Monday, August 3, 2020

ECONOMY | 02-06-2018 11:05

‘More than naive, I think the government was completely irresponsible.’

Influential economist offers his view on the Mauricio Macri administration’s economic policies, the tax burden and the role of the provinces.

A proponent of free trade, free markets and deficit-free government, José Luis Espert is an orthodox economist who has enjoyed a strong presence in local media throughout the last two decades.

Fiercely critical of Cristina Fernández de Kirchner’s interventionist economic policies, he has not bitten his tongue during Mauricio Macri’s presidency either. Today, he says he gives former Buenos Aires City mayor’s current administration an ‘F’ in terms of economic results and slamming it as not just naive, but ”irresponsible.”

Much water must pass under the bridge of reform before Argentina can truly start thinking about development in real terms, he argues. And the budget deficit, tax burden and the financial situation of the provinces are the key issues on the table, he told the Times in an interview.

Was the government’s intention of seeking economic growth in order to reduce the budget deficit without cuts naive, or could it have worked?

More than naive, I think the government was completely irresponsible. I haven’t the faintest doubt that they never wanted to make any cuts. They rolled the dice, hoped the world would keep smiling down on us as it did when we exited the default, and believed they could continue on with the same budget deficit as Cristina [Fernández de Kirchner], financing it instead with debt. Everything was going to look like a ride on the joy train with little yellow balloons.

They have been completely irresponsible. I have no doubts that they wanted to do the same as Cristina, paying for it with debt instead of issuing currency.

Are there success stories in the world of recessive economies recovering by means of stimulation (more spending)?

No. Well... you can’t bring down a budget deficit of seven percent of GDP as Macri inherited [only] with shock [measures]. You have to combine some shock with gradual measures.

Here in Argentina, the savings brought about by the energy tariff hikes, which allowed for the reduction of subsidies as a component of public spending, should have been kept entirely as savings.

Instead, the government spent them all. And because interests on public debt spiked, we consequently had the same level of public spending as during Cristina’s presidency.

That was the situation prior to the recent devaluation crisis. Public spending will now be watered down somewhat due to the peso’s slump against the dollar, as well as the higher inflation we’ll see for the rest of the year. But if it hadn’t been for this crisis, I have no doubt they would have continued down the same path, which would not have been naive, but absolutely irresponsible.

Do you think cuts and austerity measures will accelerate now after the return to the International Monetary Fund?

I have no idea. That would be guessing or mere speculation. I suspect that the IMF will want to take precautions. If they reach in agreement with Argentina, they will want the country to fulfil it. Let us not forget that on September 15, in four months, the government has to send a 2019 budget proposal to Congress that will have incorporated this agreement with the IMF, if that deal is eventually sealed.

In which areas do you consider cuts to be a priority?

There’s three basic issues here. One is that this budget deficit has caused one crisis after another in Argentina. The government has spent more than what it collects in revenue for 60 years. One hundred percent of those years were marked by deficit, with the exception of the four years under Néstor [Kirchner] in which we didn’t service our debt... but the interests accrued anyway.

Another issue is that the tax burden is simply out of control. So there’s no question about it, the deficit must be reduced by bringing down spending. And finally, we’ve got to add the provinces into the mix – without the provinces there can be no sustainable reduction of the deficit of any sort.

But which areas of spending must be reduced?

First higher public sector wages must be reduced and then frozen, both at the national level and in the provinces. Also in this emergency, automatic pensions hikes [based on inflation] for people who did not make pension payments during their lives must be suspended, along with welfare plans. I would also look at public works, at least those financed with national funds, which amount to 200 billion pesos a year.

Do you consider such measures to be viable? Without them we already see numerous protests against the government.

Don’t ask me if they’re viable, I have no idea. You asked me what needs to be done.

Where do you see the peso ending up against the dollar? What about economic growth for 2018?

Growth should end up below two percent. Next year, best case scenario, it should start off at zero. Inflation this year won’t drop below 25 percent. But we’re still working on our dollar projections and growth forecast for next year.

Last year we saw a record trade deficit and this year could be worse. How concerned should we be?

There are a lot of economists who do the numbers wrong on this one.

The current account deficit, which includes the trade deficit, is what, up until the crisis, was heading toward more than five percent of GDP, which is the other side of the coin of the budget deficit of seven percent of GDP. You don’t add five plus seven.

Conceptually they are the same. The consequence of the budget deficit and this way of financing it is a current account deficit of five percent of GDP, which now, after this devaluation and a new round of cuts, probably won’t rise as much and might even fall.

The downfall is the drop in economic activity we’ll see from now until the end of the year. That’s why I mentioned earlier a statistical carry-over of zero for GDP growth next year.

In what economic areas do you consider the Mauricio Macri administration to have done well since 2015?

I give the government an ‘F’ overall. But I do commend them for having lifted currency exchange restrictions without a crisis, having led us out of the default, reforming the INDEC statistics bureau, ending the war against the farming sector and finally for having proposed a new relationship with the rest of the world, befriending prosperous and rich countries.

What are the competitive advantages that the country should focus on in order to truly develop? Does industry play a role in that development? In all of the countries that have implemented market-friendly reforms, opening up to trade, all of them have fared well.

We, on the other hand, have fared poorly because we’ve made a mess of lowering tariffs. But there are no economies that have done poorly after opening up to free trade properly in technical terms. Argentina is a gold mine – in the agriculture sector, a part of its industrial sector, gold, zinc, copper.

That would require absolute free trade, but to avoid free trade making half the country go bankrupt you have to do it after devaluating, significantly lowering public spending, taxes and the cost of labour and having a justice system that doesn’t make a company go under for firing an employee.

It’s an enormous amount of reform prior to such free trade, but otherwise Argentina will continue as it is now.

Does lowering the cost of labour necessarily imply lowering workers’ wages?

Quite the contrary, the cost of labour must be reduced so that workers can be less miserable. For example, union dues, which are taken away from the worker’s wages by the employer, who is obligated to do so in order to give it to the union, have to be eliminated, they cannot be mandatory.

Francisco Aldaya

Francisco Aldaya

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