Argentina is heading into elections in autumn with key economic indicators all glowing bright red. Annual inflation is running at 115 percent. As foreign reserves are drained out of the banking system, the peso is deteriorating by the day, having lost 40 percent of its value against the dollar since New Year’s. The country owes $44 billion to the International Monetary Fund (IMF); it has been unable to meet its most recent refinancing program and has struggled to negotiate a new one. Poverty hovers around 40 percent in what was once the world’s tenth-richest country.

In this catastrophic environment, the leftist-populist model of governance associated with the late Peronist president Nestor Kirchner, his widow and successor Cristina Fernández de Kirchner, and current President Alberto Fernández appears to have run its course. All of the major candidates for the presidency are likely to implement a shift to a greater or lesser degree to a more orthodox economic policy.

The Candidates Head to the Right

Economy Minister Sergio Massa has emerged as the consensus Peronist candidate for the presidency. (This will be confirmed by a primary scheduled for August 13. The general election will take place on October 22.) A skilled politician, pragmatic and non-ideological, he has enjoyed good relations with the business community and with international governmental and financial circles.

Still, his tenure as economy minister, in admittedly daunting circumstances, can only be considered successful to the extent that he has avoided a complete collapse and has been able to negotiate an agreement with the IMF. This has allowed the country to avoid default and escape a political and economic crisis of the sort seen in 2001, which led then-President Fernando De La Rua to resign early and be airlifted out of the presidential palace in a helicopter to avoid angry crowds.

The consolidation of the Peronists behind Massa, rather than someone identified with the populist Kirchner approach despite the weakness of Argentina’s performance, is a sign that the party sees the public moving to the political Right. His supporters argue that Massa alone can provide needed stability for the country.

If the Peronists are drifting toward the Right in the face of Argentina’s economic crisis, the opposition is already there. The “Together for Change” coalition will pick in the primary either Horacio Rodríguez Larreta, mayor of Buenos Aires, or Patricia Bullrich. She served as security minister under Mauricio Macri, whose presidency between 2015 and 2019 provided a brief break from populism but whose policies of gradual reform were unable to gain traction, leading to a Peronist restoration under current President Alberto Fernández.

Rodríguez Larreta has styled himself as a moderate who would create consensus around a reform package; he sees this as crucial given the sharp political and social divisions in the country. Bullrich, a far-leftist Peronist in her youth, has taken a harder line, stressing the need to move fast and far toward economic reform. She is also taking a tough stance on crime, the second most important issue after the economy. The two have had a sharp-elbowed campaign, but beneath the surface, their economic programs are both about a return to economic orthodoxy.

And still further to the Right, economist and media personality Javier Milei heads his own party, “Freedom Advances.” He has gathered support by taking an “anti-politics” stance, condemning Argentina’s political “caste.” Economically, he proposes dollarization and the abolition of the central bank as well as major immediate spending cuts. While his rhetoric appeals to younger voters, he may have already peaked given his extreme positions and eccentric demeanor.

Distortions Upon Distortions

It seems clear that whoever wins in October will move away from Kirchnerist policies, although how far and how fast remains to be seen. As economy minister, Massa’s role has been essentially to find the minimum steps to restrict expenditure (such as cutting household energy subsidies) and adjust exchange rates which the IMF will accept in the short term, leaving any comprehensive program for after the elections.

But any new government will need to move away from the current inflation-inducing policies of high spending financed by the central bank’s creation of money, which loses value as soon as it is printed. At the same time, it will need to tackle the vast distortions which have been used in recent years to make up for the weakness of Argentina’s currency.

To prop up the peso, which has an overvalued official exchange rate, Argentina maintains extensive foreign exchange controls. This has had the effect of discouraging money from entering the country, particularly earnings from the crucial export agriculture sector which wants more pesos for any dollars which it repatriates. The government has thus had to periodically create special, more favorable rates known as “soy dollars,” to entice exporters of this key commodity to bring back their earnings.

Similar special rates have been introduced for those producing wine (“Malbec dollars”) and other exports. Exchange controls have been eased to allow the importation of certain key goods such as information technology, though, of course, at a higher rate (“techno dollars”). Exchange controls were even lifted last summer to allow Argentine tourists to attend the World Cup where the national soccer team proved triumphant (“Qatar dollars”).

The IMF has long urged the unification of the ramshackle system of exchange controls with multiple, discretionary rates, and doing so will be a key element of any serious reform program. But almost certainly this will entail an initial burst of inflation as prices adjust to a more realistic exchange rate in a country that already is suffering from sharp economic pain.

This pain will be magnified by the fact that any serious reform effort will require the dismantling of Argentina’s equally ramshackle system of price controls, which is aimed at preserving the purchasing power of lower-income families in the face of inflation. Particularly sensitive are controls imposed on the price of key cuts of meat, a subject of political importance in a country of carnivores.

In addition to imposing price controls, Argentina has looked to its efficient agricultural sector as a cash cow. This sector has been subjected to export taxes, in effect treating it like petroleum—a resource rent from which money can be diverted to the public purse—creating a constant drag on what otherwise is the economy’s most dynamic, productive element.

Thus, over time, Argentine agriculture, despite the country’s rich soil, has been losing ground to Brazil and other competitors. And agricultural producers have been demonized by the Peronist Far Left, which recently denounced Massa simply for appearing at the “Rural,” the sector’s signature annual fair.

Dismantling this combination of multiple exchange rates, price controls, and export taxes will be vital to the long-term success of any new government, The question of how to sequence these steps will be crucial. For example, Bullrich advocates rapid abolition of exchange controls while Rodríguez Larreta speaks of keeping them in place for one year. Massa, for his part, is staying away from talking about his post-election plans.

