Wednesday, November 30, 2022

ECONOMY | 25-11-2022 09:14

Emmanuel Álvarez Agis: ‘While we remain trapped in the grieta, lowering inflation will be quixotic’

Director of PxQ consultants and former deputy economy minister ​​Emmanuel Álvarez Agis on Sergio Massa’s approach, turning down the chance to head the portfolio and the challenges facing Argentina in the next two years.

​​Emmanuel Álvarez Agis, the director and founding-partner of PxQ consultants, served as deputy minister under former economy minister Axel Kicillof from 2013 to 2015.

A United Nations advisor on macroeconomic issues and a specialist in economic policy, he turned down an offer from President Alberto Fernández to replace Martín Guzmán as head of the economic portfolio.

Álvarez Agis values Sergio Massa for “his approximation to economic policy,” but he warns that the next two years could be Argentina’s most challenging period yet. With both the government and the opposition at each other’s throats, the country is “snowballing,” says the analyst. Opportunities, however, lie afoot, he insists.


Why do you think that they let Sergio Massa do what they did not allow Martín Guzmán to do?

I think that this is one of the most important questions for understanding the reactions of the Frente de Todos government, which are very hard to read, due to its composition. 

I think that the reason is basically fear of an economic crisis which more recently has threatened to transform itself into a political crisis and fear of what that crisis might produce. And I would not respond to that intuitively but with an analysis based on the government’s performance in the last three years. We have already observed this reaction of Minister Massa now on view twice before during this government. I don’t know if you remember but on the day the 2021 Budget was presented [September 15, 2020] there was a huge controversy between the Central Bank and then-economy minister Martín Guzmán, ending up in a new squeeze for currency controls – what came to be called the ‘Netflix dollar’ since people could no longer buy US$200 for saving purposes but deduct them from their credit card spending abroad. That lack of coordination between the Central Bank and the Economy Ministry triggered a crisis. The net international reserves touched US$4 billion and on October 1, President [Alberto] Fernández placed all economic decisions in Guzmán’s hands. The minister raised interest rates and lowered public spending but perhaps what made the most noise was the decision not to make the fourth payment of the IFE [Ingreso Familiar de Emergencia] family benefit in December, 2020. The other half of Argentina, so to speak, struck it lucky with soy reaching US$600 while the International Monetary Fund issued special drawing rights for pandemic relief and when the reserves had recovered almost to the levels of the entry of Alberto Fernández into government, the electoral dynamics began. The government again lowered interest rates, anchored the exchange rate and pumped up public spending so that there were practically no reserves the day before signing up with the IMF, with again the fear of a crisis as a result of that agreement with the IMF. 

Now that [the conditions of the] agreement with the IMF have not been met, they did the complete opposite. Massa took over with nothing more than US$1 billion in the Central Bank and is doing the same as the government was doing back in October, 2020 and the same as the government said it was going to do, but didn’t, in its agreement with the IMF – basically to raise interest rates, lower public spending and devalue selectively for some sectors. That seems to me to have been one of the things which evidently generated the most controversy in the discussion of economic policy. 

So I would say that going to the brink of the precipice, then slamming on the brakes and turning back in time, at least as far as the possibility of a major crisis goes, is not a good strategy. Because the government has slammed on the brakes, in October 2020, and in March and July this year, each time closer to the precipice. And I would say that the last time two wheels of the car remained stuck there, spinning in the abyss.


You said that Frente de Todos conditioned the government more than the IMF. Would that be the difference made by Massa, that he managed to ward off the onslaughts which Guzmán could not repel?

Massa has something which I find very valuable and necessary, which is a political approximation to economic policy. To take responsibility for my own profession, it seems to me a frequent fallacy to make economic policy unduly technical. Obviously economics has its own laws, in the scientific sense of the term, and you cannot do what you want. But also an economic programme without social acceptance is an economic programme which can be written up in a book or taught in a faculty but which cannot be applied. So I think that Massa internalises and articulates pretty well within Frente de Todos. Let’s be sincere, Frente de Todos socially represents the workers, both the formally and informally employed, both those defended by trade unions and those beyond, the middle class, small and medium-sized companies. Now it’s one thing to go articulating those differences and finding a diagonal and another thing to sort out those differences from day one, explaining the economic course and implementing it with decision. Unfortunately, the government has been doing the former and it has not given good results, only avoiding even worse scenarios.


