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I don't see the Kirchners having the courage to admit their mistakes
El Cronista
July 15, 2008

By Laura Garcia

During the "fat cow" years, the government should have let the peso appreciate. Today, the "genie" of inflation has escaped its bottle and it will continue making trouble for more than selling dollars

"It's a shame that in Argentina they have to repeat the saddest stories of Peronism," said Arturo Porzecanski of Uruguay, who was chief economist for emerging countries at ABN Amro Bank in New York and previously held high positions like economist for ING, Kidder Peabody & Co., Republic National Bank of New York and JP Morgan. Porzecanski today teaches international finance at The American University (Washington, D.C.).

El Cronista: Many economists are warning about the need to change economic policy, since the possibility of a hard landing by the economy in the coming 18 months is every day more likely. Is there time for the country to avoid it or is it already headed in that direction? What could be done to avoid it?

Arturo Porzecanski: I share this concern, in large part because I predict a sharp economic slowdown in almost the entire world which will hit Argentina hard. Its cause is the excessively high international prices of raw materials, that is inducing a shock in confidence and deepening purchasing power of consumers and investors and that brings back bad memories for me of the similarly traumatic shocks in the decade of the 1970s. I believe that this slowdown will be provoked also by the reaction of almost all the central banks of the world, which are "running on batteries" and beginning to close off channels of monetary liquidity to avoid inflationary spirals and recessions that we saw in that era as we are seeing, for example, in Brazil, Chile and Europe

Now, in Argentina the world slowdown will have a substantial impact, as the government and the country have gone back to depending highly on very high raw material prices, there is much inflationary and salary pressure in play, and the investment and business climates are harmed by the populist policies and social conflicts. To cushion the anticipated slowdown they will have to make a very forceful turn in economic policy, but I don't see that the Kirchner duo has the courage to admit their mistakes nor to speak of the will to make changes to their partisan philosophy and conduct. Populism, statism and demagoguery always begin to show very good results especially when the international context is very favorable, like it was at the beginning of the 1950s and 1970s, but they always ended very badly, in particular when this context turned unfavorably. It's a shame that in Argentina, they have to repeat the saddest stories of Peronism.

C: Inflation is eroding the high real exchange rate model. Is the recent appreciation of the peso a transitory phenomenon or are we seeing a more profound shift in monetary policy?

AP: During the "fat cow" years, the government should have been allowing the BCRA to let the Argentine peso appreciate, as their counterparts have been doing in Brazil, Chile, Uruguay and almost all the rest of the countries, to minimize inflationary pressures, especially during the unfreezing of public rates and salary recomposition. Now that the "lean cows" years are coming, the BCRA is probably doing more than it did in the last three months, such as selling reserves to cushion the pressure of devaluation. Sadly, the "genie" of inflation has escaped its bottle, due to price controls, high export taxes and other administrative measures and it will continue causing trouble for many years in more than BCRA sales of dollars to pesos.

C: What is your opinion about the handling of the conflict with the farm sector?

AP: The truth is that I'm not surprised by the determination of the government of Cristina Kirchner to raise more revenue from the farmers to finance the state machine and benefit the urban working masses. Let's not forget that Nestor Kirchner began with haircutting the revenues to the bondholders and the multinational companies that financed the modernization of the country during the 1990s, to then finance the subventionary government of the urban working masses and the picketers The populists are like that, perfectly able to kill the goose that laid the golden egg!

C: Do you see similar problems and dilemmas in other countries in the region with governments that you'd also identify as populist?

AP: Yes, of course. Let's take the case of inflationary pressure. Due to all the kinds of price controls, direct and indirect, in June the interannual inflation rate of Bolivia was more than 17%, in Nicaragua it was 22% and in Venezuela up to 32%. Is it a pure coincidence that these countries have the highest inflation in the region? I don't think so. Sooner or later, depending on the international context, bad economic management always turns to disaster.