On May 25 Néstor Kirchner, a 53-year old lawyer, member of the Peronist party and governor of the southern region of Santa Cruz for almost 12 years, assumed the presidency of Argentina following the sudden withdrawal of his rival Carlos Menem in the second round of the presidential elections.


The unsporting resignation of Argentina’s ex-leader has damaged the legitimacy of the new government, which faces a long list of problems ranging from rampant corruption and poverty to a 17.4% unemployment rate and the need to renegotiate the country’s sky-high foreign debt. Will the newly-elected president and his cabinet be able to build a new Argentina?


Kirchner forecast the measures that his government will take to rebuild Argentina during his inaugural speech to 12 leaders of Argentine states as well as to Prince Felipe of Borbón, heir to the Spanish crown. In the economic arena, the president will focus his policy on the fight against corruption, poverty and unemployment through a more interventionist state policy. Moreover, he proposes to tackle the foreign debt through sustained economic growth. His commercial policy will have as a goal the strengthening of Mercosur – the economic integration plan created by Argentina, Brazil, Paraguay and Uruguay; Chile is a commercial partner – and finally, there will be a renewal of the country’s military power.


“The president is going to apply Keynesian policy concerning public expenditures,” says Ramon Casilda Béjar, a consultant at the Inter-American Development Bank and author of the book, The Golden Decade: Economy and Spanish Investment in Latin America 1990-2000. “The state is going to be bringing order to costs and it will put in place initiatives that, in the short term, can [encourage] investments of private capital.”


But what do we know about the new president? Kirchner is married to Senator Cristina Fernández and is the father of two sons. He comes to power courtesy of his remarkable management of the Patagonian region of Santa Cruz. When he resigned his post there, unemployment represented less than 3.5% of the active population in Santa Cruz. Poverty amounted to about 8% – compared to 54% countrywide – and the public coffers overflowed with money. While these kinds of facts are more than remarkable in Argentina, the [Patagonia] region is one of the least populous in the world and has enviable natural resources of petroleum and natural gas. From that point of view, the first question is, will Kirchner be able to achieve the same success on a national level?


The Menem Factor

It won’t be easy. Kirchner comes to power with the lowest level of electoral backing in the history of Argentina, because only the first round of the presidential elections took place in April.  Ex-president Carlos Menem (who led the country between 1989 and 1999) decided to throw in the towel and abandon his electoral campaign four days before the final round. Menem was demoralized by the results of polls that forecast a crushing victory for Kirchner, by a margin of 70% to 30%.


Menem, who is 71 years old, had won the first round with 24.45% of the vote compared with 22.24% for Kirchner. Nevertheless, as Carlos Malamud, principal researcher for Latin America at the Real Instituto Elcano, noted in a previous Universia-Knowledge at Wharton article, if Menem didn’t win the presidency in the first round it was very probable that he would wind up losing later on. That’s because “many people are going to vote against him, very much along the lines of what happened in France with (Jean-Marie) Le Pen. The protest vote in support of the other candidates could come together” [and beat Menem].


Menem justified his resignation by arguing that “it was a crooked election.” The ex-president was referring to the political maneuvering by Eduardo Duhalde, his staunch political enemy and a fellow member of the Peronist party. Duhalde cancelled the Peronist party’s primaries and arranged that candidates Menem, Kirchner and Adolfo Rodríguez Saá all run in the presidential election.


By canceling those primaries, Duhalde managed to avoid a double danger, says Malamud. First, “Menem would have been the Peronist candidate for the presidential elections.” Second, the triumph of Menem would have threatened the Peronist presidency because it would have become clear in the more predictable second round that “the president would be rejected by an important part of the electorate, the so-called Le Pen effect.” In that round, the vote would have gone in favor of the non-Peronist candidate. “Menem’s arguments are only an excuse,” adds Malamud. “The same thing would have happened no matter which man was the other candidate.” That is to say, the vote to punish Menem would have given victory to Menem’s opponent.


