I had been working on a post discussing the current economic situation in Argentina and how the high inflation, loose fiscal policy and increasingly structural inflation expectations typify an economy that has major supply side problems as opposed to most developed countries, who are currently experiencing a severe demand shortfall, but then Matthew Yglesias wrote basically exactly what I had been thinking. I think he pretty much nails the points I wanted to make (though he does understate the degree to which the Argentine economy is distorted), so instead, I am going to talk a bit about the interesting phenomenon in Argentina where the government essentially is pretending that inflation doesn’t exist despite ample evidence to the contrary.
Essentially, the story in Argentina is that inflation is running somewhere in the neighborhood of 25% annually, but the government’s official statistical agency (Indec) pegs it at around 10%. Distrust in the official numbers is so high that the IMF recently sanctioned Argentina for its poor data, and rumors have been spreading that it might give Argentina a “red card” if it doesn’t improve them. Similarly, The Economist announced in February, 2012 that it would no longer use the Indec number but rather one produced by PriceStats under a billion price project-style measurement.
The government, meanwhile, has spent the last few years alternating between denying the inflation and trying to silence anyone who publishes figures that contradict the government numbers, to saying that any inflation that does exist is the fault of rapacious businesses out to exploit consumers. At the same time, it has implicitly acknowledged the real inflation rate via wage increases it’s given to public unions, by raising the minimum taxable income and through attempts at price and currency controls. If it’s so obvious, and if the government behaves in a way that acknowledges it, why not just admit that there is 25% inflation?
I think there are two main reasons why the Kirchner government continues on this track. The first is that the government is attempting a sort of heterodox stabilization program. As Lucas Llach at La ciencia maldita discusses here in a piece about the price freeze the government negotiated with supermarkets until April 1, the government is trying to change inflation expectations in a way that slows salary growth and starts to unwind the inflationary cycle. Refusing to acknowledge the real inflation rate could be an attempt at not feeding into these expectations. However, a look back at similar heterodox plans in the past (Plan Austral in Argentina and Plan Cruzado in Brazil) illustrates, without changing other contributing factors, like loose fiscal policy and barriers to investment, it’s nearly impossible to change inflation expectations through price and wage freezes alone.
The other reason the government would refuse to acknowledge the real rate of inflation is because it would require admitting that the current political economy (el modelo) has, at best, serious shortcomings, and at worst, is a failure. This is because, as Yglesias explained, the Argentine economy’s problems are on the supply side; the capacity of the economy to produce is below the demand for goods. Investment is low and recent state intrusions into the economy—import controls, nationalizations—will have dampened whatever enthusiasm there was. Admitting this, and more importantly, trying to control the inflation it’s producing, would entail a painful period of adjustment and abandoning some of the most important tenants of the modelo. Both would be politically painful, upsetting both the population at large (cuts to services are always unpopular) and the krichnerista base (leftist economic nationalism and stabilization programs are usually not compatible).
Luckily for Cristina Kirchner, the opposition remains without any sort of unifying leader, so there will remain a dearth of real policy alternatives in the near-term. However, if China’s (and as a result Brazil’s) slowdown gets any slower, the situation might become untenable quite quickly for the government.