November 24, 2014
BRICS more than Wall
Debt negotiations take a back seat to Brazil summit
Even though the clock is ticking towards that July 30 technical default deadline, the Cristina Fernández de Kirchner administration is clearly assigning exclusive priority to BRICS summitry this week (even if CFK’s speech yesterday largely revolved around talking up Argentina’s creditor performance) so today’s column must perforce follow suit. The government could be right in their gamble that losing an entire week of debt negotiations will do no harm — if only because the bullish markets seem so totally confident that crisis is eminently avoidable. But both they and the markets could also be wrong — the markets assume that money always talks and that Argentina’s need for global credit is simply too great but Hegel’s dictum that “the real is the rational and the rational is real” does not always work out so neatly (thus the market optimism about the United States Supreme Court ruling exactly one month ago yesterday was totally unfounded).
This week’s summits in Brazil are not just another BRICS in the Wall (Street) but the whole building or even block. Perhaps the big draw for BRICS right now is not so much having more than two-fifths of the world’s population, over a fifth of its output, etc. as being able to boast hosting three World Cups in a row thanks to the timely recruitment of South Africa in 2010. Yet today’s column plans to focus not so much on the bloc in its entirety as specifically the Sino-Argentine relationship on the eve of Chinese President Xi Jinping’s visit here on Saturday.
The big noise for BRICS is the “new Bretton Woods” seven decades later with the creation of a development bank along the lines of Brazil’s BNDES and a common contingency reserve fund to the tune of 50 and 100 billion dollars respectively as from next year or even 2016. Yet the sums simply do not impress when, for example, the offers for Time-Warner are reportedly reaching 75 billion dollars while Facebook paid 19 billion dollars for a simple messaging service the other day with multi-billion transactions a dime a dozen, so to speak (Citigroup has just been fined seven billion dollars for mishandling the subprime crisis). In short, it should take something more than 0.14 percent of the world economy to transform its monetary base and its trading currency.
The visit of Hu Jintao a decade ago in 2004 was preceded by the mirage of a 20-billion-dollar investment plan and Xi’s advent this weekend seems to generate a similar advance buzz even if the great expectations have shrunk somewhat to a couple of billion in credit lines for Patagonian dams and railway freight. This alone makes Xi highly welcome and yet the whole thrust of intensifying relations with China would be toward an agricultural export model totally at odds with Kirchnerism, which aims for a labour-intensive economy to create jobs and consumer-led growth based on the domestic market and protected industry.
The full dimensions of the transformation of the terms of trade achieved by China this century are not widely understood here. China is generally assumed to have contributed so hugely to the commodity price boom simply by creating an overwhelming demand for raw materials with its rapid industrialization (and, of course, for soy for its urban masses). Yet it is perhaps the revolution in relative prices which has really jacked up commodity earnings — the scale and cost structures of Chinese production have drastically lowered the prices of hi tech, capital goods and value-added products in general, as much as the demand for primary products rising. The prospect of any kind of free trade agreement with such an ultra-competitive industry must be little short of terrifying to any member of the Greater Buenos Aires industrial lobby — as it is, the manufacturing sector is growing steadily less competitive with overall export volume falling some 12 percent so far this year while agricultural sales overseas have risen nine percent. A closer association with China would surely accentuate both trends.
But would not multi-billion-dollar Chinese investments here at least create some jobs to compensate for this destructive competition, it might be asked? Not too many, according to the Chinese Embassy here — 8.3 billion dollars of investment here have created some 11,000 jobs (lots of self-employment in the supermarkets, it would seem). To be underwhelmed by this figure, it is not necessary to compare it with the other superpower — thus at the Bastille Day reception on Monday, French Ambassador Jean-Michel Cava told his guests that the 230 French companies employ 60,000 people here while the investments of the much smaller Swedish economy provide 25,000 jobs.
This is not to say that the trading opportunities with China should be scorned, quite the contrary, but simply to express surprise at the enthusiasm emanating from Kirchnerism with its import substitution fixations. The transformation in the terms of trade is irreversible with Asia only able to feed around three-quarters of its people and the urbanization of its population sure to up food demand sharply, doubling protein intake in particular (which the continent is going to need if it is to perform better in future World Cups, for a start). Moreover, even the ultra-competitive Chinese industry so dreaded here is losing ground to newer Asian tigers as the future superpower grows more prosperous with the result that its consumer spending is expected to grow from a half to two-thirds of the economy in the next 15 years. As recently as the start of this century China’s trade volume was only a fifth of the United States whereas now it is in the process of overtaking it. So Argentina would definitely be onto a winner with China — but always following the agricultural export model reviled by Kirchnerism.
Just room for a few lines on the growing gap in inflation estimates — between the 1.3 percent announced for June by INDEC statistics bureau on Tuesday and yesterday’s 2.2 percent from opposition deputies in Congress, which is based on averaging out independent estimates. Even the INDEC figure points to 15 percent inflation for the first half of the year — the highest since 2002 and remarkably steep, given the current sluggish pace of the economy. The government highlights the deceleration in inflation since summer but that might not last much longer between winter holidays and almost 19 percent wholesale inflation in the pipeline from June.