October 1, 2014
A hard rain’s a-gonna fall
CFK’s ‘model’ of consumer-led growth may be shelved
The period following the end of seven years of inflation denial on Saint Valentine’s Day finds the Cristina Fernández de Kirchner administration moving in two directions at the same time.
On the one hand, the strictest orthodoxy — last month’s devaluation has been followed by soaring interest rates drying up credit, the “sterilization” of billions of pesos by the Central Bank and even rigid pay increase ceilings, marking the firm intent to sacrifice real wage gains this year for the first time in a model of consumer-led growth. Not to mention the growing certainty that transport and utility rate subsidies will be chopped (or this week’s confirmation of the compensation for Spain’s Repsol after the 2012 expropriation of its YPF shares — see the editorial on this page).
But on the other hand, the long overdue recognition of the inflation problem was quickly followed by a flurry of often wildly demagogic solutions. These proposals bridged a vast generation gap between revival of the 1974 anti-hoarding law and online harvest monitoring but all had a zany element in common — bills to fine and expropriate at will accompanied by threats both official (the CNV Securities and Exchange Commission) and unofficial (picket denunciations) in epic grandstanding against “speculation” without any recognition that inflation might have fiscal or monetary roots.
Apart from the content of all the bills and policy proposals against inflation, there is also the sheer multiplicity — somebody should explain Occam’s razor to Axel Kicillof’s economic team (for those unfamiliar with mediaeval scholastics, the modern equivalent of Occam’s razor would be the “KISS” principle — Keep It Simple, Stupid). Nor would such objections be limited to orthodox economists — last weekend Aldo Ferrer said in a newspaper interview “the fewer controls, the better.”
Instead of these myriad controls, why not take orthodoxy a step further and let the laws of the market tame inflation? As they surely will with the monetary and incomes policies adopted — these will slow down the economy and dampen demand, knocking the bottom out of prices. These recessive effects will take some months to make themselves fully felt but readers prone to be trigger-happy with their credit cards would be well-advised to start being careful now, looking at how interest rates have shot up this month.
Still too early in the year to draw final conclusions about anything — whether the “price watch” programme, devaluation fallout or the recent stabilization of the dollar. But when anybody moves in both directions at once, it is generally because they have lost their way and most forecasts find plenty of grounds to back a hunch that it is now time for one of those crises Argentina seems to have at regular intervals — 12 years between the 1989 hyperinflation and the 2001-2 meltdown, 12 years since then.
Since so many of the responses to the post-devaluation crisis have been orthodox, many critics are jumping on the inconsistency with the previous populist course and asking why the light was not seen sooner. But the CFK administration can also be judged by its own premises or rather by comparison with its regional counterparts. Within a couple of weeks Colombia’s Juan Manuel Santos will not have much company as a centre-right president in South America (except for perhaps Paraguay) and yet among all the various shades of red and pink, only Venezuela’s Nicolás Maduro is floundering worse than CFK.
As for the others, neither Brazil’s Dilma Rousseff nor Uruguay’s José Mujica fit into any Bolivarian axis — and neither does Peru’s Ollanta Humala despite his origins as a leftwing nationalist firebrand. Ecuador’s Rafael Correa is an intriguing and often original Bolivarian variant but the dollarization of that economy (for some 15 years now) disqualifies him as a standard of comparison for dealing with currency crisis — in any case he has just lost the local elections. So that pretty much leaves Bolivia’s Evo Morales as the most suitable test of the correlation between ideology and failure.
Morales comes across as bad news for Bolivia in both word and deed. Already off to a bad start (in the eyes of the developed world) as a coca farmer militant in his pre-presidential career, his revolutionary rhetoric is unfailingly anti-capitalistic and anti-imperialistic, spurning the International Monetary Fund (although his Foreign Minister David Choquehuanca is even more extreme, sounding certifiably insane at times). And nor is it just rhetoric — Morales has been a serial nationalizer ever since he took office in 2006. Doubling the Christmas bonus a couple of months ago was a populist outburst entirely typical of his style.
And what have been the practical results of this recipe for disaster in terms of the macro-economic data? Last year Bolivia’s growth rate was 6.5 percent, roughly the same percentage as its annual inflation. Its Central Bank reserves of 14 billion dollars are fully half of Argentina’s currently crestfallen levels — truly astonishing considering that Bolivia has only a quarter of Argentina’s population and barely five percent of its economic output. Bolivia remains the poorest country in South America by some way but its destitute now number two out of every eight rather than three out of every eight when Evo came to office while per capita income has doubled in that period. Yet over and above these data, a populist government has paradoxically given Bolivia almost its first experience of something approaching fiscal solvency — partly as a result of Evo’s aggressive revenue greed (nationalizing oil and gas certainly boosted state coffers) and partly as a result of the last decade’s global commodity price boom.
So a populist government can be a success story after all — the terms of trade in today’s world are that merciful. All you need is a mix of pragmatism and consistency which is actually not all that easy — making the right adjustments to circumstances while always remaining a known quantity to the outside world, whoever you might be. One possible lesson from comparing Argentina and Bolivia is that export-led growth might just be a better bet for reducing poverty than consumer-led growth — even if there are so many people telling us the opposite.
But then 2014 looks like going down as the year CFK’s “model” of consumer-led growth was finally abandoned.