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Argentina Elects Cristina Fernandez de Kirchner: It's the Economy

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A version of this column was published in the Los Angeles Times on October 30, 2007.

Cristina Fernandez de Kirchner became the first woman elected to the presidency of Argentina on Sunday. Her victory is not difficult to explain. Her political party, under President Nestor Kirchner (her husband), led a dramatic economic turnaround that made Argentina the fastest-growing economy in the Western Hemisphere over the last five and a half years. More than 11 million people, or 28 percent of the population, were pulled over the poverty line as the economy grew by over 50 percent.

This 8.2 percent annual growth was more than twice the average for Latin America - it is more like the fastest-growing countries of Asia.

Unemployment has dropped from 21.5 percent to 8.5 percent, and real (inflation-adjusted) wages have grown by more than 40 percent.

Cristina Fernandez's victory was thus predictable and relatively easy. But the economic recovery that drove it was not so simple, and the people who led it deserve more credit than they have generally received. They had to take on not only the conventional wisdom of the economics profession, but powerful international institutions such as the International Monetary Fund. Their success may have some important implications for other developing countries.

When Argentina defaulted on a record $100 billion of debt at the end of 2001, almost all of the experts predicted that this would be the beginning of a long period of punishment. The country would be shunned by international financial markets and by foreign investors, they said, and this would be very damaging. The government had better reach an agreement with the IMF, and follow its advice. And it had better play nice with the defaulted foreign creditors.

The experts could hardly have been more wrong. The economy contracted for just three months after the default, and then began to grow. It hasn't stopped since.

Contrary to a common belief, Argentina's expansion was not based on exports or high commodity prices: only about 13 percent of the growth during the whole expansion was due to exports.

What did Argentina do right? Most importantly, the government got its basic macroeconomic policies right. After years of seeing its domestic economy crippled by an overvalued currency that made imports artificially cheap, the Argentine central bank targeted a "stable and competitive real exchange rate."

In other words, the authorities made sure that their currency didn't rise too high, and didn't swing wildly as a result of movements in financial markets. (Here in the U.S., where we have shed more than three million manufacturing jobs since 2001 - the bulk of them lost due to an overvalued dollar - we might take note.) They also kept interest rates low and made growth, rather than the lowest possible inflation, the top priority.

These policies are mostly a no-no among central bankers and economists, and Argentina had a few showdowns with the IMF, including a brief temporary default to the Fund in September 2003. But the Fund backed down, and the most of the defaulted international creditors ended up settling for 35 cents on the dollar in 2005.

Of course Argentina hasn't gotten a lot of foreign direct investment in the last five years and it cannot directly borrow on international bond markets. But these handicaps - which if you read the business press should spell doom - turned out not to be all that important. Nor are they permanent: in time, foreign investors and lenders will find their way back to a fast-growing economy.

The lesson: just as "all politics are local," so, too, are the most important economic policies for most countries. Getting the basic macroeconomic policies right for your own economy is a lot more important than pleasing international financial markets. That goes double for failed, unaccountable international financial institutions like the IMF. The Fund not only oversaw the train wreck that collapsed Argentina's economy from 1998-2002, it opposed the most important policies that drove Argentina's remarkable recovery.

The new government will face challenges, of the kind brought about by a fast-growing economy: keeping inflation in check and assuring adequate supplies of energy. But these problems are manageable. Of course there are some analysts who argue otherwise - but their forecasts over the last five years have not been very accurate.

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