[R-G] Nicolas Magud on Inflation in Argentina

[Yoshie Furuhashi]

Nicolas Magud's is a neoliberal economist's perspective, and his
comments on wage increases, price controls, etc. can't be accepted and
a coherent left-wing perspective on them must be presented to counter
views like his, but his criticisms of the sources of tax revenues and
"consumption-driven," as opposed to "investment-driven," economy are
worth taking seriously (not just in Argentina, but everywhere in Latin
America with a possible partial exception of Brazil), especially since
it looks as if commodity booms that have improved Latin American
governments' fiscal conditions and allowed for populist economic
growth are already ending. -- Yoshie

<http://www.rgemonitor.com/latam-monitor/archive/200808/>
Is (the Kirchners' self-inflicted) Potential Hyperinflation Possible
(Again) in Argentina?
Nicolas Magud | Aug 1, 2008

This is a valid question to ask ourselves, as the Kirchners'
administration has consistently pursued populist economic policies
that usually end in a hyperinflation episode. This becomes more
relevant if we review the economic history of the country. Once and
again we have seen a sequence of events, many of which we have been
observing during the past years, that ended badly. A short list
follows.

- Wage increases not only increase in frequency, but also in
magnitude: during the last agreement (late July) minimum wage increase
was in order of 27%—after having been raised closed to 20% in H1.

- Tax revenue is mainly driven by the inflation tax (e.g. VAT) and the
external boom (export taxes); the latter not being permanent.

- Government expenditures increase at very high rates (in the 40%
area). The government so far has been unable or unwilling to rein it
in.

- Given the already high inflation that has been partially and
regressively repressed by subsidies, the government is now starting to
let some of the "freezed" prices to partially accommodate. This is
welcome; but too late. Notice that so far it only intends not to
increase subsidies, but not reduce them.

- The so-called fiscal surplus is under big dispute. Its present
stance is probably worse than officially argued (as many private
sector reports show). The future balance looks much worse.

- Consumption-driven economy—as opposed to investment-driven. This is
not trivial. Increases in present aggregate demand derived from
investment create the ability to increase future aggregate supply in
line with higher aggregate demand. Consumption-driven impulses do not
necessarily create an investment stimulus; especially under weak
property right—where every profit looks like "extraordinary profits"
and thus "taxable to redistribute income". Of course this ignores the
regressive income distribution—present and future—that high inflation
causes.

- Tardy (i.e. now that the current stance and especially the future
outlook start to look gloomy) increases in retirement benefits. The
main motive for this being increase aggregate demand while gaining
some political support after the failure in the (export-tax)
confrontation with the agricultural sector—as retired people tend to
have a relatively high marginal propensity to spend. It is worth
mentioning that the conflict with the agricultural sector is far from
over, as the government still has plans to re-instate this export
taxes, albeit in a different way—the administration needs the cash.

- Price controls to (supposedly and ineffectively) control the
inflation rate. This distorts relative prices and potentially triggers
repressed inflation. If the latter holds, the relative price
correction is rarely swift… And I can't call this an anti-inflationary
plan.

- Annual inflation expectations close to 35%. This seems to be in line
with the private sector inflation estimates for the moths to come. The
more so if with the price realignment mentioned above is considered.

- Families are highly indebted and the delinquency rate is increasing.

- The real exchange rate has been continuously appreciating as the
inflation rate is on the rise while the central bank, in a way,
targets the nominal exchange rate.

- Political unrest: not only the President-Vice President recent
controversy, but the social unrest in the interior (e.g. Cordoba,
Santa Fe, etc.), and, consequently, a politically weakened
government—its own alliances melting down due to the policies applied
by the presidential couple during the last years.

- History tell us that too frequently in the past Argentina raised
wages, utilities, etc., and let some of the relative prices to
re-accommodate as a pre-stage to a devaluation (with lots creativity
such as splitting the foreign exchange market, fixing the exchange
rate, interest rate caps, etc., and an infinite list).

- Luckily the economy has not demonetized (yet?) and the central bank
has not depreciated the domestic currency (yet?); as this will
probably make the system to explode. But, as a signal, the "founding
fathers (both ideologists and implementers)" of this so-called
"productive model" are already fleeing away, trying to decouple
themselves from it

So, hyperinflation is not a problem in Argentina for the moment.
However, I could change this to may be not yet, since unfortunately we
cannot disregard it in the future. Unless I assume that the government
is intentionally stimulating inflation to reduce (i.e. inflate away)
its real expenditures instead of reducing its expenses. If so,
somebody would need to remind the authorities of the Olivera-Tanzi
effect—and that this basically does not work. This would be totally
erroneous since—although worsening as a consequence of its own
external tax policy—the surplus in the trade balance is still
positive. Things can get really nasty is this surplus disappears…

There is still (little) time to correct this. But among the features
that should be included is a strong fiscal correction, freer markets
(including relative prices!), better property rights, an independent
central bank, a long-term growth strategy (that includes investment
incentives along with lower inflation—the latter resulting from a
serious anti-inflationary program). However, and against my wishful
thinking, next year is an election year. The government has already
lost a lot political support, so it could easily be tempted into
reinforce the (already failed) populist policies. The more so since
the policies that would help recover long-term and stable growth
usually take time so enact—probably not enough time until the next
election.