Don’t Crash on Me, Argentina

Over the weekend, La Nación reported from sources within Cristina Kirchner’s government that the president was considering soliciting advice from economists outside el modelo to help tame the country’s rampant inflation. Ostensibly, this advice would largely be orthodox methods (reducing the fiscal deficit, freeing up exchange controls, ending subsidies, etc.) that the president has heretofore vehemently opposed. Moreover, nearly any program relying on orthodox reforms would, in the short-term, have significant, negative effects on the population (cuts to popular programs, increased basic costs without subsidies, higher import costs) that would make any such measure extremely unpopular. There is, of course, no guarantee that any of this will happen—considering asking for advice is a long way from implementing said policies—but I think that the Kirchner government may be seeing itself in the situation I outlined in my last post; caught between a looming economic crisis on one side and the potential fallout from the restructuring necessary to avoid it.

An ajuste along the lines of what non-kirchnerista economists would almost certainly be very painful for the Argentine economy and could actually increase in the short-term the cost of living for many Argentines. This is mainly because subsidies make up such a large part of the fiscal deficit but also because the government would likely also need to devalue the peso, perhaps by as much as 40%. The latter factor is fairly obvious. Devaluation makes imports more expensive and therefore raises the cost of living as imported items or goods whose production depends on imported items increase in cost. The former is less obvious, since rapidly closing budget deficits is usually considered contractionary. However, much of the deficit is the result of a huge array of subsidies (estimated to be equal to 3.5% of GDP), so closing the gap will require eliminating or scaling back many of those subsidies, which include electricity and public transport. In effect, the inflationary pressures caused by the emission of pesos by the Central Bank to cover the deficit would be reduced, but the real cost of living would immediately increase for nearly the whole population.

From a political standpoint, that the government is even starting to consider these policy options is dramatic. The popularity of the Kirchner presidents has largely been a result of Argentina’s strong growth since the economic collapse of 2001-2002 and the one time growth dipped during that period (2009), the kirchnerista wing of the Justicialista party was drubbed in midterm elections. Maintaining growth at all costs has been paramount to the government, and, incidentally has led to piecemeal policy adjustments that have contributed to the current state of the economy. A full-scale paquetazo seems extremely unlikely, especially since subsidies in Argentina so disproportionately benefit Buenos Aires province and the capital, making any unpopular decisions more likely to end in government-toppling protests. However, some less dramatic changes seem more likely as it appears that the government is increasingly realizing that the global economy isn’t going to be able to prop up the domestic one as it has since the end of the Financial Crisis.

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