G20 summit, as Argentina continues to raise its foreign-policy profile in Latin America. Can a nation change so radically so fast?
Few better historical examples can be found to show the importance of institutions in economic development. Argentina endured no fewer than five successful coups d’état in the 20th century. Its decline during that period was inextricably linked to the weakness of its republican institutions and the eagerness of generations of military men to “deliver the republic” from its politicians. Paradoxically, it was the last of these regimes — an ominously self-styled “process of national reorganization” — that entrenched democracy by failing so miserably: Not only did the generals engage in genocidal tactics against their political enemies, but they also sank the economy and lost an unnecessary war against the United Kingdom.
When that junta crumbled, in 1983, democracy returned. Yet Argentines could agree on little else. In 1989 a party espousing an economically liberal variant of the nation’s hegemonic political movement, Peronism, took over amid hyperinflation. President Carlos Menem implemented a strict mix of Washington-consensus policies (designed for nations recovering from economic crises) during that brief global moment when history was over. When asked about relations with the United States, historically a rival in the Americas, one of his leading ministers described them as “carnal.” Neoliberal policies worked wonders to kill off inflation and ignite foreign direct investment, yet the reforms failed to prevent an orgy of corruption and perennial debt issuance in foreign currency. The system was as fragile as the peg that linked the local peso to the U.S. dollar.
And it ended in tears. In 1995 the “tequila effect” (a widespread series of Latin American currency devaluations sparked by Mexico’s peso crisis) threatened all emerging markets, and then the Russian default of 1998 reversed the foreign flows that had financed Argentina’s deficits. A recession soon turned into a depression through ill-timed spending cuts. My generation was forced to grow up early on a hot day in late December 1999 when Menem’s successor fled the presidential palace by helicopter. Over that Christmas break the country went through five presidents, a forcible redenomination of bank deposits, and a massive devaluation. The social crisis was the deepest since the return of democracy.
From the ashes of the neoliberal experiment, a new populism was born, a phenomenon soon to be repeated across Latin America. Néstor Kirchner, once a loyal Menem lieutenant, veered Peronism away from economic orthodoxy: He decried Washington and its consensus while cozying up to rising China and reemergent Russia. When a former colleague asked him about this radical change, the perennial pragmatist is said to have answered, “The Left gives you immunity.” It also gave him unbridled power. In the midst of a China-driven global commodities boom, Kirchner’s populism was staggeringly popular: His approval rating once approached 90 percent. When his wife, Cristina Fernández de Kirchner, ran for president in 2007 as part of a plan to alternate power with her husband ad infinitum, the opposition struggled to find a candidate to oppose her. Their grip on power was as tight as that of their ally Hugo Chávez in Venezuela.
Cristina won the presidential election handily in 2007 and, after her husband’s sudden death in 2010, won again in 2011 with 54 percent of the vote; her closest rival mustered only 16 percent. But her unorthodox economic policy became radicalized after Néstor’s death: Following the financial crisis, she imposed capital and currency controls, nationalized the country’s oil behemoth, eroded the central bank’s independence so that it would finance her deficits, and manipulated government statistics to hide inflation’s effects on the poor. Only the public sector grew, enriching cronies who had public-works contracts.
Deprived of her charismatic husband, Cristina and her supporters toyed with changing the constitution to allow her a third term. Yet their dream was buried by a legislative loss in 2013 that greatly reduced their majority. For two years thereafter, all eyes were on the presidential election of 2015, which would be the first in over a decade without a Kirchner on a presidential ticket.
The standard interpretation of the victory of opposition candidate Mauricio Macri in that election — and the pro-market change that came with him — centers on the exhaustion of Kirchner’s haphazard economic model, which had caused sluggish growth and runaway inflation. Yet economic underperformance was not sufficient by itself to cause Macri’s victory; the tilting factor in the election was something different.
