Populism

As the warm winds return, the days lengthen and the jacaranda trees explode in a riot of purple along its main avenues, Buenos Aires is also enjoying the afterglow of President Mauricio Macri and his Cambiemos coalition’s resounding October win. All the big cities and provinces went their way -- the first time a party has swept the national electoral field since Argentina's return to democracy in the 1980s. The midterm election upended two constants of Argentine politics. The first was the idea that a business-oriented party can’t compete. Macri and his coalition have now won twice, and gained national traction with time. The second is that the Peronist party, the dominant political force of 20th-century Argentina, can’t lose. Yet it collapsed. These two seismic political shifts are partly the result of savvy leadership. But they also reflect fundamental shifts in Argentina’s economy and society. For one hundred years, since Argentina introduced the secret ballot in 1912, the only way the capital class came to power was through voter fraud or military coups -- of which there were six in the subsequent years. Even the middle-class oriented opposition Radical party couldn’t hold the executive office for long -- every one of its democratically elected presidents was ushered out early, either by a military escort or a market meltdown. Cambiemos has defied this truism because so far it hasn't acted like a business party. While pro-market, it isn’t neoliberally austere. Instead, like its populist predecessors, it has supported social programs, unemployment benefits and pension payouts to lessen the blow of stagflation for the average voter. Macri and his team have gone further, spending big on infrastructure projects.  Ubiquitous yellow signs hover every few blocks next to piles of dirt, slabs of concrete, reams of steel rods and pots of paint, touting repairs to broken sidewalks, darkened street lamps and blackened buildings.  The biggest bet and electoral payoff have come from the new Metrobus, dedicated lanes on the capital’s main boulevards that snake out dozens of kilometers into wealthy and humble enclaves alike. While a similar public transportation roll-out caused havoc in Chile in 2007, tanking President Michele Bachelet's approval ratings, everyone in Buenos Aires raves about the new system, which has cut some rush-hour commutes in half. This was good government backed by good marketing. A vast staff within the Casa Rosada scoured databases and polls, targeting electoral appeals street by street, ultimately turning a sea of Peronist blue municipalities Cambiemos yellow. Yet Macri’s win also came from Peronist failures. The movement has all but disintegrated, its factions losing ground in the midterms. Part of the problem is its leadership, or lack thereof. Despite her legacy of economic malpractice and deep ties to corruption, former president Cristina Fernandez de Kirchner remains its standard bearer, the most visible and popular among the unpopular. But Peronism’s slide into irrelevance also reflects a failure to adapt to structural economic change. For decades, Peronism relied on a winning electoral alliance of urban unions and rural bosses. Its pillars began to wobble in the 1970s, as offices displaced factories and the countryside began emptying out, draining the votes that rural political machines could deliver.  In the 1990s Peronist president Carlos Menem tried to adapt, opening markets, attracting private sector investment and courting the growing middle class. The 2001 economic crisis stopped this internal political evolution even as it accelerated the underlying economic shifts. After much turmoil, the nation finally settled into more than a decade of Kirchner rule—first Nestor, then his wife Cristina – from 2003 to 2015. Together they forced out their modernizing colleagues and returned to a populist economic playbook based on protectionism, clientelism through massive social programs and a government hiring spree. These efforts bought the loyalty of the nearly million Argentines who lost their living when GDP plummeted 20 percent, but they didn’t bring back organized labor. And the high export taxes they introduced on soy, beef and other agricultural products enraged Peronism's once loyal rural base. When the economy turned -- dragged down by profligate public spending, limited investment, rampant inflation, the commodity bust and a good dose of corruption -- it left the party decimated. Macri today has enviable approval ratings. Yet the president can still easily stumble. Despite an initial big bang of reforms -- floating the currency, resolving the debt issue with international holdouts, re-creating an independent statistics agency and lowering some public subsidies -- the government has yet to make many of the hard choices necessary to put the nation on a sustainable path. Fixing potholes and creating new bus lines are all well and good; but that won't drag Argentina into the 21st century. At some point, Macri's coalition will have to put forward its plans to take on the nation’s deep-seated economic dysfunctions. This starts with the cash economy. Few places beyond tony boutiques and restaurants welcome credit cards, and purchasing big ticket items such as cars and homes still involves suitcases stuffed with bills. The “blue market” peso-dollar exchange continues. After a fruitless trip to five cash machines, I used the hotel’s favored money changer -- a woman in her thirties in a white top and jeans with meticulously folded 100 peso bills -- for walking around money.  She let me know that I’d get a better rate next time if I brought $100 Benjamins instead of my lowly $20s. All of this informality means wasted time and limited sales, and in the aggregate curtails the upside of the current economic bounce. If the economy doesn’t grow, Argentina’s patience with the president and his coalition will grow thin. More fundamentally, Argentina remains uncompetitive. A decade without foreign direct investment has left it technologically backward.  Instead of the automation occurring in other emerging economies, labor redundancies are baked into even quotidian tasks. Buying a single cortado (coffee) took no less than two transactions, three lines and five people. This is not how a future economic powerhouse functions. And the government mantra of gradual change depends on outside financing. While global liquidity and low interest rates have provided the $40 billion a year cushion that Argentina needs so far, the last non-Peronist government went down in economic flames when international funding disappeared. Argentina, like all democracies, needs an opposition. With almost a third of Argentines living in poverty, there is plenty of room for a left-leaning party. But to return to power, the Peronists can’t go back to their roots. They need new leadership and new ideas. Here, the party’s longstanding ideological flexibility can be a strength. Who knows, as Peronism searches for a winning platform, it could just be the balanced budgets, labor flexibility and economic openness that Macri's government has yet to embrace. Click here to view article originally published in Bloomberg View.

