Managing inflation in electoral times

descargaUnderstanding the difference between the best anti-inflationary policy in political terms and the best one in economic terms might be a key to understand the relationship between economic policymaking and electoral results.
Por Pablo Heidrich

Inflation has a long history in Argentina 1. From the first episodes in the 1950s, under Juan Peron and Arturo Frondizi, to the accelerating inflationary spirals under the dictatorships of Juan Ongania in the 1960s and Jorge Videla in the 1970s, inflation has beset all sorts of Argentine governments. Such remote past is eclipsed by the most traumatic episodes of high inflation of the 1980s, culminating with the hyperinflation of 1989, bringing about the downfall of the Raúl Alfonsin administration. That experience, plus two more bouts of hyperinflation in 1990 and 1991, convinced Carlos Menem’s government and the local economic elites that no alternative existed to drastically liberalizing the economy and privatizing all state assets.
One can therefore say that inflation’s history in Argentina has been quite influential on its politics and economy. The question remains today as the country is again living with an inflation rate well above the regional average. With the devaluation of 2002, inflation shot up to 42%, later fell to 4.2% in 2003 but picked up to 6% in 2004. In 2005 reached 12.3% and fell down in 2006 to 9.8%. It is expected to be in a range of 8 to 12% for this year. These numbers might not mean much by themselves but undoubtedly affect the population living in such context of changing prices. From the electoral point of view, the Nestor Kirchner administration will be evaluated in October 2007, among other factors, on how it has managed this dimension of socio-economic life. For that it is important to understand a bit more on what the government is doing in that regard, how that is reported and evaluated in the press, what the opposition has been proposing to do instead, and what has been the real impact on the population so far . It goes without saying that inflation policy is an important yardstick for Argentines to judge their government’s success or failure but certainly not the only one.
With that caveat in mind, lets review the government’s actions first. Inflation was quite low in May 2003, when Kirchner came to power and remained so until early 2005, when it reached almost 1% per month in the first quarter of that year. Such levels are unsustainable over time without triggering an acceleration in prices that eventually slows down an economy. Roberto Lavagna, Kirchner’s minister of Economy, built informal agreements with leading domestic firms and managed to slowed inflation towards the middle of the year. Eventually, that mechanism did not work out and Lavagna, after attempting to slow down the economy, was dismissed by Kirchner.
Felisa Miceli replaced him in November 2005 and brought along important changes on how to deal with the issue. She asked from leading firms and industrial associations formal agreements, containing detailed and explicit promises to freeze prices, in highly publicized meetings. Kirchner backed her up and led some of the first meetings himself, thus staking out his reputation on this maneuver. Such strategy was augmented later by the inclusion of Guillermo Moreno as trade secretary, keeping tabs on large firms to follow their agreements or negotiate mark-ups after showing their production costs. This last policy has been the most resisted by firms, anxious to protect their extraordinary rates of profit after the devaluation of 2002.
Such battery of measures, walking the tight line between commonly used price agreements (France, India and Germany use them more or less selectively), and government-decreed price freezes (known to have failed in Argentina and elsewhere every time), managed to first control the acceleration of inflation from 2005 to 2006, and eventually lower it at the end of that year. However, 2007 showed the fatigue of this strategy and eventually, the government has responded with a probable manipulation of the national statistical bureau, which produces the monthly calculation of the inflation rate. Right now, the Kirchner administration looks set to maintain this course at least until the presidential elections.
The local media has reported this issue by first showing the impact of inflation on the people’s income, then on how it might be reducing investment in the goods with controlled prices, and finally, on how scarcities in some basic necessities are starting to show in supermarkets. The overall perspective in national newspapers and electronic media conglomerates is that inflation is currently the biggest problem in Argentina, only comparable to the high rates of criminality they also duly report on a daily basis.
What is most relevant in such reporting is the lack of consistent analysis of what can be causing such high inflation. In turn, what economists from neoliberal think tanks (such as FIEL, Macroeconómica, Economía y Regiones, IIERAL, etc) provide as explanation is taking in the media at face value: that the government’s increased expenditures and promotion of pay increases for workers in the private sector is fueling an unsustainable consumption boom. Such excess is made worse – they say – by the government’s hostility to business, which lowers the possibility of increased investments to provide sufficient supply for that excessive demand.
The opposition has been quite systematic in its targeting of this issue as a fault of government policy but rather weak at the time of proposing alternatives. Lavagna, now a presidential candidate for a coalition of non-Kirchner peronists and radicals, has been the only one to actually precise that this rate of inflation can just be partially reduced, to perhaps 7-8%, with a large reduction of government expenditures and a strong increase in real interest rates. He prefers, as others in the opposition, to criticize the government’s management of price controls and its manipulation of the national statistics bureau. Ricardo Lopez Murphy, a well-known neoliberal economist, has only referred to the need of Argentina to reflect “world prices” in its domestic economy, indirectly saying that the solution to the current rates of inflation are in appreciating the currency and allowing price increases for sectors that produce for both, the domestic and international markets. Still, such remarks are done very obliquely to avoid being related to the failed neoliberalism of the 1990s. Other opposition candidates, such as Elisa Carrió and Mauricio Macri have entirely avoided proposing any policy alternatives to deal with inflation, focusing instead on criticizing the measures used by the government. From such criticism, they intend to show that the government is just policy-incapable, with a bent on repressing private economic actors and manipulating statistical indexes.
In fact, the importance of inflation for the average Argentine voter has quite a few interesting characteristics. One is that inflation concerns are stronger among upper middle class voters in the metropolitan area, who are less then 20% of the electorate, than for the population at large. Instead, concerns in regards to unemployment, low salaries (something partially related to inflation levels) and poverty are the highest ranked by most voters. The second is that the government efforts to control it have focused on items that are more important for working class and low middle class people, such as foodstuffs, transportation prices and generic medicines. Other items such as electronics, entertainment, private education and private health insurance have occupied comparatively much less effort. Such strategy seems to be working politically as there is a very high level of approval among low middle class and working class voters for the price controls established by the government. And business is systematically blamed in opinion polls for price hikes, instead. Therefore, the population response to this problem is quite consistent with the actions of the government. Or one can conclude that the anti-inflationary policy of the Kirchner administration is quite well tuned to voter preferences, regardless of whether that is the best policy to follow in economic terms 2.
1. This piece is part of what hopes to be a series of four articles written from Argentina during its electoral year, analyzing how economic policy is a factor in the people’s decision on the Kirchner administration, and its opposition. The topics dealt with will be inflation, employment, investment and foreign economic relations. It is not an exhaustive list but it touches all the main economic issues being discussed currently in Argentina and about it, from beyond its borders.
2. In fact, to decide whether those policies are the best or not, one needs to look at the real causes of the current level of inflation in Argentina. That is a very interesting issue in itself but elaborating on it here now would make this article way too long, adding only marginally to the central issue of how inflation is likely to affect the elections. It will be touched upon in my remaining posting, especially, in those on investment and international economic relations.