What changed in 2015 was the perception of corruption in the Kirchner regime and the electorate’s willingness to take it. Populist candidates lost the election to a reformer who promised painful structural reforms, but victory did not come easily. Indeed, during most of the presidential campaign, Macri trailed not only the candidate closest to Cristina, Buenos Aires governor Daniel Scioli, but also Sergio Massa, another splinter Peronist.
During the last few weeks of the campaign, corruption allegations against Kirchner and her closest clique eroded Scioli’s advantage. Their Achilles heel was the province that Scioli ruled, where Cristina was running one of her closest associates, Aníbal Fernández, for governor. Fernández stood accused of a variety of crimes, including money laundering and a drug-tainted triple murder. Yet the central accusation was one of corruption, kept alive over years by journalists who were often threatened by the government. Those accusations struck a chord during the campaign.
Peronism performed well in the elections all around the country, except in Buenos Aires. There Fernández cost the party its first loss in the most populous province in 25 years, and that, in turn, cost Scioli the presidency.
The return of growth has been slow, but so far the electorate — and markets — have given Macri time. The nation’s economic performance in his first two years in office has been unimpressive, driven by structural changes that will require a while to take hold, along with the reversal of many of Kirchner’s most outrageous policies, including bloated public contracts and regressive subsidies on items, such as electricity and transportation, that the poorest cannot afford even when they are subsidized. Macri lifted capital and foreign-exchange controls early in his government and is now promising progressive fiscal and labor reforms for 2018. A controversial pension reform was passed late last year. Meanwhile, a newly independent central bank has kept interest rates high to bring down inflation, often surpassing its targets.
Amid these difficulties, judicial proceedings against Kirchner and her acolytes for corruption have damaged the opposition. Long-dormant court cases are now in overdrive: Cristina’s two closest business associates, Lázaro Baez and Cristóbal Lopez, are imprisoned awaiting trial for corruption. The same applies to her former secretary of public works, who was caught with over $9 million in U.S. currency at a monastery, of all places. Her vice president, Amado Boudou, is accused of trying to take over the company that printed currency. As a member of the Senate, Kirchner has immunity, but even that did not save her most powerful minister, Julio de Vido, who had his immunity stripped by Congress last year and is now also imprisoned. Aníbal Fernández is still out, but for how long?
The importance of corruption in the decline and fall of Latin American populism extends beyond Argentina. The Lava Jato (“Car Wash”) money-laundering and corruption scandal in Brazil has claimed a whole generation of politicians there, and then some. Through the bribery colossus Odebrecht, a Brazilian industrial conglomerate, it has tainted Peruvian ex-presidents as well as Mexican ministers. Corruption is the most important issue in Brazil’s momentous 2018 presidential elections. The populist government of the late Chávez in Venezuela has mutated into an increasingly militaristic dictatorship under Nicolás Maduro precisely because of the unpopularity of the socialist ruling party, PSUV. The increasingly blatant corruption of Chávez’s successors and party elites during an economic debacle has hardly helped.
Although Macri’s government lacks a majority in Congress, he controls not just the presidency but also the mayoralty of the city of Buenos Aires (run by his experienced former chief of staff, Horacio Rodríguez Larreta) and the governorship of Buenos Aires province (run by young star María Eugenia Vidal). One of them is likely to be Macri’s successor eventually, though the results of this year’s legislative elections predict a second term for him, if only the government can avoid perceptions that those who are worst off will bear the burden of the economic adjustments.
It’s not hard to find political-science papers from the 1960s explaining that there was something about Spain that made its society incompatible with democracy. Countries do not change, until they do. Argentina’s transition away from populism is only beginning, but the signs are encouraging: Growth is accelerating, reforms continue, corruption is being prosecuted, and disruption is coming to industries long protected by political power. Barring an external shock, there are more reasons to be hopeful about Argentina’s future now than at any time in the last two decades of radical swings. Perhaps one day this financial-history lesson will have a happier ending.
– Mr. Barbieri is the executive director of Greenmantle, a macroeconomic and geopolitical advisory company, and a senior associate in the Applied History Project at Harvard University’s John F. Kennedy School of Government. He is working on a history of Latin American populism.