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Neoliberalism in the Pampas

Soybean Republic

As promised, here are some brief reflections on the situation in Argentina, which I think is not as bad as in Brazil economically or politically, surprisingly, since Argentina had a balance of payments problem that is completely absent in the increasingly chaotic neighbor, and the left actually lost the election, which was not the case of Dilma (a coup was required to defenestrate her). As I suggested in my talk a year ago (for non Spanish speakers go to this text), the economy would experience a recession and higher inflation as a result of the likely (and effectively adopted) economic package of devaluation and fiscal adjustment.
Figure above shows that inflation accelerated from about 25% to about 40%, later figure from IMF estimates, and GDP moved from moderate growth (2.5%) to slightly less than 2% fall (again IMF estimates). It is worth noticing that many, including some that claim to be somewhat heterodox (in particular when they're not in Argentina), suggested that devaluation was not inflationary, and that it would produce significant growth of exports and lead to GDP growth.

Long term growth of exports depends essentially on the income of the trading partners, and the slowdown in China, the terrible collapse of the Brazilian economy, and overall gloomy perspectives of the global economy suggest that to expect growth from the external economy is wishful thinking. By the way, the notion that the problem is that the nominal devaluation (of about 100%) was not large enough and the real exchange rate is still appreciated (see here, in Spanish, Frenkel suggests that "we reedited the exchange rate lag") is outright delusional. The idea that if you devalue enough a country like Argentina would be competitive not just in the production of commodities, i.e. soybeans, but also in some marginal manufacturing sector, is based on a misreading of the East Asian experience, and the exaggeration of the idea that manufacturing exports respond simply to price signals (the right exchange rate) rather than industrial policy.

Also, there is no reason to expect a recovery next year on the basis of consumption, since real wages are falling, and the unemployment level went up from 7.2 to 9.2% according to IMF estimates. That also implies that private investment is not going to increase (yes, that's called the accelerator, and yes the IMF expects a fall of about 0.5% of GDP in investment).

However, contrary to what you might think all of this was expected. This is less of a surprise for the government that most analysts understand. As I said in the talk linked above, the objective was to get a recession and increase unemployment, reduce the bargaining power of the labor force, and reduce the real wage. That will be the basis of the future stabilization of the economy. Stagnating wages, and a relatively stable exchange rate. For that reason, and to avoid the continuous capital flight, the government did increase the interest rate. And also, since the Obama administration supported this neoliberal government (they are not populists after all) and the Macri administration was willing to do anything the Vultures wanted, Argentina finally returned to the international financial markets, and the external constraint was lifted. International reserves are up, from the low 20s to 30 something billion.

That implies that even with a current account deficit, which is at a bit more than 2% of GDP (slightly lower than before as a result of the recession), fiscal stimulus would allow for a recovery. Note that this could be done without increasing significantly the governments degree of indebtedness in dollars. There is no reason to borrow abroad to finance domestic spending. But in essence that's what this administration is doing, since they self imposed limits on the ability of the central bank to finance the treasury, which they misguidedly saw as the source of inflationary pressures. The more pressing short run question is whether they will accelerate public investment to promote growth and perhaps have a recovery in time for next year's election (something I suggested they might do in my talk last year). It seems that the degree of fiscal conservatism of this administration (there is no way you can call Prat-Gay Keynesian, even if the term has suffered with semantical saturation; or call the neoliberal Macri government heterodox, for that matter) is so extreme that they would prefer to continue with the recession. And yes, without external expansion, private demand, or government expansion there cannot be any recovery.

There are other more preoccupying issues with this administration,* and I'm not even talking the corruption that concerned so much the critics of the previous government (Macri's name is in the Panama papers, for one, or the fact that his energy minister worked for Shell, and the many other conflicts of interest between the government and private corporations) that are now silent, or the fact that the statistical office (Indec) has also left a gap in the data and has actually increased the uncertainty about the macroeconomic numbers, including inflation (something that critics of the previous government also, correctly, complained about, but interestingly enough they are silent now). I mean the cuts in spending on research and development, and the reversion of the very few initiatives that promoted national technology, like the cancellation of the manufacture of communications satellites, after the launch of two (ARSAT 1 and 2) in the last couple of years. Those were the kind of policies that would have the possibility of leading to some degree of manufacturing export dynamism. But for this government the plan is the return of the old 19th century commodity export model, and if they could reverse the external policy to colonial times (with the US instead of Spain as the metropolis) they probably would.

* And I mean just the economic stuff, leaving aside the record on human rights.

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