Whatever the reasoning, it’s clear that this “soap opera” has had consequences for Argentina’s governability right at a time when the country is in a complicated transitional stage. “Menem undermined the legitimacy of the new government by resigning in the second round,” states Malamud. “It is not the same thing to rule with the support of 70% to 75% – which the polls gave [Kirchner against Menem] – as opposed to the 22% that Kirchner obtained in the first round. The legitimacy of the new government is damaged, and the government now has to achieve the consensus that it needs by doing so on the job.”


A Balanced Team 

It remained for Kirchner to get started governing. His first political measure was to create a new government team whose composition was determined by the withdrawal of Menem. This signals that “Kirchner’s intention to sign up non-party members could not be realized,” Malamud says. “A broader consensus couldn’t be achieved because there was no second round.


“Kirchner has bet on continuity, and he has drawn up a balanced cabinet in which four of the ministers come from the earlier government of Duhalde; another four are direct backers of Kirchner; and the rest have various origins,” Malamud adds. On the other hand, in choosing his supporters, the new president has clarified the division that exists within the Peronist party in power. “Kirchner excluded Menem and Rodriguez Saá from his government.”


Duhalde’s obvious support for Kirchner and his decisive influence in Kirchner’s victory have raised doubts about the independence of the new cabinet. “There was no imposition on the part of Duhalde, as it was feared,” states Malamud. In the end, the ministerial team is composed of four Kirchner sympathizers: Julio De Vido, minister of federal planning, public investment and services; Sergio Acevedo, Secretary of State Intelligence; Alberto Fernández, Chief of Cabinet; and Alicia Kirchner, who is the president’s sister. She is responsible for social development as she was in Santa Cruz province. There are also four Duhalde supporters: Roberto Lavagna, who stays on as minister of the economy; Anibal Fernández, formerly minister of production and now minister of the interior; José Pampurro, responsible for defense; and Gines González, who will continue at the ministry of health. Also, Gustavo Béliz, is the new minister of justice, security and human rights; and Rafael Bielsa, is minister of foreign relations.


Lavagna’s management during Duhalde’s government was “was good, and correct”, says Casilda, “Lavagna has been like a midfielder in football. He has kept things under control and he has put the ball in play.” During a year and half as head of the ministry of the economy, Lavagna has managed to control prices, stabilize the exchange rate and create unemployment benefits that cover about two million people. He also reduced social unrest and achieved economic growth of about 4% this year. After various threats of default, he managed a minimal accord with the IMF in January in order to postpone the expiration date of foreign debt payments until the end of August.


Perhaps in response to the tremendous challenges that Argentina faces, Kirchner has reformed the ministry of the economy and production, creating a new portfolio of federal planning, public investment and services– independent from “economy” – which will take care of managing public works, energy, communications, mining and transportation.


Employment, Exports and Tax Evasion

The government has put into operation a public works plan as a means of expanding economic growth and creating jobs. According to Wharton management professor Mauro Guillén, the interventionist policy that the new government advocates “is a mistake, but it was to be expected. Peronism (except for Menem) has always been in favor of the state. Argentina needs to export more, not to invest more in order to generate jobs. I am an optimist. In Argentina, there are companies that know how to export – metals, oil products, candy, for example.  What they need is to make things easy for those companies, not for the state to spend more on investment. In contrast, the state must protect the unemployed and make relocation easier.”


Growth in exports, fostered by the strong devaluation, had a key role in Argentina’s economic growth over the last months. Export growth is one of the government’s priorities, along with import substitution. As proof of that, it has approved a measure to return taxes, amounting to nearly 159 million pesos, to small and midsize companies in order to boost their exports. According to Casilda, “it would be very interesting if exports grow. The challenge is the diversification of exports into products that build in value. The import substitution model is an old one; if they do that with higher quality and better prices, that’s fine. But if they do [import substitution] just to rebuild old monopolies, that doesn’t look good to me.”


Tax evasion is one of the country’s major problems, and Lavagna has made fighting it a top economic priority. The government will dedicate 8 million pesos – 2.8 million euros, or $2.7 million – to immediately establishing tax courts dedicated exclusively to clamping down on evasion. These tax courts have already existed but until now they couldn’t count on having the budgets they need to function properly.