Massa’s plan against inflation seems modest, basically consisting of price controls between November and February, with the novelty that the citizens themselves will be able to control those prices via an app. Do you assign this any chance of working?

I differ as to that actually being Massa’s plan against inflation. The government has, and I do not understand very well why, a certain rejection towards any plan, as the president himself has said – he does not believe in plans and far less one setting as its priority lowering inflation. Now, regardless of what the government announces or says, when you look at what they are doing, I see an intention to deflate the economy very gradually, basically related to the dynamics of fiscal, monetary, exchange rate and public utility pricing policies and this price agreement fits into that framework. So if you look at the consistency of that plan, it is not one which is going to halve inflation or more because the variables are not configured thus. 

Now more seriously still, I believe that this plan, which I would indeed catalogue as modest, has certain inconsistencies in terms of any plan against inflation needing to deflate all the prices of the economy in sync, so that nobody either goes ahead or lags behind. It is often said that halting an inflation of 100 percent is like coordinating an avalanche in a football crowd – you need everybody to stop at the same time because otherwise they will all tread on each other. So when I see that the objective is to converge towards a monthly inflation of four percent but there are quarterly increases of 35 to 40 percent, the currency is now being devalued at a monthly rate of seven percent, collective wage bargaining is around eight to nine percent a month, the monthly interest rate is 6.2 to 6.3 percent, petrol goes up six percent, etc., we are not deflating evenly and to make matters worse, if what we want is to keep the workers ahead of prices while halting the avalanche, the worst idea is to do so secretly. It seems to me, among other things, that any plan against inflation has to be an exercise in coordinating expectations. And for that to happen the agents have to agree on the final objective of the plan, which might be halting inflation but also wage recovery. 

It seems to me in all these contradictions and restrictions which – I was going to say – Frente de Todos imposes on Massa but, let us be sincere, Massa himself is a member of Frente de Todos so that I would not say that Massa is a prisoner of Frente de Todos but has decided to participate in that political creation. It seems to me that all those restrictions lead to the plan suffering from certain inconsistencies. 


Do you think that the plan is giving priority to wage recovery?

Of course, but I think that within that wage recovery there are certain inconsistencies which could end up doing more damage to wages at the end of the day. It is thus counterintuitive to our inflation heading towards three digits annually. What might intuitively seem the best way of pushing up the purchasing-power of wages could result in being the worst, which is trying to keep collective bargaining running ahead of prices. 

I’ll make a very simple point. Let us suppose that the minister agrees with a shampoo or pasta manufacturer that the product in question will go up a monthly four percent for four months running but during that same period there is a monthly devaluation of seven percent. We should ask ourselves if there is any guarantee of being able to lower the dollar price of that product so drastically because if there is a devaluation of seven percent and price increases of four percent, the dollar price of that product is evidently falling. 

So it seems to me that this is not being discussed and again there is a lack of coordination as to whether everybody’s objective is recovering the purchasing-power of wages. But I do believe that at least as far as intentions go, that is the objective. 


You speak of the official dollar exchange rate being devalued over 50 percent above the inflation target of four percent. Could that devaluation also be slowed down to four percent in line with the other sectoral devaluations?

It would be a pleasant surprise for me if we could have all the nominal variables converging on a monthly four percent. Now I do not understand why that cannot be announced in advance because all the evidence from the anti-inflation plans in the history of the modern world indicates that it is better to anticipate and then obviously implement it correctly and with expertise. Trying to lower inflation by taking the economic agents by surprise is a very bad idea. So if we find ourselves with the surprise of prices beginning to head towards a monthly four percent in unison, the exchange rate may also start heading towards a monthly four percent, thus resolving one of the main inconsistencies of the plan.

