-Analysis-

BUENOS AIRES— A year ago I wrote in this newspaper that Argentina — as it so often has in the face of crises brought on by over-spending and protectionism — was once again embracing neoliberal orthodoxy and all the economic pitfalls that come with it. The events of recent weeks underscore the risks even more.

I stated, in my previous essay, that capitalistic cycles often begin after an inherited recession. The economic slump is what justifies the shift back toward free-market policies. The promise made is that capital — encouraged by prospects of big financial returns guaranteed by the state — will be transformed into investments that fuel economic growth.

"The arrival of capital exceeds the current account deficit, and reserves grow," I wrote. "But in time the trade deficit grows too, and afterwards, the current account deficit itself. That is how the reversion cycle begins, with erosion of liquidity, falling asset prices, loss of reserves etc."

Rising debt is characteristic of these neoliberal phases and explained in terms of an inherited fiscal deficit. In reality, though, it's meant to stimulate the economy and win elections. At some point, financial operators decide there are too many inconsistencies, and start to leave. The government then "tries to cut the public deficit and eventually there is devaluation."

From there, a process of economic contraction begins and gains force as "the country risk and interest rates rise further, until it finally aggravates the financial crisis and the exchange market with falling Central Bank reserves." The causes are domestic policies, but "the intensity of these adjustments depends on the circumstances of the international setting... the greatest uncertainty being the duration of these cyclical, historical phases (which depends more on external than internal factors)."

Bigger public spending cuts and an economic slowdown are expected in Argentina — Photo:Hernána Piñera/Flickr

That's the pattern we've seen before. And as the financial turmoil of recent weeks suggests, history is once again repeating itself. President Mauricio Macri and his Cambiemos (Let's Change) allies believed that their victory in the last elections gave them the power to lower interest rates, loosen inflation targets and — with an eye toward future elections — keep public spending high.

Notably, the "populist" government of Brazil's last president, Dilma Rousseff, sought to do something similar. It tried to lower interest rates and alter the pacts the Workers Party had made in terms of financial and monetary orthodoxy under her predecessor, Lula da Silva. Both attempts proved short-lived, as financial operators reminded those governments that in an open and indebted economy, creditors are in charge. In the end, and irrespective of their political colors, both promised to embrace monetary orthodoxy and assure financial returns in exchange for creditors backing them and generating "confidence."

Populism wins votes because of neoliberalism's failures

The Macri government's flawed policies have hastened the end of an expansive phase. Interest rates have risen to levels far above what was needed to end the exchange restrictions bequeathed by the last government. The country's external deficit, in the meantime, is growing, as is the fiscal deficit and general indebtedness. The administration can't, in other words, keep blaming its predecessor.

If, in addition, it is promising to lower taxes (with more debt to service and a slowing economy), a projected combination of spending deficit and an overdue devaluation will be explosive. Instead of criticizing the last government, the Macri administration should understand that populism wins votes precisely because of the repeated failures of neoliberal policies (be they disguised or not). The same applies to "progressive" populist regimes whose own inconsistent economic policies so often pave the way for the return of neoliberalism.

The government should reflect on this because the brief expansion is now over, and bigger public spending cuts (where?) and an economic slowdown are expected. Their social effects will be more negative than before. Little wonder that the government's "zero poverty" promise has disappeared from official discourse. Declarations being made now in defense of continuing government policies under IMF supervision will not help Argentines forget the ghosts of the past. The government would do better to change the policies that created the present scenario, and thus avoid repeating the same old mistakes.

*The author is an economist and director of the Centro Interdisciplinario para el Estudio de Políticas Públicas (Ciepp) think tank