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ECONOMY | 03-06-2023 06:23

Alejandro Werner: ‘The IMF is buying time to avoid Argentina defaulting in June’

Former Western Hemisphere director of the International Monetary Fund on global economics and geopolitics, the need to deepen political consensus and why his former employer is “buying time” in order to avoid “an Argentine default in June.”

Alejandro Werner was the director of the International Monetary Fund’s Western Hemisphere Department between 2013 and 2021, a period during which the multilateral lender granted a record loan to Mauricio Macri’s government. 

Although born in Buenos Aires, he grew up in Mexico where he spent a good part of his career, rising to be finance undersecretary and the cabinet chief at the Economy Ministry. With a doctorate in economics from the Massachusetts Institute of Technology (MIT) and currently in charge of the Georgetown Americas Institute, he shares a global vision of the region in an extended interview.

“Argentina has very important potential if it can resolve its macroeconomic problems,” he maintains, arguing that Latin America faces an opportunity for accelerated development.

 

The global economy changed after the pandemic. How would you describe the current scenario?

Three factors have triggered changes in the world economy: the pandemic, the war between Russia and Ukraine and the tensions between China and the United States. The pandemic is over but it left scars, as can be seen in the slower growth of per capita GDP in emerging countries and in the loss of human capital, both for the lower mortality and the deterioration of education. On the other hand, the commercial risks distort international trade, leading companies to think of bringing their chains of production closer, what is known as nearshoring. 

The pandemic also had positive effects. Some analysts say that we have advanced seven years in the adoption of technology due to the need for remote work, which will be reflected in productivity. It also had its impact in the need to reorganise production taking into account the social distancing and the lockdowns, as well as the ideas and innovations arising in multiple fields.

 

What changed with the war in Ukraine?

Besides being a terrible human tragedy, it repositioned the market for raw materials due to the dependence Europe had on Russian gas. This incorporated into the commodity or high tech markets (as with the chips) the possibility of my commercial counterpart using that dependence with geopolitical objectives. That has fomented the search for supply from allied countries, or ‘ally-shoring,’ as it is called, which is changing the purely economic concepts of commodity markets. We are also seeing a deeper use of economic sanctions on the part of the United States.

 

And the tensions between the United States and China?

The tensions between China and the United States began with commercial objectives and the protection of intellectual property during the Donald Trump presidency. The Joe Biden administration maintained the tariffs and deepened the antagonism with China, which became not only commercial but also geopolitical. That changed the conception of the relationship with China. 

Washington’s objective is no longer to accelerate the transition towards a market economy and a democratic society since it sees the country as a menace to US supremacy in the world. For its part, China has adopted a more assertive geopolitical role, thus deepening the antagonistic dynamics. More antagonistic policies demand clear alignments from the allies of one or the other. This is leading to the global chains of production being relocated beyond China. That is a permanent change, independent of the political party in power – one of the few issues uniting Republicans and Democrats in the US Congress.

 

What implications do nearshoring and ally-shoring have for Latin America?

The United States sees Latin America as a region not aligned with antagonistic powers, like Russia or China, although the sympathies of some might lean that way. Washington had forgotten the region a bit as not relevant from the geopolitical viewpoint but is now returning because it sees these countries as potential allies in the chains of production. We’re talking about lithium, copper and other rare metals necessary for the energy transition. The United States are also well positioned to transfer part of their manufacturing processes, above all to Mexico, Central America and the Caribbean. That is why the Biden administration proposed the Americas Partnership for Economic Prosperity. 

If it does not come accompanied by funding and concrete integration proposals, it is pretty feeble compared with the aggressive vision with which China is implementing its foreign policy. On the other hand, nearshoring implies the return to an ideology believing in an industrial policy, something not seen in recent decades.

 

What are you referring to when you call Chinese foreign policy aggressive?

When Latin America needed vaccines against Covid-19, China’s response was far more  rapid and convincing than the US. The same applies to certain loans. When some countries in the region were in urgent situations, China responded to their needs. If the operational methods of US international policy do not change, there will be an important competitive disadvantage.

 

How do you see the near future of the region?

Last year we were positively surprised by a very dynamic Colombian economy while Brazil and Mexico grew more than expected. Perhaps we economists underestimated the long-term negative effects of Covid-19. The high commodity prices were also an influence. In Mexico’s case, the rapid US growth had its effect and in the Caribbean, the recovery of tourism. And China reopening towards the end of the year also contributed to the entire region. But I share the preview of an important slowdown in Latin America this year with potential recessions in some countries like Chile. Yet Latin America is well poised for the future.

 

Why?

There are expectations of historically high commodity prices for a region very abundant in the resources necessary for energy transition and which might receive important links within global chains of production. One example is the announcement of the construction of a Tesla mega-plant in Nuevo León, Mexico. These processes will be important but I do not believe that they will suffice to induce a process of inclusive growth leading to a convergence of per capita income levels with the advanced countries. We are rather talking about more growth in the next 10 to 15 years. To achieve a change in the levels of development, an acceleration in the processes of structural transformation would be needed, apart from external factors.

 

What do you think of the current situation of Argentina?

As an economist you get hooked on Argentina as if it were a bad soap opera. You watch the chapters and the same problems continue without resolution. Now I’m visualising a new season of austerity and reform. Argentina has an overdose of diagnosis, the big question is how to reach the political consensus to put through a process of deep short-term reforms. Argentina cannot sustain the current size of its state. The level of taxation, including the ‘inflationary tax,’ converts it into an economy with low levels of investment and closed to the outside world because if it opens up, the capital flight would be gigantic. Nobody has any confidence in the sustainability of this model. 

Both a macroeconomic and microeconomic revolution are needed, as well as labour law and pension reforms, opening up mining, completing important infrastructure projects such as the Hidrovía waterway and the gas pipelines and a clear framework for developing lithium. Argentina has very important potential for resolving its macroeconomic problems. Political consensus is needed to carry out the most aggressive agenda of transformation the country has seen since the 1990s.

 

Argentina is undergoing the worst drought in decades and some speculate that the IMF will grant extraordinary aid due to this situation. Is that possible?

The drought was a major negative shock but Argentina had a surplus in the two previous years due to extra exports and didn’t save a cent. If they had, they could have handled the drought. Having said that, the IMF is probably inclined to invest a small sum in order to close the negotiation and enable the minister to return home saying that he has obtained additional funds. The IMF is buying time to avoid Argentina defaulting in June, thus postponing the situation until after September and placing themselves close to the new government with whom they can negotiate a new programme.

 

* Article produced in collaboration with Francisco Uranga.

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