Proof of Life

By MARY ANASTASIA O'GRADY
June 25, 2007 - Wall Street Journal

Maybe the Argentine electorate is not willing to march lock-step off a cliff behind the authoritarian socialism of President Néstor Kirchner after all.
That possibility was raised yesterday when Mauricio Macri of the center-right PRO party appeared to be on course to defeat Mr. Kirchner's minister of education, Peronist Daniel Filmus, in the Buenos Aires mayoral election runoff. Mr. Filmus was Mr. Kirchner's hand-picked candidate and the president mobilized every advantage of his office -- in a country where transparency is nearly nonexistent -- to favor his man. Even so, the Peronist faltered. As we went to press, the final results weren't in but exit polls suggested a strong Macri victory.
Pundits still expect either Mr. Kirchner or his wife, Cristina Fernández, to run in and win the October presidential election. But the failure of the president's proxy in the capital city ballotage yesterday suggests that his days of uncontested power are over. Argentine pluralism and democracy may be making a comeback, and none too soon.
That porteños -- as denizens of the port city are known -- said "no mas" to Mr. Kirchner yesterday is also a positive development for the cause of stability, peace and growth throughout South America. Only a decade ago Argentina had substantial geopolitical relevance, so much so that the U.S. qualified it as "a major non-NATO ally." But since Mr. Kirchner came to power in 2003, the country's international profile has been reduced to banana-republic status. It has allied itself with the menacing president of Venezuela, Hugo Chávez, supported the anti-democratic agenda of Bolivian President Evo Morales, picked a nasty fight with its neighbor Uruguay, broken gas contracts with Chile and invested enormous political capital in skewering foreign investors. It is an understatement to say that Mr. Kirchner's Argentina has not been good for the region.
While Mr. Macri, who also happens to be the president of Argentina's championship soccer team the Boca Juniors, is considered "center-right," the city that just elected him cannot be classified as any such thing. In 2003 it elected the hard-left Aníbal Ibarra, who allied himself with the Kirchner wing of the Peronists. This time the vote has gone the other way and it's worth asking why.
Some are blaming the kirchnerista loss on Mr. Filmus's weak candidacy and the victory of the Boca Juniors last week at Latin America's most prestigious soccer tournament. Yet there is no denying that anti-Kirchner sentiment also played a role. With the president so actively involving himself in the campaign, the election became as much a referendum on the national government as it was a mayoral race.
Booming Argentine growth ought to have put strong winds at Mr. Filmus's back. But locals have been reminded in recent weeks -- by natural gas shortages in a winter that has started off unusually cold -- that perhaps all is not right with Mr. Kirchner's economic model. The government has had to ration gas supplies to industry and taxis in order to meet residential demand. This is putting pressure on business. Petrochemical, chemical and steel operations are all being affected. Reuters reported last week that three steel companies, which asked not to be identified, said layoffs were possible as a result of the energy shortages.
It would not be surprising if energy turns out to be only the canary in the coal mine of the Argentine economy. Scarcities do not occur in market economies because as supply is constrained prices rise, tempering demand; consumers can then get all they want at the new price level. More important, higher prices stimulate new supply as producers have a greater incentive to invest and innovate to bring product to market and get paid.
Since the end of 2001 the Peronist economic agenda has rejected these simple laws of the market in favor of economic populism. In December of that year, the government reneged on its debt, establishing an uncertain environment for capital that continues today. In 2002, it further alienated investors by abrogating utilities contracts and imposing price controls. These decisions were taken before Mr. Kirchner assumed the presidency but his government has made things worse by broadening the scope of the price controls and pursuing an almost irrational vendetta against the private sector, creditors and profits.
The Kirchner legacy has also spread an anti-property rights ideology throughout the country. Local legislatures in Catamarca and Corrientes provinces are now contemplating the seizure of ranch land owned by foreigners, reinforcing the message that investing in Argentina is a risky proposition.
The costs for this nonsense are now showing up. Consumers are hungry for a variety of artificially low-priced products, from gas to foodstuffs, but supply is going in the opposite direction as investors are nowhere to be seen. Ergo, shortages. In the energy sector the problem is particularly acute. Barclays Capital warned last week that "the inelasticity of supply in an industry whose output faces continued declining rates makes the lack of investment in exploration and production of oil and gas concerning." The country's "unorthodox economic policy framework might be reaching its limits," the report said. Shortages are also showing up in milk and other dairy products.
Still, the economy is on track to grow by at least 7% this year, which suggests that yesterday's anti-Kirchner vote may have been driven by other issues too. The list could include electoral disgust with a massive public-works corruption scandal, the firing of personnel who refused to "adjust" national inflation statistics, financial investigations of government adversaries and double-digit inflation. The president's penchant for alienating neighbors and his four-year effort to revive the divisiveness of the Dirty War have also invited much criticism from educated Argentines.
Whatever the cause, the Macri victory suggests cracks in a government machine that until now has handily steamrolled its opposition. The outcome in Buenos Aires might even point to a nascent but profound shift in Argentine politics.