I was recently featured on a panel with Katie Simmons and Ken Wollack, moderated by Bruce Stokes, that discussed global public opinion toward democracy amid the rise of populists and autocrats, and the implications for the future of democracy and U.S. foreign policy. The discussion follows the release of a Pew Research Center survey in thirty-eight countries on attitudes toward democracy. You can check out the video of our discussion below or on CFR’s event page.

MILAN – The first round of the French election turned out much as expected: the centrist Emmanuel Macron finished first, with 24% of the vote, rather narrowly beating the right-wing National Front’s Marine Le Pen, who won 21.3%. Barring a political accident of the type that befell the former frontrunner, conservative François Fillon, Macron will almost certainly win the second-round runoff against Le Pen on May 7. The European Union seems safe – for now. With the pro-EU Macron seemingly headed toward the Élysée Palace – the establishment candidates on the right and the left who lost in the first round have already endorsed him – the immediate threat to the EU and the eurozone seems to have subsided. But this is no time for complacency. Unless Europe addresses flaws in growth patterns and pursues urgent reforms, the longer-term risks to its survival will almost certainly continue to mount. And, as has often been noted, the French election, like other key votes over the past year, represents a rejection of establishment political parties: the Republicans’ Fillon came in third, with about 20% of the vote, and the Socialist Party’s Benoît Hamon finished fifth, with less than 6.5%. Meanwhile, the left-wing Euroskeptic Jean-Luc Mélenchon won 19.5%, putting the total share of voters who chose candidates of non-traditional parties – Le Pen, Macron, and Mélenchon – at nearly 65%. Unlike last year’s votes for Brexit in the United Kingdom and Donald Trump in the United States, which were driven by middle-class, middle-aged voters, in France, the young led the way in rejecting the establishment. Among 18-34-year-olds, Mélenchon – who has so far declined to endorse Macron for the second round – received roughly 27% of the vote. Le Pen was the second most popular candidate among young voters, especially the less educated. This trend is not exclusive to France. In Italy, the anti-establishment, Euroskeptic Five Star Movement has surpassed the center-left Democratic Party in recent polls, with the young comprising a significant share of that support. Likewise, in last December’s Italian referendum, younger voters formed a substantial share of the vote against the constitutional reforms – essentially a vote against then-Prime Minister Matteo Renzi, who had staked his political survival on their adoption. Of course, even in the face of weak and declining economic performance, there may be an upper limit to the support that populist parties can muster – a level that falls short of a governing mandate. But the fact that parties and candidates that reject the status quo are gaining ground, particularly among young people, reflects profound political polarization, which generates governance challenges that could impede reform. Yet reform is precisely what is needed to address these trends, which reflect fundamental problems with today’s prevailing growth patterns. In France, Italy, and Spain, growth is too slow, unemployment is high, and youth unemployment is even higher. In France, the youth-unemployment rate is in the neighborhood of 24%, and trending downward only slowly. Youth unemployment in Italy stands at 35%, and exceeds 40% in Spain. These are countries with substantial social-security systems. But those systems protect labor-market incumbents much more than new entrants. And the reforms that have been implemented, in order to ease entry into work, are not sufficient in the context of weak overall growth. Without deeper reform, the demographic arithmetic suggests that the disenfranchised and anti-establishment share of the population may grow (unless today’s young people change their stripes as they age). The question is whether this trend will lead to a genuine disruption of the status quo or merely to political polarization that weakens government effectiveness. The solution to European economies’ woes seems clear: a set of reforms that encourages more vigorous and much more inclusive growth patterns. After all, while globalization and technology lead to job displacement, sufficient growth can ensure that overall employment is sustained. To that end, reforms are needed at both the national and EU levels. While each EU country has its own specific features, some common reform imperatives stand out. In particular, all countries need to reduce structural rigidity, which deters investment and hampers growth. To boost flexibility, social-security systems have to be largely disconnected from specific jobs, companies, and sectors, and rebuilt around individuals and families, income, and human capital. The remainder of the domestic reform agenda is complex, but its goal is simple: enhance private-sector investment. Under this heading are items like regulatory reform, anti-corruption measures, and public-sector investment, especially in education and research. At the European level, the most important recent development is the weakening of the euro relative to most major currencies, especially the US dollar, since mid-2014. This has caused the eurozone to run a substantial surplus and helped to restore some competitiveness in the tradable sectors in France, Spain, and Italy. In all three countries, tourism is an important sector for employment and the balance of payments, and expenditures have been rising when measured in euros. Of course, the weaker euro has fueled large surpluses in Germany and northern Europe, where unit labor costs are lower, relative to productivity. In the longer term, convergence of unit labor costs is needed. But that will take time, especially in a low-inflation environment. In the meantime, the weak euro may help to spur growth. EU-level action is also needed on immigration, which has emerged as a major economic and political issue. Faced with inflows of huge numbers of refugees from the Middle East and Africa – inflows that exceed many countries’ absorptive capacity – the EU may need to modify the free movement of people for a period of time. After Germany, France is the most important country in the eurozone. If a Macron victory is treated as an opportunity to pursue aggressive reforms targeted at boosting growth and employment, the French election may amount to an important turning point for Europe. If, however, it is treated as a validation of the status quo, it will produce only a short reprieve for a besieged EU. This article originally appeared on project-syndicate.org.