Argentina: Opposition Candidates' Economic Platforms

UNCLAS BUENOS AIRES 002087 SIPDIS SIPDIS SENSITIVE PASS NSC FOR MSMART PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE TREASURY FOR MMALLOY, LTRAN USTR FOR KDUCKWORTH DOC FOR 4322/ITA/MAC/OLAC/PEACHER US SOUTHCOM FOR POLAD E.O. 12958: N/A TAGS: ECON EFIN PREL PGOV AR SUBJECT: Argentina: Opposition Candidates' Economic Platforms Ref: (A) Buenos Aires 2021 (B) Buenos Aires 2015 (C) Buenos Aires 1995 -------------- Summary -------------- ¶1. (SBU) Substantive policy debate about clouds gathering on Argentina's economic horizon has been largely absent from the presidential election campaign here. An exception has been high-profile sniping by principal opposition candidates Roberto Lavagna and Elisa Carrio at GoA mis-steps in its alleged efforts to manipulate inflation statistics. Former Economy Minister Lavagna, the architect of the GoA's current economic policy mix, supports the main tenets of the GoA's economic model but argues it should "evolve" to meet domestic and external market challenges. Lavagna has limited his economic policy critique to the GoA's inefficient price control regime, the President's use of non-transparent "superpower" budget authority, and the government's hollowing out of key Argentine economic institutions. Surprisingly, Carrio, the most leftist major candidate (besides, arguably, frontrunner Cristina Kirchner),has articulated the most orthodox economic policy platform, emphasizing a central bank focused on inflation management, a more flexible exchange rate regime, and a progressive income redistribution bias via tax reform. Less popular candidates Rodriquez Saa, Lopez Murphy, and Sobisch have similarly echoed more orthodox economic prescriptions and hammered on inflation. End Summary. -------------- -- Lavagna: Former Economy Minister's Bully Pulpit -------------- -- ¶2. (SBU) If any one person can claim to be the architect of Argentina's economic recovery, it is Roberto Lavagna, who was Economy Minister from 2002 until November 2005. In his election campaign, Lavagna has not been shy about making this point. Responding sardonically to claims by President Kirchner's allies that the president is the real economic helmsman, Lavagna observed that "there is a tendency to put on the medals won by others, from human rights to the economic recovery." In recent weeks, Lavagna has increasingly focused his attacks on inflation and the GoA's apparent manipulation of statistics. ¶3. (SBU) In Lavagna's view, the Kirchner government is squandering the economic legacy he left in 2005 by imposing "a rigid system of price controls" and resuming ownership of some formerly state-run companies privatized in the 1990's. Lavagna has also been critical of the President's misuse of "superpower" budget authority to allow him to alter budget expenditures and issue "decrees of necessity and urgency" without seeking congressional approval. In an August 2007 AmCham luncheon attended by the Ambassador and EconCouns, he decried the Kirchner administration's "systematic hollowing out" of key economic institutions, including statistical agency INDEC (Ref A), competition policy agency CNDC, agricultural marketing agency ONCCA, and the GoA's financial investigation unit UIF. On regional trade policy, Lavagna has been critical of what he calls president Kirchner's "turn to the left" in his alliance with Venezuelan President Chavez. As Lavagna sees it, Chavez is trying to hijack Mercosur's trade promoting customs union and economic integration priorities and turn Mercosur into a regional anti-American political alliance. ¶4. (SBU) Lavagna's resignation from the Kirchner administration in November, 2005 followed his warning that government contracts and control of state companies were being steered to President Kirchner's political allies based on records of loyalty rather than competence. During the August 2007 AmCham lunch, Lavagna recalled a conversation he once had with another senior official while still a member of the Kirchner government. The official told him that the only two ways of dealing with Mr. Kirchner were "to be either a slave or an enemy, and I've chosen to be a slave." That option, Mr. Lavagna added, "is not for me." -------------- Lavagna's Contradictory Economic Platform -------------- ¶5. (SBU) In June 2007, Lavagna was the first of a group of early presidential candidates to publish an outline of his economic platform in major Argentine dailies. Key components include: (1) Maintaining a total and primary fiscal surplus with the goal of substantially reducing the GoA's debt overhang; (2) maintaining a "competitive" (i.e. undervalued) peso exchange rate; (3) eliminating price controls; (4) combating inflation via responsible fiscal policies; (5) stimulating and expanding domestic demand/consumption via a "virtuous circle" of increased