Tuesday, July 7, 2020

OPINION AND ANALYSIS | 22-01-2018 16:22

Macri could be inflation's next victim

Rising prices always hurt the government of the day which gets blamed for letting them move upwards, but so too do measures to stabilise the economy.

For almost three quarters of a century, the people in charge of Argentina’s economic fortunes have spent much of their time grappling with inflation, the hydra-headed beast that has made the country its favourite stomping ground. Most of them failed miserably in their efforts to force it to go somewhere else. Will Mauricio Macri emerge triumphant from his battle against inflation? The way things are going, that looks unlikely.

If the country’s long experience in the matter is anything to go by, appeals to patriotic sentiments followed by corporatist pacts in which everybody promises to do whatever is necessary are worse than useless: before the politicians, trade union leaders and business lobbyists involved finish congratulating themselves on their collective achievement, inflation will have come roaring back.

The only presidents who thought inflation had ceased to be a major problem were Carlos Menem, who, thanks to Domingo Cavallo’s currency board, managed to tame the ravenous monster after it had taken some huge bites out of the economy, and his successor Fernando de la Rúa.

We all know what came next. When the 21st century rolled in, a large majority of Argentines insisted that they desperately wanted the country to remain relatively inflation-free as it had been for several years, but, as De la Rúa soon found out, hardly any were prepared to put up with what would have been needed for it to stay that way. So instead of teaching people that overcoming inflation would be far harder than many had come to assume, the catastrophic downturn the country suffered when the currency board broke apart had the opposite effect. Since then, the conventional wisdom is that it is better not to put too many barriers in inflation’s path.

After everything came crashing down, things quickly returned to what here passes for normal. Of all the countries on earth, Argentina is the most inflationary. After a brief pause made possible by the impoverishment of a large slice of the population under Eduardo Duhalde’s government, the local consumer price index yet again started rising more in a single month than it does in an entire year in most of the rest of the world.

The lesson most people derived from the unhappy fate of Cavallo’s scheme was that forcing the national economy into a monetary straitjacket had been an unforgivable mistake that should never be repeated. In the wake of the generalised collapse and default that signalled the premature end of De la Rúa’s term in office, it was agreed that only a lunatic would dream of tying the peso to the US dollar, let alone to something really nasty like the Swiss franc.

It would surely have been better if more people had reacted by recognising that in order to function properly Argentina would require a far more thorough overhaul than the previous governments had dared to suggest because the big problem was not price stability as such, as so many told themselves, but the economy’s evident inability to live with anything approaching the developed world’s inflation rate.

When Cavallo stopped inflation in its tracks, he assumed that the political bonus Menem’s government received as a result would give him plenty of time to go about the gritty business of reshaping the economy, so it could thrive in the eerily stable circumstances he had contrived to bring about. For a variety of reasons, far too little was done. Instead of trying to make sure they would stay afloat when, rather than if, international interest rates increased, politicians and businessmen made the most of what for them was a splendid opportunity to get their hands on lots of easy money. Like the Greeks after they wangled their way into the Eurozone, they embarked on a carefree spending spree that continued until worried creditors began asking them to honour their commitments.

Will Macri and the people surrounding him enjoy better luck than their predecessors, or will they too share the fate of the Peronists, Radicals and military men who for a while thought they could either coax or, by mouthing threats, drive inflation back into its cage? In public, they seem to be in an upbeat mood, but time is running against them. Interest rates could soon start going up in the US, Europe and East Asia, which would make their task more difficult. Back home, price inflation picked up steam yet again in December; as a result, many who had supported them in October began to have second thoughts. That puts Team Macri in a bind: rising prices always hurt the government of the day which gets blamed for letting them move upwards, but so too do measures to stabilise the economy. While the latest round of utility rate increases may have been long overdue, they came at a delicate moment. What is more, along with the Kirchnerites, there are trade union leaders who would like to see a bit of turmoil because, in their view, it could help keep them out of jail.

Macri is clearly willing to spend part of his recently acquired political capital doing what he assumes is necessary in the hope that, a few months further along the road, matters will have improved enough to satisfy everyone apart from a handful of chronic malcontents, but unless that happens he could find himself bogged down, unable to do much more than cross his fingers and pray that somehow or other inflation will go away.

Raúl Alfonsín’s government, like Cristina’s, seemed to believe that inflation kept barrelling ahead because Argentine shopkeepers were a uniquely greedy lot or because, for mysterious reasons, factory owners were reluctant to produce far more goods at accessible prices. Macri’s approach is less moralistic. He takes it for granted that most shopkeepers, factory owners and even trade union bosses are much the same as their counterparts elsewhere and behave the way they do because they have always lived in a different environment. That is why he thinks the country sorely needs a cultural revolution which, among other things, persuades all decent members of the political and economic elite that unless they do whatever it takes to bring inflation to heel, Argentina’s future could be far worse than her recent past.

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James Neilson

James Neilson

Former editor of the Buenos Aires Herald (1979-1986).

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