Thursday, September 24, 2020

OPINION AND ANALYSIS | 11-04-2020 08:18

We don’t have what it takes to face this economic crisis

It is difficult to envision how Argentina, the region and the world will come out of this mess unless a generalised, global set of solutions is put on the table.

The impact of the coronavirus outbreak will undoubtedly hurt poor and developing nations harder than so-called advanced economies. This is bad news for Argentina, a nation that has been hit by a near-decade of economic decrepitude and a strong bout of stagflation, exacerbated by the previous two presidencies led by Cristina Fernández de Kirchner and Mauricio Macri.

The proactive public health response taken by President Alberto Fernández is encouraging — despite recent reports of inefficient management of government resources in the acquisition of essential items at the Social Development Ministry led by Daniel Arroyo and other related issues – but nevertheless, the magnitude of the economic fall-out could still be disastrous. The situation of the beleaguered private sector, already castigated by one of the world’s highest tax burdens and nearly prohibitive labour costs, is ruinous. Even more troubling is the fate of the informal sector, which is estimated to generate half of the nation’s jobs. While the fallacy of having to choose between the economy and the public health emergency appears to have been laid to rest, it is imperative that the Fernández administration and the opposition continue to work together to successively unveil further emergency measures that can avert the irreparable damage that an economic freefall could impose on our social fabric as the negative feedback loop of private defaults-bankruptcies-job loss goes into overdrive.

Unfortunately, it is still too early to gauge the ultimate damage that will occur as a consequence of the Covid-19 pandemic, which means it is still premature to tell whether the tools at our disposal are sufficient. It is beginning to look, however, as if it is unlikely that they are, meaning that unless there is a coordinated global response that will allow governments – particularly those in poorer regions of the world, such as Latin America – to exaggerate in their response, we could be facing another instance of having done too little too late.

Latin American nations are in a worse shape to face this current downturn than they were during the so-called Global Financial Crisis. Fiscal deficits have deteriorated more than seven-fold since 2008 while debt as a percentage of GDP has risen from 40 to 62 percent, according to Alejandro Izquierdo and Martín Ardanaz of the Inter-American Development Bank. This implies that the capacity to implement countercyclical fiscal stimulus programmes is about half what it was in 2009. For Argentina, which pumped a little less than four percent of its output into the economy back then, it means we’re almost at our limit, with this round of emergency spending estimated at 1.2 percent of GDP by the International Monetary Fund in their Covid-19 policy tracker. Furthermore, almost two-thirds of that previous expansion ended up being permanent, while counter-cyclical policies must be temporary by definition, worsening systemic deficits and limiting current expansionary manoeuvrability.

Those emergency interventions were also extremely inefficient, costing Latin America 4.4 percent of GDP, as social spending aimed at aiding the poor “has actually been going to non-poor, [which adds to] significant inefficiencies in public-sector wages, goods and infrastructure procurement.” We had a taste of that this week when journalist Diego Cabot revealed the Social Development Ministry paid more than US$700 million for essential food products for soup kitchens – some US$300 million above the government imposed maximum prices. Whether it was incompetence or all-out corruption remains to be seen, and President Fernández was forced to make some heads roll, in order to show he had taken charge of the matter. In a time of national unity, in the face of a true disaster, an erosion of the public’s already limited trust in their leaders could prove devastating. The fear of a return to the worst practices of crooked Peronism are an early indication that Fernández’s surging approval ratings could prove temporary. And that would make the response to the coronavirus pandemic even more challenging.

Returning to the question of how to ameliorate the impact of the corona-crisis, Argentina’s incapacity to borrow has led to an incredible amount of money printing. According to a piece by Bloomberg published this week in the Times, Argentina’s monetary base grew by US$619 billion in the 30 days to Wednesday, some 34 percent. The government’s intention was to incentivise bank lending to provide liquidity for individuals and firms, but eight percent of that went to the public, while the rest remained at the Central Bank or in private financial institutions, meaning the economy isn’t being provided with necessary capital in the face of an absolute standstill of activity. A second question has to do with inflation and its monetary element, as prices have risen at a rate of 50.3 percent in the 12 months to February. It is unclear whether this is sustainable in a country like Argentina, even if Central Bank President Miguel Ángel Pesce believes it is. At the end of the day, it appears to be the only option.

This takes us to the aforementioned irreparable damage being caused to the private and informal sectors. Barry Eichengreen of the economics department at UC Berkeley recently explained that while this crisis hasn’t caused damage to the physical capital stock, as a war or a natural disaster would, it will severely wound the supply-side of the equation, particularly given the impact on labour. “Workers experiencing unemployment in a downturn can be permanently scarred. They are less able to form durable attachments with employers and more likely to experience additional episodes of joblessness. Their wages tend to be lower, not just in the immediate aftermath of the event, but for decades, even over their entire working lifetimes. Lower wages are a sign that these workers’ productivity has been impaired.” The destruction of organisational know-how that would come from a tsunami of bankruptcies could generate long-term structural unemployment, meaning permanent loss of human capital that would take decades to recover. The situation is even more extreme in countries like Argentina where the “payments chain” has been completely severed, as employers focus on paying salaries at the expense of everything else. Many are proceeding to lay-offs, even in the face of doubled severance payments. In the case of the informal sector, day labourers and others have directly lost their source of income.

It is difficult to envision how Argentina, the region and the world will come out of this mess unless a generalised, global set of solutions is put on the table. One example is a debt moratorium for low- and middle-income nations, such as the one proposed by economists Pierre-Olivier Gourinchas and Chang-Tai Hsieh, which could free up more than US$1 trillion or 3.3 percent of those countries’ GDP. But that would still not be enough, as other factors including falling global demand and commerce, and tanking commodity prices asymmetrically hit the world’s poorer nations.

A few weeks ago, I argued the Covid-19 crisis could be an opportunity for Alberto Fernández and Argentina, in that it levelled down the economic situation of the global economy, while giving it breathing room in the case of a potential sovereign debt default. That condition stands if and only if there is a global economic response. And for that we need global leadership.

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Agustino Fontevecchia

Agustino Fontevecchia


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