salaries, pension payments and investment, the latter via targeted tax incentives; and (6) using appropriate banking sector and capital market policies to maintain low interest rates. He has argued that any macro and micro policy prescription needs to evolve to meet domestic challenges and exogenous shocks, calling the GoA's "if-it-ain't-broke-don't-fix-it" economic policy philosophy an "ostrich" approach to economic management. ¶6. (SBU) Clearly, Lavagna's economic platform is many steps removed from liberal free-market orthodoxy. Local analysts argue that many of his proposals are contradictory or mutually exclusive. Most commonly cited are his calls to combat inflation via "responsible" fiscal policies while continuing to stimulate already overheated domestic consumption via higher salaries, cutting taxes to encourage investment, and maintaining low (currently net real negative) interest rates. Critics also note that, despite Lavagna's calls for fiscal probity, his record is that of a spendthrift. During the 2002-2005 period that Lavagna served as Economy Minister, public expenditures jumped over 100%, from approximately Pesos 53 to 107 billion. ¶7. While Lavagna has been the primary voice in defining and defending his economic platform, he has been accompanied by Javier Gonzalez Fraga, former central bank governor from 1989-1991 under the Menem administration. Currently a professor at Buenos Aires prestigious Catholic university, Fraga has made a number of public statements regretting the GoA's "debasement" of statistical agency INDEC. -------------- --- Carrio's Surprisingly Orthodox Economic Platform -------------- --- ¶8. (SBU) Center-left candidate Elisa Carrio is widely seen as the front-runner for second place in the October 28 elections. An outspoken political figure, Carrio says she would return Argentina to its republican roots, "democratizing" power and limiting presidential mandates to one term. She argues it is possible to simultaneously enjoy a "republic, economic development, and social justice" and that her first priorities as president would be to lower inflation, fight Argentina's escalating drug problem, and establish better social programs for youths. At a September 28 lunch attended by the Ambassador, Carrio criticized the cost and ineffectiveness of school nutrition programs and proposed to use that money instead for direct payments to families to feed their children and keep them in school. She also promised guaranteed pensions for the elderly. ¶9. (SBU) Carrio's campaign gained considerable credibility when she brought former Central Bank governor (2002-2004) Alfonso Prat-Gay onto her team as her shadow Economy Minster. Prat-Gay was appointed President of the Argentine Central Bank in December 2002, during the Duhalde administration. The Kirchner administration's decision not to renew Prat-Gay's appointment in 2004 was reportedly related to his conflicts with then-Minister of Economy Lavagna and his criticism of the GoA's handling of IMF negotiations and debt restructuring with private creditors. ¶10. (SBU) In September 2007, Carrio's Civic Coalition party published a "Productivity Plan: 2007-2011" which included mandates for (1) a wholly independent central bank conducting a monetary policy focused on controlling inflation; (2) contra-cyclic fiscal policy with the creation of contra-cyclic trust funds on the Chilean model; (3) a commitment to maintain a true primary fiscal surplus in the 1% to 4% of GDP range; (4) a more flexible exchange rate regime to more readily accommodate exogenous shocks; and (5) a progressive income redistribution bias via tax reform, including a lowering of VAT taxes and an extension of income taxes to financial assets. Interestingly, Carrio's economic platform does not specifically reject government price controls, but rather asks for substantive product- and sector-specific impact analyses of controls. ¶11. (SBU) Like Lavagna, Carrio and Prat Guy have repeatedly and loudly charged that the GoA has manipulated inflation statistics and damaged both the credibility of INDEC and the Argentine state in the eyes of domestic and foreign investors. When current Central Bank governor Martin Redrado said to an investor group in London last month that he is "preoccupied" by Argentine inflation levels, Prat-Gay retorted: "Better the central bank should be 'occupied' (dealing) with inflation rather than simply 'preoccupied' by it." ¶12. (SBU) Given Carrio's left-of-center political base, many of her public statements on economic policy have focused less on the Civic Coalition's relatively conservative published economic platform and more on economic themes with a populist twist: despite significant declines in poverty and indigence levels, Carrio has criticized the GOA for a regressive tax system that, in an inflationary environment, has contributed to growing income