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Thursday, December 19, 2013

2001 & today’s odyssey

By Michael Soltys / Senior Editor / Economic Outlook

Tomorrow is the 12th anniversary of the traumatic downfall of Fernando de la Rúa’s Alliance government and some analysts have already started drawing parallels with the current situation — and more often from the fiscal and economic rather than the political and sociological angle, despite the recent looting.

Today’s fiscal deficit is almost as high as then as a percentage of Gross Domestic Product, such voices point out, with slumping Central Bank reserves and bank deposits as well as a similar imbalance between the exodus and inflow of dollars. And all that despite a tax burden which has almost doubled as a percentage of GDP and several years of a global commodity boom which was barely off the ground in 2001 (although it should also be pointed out that the Alliance started that fateful year by “armour-plating” the economy with a 38-billion-dollar international loan and a bond mega-swap whereas the Cristina Fernández de Kirchner administration is still striving to return to global capital markets).

Yet there is an even more important difference with 2001 — namely employment levels. Already in 2001, unemployment was over 18 percent, peaking at 22 percent the following year, whereas both Kirchner presidencies have made job protection a top priority with just over seven percent of the population out of work. This comparison is not entirely odious for the pre-Kirchnerites —thus the 18 percent unemployment was the price of the strong productivity gains made by the Carlos Menem-Domingo Cavallo duo in particular (and indeed it is striking that improved productivity was far more destructive of jobs than the total meltdown of 2001-2, accounting for over two-thirds of the unemployment increase in the previous decade)) while modernizing the economy has been a poor second to protecting (and creating) jobs for the Kirchners.

Just this one factor of single-digit unemployment is enough to distance the current situation from 2001. So great is the constant menace of chronic inflation in Argentina that some pundits like to use Germany as a cautionary example by pointing out that Adolf Hitler came to power as a result of the 1923 hyperinflation. But this is historically inaccurate. There was a 10-year gap between the 1923 hyperinflation (which came and went in that year) and Hitler’s ascent to Chancellor in 1933 — it was Germany’s then far more recent experience of eight million unemployed which goes much further toward explaining Nazism. Mass unemployment is thus infinitely more destabilizing for society than inflation ever could be — that would be Germany’s lesson for Argentina.

Low unemployment is thus a key difference with 2001, far more than the political landscape. Having a Radical president then and a Peronist president now is relative. There were then and there are now Peronist sectors with a stake both for and against destabilization. If 12 years ago tomorrow Eduardo Duhalde could already sniff a presidency which was then less than a fortnight away for him, Menem supporters wanted De la Rúa to go the distance as their ticket for a 2003 comeback (just as there are signs that CFK currently eyes City Mayor Mauricio Macri in similar terms). Today, while CFK still retains a numerous following, some of the many Peronists estranged from her camp are perhaps less patient about the prospect of having to wait 721 days than others.

“won decade”

But those pundits stretching a point to make the 2001 comparison are probably doing Kirchnerism a favour — most claims to the “won decade” rest precisely on comparisons with the 2001-2 meltdown, against which almost anything would be progress. Yet one aspect of that comparison is uncomfortable. Any contribution by Alliance ineptitude to the 2001 crisis was minor when measured against the unsustainable growth of convertibility — indeed the cardinal sin of De la Rúa’s administration was to aspire to a cleaner version of convertibility rather than seek an immediate exit strategy. Today’s growth is also looking unsustainable — more nominal and less real than ever — since it is based on deficit financing maintained by printing money underwritten by Central Bank reserves and pension funds.

While deficit financing of this kind always contains the seeds of crisis, the catalyst for that crisis usually comes from outside and the events of this month (a December yet again) could just be a case in point. Incomes policy is often a moment of truth for shaky models and the demands for parity with this month’s major police pay increases could prove a final straw.

Even more recently, this week’s power cuts should have convinced the CFK administration that it had no choice but to discontinue subsidized utility rates which discourage investment and feed extravagant demand. But post-electoral “fine-tuning” seems eternally doomed with this administration — just as two summers ago it became impossible the day of the Once rail tragedy, so now upping utility rates seems a political impossibility so soon after the mass looting with over a dozen deaths and with this week’s power cuts irritating an already exasperated citizenry. The word from the Federal Planning Ministry is that any subsidy cuts have been indefinitely postponed, even if Axel Kicillof started hinting in that direction as the obvious solution as soon as he became economy minister.

Yet deeming any cut of these subsidies to be politically impossible does not make them any more fiscally possible to sustain — a staggering 85 billion pesos of energy subsidies almost explains the fiscal deficit (and the consequent dent in Central Bank reserves) by itself. And nor are this week’s warning signs about the power grid being strained to its limit alleviated by a continuation of the policies which led to this situation.

trapped in subsidies

If the implosions 12 years ago tomorrow were the result of convertibility being maintained far too long for its own good (over a decade), the CFK administration seems trapped in subsidies which have equally outlasted their useful life (again, over a decade). It is not even a case of economic solvency being sacrificed for populism because these subsidies are bad populism, favouring the most opulent households with the most power-driven modern conveniences. The government is thus “not dying in its law” but simply trapped.

The more the comparison between 2001 and today is explored, the more both differences and similarities seem to emerge.

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