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opinion and analysis ECONOMIC QUESTIONS

Do film sequels and second halves ever work?

If fiscal balance is unlikely to benefit, why suffer the negative symbolism of a tax on production so much at odds with Macri’s philosophy?

Saturday 2 June, 2018
Minister Nicolas Dujovne.
Minister Nicolas Dujovne. Foto:PABLO TEMES

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Crushing Haiti in football (or indeed in any other department) does not end Argentina’s problems, according to the New England economist Dr Hale. He writes:

“In my experience observing various corners of the globe the worst part of any crisis is usually also the easiest. When your currency is on the ropes with basic confidence in jeopardy, it’s impossible to focus on anything else but that stage only lasts a few days or weeks at the most – either it burns itself out or the government finds a way to take the edge off the crisis (which is what I think occurred in Argentina’s case). But when calm returns to the surface with the economy still as vulnerable as ever and most indicators negative, you then face the much more difficult task of tackling the underlying problems and here I see President Mauricio Macri’s economic team as at a loss, even after being reshuffled. A fortnight ago I was facetiously suggesting that IMF stands for ‘Is Macri Fried?’ but now I think that ‘Is Macri Flummoxed?’ might be more accurate.”

My reply:

“Entrance into a crisis is always much easier than finding the exit, I agree. And I also share your change of acronym from ‘Fried’ to ‘Flummoxed’ – indeed I suspect that one big reason for going to the International Monetary Fund was the hope that these negotiations will somehow produce the road map which eludes their own abilities. Far from coming up with the right treatment, I’m not at all sure that Macri’s team has arrived at a diagnosis. So much have they lost their way from gradualism that they have even looked to such classic Kirchnerite mechanisms as export duties and price controls (without yet implementing them). Well not quite price controls perhaps but Buenos Aires Governor María Eugenia Vidal’s talk of exposing those upping food prices was very much in tune with the Kirchnerite psychology of killing the messenger – prices are the clearest signal the market can send and if it is believed that cartels or middlemen are distorting prices, then tackle those structures.

“Export duties are an even more direct contradiction since they collide with the origins of the Macri government – ‘retentions’ on all farm exports save soy were abolished in his very first week. So far halting the phased elimination of soy export duties has only been a reluctantly denied pre-weekend rumour but increased export duties on biodiesel is a hard fact published in the Official Gazette at the start of this week – originally duty-free until an eight percent levy was introduced in January, that burden has now been almost doubled to 15 percent. This move can also be read as a reaction to a disastrous harvest, seeking to discourage this industry from raiding the depleted supplies of its raw material even if biofuel is a value-added export. This new tax looks like being pretty ineffective since Donald Trump has sealed off the United States while the European market is looking increasingly precarious. But if fiscal balance is unlikely to benefit, why suffer the negative symbolism of a tax on production so much at odds with Macri’s philosophy?

“Among the wreckage left behind after the first tidal wave of the crisis subsided are various key indicators for this year – that 2018 inflation forecast of 15 percent (so controversially ‘recalibrated’ last December 28) and a dollar worth 20.50 pesos by the end of the year according to the 2018 budget (22.80 pesos according to the futures market at the start of this year) have clearly been overtaken by the new realities when even a losing battle to keep the dollar at 25 pesos has cost the Central Bank over a quarter of its reserves. None of this was in the plans of Macri, who just three months ago was happily sketching a non-economic agenda of sugar-free diets and national parks (of which only the abortion debate seems to be surviving) in his state-of-the-nation speech but now the year seems hopelessly lost before it is even halfway through. At a loss how to ‘recalibrate,’ the idea now seems to appeal to a ‘great national agreement’ for some vague consensus while the new hard data emerge from the negotiations with the IMF.

“So what will the rest of the year bring in this new scenario? Since the new economic czar Treasury Minister Nicolás Dujovne has as good as admitted to stagflation, nobody seems to expect anything else (especially with Brazilian recovery now apparently also faltering amid their teamster fuel strike and electoral uncertainty) but I am not so sure. In such a highly dollarised economy as Argentina devaluation automatically triggers price increases but the reality is more complex with some items sharply up but others down by as much as 50 percent (nor is there much logic behind it since the price of that supreme US beverage Coca Cola has fallen with the surge of the US currency). Consumer tolerance of price increases (with or without Vidal) drops sharply with austerity around the corner – once the dollar anchor against inflation loses its moorings, recession can always take its place. Yet recession is no certainty either because devaluation might well end up boosting demand in real dollar as well as nominal peso terms – a lot less people will be doing their shopping in Chile or Miami and far more here. Meanwhile local industry gains from dearer imports and more competitive exports. Yet at the same time the hitherto booming construction industry is hit by the double whammy of public works cuts and soaring UVA mortgages in a dollarised housing market. But as a whole the Argentine economy is best described as adrift rather than sinking.

“Even after being promoted to supreme co-ordinator of economic policy, Dujovne still seems to lack the big picture – gradualism might no longer be the name of the game but the focus remains very much the fiscal deficit as we are told of a plan to take a further 20 billion pesos off public spending by axing sub-ministerial cars and their overpaid chauffeurs (evidently it would involve considerably more than that to save this sum). Still also the primary deficit rather than the red in the overall balance of payments including debt service at the new exchange rates. Not to mention the economy as a whole with barely a mention of the real key to genuine growth and development – productivity.”

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