Renewing the IMF Accord

The ministry of the economy will be responsible for sitting down to negotiate with the IMF at the end of August and search for an agreement in regards to the $6.6 billion in payments that Argentina has outstanding until the end of this year. Argentina owes the IMF a total of $14 billion. Moreover, the state must decide what to do with private creditors to whom it owes $60 billion in bonds dating back to December 2001 when Argentina suspended payments and entered a full-fledged economic and social crisis. Kirchner anticipates bringing economic growth up to about 5% in order to tackle the foreign debt.


“The negotiations with the IMF will be very difficult because no one wants to give a gift to Argentina after what has already happened,” says Guillen. “I believe Argentina should try to close an agreement as early as it can so that international funds return to the country. Without that, I see no way out.”


The recent decision of the government to veto the 90-day extension of the suspension of its mortgage executions is not going to make things easier. On the contrary, this measure is one of the IMF’s requirements for signing a new agreement [with Argentina].


Another priority of the IMF is the normalization of prices for public services provided by companies privatized during the Menem era. Providers of these services, including the Spanish firms Telefónica and Endesa, are asking for an increase in prices frozen during the devaluation. On several occasions, groups of customers have put a brake on prices through the ministry of justice, without the government being able to avoid it. The new minister of planning and development, Julio De Vido, has already said that there will be no short-term price increases and that, before determining any increases in prices, there will be a review of the contracts granted to privatized companies, according to Argentinean newspaper Clarín.


One area that remains unresolved is banking reform. “The country will not get moving if they don’t create an efficient financial system that uses domestic savings and facilitates credit – at the right price and in time – and if they subordinate the public bank to a private financial system,” Casilda says.


In the political arena, the new president will have to come to agreements with the other factions within the Peronist party, as well as with the opposition, in order to get his initiatives moving forward. “Menemism is practically finished,” says Malamud. “It is possible that a large part of Menem’s supporters will leave the Congress after legislative elections in August or September.”


U.S.Influence on the Wane

During the electoral campaign, shortly before the second round of presidential elections, Kirchner and Lavagna visited President Ricardo Lagos in Chile and Luis Inacio Lula da Silva in Brazil. “The election of Nestor Kirchner will have the benefit of strengthening Mercosur, something that would not have happened if Carlos Menem had won,” Casilda notes.


“We will give priority to the rebuilding of Mercosur and the integration of Latin America,” the new president said. Mercosur’s goal is to develop a common market of the south through the efficient use of resources, development of communications, coordination of macroeconomic policies and the complementary use of various economic sectors.


The good relations that exist between Kirchner and Lula “are going to boost Mercosur when they consider the creation of the Free Trade Area of the Americas (FTAA) in 2005,” suggests Casilda. “Mercosur is going to be in a very strong position to negotiate agreements and tariffs …. This [fact] is not in the interest of the United States.”


Argentina, which is strongly dependent on its agricultural sector, is demanding that the United States eliminate agricultural subsidies and American anti-dumping laws, while Washington is asking for Mercosur to open its market for services.


The Bush administration’s expectations for the FTAA are quite high, and the plan has moved into a second stage. In recent months, Argentina has increased its commercial interchange with Brazil – which had been held up as a result of the economic crisis – by adopting sets of rules for the free flotation of exchange rates in both economies and the gradual alignment of the value of the Argentine peso and the Brazilian real.


“Mercosur now has a future, provided that Argentina has a floating exchange rate,” says Guillen. “Even then, I believe that this isn’t a good trading bloc for Argentina since Brazil stands to gain [from it].” Casilda disagrees with Guillen, stating that “everything depends on how they carry out the integration of Mercosur, on how it is negotiated.” In any case, “the cordial understanding between Kirchner and Lula must overcome the status of the customs union and make progress toward an internal market that is capable of competing in the global economic landscape.”


Plans for integration extend beyond the purely economic realm to the possibility of creating a single currency and free circulation of the region’s population. Opinions are divided concerning the future of such a scenario. Celso Amorim,Brazil’s minister of foreign relations, has already noted that “the goal of a Mercosur monetary union is no longer a dream.” But some experts believe that the region will have to wait some time for that dream to become a reality. Before that happens, the integration of Mercosur will have to continue moving ahead. In that process, Kirchner’s Argentina can – and must – play an important role.