Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

En garde with Lagarde

Macri’s team differs from their predecessors both in having a greater awareness of the root causes of inflation and in having less options with which to fight them.

Saturday 28 July, 2018
Christine Lagarde.
Christine Lagarde. Foto:JOAQUIN TEMES

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A fortnight ago on Bastille Day, the New England academic Dr Hale expressed his resentment over that ancient Paris prison upstaging Lexington just down his road as the cradle of revolution, but his running battle with the French is far from over. He writes:

“It seems that the French have been finding ways to annoy me all month. I’ve already expressed my opinion about Bastille Day, when we were 14 years ahead of them in raising the banners of liberation (in 1775), and then the very next day they have the cheek to win a World Cup from which the United States is totally absent. But then last weekend this Christine Lagarde (who says that the International Monetary Fund has to be run by a French official, recalling the lengthy reigns of Jacques de Larosière and Michel Camdessus?) prances into town and steals the show entirely from our US Secretary of the Treasury Steven Mnuchin and all the other G20 economic czars.

“You only have to drop Lagarde’s name, along with the IMF acronym, and the renta-mob crowd are out in all their synthetic fury but any attempt to goad the same people into an anti-Yankee frenzy with a mention of Steven Mnuchin would doubtless have met with the response: ‘Steven who?’

“How can a Donald Trump man inspire such indifference? Ditto for Britain’s Chancellor of the Exchequer Philip Hammond despite representing the Malvinas usurper and having earlier been Defence Secretary (note my respectfully Brit spelling). Anyway, you’ll just have to fill me in about Mnuchin & Co last weekend. That’s just the top of the news – also the general economic trend in the light of the May slump announced this week; inflation remains a constant worry and, finally, what shape is austerity taking in the wake of Lagarde’s visit?”

My reply:

“That spotlight on Lagarde was far from illogical because while the IMF agreement is absolutely central to Argentina’s immediate prospects, the lack of interest between Argentina and the visiting economy ministers and central bankers was mutual. There were, of course, the ritual statements of the occasion, with Mnuchin proclaiming firm US backing for President Mauricio Macri’s economic plan and Macri thanking the international community for its support (the closing G20 agreement was hardly more specific about any other issue). But the visitors came here very much wearing their G20 caps with any local consequences entirely overridden by the global impact of the budding trade war triggered by Trump’s ‘America First’ protectionist nationalism. And all the harder to argue the folly of this course when the US is superficially the big winner with the ‘flight to quality.’

“Macri’s economic team could reassure Lagarde that Argentina was running ahead of the primary fiscal deficit target of 2.7 percent of gross domestic product (as indeed it is although the final total must include debt service in a volatile world) but inflation is another story. Something not lost on Lagarde who praised the fiscal results as ‘extremely positive’ but warned: ‘The inflation target must be met.’ When just last month’s 3.7 percent inflation alone tops the annual figure in many countries of the same Latin American region, never mind the rest of the world, there is evidently a problem. A problem which aggravates poverty and deters investors who would rather first explore the 90 percent of the planet without this cancer. Not that Macri can uniquely be blamed since there have only been 14 years of single-digit inflation in Argentina since World War II. But Macri’s team differs from their predecessors both in having a greater awareness of the root causes of inflation and in having less options with which to fight them – the economy is more vulnerable than ever with the twin fiscal and trade deficits, the shrinking availability of external credit, a 50-percent devaluation in half a year and a sharp acceleration of the recessive tendencies.

“With regard to the latter, you refer to the May slump – the contraction of minus 5.8 percent as against the same month last year posted by INDEC statistics bureau on Tuesday – which in the eyes of many economists has killed off the last hopes of avoiding negative growth this year. Yet the plunge is not across the board – at least three-quarters of the decline is the contrast between last year’s harvest and this year’s drought (agricultural output crashed 35 percent) with milder falls in other sectors. Moreover, a sharp devaluation will always shrink the dollar GDP. In many other countries there is a dramatic difference between $GDP and purchasingpower parities but far less so in Argentina with its inflation also affecting the greenback. But at least the dollar is calm for now.

“Finally, you ask me for a progress report on austerity. Various questions remain unanswered – for example, how to juggle the government pledge not to increase gas and electricity bills beyond inflation with last month’s 74-percent surge of subsidies as against inflation if fiscal reduction targets are to be met. Not only are the areas destined for cuts still up in the air but also the sum to be cut. Since the IMF agreement this sum has been raised from 200 to 300 billion pesos (although still 200 billion pesos for the national government, according to Interior Minister Rogellio Frigerio, with the remaining third to be defrayed by provincial governors) but some estimates halve that 300 billion because with inflation nominal revenue is rising much faster than the government’s timid tax cuts (with the latent possibility of grinding to a halt in the case of export duties at least).

“Furthermore, the margin for cuts is assumed to be limited by the fact that around four out of every seven pesos of public spending is index-linked, chiefly pensions and social benefits. Yet this index-linking has been anything but rigid in recent times. Based on the inflation of the third quarter of 2017 (the last quarter before the pension reform) retirement benefits have been raised by little more than 12 percent in the last nine months, less than half the inflation – roughly 5.7 percent for the first and second quarters of this year alike even though the former was a relatively quiet summer and the latter an autumn of savage devaluation.

“One last curiosity and one final question. The curiosity – today Macri will be officially opening the Rural Society farm show in Palermo on the eve of its closure. And the question – Lagarde was duly demonised by last weekend’s demonstrations but if the Frenchwoman is a vegetarian, who are the cannibals?”

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