November 27, 2014
This year’s already bleak economic prospects look even worse with the apparent domination of spoiler strategies on both sides of the political divide, respectively devoted to giving orthodoxy and Peronism a bad name.
For the government austerity is a classic win-win situation — or rather a “win-win-win” situation because there are three possible outcomes, all favourable.
The Cristina Fernández de Kirchner administration’s economic team is obviously sceptical about orthodoxy working any magic in untangling fiscal disarray but would be grateful if it did. And why not? If we look at Southern Europe today, austerity has not banished some of the deeper problems (such as youth unemployment) or an overall fragility but it has made their economies more competitive and, perhaps above all, lowered the interest rates for international credit to accessible levels.
The latter might well be the key to the second favourable outcome for the CFK administration. That would be austerity doing nothing to improve local economic trends, perhaps even turning stagnation into recession, but impressing overseas opinion sufficiently to secure billions of dollars in international loans. This would enable CFK to repeat the 2011 combo of runaway deficit spending and cheap dollars which helped to underpin her landslide that year (transformed into currency curbs the very next month), creating enough of a feelgood factor to transform last year’s electoral defeats into next year’s victory or at the very least control her succession much more.
The third outcome — things simply going from bad to worse at home amid continuing hostility from the outside world — seems the bleakest but would also have the huge advantage of inoculating the Argentine public against anything resembling austerity or orthodoxy for at least a decade and granting a new lease of life to Peronism and populism. This would be unfair because, as Economy Minister Axel Kicillof must surely know from his extensive reading of Keynes, the right time to cut back is anti-cyclically during boom years and not during a downturn.
Meanwhile an inverse logic applies to the opposition. Instead of a traumatic year giving orthodoxy a bad name, their hope is of Peronism gaining a bad name from having to sort out its own mess for the first time in its history — if CFK goes the full distance of her last 20 months downhill all the way, the most optimistic hope that the discredit might end Peronism forever. Even if the International Monetary Fund seems to be placing Argentina and Venezuela in the same bag, their oppositions are totally different — no protests from an extraordinarily patient opposition here and no constructive alternatives either, perhaps mostly because of the mindset explained above. If a replay of the 2001 collapse of the Alliance government does not seem so inevitable in this crisis, this is partly because the opposition is not Peronist this time (even if stronger institutional ethics did not prevent the Radicals from resorting to the barracks at various points in the previous century) but mainly from a widespread desire to see Peronism stew in its own juice.
Meanwhile that IMF report is puzzling because the two countries they have singled out as the region’s 2014 slow-coaches with lax policies, high inflation and shrinking foreign exchange reserves — Argentina and Venezuela — saw their country risks fall by 18 and 14 percent respectively in March. Somebody must be wrong. Since it has been confirmed that Kicillof will be personally attending the annual general assemblies of the IMF and the World Bank in Washington DC, he will have plenty to discuss there — not least the persistence of a 4.3 percent 2013 growth rate (condemning Argentina to the payment of billions in growth-linked bonds) instead of the three percent which emerged so abruptly a fortnight ago.
Today’s general strike aimed at bringing the country to a halt had a similar effect on much of last week’s news even if it also seems to have accelerated some collective bargaining agreements — for example, the shop workers union (with the egregious acronym of FAECyS) assented to remaining under the government’s wage ceiling via the subterfuge of negotiating a 27 percent increase plus two lump sums of 1,200 pesos. Thus the cutbacks in water and gas utility bill subsidies announced on March 27 would surely have been extended to electricity by now were it not for the fear of boosting the success of today’s stoppage by burning a new hole in wage-packets. Various developments are thus on hold.
But CFK urgently needs a new “model” because consumer-led growth is going rapidly down the tubes. The once stellar auto industry has been in deep trouble for some time now but March figures confirm the slump — a 35 percent plunge in sales and 26 percent in production.
The luxury car tax is now hotly criticized in retrospect but this was probably the last straw with the core damage already done by the triple whammy of Brazilian slowdown, devaluation and doubled interest rates. That same troika is now starting to have a similarly destructive effect on consumer durables.
Instead of watching in stunned silence the implosion of its “model” as the real wages of an always small domestic market shrink, the government needs to shift gears as rapidly as possible from consumer-led to export-led growth, urgently freeing up trade. If this is not done, the logic of higher interest rates will mean that the financial sector will fill the vacuum as the motor of the economy with its notorious “bicycles” — that aspect of the 2001 crisis might then be replayed with the banking version of “motorcycle thief” bringing out the lynch mobs.
Last but not least, this column began by describing the government as intent on giving austerity a bad name but is austerity even being seriously tried? Not in terms of public spending, which continues to expand at around 40 percent (and without the capital flight which until 2012 took 10-15 percent off the resultant inflation rate). Perhaps undue hopes are being set on subsidy cuts. But no matter how orthodox the rest of policy, this can only lead to new cycles of inflation and devaluation.