April 16, 2014
Saturday, December 14, 2013

Analyzing the past to help predict the future

Economy Minister Axel Kicillof, Cabinet Chief Jorge Capitanich and ANSeS chief Diego Bossio chat at the Government House last week.
By Miguel Braun
For The Herald
The government’s current economic strategy is more rational than its alternatives

The current Argentine economic situation is complicated though not critical. The recent wave of looting reflects political conflict rather than a full-blown crisis as that of 2001. However, the crisis scenario cannot be ruled out. Argentina has been in similar situations before, so discussing the lessons from the past can help predict what can happen in the next two years. The main conclusion is that the government’s current strategy (to make minor changes but not a major overhaul of the model) is the more rational and likely to succeed in comparison with its alternatives (an orthodox stabilization plan or a real “deepening” of the model toward a 21st century socialism like Venezuela).

The current situation includes high and relatively stable but persistent inflation; a foreign exchange crunch and an overvalued exchange rate. Politically, the presidency has been weakened: it lacks an heir, it faces the corrosion of a decade in office, an electoral defeat, schisms within Peronism and the threat of labour and business sectors ready to regroup and claim a larger piece of the fiscal pie as an answer to the government’s weakness.

About a month after the Cabinet changes, it is increasingly clear that the administration is trying to avoid a major overhaul by introducing marginal changes — its aim seems to be to reach 2015 as best as possible without deep reform. There are some gestures such as the ouster of Guillermo Moreno, nemesis of the private sector, and renewed negotiations with multilateral organizations and with Repsol. And there are some economic corrections, such as a newfound willingness for taking on external debt and the hike in taxes applicable to imported cars and credit card use overseas. However, these measures do not address the underlying issues: lagging competitiveness, growing public spending, relative price distortions and a complex environment for investment.

History shows that this strategy might be the wisest, given the circumstances. There are four scenarios that help to understand the current situation. The first of them is Perón’s second term of office. The Peronist model showed its first symptoms of depletion around 1949; the signs were similar to today’s: foreign trade complications, foreign currency crunch and inflation. Worsening terms of trade and a drought restricted foreign currency inflows, which prompted limits on imports, which in turn slowed down industry. Inflation went from 13 to 31 percent in 1949, although wages still grew more. In 1951, wage increases were lower than inflation and the foreign trade balance showed a deficit.

The government responded with pragmatism. After re-election, in 1952 the Peronist administration advanced unpopular but necessary changes to revert stagnation, contain inflation and alleviate the foreign deficit. Public spending fell 23 percent from 1950 through 1953, monetary expansion was curbed and wage hikes contained, and a friendlier policy toward foreign capital and the agricultural sector were instated. It was a virtuous stabilization: in 1954 inflation was lowered to 3.9 percent, real wages started to recover and the foreign trade balance was back in the black.

In 1958, the Frondizi administration put in place a comprehensive plan to contain public and private spending and increase investment. The exchange market was liberated and unified, devaluing the peso and thus favouring exports; quantitative restrictions and import permits were freed while tariffs of up to 300 percent were set on luxury items. The plan had key foreign backing, including foreign loans with the IMF, the United States Treasury and the Eximbank. That source of dollars allowed the Central Bank to intervene in the foreign exchange market to curb volatility and guarantee the import of intermediate goods and equipment. To contain inflation, monetary expansion was limited and public spending was lowered (containing public wages and investments and increasing utility prices to reduce subsidies). As might be expected, the orthodox plan produced a heavy fall in real wages which fostered labour unrest. All in all, by 1959 the plan began to yield positive results; by 1960 and 1961 the economy grew more than 8 percent per annum and inflation had been contained.

The economic context in 1975 included very high inflation, low growth and a delicate external front. The Economy minister’s attempt at shock therapy, the “Rodrigazo”, included a 100% devaluation, price liberalization and a hike in utility bills and its results were regrettable. The differences today are many and a comparable shock therapy does not seem to be in order, and neither does an orthodox plan such as Frondizi’s.

The current political configuration has some points in common with the 1997-1999 period. A Peronist president without re-election, no heir in sight, a relatively weak opposition and a Peronist candidate not favoured by the administration (Duhalde then, Scioli today). Just as Kirchnerism today faces an economic model which has been exhausted, Menemism faced the end of convertibility, with its shortcomings evident. Just as today, the government’s response in 1997-1999 was to do as little as possible, to try to make the situation last till the transition.

Differences notwithstanding, looking at the past helps to understand the administration’s actions. Making only marginal changes and not an orthodox plan seems to be, given the political circumstances (no re-election, no electoral, foreign nor union support nor credibility in the business sector) the most rational approach and the most likely to succeed, even if it means postponing the inevitable.

* Miguel Braun is executive director of Fundación Pensar, the think tank of Buenos Aires Mayor Mauricio Macri.z

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