Wednesday, May 22, 2024

OP-ED | 06-04-2024 06:29

Mixed messages

While Argentina’s government has turned full circle between the two Easters from leftist populism to far right devotees of the market calling themselves libertarians, inflation persists as the basic fact of life .

No phrase has been more repeated by President Javier Milei than his “No hay plata” admission that the cupboard is bare, not even “forces of heaven,” and yet we have just emerged from a super-long Easter weekend in which millions of tourists spent an estimated 70 percent more in real terms than this time last year – a year in which money was spent as if going out of fashion precisely in anticipation of the current austerity. Even allowing for the fact that this year’s Easter weekend was also almost 70 percent longer due to the annexation of last Tuesday’s Veteran’s Day, it remains a paradox.

While Argentina’s government has turned full circle between the two Easters from leftist populism to far right devotees of the market calling themselves libertarians (and not entirely exempt from populism either), inflation persists as the basic fact of life – central even to the Milei Presidency’s prime achievement of a fiscal surplus. The government takes pride in inflation having descended each month since its first month in office, when it was an impossibly high 25.5 percent, but the fact remains that it has stayed double-digit with the annual figure closer to 300 percent than the 200 percent on which it closed last year. The natural reaction to inflation is to spend rather than to save or invest and at these levels such reflexes are going to be more extreme, as we have just seen over Easter.

This bumper weekend (even with thousands more citizens crossing frontiers to escape some of the world’s highest prices) adds an extra complication when measuring an economy with every appearance of a perfect storm while a majority continues to give the new government the benefit of the doubt. Production is shrinking while idle capacity mounts, salaries and pensions lag far behind inflation while the once almighty dollar has become almost as vulnerable to inflation as the peso with the stabilised exchange rate, making some items the most expensive in the world amid miserable wages. The efforts towards transforming Argentina into a normal country have thus far resulted in a highly abnormal economy, even if Milei makes it clear that he never expected otherwise.

While attention is mostly turned elsewhere, the quarter beginning this week may well be decisive for the revolution sought by Milei. The controversial Supreme Court nominations have raised valid questions as to whether Milei is seeking the institutional restoration also essential for a market economy but the changes remain many months away (and only complete next year even if they succeed) and fraught with uncertainty while the gender factor remains difficult to ignore. Congress is a more immediate battleground as the government moves to present its downsized ‘omnibus’ law and save its deregulatory emergency mega-decree 70/2023 from the cancellation by senators being echoed by the deputies but huge margins remain beyond the legislative sphere – possession is nine-tenths of the law when holding office as with most things.

Instead this infant quarter faces more immediate challenges which will mostly test the Economy Ministry. One will be to prove the sustainability of the fiscal surplus achieved in the first quarter. The International Monetary Fund has made a point of stating that it is more impressed by the raw numbers than the quality of this surplus. Perhaps the most contested component of Economy Minister Luis Caputo’s fiscal squeeze is also the most legitimate – namely the crackdown on transfers to the provinces since their often swollen payrolls call for retrenchment. But the elimination of public works, transferring the burden to a private sector still awaiting full stabilisation before investing, is disastrous for an economy crying out for the expansion and modernisation of its infrastructure – to equate public works with the corruption of previous administrations is to throw out the baby with the bathwater.

Above all, the fiscal surplus may be the victim of its own success if inflation continues to go down – by the massacre of pensions in particular alongside real wages in general, the government has made its biggest saving but the lower inflation, the less the savings (on the contrary, the index-linking of pensions to a receding inflation will return a couple of points to the retired if the updating is based on a couple of months back). Then there is the disarray of relative prices if increasing gas bills almost fivefold leaves them not much more than a full meal in a good (not even exclusive) restaurant.

A work in progress – with the progress yet to be seen.

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