The other point is how to make the plan compatible with our commitments to the IMF, in particular the reduction of subsidies, which implies increased public service billing. 

I’ll now bring up something which is more simple arithmetic than economics – in order to get inflation down to a monthly four percent, something is going to have to go up a monthly two percent because something else is sure to go up six to seven percent. I cannot find what will be the anchor for those increases, as we economists might say, I do not find something to bring down the average. So there is where I say: beware that this does not become a pressure cooker because in four months time it may be hard to take off the lid.


In an interview you spoke of the ‘Maradona theory’ of Bank of England interest rates, proposing a correlation here as an example of the game of expectations. What the Bank of England has done, you said, “was to construct a reputation like [Diego] Maradona with his second goal [in 1986] against England.” You might believe that Maradona could do anything without any need to cheat, so even when he did cheat, you did not believe that he was doing so. When it is the reverse, as in the case of Argentina whose economic reputation is so bad, is there any way an anti-inflation plan can be credible? Finally, has Massa decided to lie because if he tells the truth, they’re still going to think he’s lying?

What a paradox what is happening to Argentina as a result of the lack of credibility you pointed out. When you look at Argentina’s fiscal dynamics under the Alberto Fernández presidency, even taking into account the year of the pandemic, market expectations were, without exaggerating, double the fiscal deficit in 2020, 2021 and even this year. What is true is that first Martín Guzmán and now Sergio Massa have, I insist, followed fiscal dynamics placing the deficit well below market expectations. So, one might say, this should trigger a  certain optimism regarding Argentine dynamics but what one sees on the markets and in investment decisions and what one reads in the reports is: “Yes, sure but they’re going to default.” It’s like Peter and the wolf, if they always believe that you are going to default, even if you have demonstrated once and again that you have not defaulted, they expect that default the next time round. So, as always, credibility is very easy to lose and very difficult to regain. You need years and years of a delivery which really shows that you have put behind you certain vices you had in the past. And that transcends the grieta rift. Governments of all political colours have failed to balance the budget. That is one of the basic instruments we analysed in Brazil, Chile, Ecuador, Colombia, etc. For us budget analysis is something to which we devote a lot of time and thought. If truth be told, that is not the case in Argentina because nobody expects it to be respected. So you can look at the Budget for some norm in particular, some message which the government wishes to transmit but you don’t look at it to anticipate the effects of economic policy. So credibility fades rapidly and takes a long time to come back. 


Could it be that instead of a one-off devaluation of 30-40 percent, Sergio Massa’s plan is to devalue more than expected, i.e. more than inflation instead of the opposite tack of anchoring it, while at the same time another form of compensating for a brusque devaluation would be sectoral devaluations?

I’ll divide my response into two halves. The experience we have with these exchange rate schemes, not only in Argentina but throughout the region, is that when you have these dynamics of micro-devaluations – or ‘crawling peg,’ as it is called in the jargon – it is very difficult to fit inflation to the speed at which you go gradually devaluing the currency. 

In simple terms, if you devalue at a monthly six to seven percent, it is very difficult to have inflation running at a monthly six to seven percent because at the end of the day the economy starts index-linking those dynamics because we all have that reference of how much we want to earn in dollars, which have ended up being the strongest currency in the world. Furthermore, with a weak currency like the Argentine, that reference is even more internalised. So my first answer is that it is very difficult to devalue crawling peg dynamics at a speed faster than inflation. 

The only time that Argentina could do that consistently was with an absolutely unusual and incredible event – the pandemic. During the first seven or eight months of the pandemic, Argentina could systematically devalue faster than inflation. The economy had hardly returned to normal when inflation adjusted to the crawling peg rhythm and afterwards advanced at an independent pace. Because it is also true that this is not symmetrical – when the crawling peg slows down, the inflation does not go down if the index-linking and the inflationary momentum have consolidated but rather up, unfortunately. 

