April 18, 2014
The year before 1984
The obvious topic for today’s column — the last three decades of economic history in the light of Tuesday’s 30th anniversary of continuous democracy — prompts two conflicting general impressions: how much we have advanced since 1983 but also how much remains the same.
Back in 1983 the new Radical government found its strong electoral mandate and democratic honeymoon saddled with a dire economic inheritance including a fiscal deficit of six percent of Gross Domestic Product feeding inflation — no downtown street was complete without its “little trees” (arbolitos) hawking dollars. Today a fiscal deficit which could be as much as four percent of GDP (always excluding the Central Bank and ANseS social security bailouts) obliges the money supply to expand at several times that percentage with green (or “blue”) everybody’s favourite colour.
To be sure, there are also differences, even within this context. Thus in 1983 the departing military régime left the cupboard entirely bare in the Central Bank while today the reserves still top 30 billion dollars — shrinking alarmingly but still ample firepower to crush a tiny parallel market which struggles to reach 10 million on a good day. And the inflation rate in the years before the 1989 hyperinflation was in a monthly 17-25 percent range (mostly due to index-linking) as against the two or so percent calculated today by the most critically independent.
But within these differences the virtual dollarization remains a constant in an eternal limbo. Neither extreme can prevail. There was never the total dollarization now entering its 15th year in Ecuador although the “convertibility” currency board here lasted 129 months (1991-2002) — far too long for its own good. Of the various attempts at “pesofication” (if we exclude the brutal extirpation of convertibility’s impossible dollar debts after the 2001-2 meltdown), the most durable was perhaps also the most recent — arising out of the currency curbs following Cristina Fernández de Kirchner’s landslide in October, 2011, and hanging around until the dollar whitewash announced early last May implicitly admitted defeat. Argentina thus seems incapable of settling on a single currency or a single exchange rate between those two currencies.
That first decade since 1983 in the wake of the Mexican debt crisis has gone down as the “lost decade” for the entire region, not just Argentina — Brazil, Peru, Uruguay, Bolivia and others were all queuing up for their piece of the Brady Plan (a haircut for creditors was not the creation of the early Néstor Kirchner years, as some would like us to believe). And not just the region either — in those days the debt percentages of South Korea, for example, were pretty much as dire as Argentina’s.
Since then South Korea has gone from strength to strength as an emerging market (as it still remains in OECD eyes despite its general wealth and its ample current account surplus) while Argentina has remained in stop-go mode throughout the last three decades, moving in boom-and-bust cycles, regardless of whether a reform-minded Raúl Alfonsín, a modernizing Carlos Menem or populist Kirchners occupied the presidency. In contrast to the almost continuous progress of South Korea (the cover of Time magazine around the Christmas of 1997 speculated whether it could continue to exist as a nation, so steep was its financial collapse then), Argentina’s cycles have lasted six years at most — their brevity ensured by economic policies generally based on pro-cyclical premises and short-term thinking.
These cycles should not only be measured as ups and downs. The successful emerging markets have prospered on the basis of playing to clearly defined strengths but the Argentine model incessantly shifts its pillars. Import substitution at one point, export-led growth at another; high salaries to feed the domestic consumer market versus competitive wages to meet global challenges; state planning versus wooing the foreign investor; high or low exchange rates, etc. etc. As a result Argentina tends to fall between two stools — for example, labour too costly to compete with Asian sweatshops while well short of the developed world’s productivity.
Or at least that is one vision of economic history under democracy. CFK expressed a far more linear view on Tuesday — a direct correlation between democracy and growth (especially in the last decade), which could not be a coincidence. Nominal global GDP has expanded from 11-12 trillion dollars in 1983 to over 65 trillion now so obviously Argentina has grown too. And perhaps especially so in the last seven years since inflation denial confuses nominal with real growth. Although there has also been real growth (and not just the commodity boom).
What has grown beyond any doubt is the fiscal clout of the state — when this columnist started at this newspaper over 30 years ago, there were perhaps as few as 30,000 tax-payers in Argentina while last month’s tax haul was 73.6 billion pesos. But this mushrooming state, doubling its share of the economy in the last decade, does not offer improvements in efficiency to accompany this expansion — the bigger the state, the less there seems to be of the professional civil service which is so key to governance and continuity.
Plenty more could be written about the last 30 years but it is difficult to look ahead even 30 days. To be sure, various panoramas for 2014 are being churned out this month forecasting the growth rate, inflation, the fiscal deficit, etc. but policy is still finding its way in these early and rocky days of the Cabinet changes, never mind the rest of the world.
This column would like to tip just a couple of warning signs on the margin of the big picture.
One is the prospects of the car industry, the erstwhile co-star of the previous booms alongside soy — third-quarter contraction in Brazil (its main and indeed almost only market) abroad and the luxury tax at home is a double whammy.
The other is the new economic team’s budding anti-inflation strategy of frozen profit margins. This seems based on the logic that the huge gap between producer and consumer prices can be closed by cutting out the middlemen, thus capping prices and ensuring profit at the same time. But do they know what lies in the middle? When not extremely powerful people, the difference between farm and supermarket prices often pays for protected and precariously competitive local industry — this anti-inflation strategy could thus conspire against import substitution and jobs.