Despite stringent controls, consumer prices in Argentina are spiralling out of control. So too is public anger at apparent government duplicity. But with an election looming, resolute action to curb inflation is unlikely any time soon. Can the 1920s research of a Russian economist hold the key to today’s most pressing question about the Argentine economy?
Nikolai Kondratieff, who paid for his iconoclasm by being shot in 1938 during the Stalinist purges, argued that capitalist inventiveness and production created 40- to 60-year cycles of growth and recession. For some analysts, Argentina ’s chances of breaking out of the growth-crushing volatility that has dogged its promise for much of the last half century are linked to a continued upward trend in commodity prices, largely driven by demand from China and India .
While it may not be the whole story, record commodity exports are a major part of the explanation for Argentina ’s stellar and surprising economic rebound over the last four years. IERAL, an economic think-tank, forecasts that 2006-07 crop exports will bring in almost $18 billion, about $4 billion more than the previous year, giving the government some $3.1 billion in export taxes alone. But ever sceptical given their history, Argentines are hardly banking on the favourable international environment.
For economist Miguel Kiguel, head of Buenos Aires-based NuVerse Consulting, this is a period of unique opportunities. Nevertheless, he laments: “Taking advantage of them is another thing all together, and we Argentines are experts in missing the train.”
In fact, over 40 months of uninterrupted GDP growth, clocking in at roughly 9% every year, seems only to have given Argentines the luxury of feeling anxious, as opposed to panicked or euphoric, the two most common states of mind in recent years.
Credibility gap
Even Mario Brodersohn, director of Econometrica, a former government economics official and an adviser to the opposition Radical Party, doubts that the benign international scenario can last. “Can we really believe that the next four years will be like the last four?” he says.
Even if they are, Brodersohn, who first raised the issue of the durability of the reversal in the long-depressed terms of trade, questions whether president Nestor Kirchner’s administration has the right policy mix – high exchange rate, expansionary monetary policies, price controls and subsidies – to ride the wave.
Economists and analysts hold a range of views on the problems that lurk beneath the macroeconomic indicators. There is a one-word alarm that is causing jitters across the board: inflation. No matter how the causes and prescriptions are articulated, the broad consensus is that the problem has grown dramatically in the last six months and that, with presidential elections scheduled for October, there is no political appetite to combat it.
With seven months to go before the ballot, former economy minister Roberto Lavagna appears to be the only challenge to a Kirchner victory, albeit a far-fetched one at this point. Public opinion polls foresee a first-round victory for Kirchner, should he decide to run. Speculation over his stepping aside and, essentially, placing his wife, senator Cristina Fernandez, in the Casa Rosada is rife and, if anything, the odds in favour of such a ploy are growing.
Lavagna, just in from the hustings, recovers his calm in his quiet office just a block from the iconic Obelisque, but he is still pulling no punches; his critique of the past year of Kirchner’s government is scalding. He charges that the government misinterpreted the 2006 mid-term elections, leading it to commit serious mistakes in weakening vital institutions and endangering sound international policies, to say nothing of misguided economic policies. He ticks off a list that includes its failure to implement the Anti-Cyclical Fund he advocated while minister, its introduction of a web of subsidies, many he claims to “cronies” and, above all, its risky system of price controls.
Inflation, says Lavagna, was really 14-15% in 2006, far from the official 9.8% figure. “Conditions are still sound enough to regain a balance and continue growing. But,” he adds ominously, “only for another year or so – and I can’t be sure.”
Containment
Inflation becomes a full-blown three-syllable debating term when economists consider ways to contain it. For a narrowing minority, in its current incarnation it is a problem of monetary policy, namely that the undervalued exchange rate is the culprit. Absent the disguised fixed rate of 3:1 (with narrow fluctuations) and a rate closer to 2.8:1, and the price rises would iron themselves out.
Miguel Kiguel is one of those who argue that inflation is a monetary problem tied, in Argentina’s case, to the exchange and wage rates which, from their depressed levels of four years ago, have been rising sharply as unemployment has fallen and trade unions have recovered bargaining power. Coupled with an expansionary monetary policy, demand is another factor pushing prices higher. “I like to think of the example of India,” he explains, “where there are huge distortions in the economy, but demand, and therefore inflation, is lower.”
Another group of analysts holds that inflation is a symptom of the underlying structural problems that put brakes on production increases that could meet the welcome, if now double-edged sword of greater demand. According to former central bank vice-president Pedro Lacoste, the 30% existing under-utilized capacity allowed increased demand to be met without an impact on prices between 2003 and 2005. “In 2006, that factor ceased to be operative, and as a result the government policy of stimulating demand not only increased GDP, it also led to inflation.”
Investors of all sizes and in all but the sectors less dependent on the internal market (soy producers and mining, for example, and excluding construction) are reluctant to increase their exposure when relative prices – including the exchange rate, labour, utilities, food prices, etc. – are subject to unpredictable changes. Even in sectors that are benefiting from the plethora of subsidies, there is reluctance to finance expansion, as it is widely believed that such arrangements can’t be depended upon. As a result, in the final quarter of 2006, as inflation expectations settled in, investment, such as it is, stalled.
The government, faced with the growing evidence that what former central bank president Javier Gonzalez Fraga has called “draconian” price controls are failing, and obsessed with going into the presidential election with lower prices, intervened in the statistics gathering agency Indec, replacing the head of its consumer prices section with a more pliant chief. Clumsily executed and widely condemned, the action only drew more attention to the growing sense that, as Lehman Brothers analyst Guillermo Mondino says, “the economy is settling into an inflationary equilibrium.”
However, though a stern critic of the current economic policy, even Mondino concedes that there is no imminent crisis. “With surpluses and high reserves, there is a buffer, although tensions are being created that will make any exit more painful,” he predicts.
President Kirchner and his intimate circle are proud of what they like to refer to as Argentina’s “Chinese growth rates”, for which reason they must be anxious to see them continue as much in China as at home. Argentina may need a long international expansionary wave to give it time to ride out its own domestic undertows.