September 22, 2014
Miguel A. Kiguel, economistSunday, May 25, 2014
‘Now we really need to adjust the economy to inflation’
Education: Undergraduate degree in Economics from Buenos Aires University (UBA), PHD from Columbia University
Past posts: Banco Hipotecario governor (2001-03), under-secretary of finance and chief adviser to the Economy minister (1996-99)
Current positions: Executive director of Econviews and Vice-President of MegaInver investment fund. Professor at Torcuato di Tella University.
Hobbies: Tennis, reading, travelling
Favorite authors: When he was young, Julio Cortázar, Ernesto Sábato and Gabriel García Márquez. Now prefers Michael Lewis
Do you agree with recent government measures that increased interest rates and sought to decrease some subsidies?
They had no choice. It was a desperate attempt to correct a situation that included plunging Central Bank reserves. It was a reasonable package but parts of the government are uncomfortable with the situation and would like to at least keep the currency stable and decrease interest rates.
You’ve praised gradual devaluations in the past but over the last two years, when the peso lost value at a snail’s pace, there was lots of speculation against the peso. Might it be better to have sharp devaluation that comes as a surprise rather than a gradual crawl?
No, I don’t think so. The January devaluation was very traumatic — it really created big winners and losers. Those with long positions in dollars made a lot of money, those with debts in dollars lost money. The Central Bank was the biggest loser because it sold a lot of futures contracts, while private banks and many of the exporters made a big profit.
When the currency was devaluing 2 to 3 percent per month, capital flight soared. Why wouldn’t that situation repeat itself if the policy of a slow devaluation continues?
The situation is very different from last year. Everyone thought that the exchange rate had to catch up with prices, so doing 2, 3 percent per month wasn’t enough. In January they caught up, with a 22 percent depreciation. So once they got there, there was no reason to speculate. The problem is that inflation continues to be around 2 to 3 percent per month.
Why do you think that the government didn’t attack inflation earlier?
Because there was no political demand for it to do so, there was a lot of tolerance to inflation. This is a government that began its mandate during a period of huge unemployment and economic depression, so it was willing to accept some inflation. It was presented as a trade-off to the public. But eventually the day of reckoning comes and now we really need to adjust the economy to inflation.
How do you think the shakeup in the government’s economic team, including Economy Minister Axel Kicillof and Trade Secretary Augusto Costa, has affected government policy?
Nothing changed very much. Clearly getting (former Domestic Trade secretary Guillermo) Moreno out was a good thing. But in terms of performance, I don’t really think Argentina has achieved a lot. On the financial side it’s much better, but inflation is high and the recession is here.
Do you think there is a chance that the negative opinions of the government from abroad can change?
No, it’s already been too many years. What might help that change is people seeing that a new government is imminent. But it won’t be because these guys are doing things better but rather because people are expecting more in the future.
Do you agree with those who say the government must cut subsidies?
Yes, but the problem is if you cut subsidies you need to increase prices and that generates pressure on wages and the exchange rate. That’s the dilemma the government is now facing.
Is it possible to cut subsidies without causing social upheaval?
This government increased the bus fare 66 percent in January and nothing happened. They announced an increase in the price of train tickets and nothing happened. They announced an increase in municipal water and natural gas prices and nothing happened. You’re talking about very large increases percentagewise but very small when measured in pesos.
What do you think is the most positive thing the government has done over the past 10 years?
For a while it was having fiscal discipline, but that’s gone now. I think in general they did much better in terms of social policies. People always talk about the universal child benefit, but there are many others.
What about the worst?
The distrust of markets and freezing the rates of public utilities. The energy policy was a disaster, perhaps one of the biggest. Debt-management policy was also a disaster because it led to a drop in international reserves. Basically it’s not respecting institutions and really intervening too much at the micro level.
Argentina got lots of loans in the late 1990s, which ended in a record default. Do you think this government will leave the next administration in a better position?
In terms of debt, there will be much less debt. This country is almost without debt.
So, that’s a positive, right?
That’s a plus but you have to find the balance. You don’t want to take on too much debt, but you don’t want to starve your country simply to reduce debt. And particularly over the last year, Argentina had to decrease its reserves in order to pay debt. And because reserves were so low, it had to restrict imports, which contributed to generating a recession.
So, you don’t think it’s worse than the end of the Menem era?
No, it isn’t worse. How we got here is negative, if we had gotten here with fiscal surpluses it would be fine.
Are you critical of any of the policies from the Menem administration?
It’s obviously easy to be critical in hindsight. If I had to pick one issue it would be the lack social policies at the time. From a macroeconomic point of view, I would say the biggest mistake was the dollarization of the economy. If we hadn’t been dollarized, Argentina could have devalued without having the crisis we ended up suffering.
So, if the government had devalued in 1996-1997, there would have still been problems?
It would have been difficult but much easier. We wouldn’t have had the crisis that we suffered.