Is Multiple Equilibria Possible in Argentina?

The Argentine president submitted a law to Congress to have midterm elections in late June instead of late October—as the current law states. What are the economic causes and possible implications?

Other than direct political reasons, the main cause is improving the chances of wining the election due to economic motives (Is the economy, stupid!). As of today, most private forecasts point to a marked contraction starting in Q3. Thus, so the argument would go, by late June the impact of the accumulated macroeconomic mismanagement that started in the early 2000s’ but became visible to the general public as a consequence of the world financial crisis will not be fully perceived yet. Conditional on the current policy stance, it would seem as if the full effects on the economy (higher unemployment and poverty, lower production, more stringent fiscal and trade balances, much depreciated domestic currency, etc.) will wait until Q3. The current administration is then vetting on these things in order to keep political power. An alternative way of thinking about this is that the government finally decided to correct its populist economics in the usual way: strong fiscal correction, sharp depreciation of the domestic currency, etc. (For further details on these issues, see my post on Populism on June 25, 2008, and many of the ones that followed it.) Do they know anything that we don’t?

In a nutshell, and wishfully thinking, the government intention is not only to maintain thier political power, but more importantly to adjust the economy—and it is politically preferable to do it after the election. But, the key questions are: How much forward-looking are economic agents? What are there expectations on economic policy for the day after the election—assuming the current administration’s party wins? For, what I described above is one possible equilibrium—the one envisioned by the government. Another possible equilibrium could be that as the market anticipates these things, and given the increase in economic and political uncertainty that the current administration generates, the economic and political system will endogenously force the adjustment to happen prior to the election. How will the polls results if so?

Bottom line: the populist economic policy in Argentina since the early 2000’s, as expected, is coming to the standard end of such a policy. The government, anticipating it wants to secure power prior to correcting its accumulated mistakes. But that would be the “good” equilibrium—on which the government is literally vetting. However, given the policies that they themselves implemented, another equilibrium does exist—the “bad” one. In the latter, the adjustment precipitates in front of the policymaker’s hands. At this time, we need to wait for the facts to give us the right answer.