inequality. And, while demanding clear rules of the regulatory and incentive game for domestic and foreign investors, Carrio asks for ongoing oversight of private sector players to combat their the private sector's "tendency" to monopolistic abuses of market power. -------------- Other Candidate Economic Platforms -------------- ¶13. (SBU) Alberto Rodrguez Saa, a Peronist leader and current governor of San Luis province, is running in fourth place for the Presidency, according to most polls. His brother Rodolfo Rodriguez Saa also served as governor of San Luis and briefly as President of Argentina for one-week in December 2001 following De la Rua's resignation, where he gained international notoriety for declaring Argentina's debt default in Congress. Alberto Rodriguez Saa's economic platform highlights initiatives to re-work Argentina's "co-participation" federal revenue sharing regime to increase the share of government revenues automatically passed to provinces; the need to restrict Presidential "superpowers" and linked decrees of "necessity and urgency," and more broadly, the need to reduce overt government intervention in the productive economy, particularly in the agricultural and cattle sectors. ¶14. (SBU) Ricardo Lopez Murphy, the center-right candidate currently running in fifth place according to most polls, previously ran for the presidency in 2003, where he came in third place with 18% of the votes. Today, however, he is running at less than 5% in the polls. Lopez Murphy served as Minister of Defense and of Economy in the 1999-2001 de la Rua administration, though his tenure as Economy Minister lasted only two weeks: after attempting to introduce a fiscal tightening program, popular protests ended in his resignation. An economist with a PhD from Chicago University, his economic platform reflects an orthodox monetary approach to cooling down an over-heated Argentine economy. Lopez Murphy's public comments on economic policy have decried GoA manipulation of inflation statistics; encouraged market-based competition within a transparent and consistent regulatory framework; called for a reduction in "politicized" state infrastructure expenditures in favor of more efficient private sector investment; proposed the development of incentive programs to encourage Argentine software and high-tech companies to undertake in-country R&D, and recommended the development of non-conventional energy sources to address looming electricity and natural gas shortages. ¶15. (SBU) Finally, center-right leader and current governor of Neuquen province Jorge Sobisch is running a distant sixth place for the Presidency, according to most polls. Sobisch's governorship ends in December 2007; in April 2007, after sending in police to manage a teacher's union strike, he was blamed for the shooting death of a Neuquen teacher. Despite popular calls for his resignation, he vowed to finish his term as governor. Sobisch's economic platform calls for a reform of Argentina's co-participation revenue sharing regime and a linked simplification of Argentina's complex the tax structure which concentrates revenue -- and power -- at the federal level. He has also called for more "balanced" Argentine economic development, with a focus on Argentina's productive provincial regions. -------------- Comment -------------- ¶16. (SBU) GoA mis-steps in its attempts to manage inflation via price controls and - allegedly - to manipulate inflation statistics have become prime fodder for opposition candidates. Otherwise, the final weeks of Argentina's presidential campaign have been bereft of substantive debate on economic themes. It appears that five consecutive years of 8+% post-crisis GDP growth, topped off by a pre-election "pinata" of salary and pension increases, tax breaks, industrial protection measures and public works commitments have encouraged Argentine voters to accept GoA promises of continued growth and increases in real income in a follow-on Cristina Fernandez de Kirchner administration. ¶17. (SBU) It is one of the ironies of this Argentine electoral campaign that Elisa Carrio, the first-tier candidate farthest to the left on the political spectrum, is running on the most "orthodox" economic platform, one that calls for measures to cool down Argentina's overheated consumer demand. In contrast, Roberto Lavagna, architect of all the key aspects of the GoA's current macro policy mix, is calling for an "evolutionary" economic policy that adapts to domestic and international market realities. But other than promising an end to price controls and damning the GoA's poor implementation of "his" economic model, Lavagna has consistently validated current GoA macro policies -- policies that many argue have led, inexorably, to the very inflationary pressures and related disequilibria that cast a shadow over Argentina's current economic boom. WAYNE