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OPINION AND ANALYSIS | 02-06-2018 09:00

Austerity can’t be Macri’s only solution

It was pathetic to hear former president Cristina Fernández de Kirchner listing the economic successes of her administration, and Pichetto —traditionally centered and pragmatic — showing his true colours, taking advantage of the spotlight for electoral gain.

It’s curious that in a land as plentiful as Argentina, yet where the State is broke and enforcing austerity-focused economic reforms, Argentines spent some US$10.7 billion in tourism abroad last year, a figure even greater than the record US$8.5-billion trade deficit we had with the rest of the world. After last month’s emerging market currency crisis – which hit Argentina particularly hard and acted as a slap to the face of President Mauricio Macri, forcing him to shake up his economic team – the Peronist opposition, opportunist as ever, passed an untenable law limiting increases in public service costs, which Macri vetoed immediately. In response, the ruling Cambiemos (Let’s Change) coalition is doubling-down on austerity, announcing belt-tightening policies left and right, with Economy Minister Nicolas Dujvone leading the charge. The problem is that austerity appears to be Macri’s only answer in the face of a multifaceted problem. A Hydra, like the one encountered by Hercules at Lake Lerna, whose heads grew back after each decapitation until the hero called on his nephew for help and together they realised they had to burn the open wound in order to avoid the growth of a new head.

Before getting into the longer-term macroeconomic imbalances that should form the basis of an integral plan to put Argentina on a path of sustainable economic growth (rather than cutting one head off at a time), its important to comment on the political hypocrisy that has taken over. Peronists, like sharks, can smell a drop of blood in the ocean. A weakened Macri, pummelled by a currency crisis that was exacerbated by a series of mistakes in economic policymaking, was at the weakest point of his two-year presidency, dropping so low as to call on the dreaded International Monetary Fund for help. Miguel Ángel Pichetto, leader of the Peronist bloc in the Senate, took the lead on a bill that had quickly passed the Lower House limiting increases in public service prices, with an estimated cost of 65 billion to 115 billion pesos. It was pathetic to hear former president Cristina Fernández de Kirchner listing the economic successes of her administration, and Pichetto —traditionally centered and pragmatic — showing his true colours, taking advantage of the spotlight for electoral gain. “Why did they do this,” Macri asked at a press conference after vetoing the law, “was it a demonstration of power by the Peronists?” Obviously.

Argentina has been in the eye of the perfect storm for quite some time now, allowing stagflation to spread as the fiscal deficit spiralled out of control. Macri’s response was a patchwork of policies aimed at lowering inflation through the Central Bank, increasing social spending to guarantee governability, while tackling government expenditures by cutting subsidies, particularly in the Buenos Aires metropolitan area which, for years, benefitted from its electoral importance as the most populous two districts in the country (City and Province), thus paying substantially less for public transport, utilities and other public goods. At the same time, Cambiemos’ economic team managed to lift currency controls while opening up the borders to trade. All of this financed by international markets after having settled with Paul Singer’s Elliot Management and the rest of the so-called “vulture” funds.

Macri’s master plan was underpinned by the philosophy of the businessman-king, to paraphrase Friedrich Nietzsche, as the productive nerve-centre of the economy. As macroeconomic conditions trended toward normality, and credit became available thanks to Finance Minister Luis “Toto” Caputo’s Wall Street cred, investment would shower the nation, and businessmen would generate output, jobs, and aggregate demand. The magic sauce — economic growth — would then “lift all boats” on the path to prosperity, reverting the fiscal deficit and finally taming inflation.

Yet, the rainstorm of investments, as Macri called them, never materialised. Capital flowed into financial assets thanks to juicy yields on the back of ultra-high interest rates used by Central Bank president Federico Sturzenegger to target inflation, artificially strengthening the peso against the dollar, thus exacerbating the trade deficit. When the faeces hit the fan — as the Federal Reserve’s raising of interest rates created a global run on emerging markets — the correction was violent, severely damaging confidence and the government’s credibility.

Argentina’s is a consumption-based economy, something Cristina understood quite well. In 2017, private consumption made up 73.3 percent of our GDP (the number jumps to 86.9 percent if you include public sector consumption), a number that has been steadily increasing and has remained above 70 percent since 2010. Global household consumption averages 58 percent, according to the World Bank, and the US started the year at 69 percent. While such levels of consumption are difficult to finance for a poor country like Argentina, and are probably one of the causes of current imbalances, aggressively cutting consumption will produce recessionary conditions.

Of the 2.9 pesos trillion budgeted for 2018, 1.4 trillion pesos was destined to social expenditure, compared with 143 billion pesos in government expenditures and 406 billion pesos in servicing public debt. The crux, of course, is how to lower social security without deeply affecting consumption. Through the previsional reform, Macri sought to rationalise the pension system to make it more sustainable. Then, unable to utilise his political capital, he fell short of the much-needed labour reform, which is one of the most important responses to the actual conundrum. More than 99 percent of businesses in Argentina are considered small- and medium-sized, accounting for twothirds of employment. Yet, 34.2 percent of workers are part of the informal economy (en negro), which in turn incentivise the government to impose one of the world’s heaviest tax burdens. Rigid labour laws and extremely high taxes make Argentina one of the world’s most unproductive places. No wonder imports have jumped to 29.3 percent of GDP, beating exports by ten percentage points and causing a dangerous lack of dollars.

Balancing the primary deficit through austerity is a troublesome recipe that could lead to several years of anaemic economic growth that not only disincentivises investment but also primarily weighs down on the poor. Slashing spending without putting into place the conditions for productivity to rise is like cutting only one of the Hydra’s heads, only to watch it grow back again. Relying on populist mumbo jumbo, as the Peronists proposed in Congress this week, could even stoke hyperinflation. Hercules had to cut all of the beast’s heads, burning the wounds to stop their growth. Only then did he succeed.

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Agustino Fontevecchia

Agustino Fontevecchia


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