As for sectoral devaluations, I believe quite frankly that they are a double-edged weapon. In the office we say that it’s like the first time you give a tablet to a kid and then they’re always asking you for one and, what’s worse, so do their brothers and sisters. So when you introduce the soy dollar, a measure which was excellent for coping with the emergency situation when Massa took office, it had very good results with the Central Bank recovering reserves. Now what happens? The soy exporter asks for the return of the tablet – they want the soy dollar back. And the second problem is that the other sectors say: “Hey, how about me too?” And to make matters worse, the other sectors will have more need than soy, which is one of our most competitive exports. If you give a 200-peso to soybeans, why not to wine, for example? So I believe that the minister now faces the challenge of consolidating the vision that he will not abuse that tool because to the extent that the market foresees that this tool can be used again for soy or other sectors, the reaction, as we are already seeing now, is to delay exports in the expectation of a tailormade dollar for each sector. So since it worked as an emergency measure, the problem is consolidating what you only used in an emergency and not using it again.


Talking about votes in the ballot-boxes and economic planning, you were the deputy economy minister in the second term of Cristina Fernández de Kirchner and you know the job, the work it signifies and the tensions which it implies. Over and above your now denying it, you rejected the possibility of becoming economy minister when Alberto Fernández took office in 2019 and before Sergio Massa this year. Did you decide against considering the possibility of becoming Economy minister because you knew it was a very complex task in a political context lacking agreements?

I think that the evidence explains that very clearly. It seems to me that any economic programme carries as its precondition a political agreement within Frente de Todos. I think that the government’s main error was not having discussed things which were evident in December 2019, things which were very clearly going to arouse stronger discussions than one might normally have during an administration – private-sector in default and the biggest IMF loan agreement in history. Of course that was going to raise doubts as to how that situation could be faced. And today, I insist, the evidence exempts me from explaining why Frente de Todos did not have that discussion and really, as a political grouping and as a country, it is very sad to put to the vote an agreement with the IMF – which might be good, bad or inbetween, the best or worst in history, it doesn’t matter – but it is sad when the government takes that agreement to Congress, only for its main component, Kirchnerism, to vote against. So what were we doing during the last three years? Because one might think: OK, there was no prior discussion of how to face the challenge implied by that ruinous agreement with the IMF, which, it is my impression, [Mauricio] Macri signed irresponsibly as the economic error of the century. But let us suppose that we had taken the time during those previous two years to discuss the agreement with the IMF and arrive at a consensus. We only realised last March that when you might think that the economy is a technical question and that simply having the state machinery, controlling the main economic variables and taking measures, the economic plan is destined to succeed, it is not so. My concepts come from where I was trained in the tradition of what is termed political economy, which is not the economy of petty politics, it is the economics of the best thinkers in the economic sciences ranging from [Adam] Smith and [Karl] Marx to [John Maynard] Keynes or [Milton] Friedman, to mention people who thought about political economy with their heads. So to see a government arguing in public, disagreeing over such basic things as what to do with a programme with the IMF, the level of interest rates, how much to charge for water, electricity, gas … Anybody who believes that they have the capacity to draft an economic programme outweighing and countering those contradictions very clearly has a problem of vision, it seems to me. Today Massa, due to the force of events, is generating such consensus. We all believe that it would have been better to have arrived at that consensus, whether by the force of events or talking them through, three years ago.


Would a true plan of stabilisation, which does not have the inconsistencies you mention in Massa’s modest mini-plan against inflation, require a political consensus which can only come from a government recently starting?

It requires political consensus. If you are capable of generating such consensus halfway through your administration or in its last year, that merits extra consideration. But beyond doubt it requires consensus because the truth is that a stabilisation plan to reduce current levels of inflation goes beyond just applying the tools termed classic, fiscal or monetary policy, shall we say. You also have to think of where relative prices are going to be after that plan of stabilisation. That means you have to halt inflation as if it were an avalanche. You have to succeed in stopping everything at the same time. 

