Chile versus Argentina

Fernández’s government bullies and nationalizes businesses, and pressures the central bank to use international reserves for debt payments. And Argentina’s major trade agreement, Mercosur, has fallen far short of its potential. Over the next five years, the International Monetary Fund expects Argentina to experience weaker growth, higher inflation, and more unemployment than Chile.

Fortunately, voters are increasingly turning against Fernández’s government. In August, opposition candidates like Sergio Massa and Mauricio Macri attracted substantial electoral support with their business-friendly, anti-inflation campaigns, making them likely presidential candidates in 2015. Even if Fernández does not cause too much damage in the interim, her successor will have to restore Argentina’s credibility at home and abroad, in order to prevent capital flight.

Can an Argentine president promote disinflation and retain voter support during a period of slower growth, or even recession? It happened in the US. President Ronald Reagan supported US Federal Reserve Chairman Paul Volcker’s disinflation, despite a deep recession, a temporary spike in unemployment, and midterm election losses. The economy soon rebounded, and Reagan was re-elected. Price stability enabled a quarter-century of strong growth and low unemployment, interrupted by two brief, mild recessions – the best macroeconomic performance in American history.

One hopes that Argentina will learn from its western neighbor – and that a Bachelet administration in Chile will look across the Andes, recognize where its proposals risk taking the country, and change course before it is too late.

Michael J. Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993.

Copyright: Project Syndicate, 2013.