A Decaying Welfare State

Any reform plan will have to address what kind of social safety net will be retained during the period of adjustment. Ever since the era of Perón (who first achieved political prominence as minister of labor), Argentina has maintained an extensive welfare system. This includes PAMI, the equivalent to Medicare, and ANSES, which administers payments for retirement, subsidies for minors, and disability and unemployment compensation.

The reality is that Argentina’s poorly functioning economy has been unable to sustain these institutions—Argentine doctors are badly paid and often have to work three different jobs to make a decent living, There are frequent reports of them emigrating to countries such as Spain, where Argentine medical credentials are well regarded. Additionally, welfare bureaucracies are politicized and often corrupt. (PAMI is a redoubt of the Kirchnerist “La Campora” movement within Peronism.)

And indeed, with the decay of the economy, the Kirchnerist administrations greatly expanded the system of minimal welfare payments for the jobless known as “social plans.” To a large degree, they are not administered directly by the government but by “social organizations”—non-governmental entities which can lend or withhold support to the ruling Peronists, and have relationships with various party factions. They are capable of putting large numbers of protestors (“piqueteros”) on the street, paralyzing Buenos Aires and other cities. The head of one social organization, named the “Evita Movement” for Juan Perón’s famous wife, holds a senior position in the Ministry of Social Development.

Their strength was demonstrated when it was reported that the welfare rolls had been padded with activists who did not actually qualify for benefits; when the minister of social development pledged to purge the rolls of these persons, the social organizations pushed back, claiming that the allegations had been grossly exaggerated. The minister backed off and the scandal eventually faded from view.

The Rise and Fall of Privatization

Another key area for reform is Argentina’s bloated complex of state-owned enterprises. While a serious effort at privatization was undertaken during Carlos Menem’s presidency, there were multiple allegations that it was conducted in an un-transparent form, with assets passed to favored businessmen at fire sale prices, which created permanent public suspicion of privatization which will need to be overcome.

The Kirchners reversed some of these privatizations, notably buying back control of state oil producer YPF from its majority shareholder. (The process has resulted in lawsuits from minority shareholders which are still pending.) Air carrier Aerolineas Argentinas, which was initially sold to Spanish interests, has also been returned to state ownership, where it remains a chronic money loser. And the state railway corporation, partially privatized earlier and also returned to the state, remains massively over-staffed, employing over 30,000 people, making it larger than any single private enterprise in Argentina.

The Likelihood of Pushback

The task of macroeconomic stabilization, rationalizing the welfare state, and addressing state-owned enterprises is enormous. There is much to be said for the argument that if done, it will need to be done quickly, before opposition can build up. Shock therapy—“surgery without anesthesia” as Menem termed it during his era of reform—has the benefit of creating building credibility among both foreign and domestic investors.

And the next president will doubtless remember Mauricio Macri, whose administration proved to be only a parenthesis between populist governments. He had started out strongly, only to find that, when he loosened his inflation targets, investor confidence disappeared immediately and he was forced to seek a huge loan from the IMF.

The IMF itself, which throughout the current administration has had to negotiate repayment plans with a government whose main goal has been to put off as much pain as possible until after the elections, will be hungry for a more serious approach. It is likely to be supportive as far as continuing to roll over Argentina’s debt, although it may find any request for additional lending to be a bridge too far, at least until there is evidence that real reforms have been implemented.

But any new president will find that the genius, if one can call it that, of the Kirchner administrations is that they created powerful counterweights to any effort to dismantle the oversized Argentine state. The “social movements,” subsidized by the state welfare system which they administer, are capable of bringing huge numbers of people out on the street for extended periods of time.

Argentina could conceivably see a sustained campaign of resistance that would look like the multi-month “social explosions” which wracked Chile and Colombia if the welfare system is reformed and price controls are eliminated. Additionally, Argentina’s labor unions, historically strong, though weakened with the decay of the economy, are forces to be reckoned with. Privatization and reform of Argentina’s rigid labor laws could make them join in any anti-government campaign.

One sign of what such confrontations might look like has been in the northwestern province of Jujuy where Governor Gerardo Morales, who is also the running mate of Horacio Rodríguez Larreta, has been locked in a confrontation with protesters over constitutional changes which would limit their ability to engage in disruptive activities.

They have engaged in a sustained series of roadblocks, seemingly enjoying the support of the Peronist central government where President Fernández has denounced Morales’ alleged authoritarianism. Headlines were made when a roadblock prevented a woman from getting needed medical treatment, leading to her death.

Ready for Change?

Key elements of any reform campaign will require legislative action. Much will depend on the composition of Congress. If the “Together for Change” coalition has a majority, perhaps along with representatives from Milei’s libertarians, the next government may be able to get legislation passed. But ultimately, it will depend on the underlying climate of opinion among Argentina’s people.

If the miseries of recent years, with high inflation and economic stagnation, leave the public feeling that it simply cannot take any more short-term pain, reform will founder. But if the public truly has come to recognize that real change, not merely doing the minimum to get past the crisis of the moment, is required, it may have a chance. To justify what remains the emblematic effort at conservative reform, that of Britain in the 1980s, Margaret Thatcher was fond of saying: “There is no alternative.” Whether the Argentine public has reached a similar conclusion remains to be seen.

Richard M. Sanders is Senior Fellow, Western Hemisphere at the Center for the National Interest. He is also a Global Fellow at the Woodrow Wilson International Center for Scholars. A former member of the Senior Foreign Service of the U.S. Department of State, he has served as the Director of the Office of Brazilian and Southern Cone Affairs and at embassies throughout Latin America.

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