April showers

Dr Hale prides himself on not asking the obvious (which is often unavoidable) and this week is a case in point. The New England economist writes: “Some might see this week’s focus as President Mauricio Macri’s international agenda – the visit of Spanish Prime Minister Mariano Rajoy and this weekend’s Americas Summit in Lima – but neither really interests me for opposite reasons. Rajoy’s visit was far too predictable, running almost entirely according to script, whereas the Summit is looking entirely unpredictable – it would have been definitely so with Donald Trump, of course, and now presumably so without him although very possibly also another big yawn.

“What does attract my attention is the very singular sight of Argentina importing soy from the United States for the first time in two decades (which would be more or less since when the pools began the transformation of Argentine agriculture) – what exactly is going on in one of the world’s traditional breadbaskets? You thus import precisely when huge export windfalls are opening up with Chinese retaliation to Trump’s protectionism (although there are also signs of Beijing backing away from a trade war where they stand more to lose). Also striking my attention was the Chapter 11 or Chapter 10 (or whatever our equivalent of your ‘crisis prevention procedure’ might be) requested by Carrefour – how could such a literally household name as the French supermarket chain come to this? Anyway questions about other sectors can await a future occasion – my curiosity this week boils down to your agriculture and your retailing.”

My reply:

“I share your scepticism over Rajoy’s visit – plenty of hype about Spanish investments here but why should Iberian businessmen place their money in Argentina with its persistent inflation and notorious tax burdens and labour costs when it could be argued that their patriotic duty is to stay home and create jobs in Spain itself where unemployment is still 15 percent (around twice Argentine levels)? With Spain Argentina’s second investor, most of those who want to come are presumably already here (apart from niches in areas like renewable energy and tourism).

“Despite your aversion to the obvious, there is one extremely obvious answer to your question as to why Argentina should be importing from the US and not exploiting the Chinese opportunities – the soy simply isn’t there due to the summer drought. Although we now have some April showers, the previous five months saw only about half the usual rainfall. And half less rainfall spells a third less soy – as against last year’s harvest of over 57 million tons, current estimates are down to 37 million, which means at least US$3 billion lost to the balance of payments. With all other crops and ranching badly affected too, not to mention the various spin-offs for inland regions. Such a contrast to the flooding so roundly cursed by farmers last year.

“Nor is the government as sensitive to the plight of the farmer as it might be, despite the loyalty of its rural constituency. Pamper the pampa might have been the initial instinct of the first non-Peronist government in almost three decades but last October’s electoral gains seem to have turned the Greater Buenos Aires urban sprawl into the main priority, toward which rural property taxation has gone up something fierce in the last year. Central Bank exchange market intervention to hold the dollar down has perhaps helped to prevent a frisky inflation from being worse but it has also eroded the export earnings whereby farmers might hope to compensate some of the shortfalls from their shrinking harvest. Furthermore, this discouragement of devaluation threatens to make Argentina less competitive because the Brazilian currency has already sagged amid the political turmoil surrounding Lula’s imprisonment while devaluation is a possible Chinese weapon against Trump. The government is moving on the infrastructural front to improve logistics for farmers in the long term and there are also short-term measures, which do not seem up to the dimensions of the adversity.

“As for your retail question, some of the chain’s problems are specific to Carrefour (for example, the local branch’s slowness in adapting to e-commerce even though any enterprise’s reluctance to sow the seeds of its own destruction is always understandable) and some more general. If a generation ago the economies of scale gave the supermarket some easy gains against corner groceries, today’s competition is trickier – wholesalers (still fairly minor at around four percent of sales because not everybody lives close), informal retailing (for which ‘Chinese supermarkets’ is an unfair but frequent synonym and which hogs 45-60 percent of the market) and now e-commerce. The difference between paying and not paying taxes and between heeding and ignoring labour legislation would be big in any country but bulks especially large in Argentina with the weight of indirect taxation (supermarkets are especially critical of the gross earnings levy) and payroll surcharges in a labourintensive economy (incredibly, Argentina has almost twice as many Carrefour employees as the chain’s French homeland). As a consequence supermarkets have fallen from almost half to slightly over a third of sales in the last two decades.

“Apart from their shrinking slice of the pie, supermarkets also suffer from that pie hardly growing in an expanding economy – indeed consumer sales contracted 3.1 percent in 2017 in a year in which the economy grew by 2.9 percent according to INDEC statistics bureau (perhaps because three percent or more would have triggered the payment of growth-linked bonds). This was because the massive increases to update household utility bills to a decade-long freeze crowded out consumer purchases – a pattern which has been repeated so far this year.

“Furthermore, the combination of stagnant sales and a growing economy pushes up prices despite every effort to keep the dollar quiet. The final inflation figures for the first quarter came out with the March data announced by INDEC on Thursday and they were not encouraging for an incomes policy anchored on a 15 percent wage increase cap – 2.3 percent for March and 6.7 percent for the quarter as a whole. Even though the eternal March culprit of education again kicked in at the start of the school year (13.8 percent, not that teachers are anywhere near satisfied), the more recent culprit of utility updating did not apply because core inflation was even higher at 2.6 percent. Inflation thus needs to be seen as multi-causal and perhaps we should even start listening to the monetarists.”