But furthermore, if you think that the Argentine economy has a problem with relative prices, and I think that it does, perhaps what you want is that when you have halted that avalanche, the last should be first and the first last. In other words, if you say: “A programme of stabilisation must be applied,” the question arises: “What for?” To lower inflation so that the purchasing-power of wages grows. What you want is for the worker who was in last place in that avalanche to end up first and the businessman who was ahead of the pack to finish last. That requires much technical expertise but also political consensus because you have to convince people that it is better to be last in a crowd without an avalanche than first in an avalanche. Which is true because those who are first in the avalanche generally have a good time for a while but afterwards they are the ones who end up worst. So those who think that programmes are defined by their technical aspects understand nothing about political economy. That can only be done by a leader who invites the general population, but also the economic agents to an effort to halt the avalanche. If there is no trust in that leader, what are you going to do? You are not going to stop because if that leader is not going to halt the person behind you, then the latter is going to trample over your head.


And do you think that a possible future Juntos por el Cambio government can obtain that consensus?

When I listen to the public considerations of the main representatives of Juntos por el Cambio, I tend to think not. Above all, because when I talk to my colleagues who are working on a stabilisation plan within Cambiemos, I see some very good things in technical terms, some very good discussions. I believe that most Cambiemos economists are thinking through these problems very profoundly and are on target. I could tell you about conversations I’ve had with Martín Lousteau and Hernán Lacunza, about things which I’ve heard Eduardo Levy Yeyati say, which have seemed very sharp to me. But when I listen to their policies, I see that they are giving a political framework to that stabilisation plan in which, following our avalanche metaphor, there seem to be villains. It seems that there is an avalanche because [pilots union leader Pablo] Biró enjoys labour privileges in Aerolíneas Argentinas, which he might or might not have, but when facing up to the problem of inflation, it’s all due to Biró, [teamster] Pablo Moyano, the social movements, protectionist businessmen who produce thanks to the restrictions on imports, etc. 

It seems difficult to me that their programme can succeed because what they are saying is: “Do you know how we’re going to stop the avalanche? By eliminating half the stadium.” I don’t like those plans of stabilisation. It seems to me that the challenge is to halt inflation with everybody aboard, not throwing half the crowd out of the stadium and country. So I truly see some interesting things technically but other things seem to me wrong-headed. 

All our opinions are worth the same and we can have our technical discussions but it seems to me that the political framework separates the good from the bad. The current government tries to single out heroes and villains while a Cambiemos government will try to make out that the heroes of this government are the villains while the bad apples are the good guys. It seems to me that if we carry on like that, we’re snowballing.


Our interview last year was in September when a Russian invasion of Ukraine and all the consequences of that war could not be imagined. At that point you were optimistic about the world economy. Today with the war and central banks hiking interest rates, do you have the same optimism regarding the future of the world economy next year and in 2024?

I’ll put it in these terms: I see a very promising future for Argentina, of which we are going to be able to take advantage in three or four years’ time. One very clear example: the gas pipeline which will be completed next year will save us US$2 billion. But when we combine that gas pipeline with another one and one for oil, we’ll probably be saving US$8 billion in imports. 

Now the question becomes how we reach next March with the quantity of dollars in the Central Bank today. So it seems to me that these long-term economic perspectives of Argentina have become disconnected from the changes in the short term, due to the war, but there could also be long-term changes if the world is heading towards a reconfiguration of its energy grid, as is clearly happening. The next two years are thus Argentina’s challenge. It seems to me that the political force which decides to fix this faces the challenge of not doing so via an economic mega-crisis. And I believe that fixing this without an economic mega-crisis will enable us to join a world in many ways much kinder to Argentina than in the past less traumatically. Because, I insist, Vaca Muerta [shale] can export up to US$50 billion annually while unemployment reaches 18 percent. I want those US$50 billion to be exported annually with unemployment at four percent. Both scenarios are possible. 

Sometimes you have to understand that commodity dynamics tend to be parallel to domestic macroeconomics. Obviously a world at war makes me pessimistic in human terms. But strictly from an economic viewpoint, this war is good news for Argentina, we only need to know how to take advantage of it with rather more ordered macroeconomics than at present. 

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Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.


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