The Economist: Argentina and its prices

Albert Einstein is said to have defined insanity as doing the same thing over and over again, and expecting a different result. The Peronist Government of Argentina he seems as puzzled by this simple rule as some people are by the theory of relativity. On October 19, the new Secretary of Internal Commerce, Roberto Feletti, issued a decree that sets, until January, the prices of 1,432 products ranging from cream cheese to shaving cream.

The annex to the decree has 881 pages in which it is specified, down to the last fraction of the Argentine peso, the maximum price for each product in each of the 24 provinces of the country. The reason? Prices increased 3.5% in September, an unexpectedly high percentage, bringing annualized inflation to 53%. Figures for October will be released three days before November 14, when a crucial midterm legislative election will take place.

In September, the ruling coalition was in shock after losing in a primary that serves as a mock election. The lesson that Cristina Fernández de Kirchner, the powerful vice president who was president from 2007 to 2015, learned was that the government had intervened very little in the economy. Feletti’s controls will allow the ruling coalition to blame companies for the price hike.

“There is no economic logic, everything is communicational and political,” says Federico Sturzenegger, former president of the Central Bank of Argentina. The government itself is the reason why this country has the highest inflation among the world’s major economies – with the exception of Venezuela, whose government is even more addicted to controls. As of December 2019, it had set caps on utility rates and interest rates.

The government’s failure to reach an agreement with the IMF prevents it from accessing international sources of credit. So it is financing the fiscal deficit this year, of about 4% of GDP, mainly with the printing of banknotes. “That money chases other goods,” which pushes inflation up, Sturzenegger points out.

The country has lived it before. Peronism’s fondness for subsidies and protectionism, and for keeping the exchange rate fixed, causes Argentina to suffer from chronic fiscal deficits and a shortage of hard currency. At the end of 2013, with the decline of the commodities boom and a new illiquidity in dollars, the Fernández government tightened its previous controls on prices, exchange rates and capital movements.

What followed, logically, was recession and higher inflation, and the Peronists lost the 2015 presidential election to center-right Mauricio Macri. So why repeat a failed recipe? The Kirchnerists’ reading is that in 2015 they lost by a slim margin. They represent interests that benefit from protection (large industrial entrepreneurs) or are assisted with subsidies (the poor population). The controls guarantee a kind of stability by avoiding hyperinflation.

This artificial stability comes at a cost: Argentina’s economy has hardly grown since 2008. Wages have risen less than inflation in eight of the last ten years, and the population was steadily poorer even before the pandemic. Those who can, transfer their money abroad: in the recent Pandora Papers leak, Argentina ranks third in the number of beneficiaries of offshore companies, behind Russia and the United Kingdom.

Can the government maintain controls until the 2023 presidential election? In addition to rising inflation, the exchange rate on the (tolerated) black market has doubled the official rate. Alberto Fernández, the “substitute” president installed by Fernández, is weakened by his mismanagement of the pandemic – he lost credibility after violating the draconian quarantine that he himself imposed to celebrate his partner’s birthday. Losing in the legislatures would be another hard blow.

The economist Luis Secco points out that past episodes of hyperinflation occurred when governments were weakened after losing midterm elections. However, there would be room for maneuver to get out of the way, especially if the government reaches an agreement with the IMF. Even if it fails to do so and finances the entire fiscal deficit for 2022, projected at 4% of GDP, with banknote printing, inflation would not have to be much higher than this year.

Macri lifted the controls, generating growth in the short term, but was too slow to reform the state, which caused a sharp depreciation of the peso and a belated cut in the fiscal deficit. “The population no longer supports austerity,” said Máximo Kirchner, a pro-government deputy and son of the vice president. The current government’s measures offer slow but inexorable impoverishment. Perhaps Argentines end up realizing that they are failed policies.

Translated for Management by Antonio Yonz Martínez

© The Economist Newspaper Ltd, London, 2021