Argentina’s New Government Needs To Act Quickly To Fix The Economy

By Mohamed A. El-Erian,

Mauricio Macri, President of Argentina. Photo courtesy of Casa Rosada, Presidencia De La Nacion Argentina.

Last week, the government of newly elected Argentine President Mauricio Macri launched a bold plan to revitalize a bruised and beleaguered economy plagued by high inflation. At a time of daunting crisis conditions, one should not underestimate the importance of this move not just for Argentina, but also for other countries, where leaders are watching closely for clues about how to deal with their own economic woes.

Thanks to years of economic mismanagement, Argentina’s economy has been badly underperforming for decades. Previous governments sought to avoid difficult policy choices and obfuscate fundamental issues by implementing inefficient controls that grossly misallocated resources and undermined Argentina’s ability to generate the foreign-exchange earnings needed to cover its import bill, resulting in domestic shortages. The recent drop in commodity prices has exacerbated the situation, depleting what little growth dynamism the economy had left, while fueling inflation, deepening poverty, and spreading economic insecurity and financial instability.

In theory, governments in such a situation have five basic options to contain crisis conditions, pending the effects of measures to reinvigorate growth and employment engines.

*Run down the financial reserves and wealth that were accumulated when the economy was doing better.

*Borrow from foreign and domestic lenders.

*Cut public-sector spending directly, while creating incentives to induce lower private-sector expenditure.

*Generate revenues through higher taxes and fees, and earn more from abroad.

*Use the price mechanism to accelerate adjustments throughout the economy, as well as in trade and financial interactions with other countries.

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Mohamed A. El-Erian, Chief Economic Adviser at Allianz and a member of its International Executive Committee, is Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO and co-Chief Investment Officer of PIMCO.