Tuesday, March 5, 2013

Lessons for SA in the Crisis of Cristinanomics

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05 Mar 2013 | Tony Leon | Original Publication:  BDlive

Argentina’s 'Crisis of Cristinanomics' demonstrates the damage that populist economics and misgovernance can do to a country’s economy, writes Tony Leon

THE point of living in another country can be to learn lessons for your own. In September, at the end of my ambassadorship to Argentina I took a last walk down the boulevards in Buenos Aires. I noted the empty display windows in one of its upmarket emporiums. Fashion retailer Louis Vuitton — ironically a favourite of handbag-wielding president Cristina Fernandez de Kirchner — had just announced it was closing its doors. Its exit from the country, following fast on the departure of other international luxury brands was the latest scene in a long-playing melodrama — the Crisis of Cristinanomics.

My stroll inspired an article I wrote at the time for the Financial Times. I made the unexceptional point that Argentina was heading, and not for the first time in its turbulent history, over an economic cliff as people raced to dump their pesos for dollars and a zealous and increasingly beleaguered government fought back through draconian currency controls, manipulating economic data and import-suppression measures. This led to a flurry of online and printed responses, some of which suggested my comment to be either alarmist or undiplomatic.

Returning last week for a brief visit to Buenos Aires, I had the opportunity to witness first-hand how the situation has evolved after a five-month absence.

First, the number of vacant shop windows has increased and few foreign products are on display. For the bulk of the lower middle-class, from which the president draws her votes, this is of little consequence. But now in a desperate effort to stem the effects of rampant inflation, the government has decreed that supermarkets will freeze their prices for two months. As with every attempt to impose price stability through coercion rather than the forces of the market, the law of perverse consequences kicks in: emptying shelves and unavailable products as producers simply hold back on production and distribution until the situation normalises.

Meanwhile, the hard-pressed trade unions have joined the forces of the fragmented opposition as they seek wage hikes of double the official rate of inflation. Of course, the rich are inconvenienced, but the growing army of the poor and the pensioners are truly hit hard as their earnings and savings are debased. Not surprisingly, the number of street protests has mushroomed.

Perhaps nothing demonstrates the institutional damage populist economics and misgovernance have wrought on this once front-ranking economy (famously, in 1930 Argentina was one of the 10 wealthiest countries in the world) than the fight around the true rate of inflation in the country. Early last month, the International Monetary Fund (IMF) took the unusual step of officially censuring Argentina for its official statistics. It put the country on notice that if its blatantly manipulated inflation numbers are not corrected by September, it will face a range of sanctions, including possible expulsion. The Economist harrumphed that, once again, "Argentina seems incapable of playing by the same rules as everyone else". The magazine has refused to publish the country’s cooked numbers.

But for Kirchner, who practises confrontation as an art form, the IMF is simply another enemy. She sent out a stream of angry tweets denouncing the organisation as "neocolonialist" and "an ally of the banks". For a government whose policies have excluded it from international credit markets and whose raiding of private pension funds and nationalisation of foreign companies have highlighted its desperate search for revenue to continue the public hand-outs that buy it votes, there is a sort of logic behind the manipulation.

The spread between the official rate of inflation and the real rise in prices is estimated to be about 15 percentage points or more, and this is reflected in the annual wage increase. But the manipulation allows the government to save about $2.5bn on inflation-linked bonds.

And it’s not just the inflation numbers that are fudged. During a walk downtown shopping, I was besieged by moneychangers offering a black market (or "blue" in honour of the nation’s flag) rate of 7.85 pesos a dollar, nearly 40% higher than the official, and highly manipulated, rate. Arbitraging the currency is the one growth industry in this economically beleaguered country.

During my visit, I was struck, again, by a huge disconnect. On the one hand the country has fantastic human capital and some world-class companies (which allow it to produce enough food to feed half a billion people in the world). On the other, in the words of Argentinian academic Pierpaolo Barbieri, the economy is being brought to a standstill by a government that practises "a toxic mix of inflation, authoritarianism and corruption".

No end of lessons then for Pretoria to learn, and unlearn, from Buenos Aires.

Apology: In last week’s column I incorrectly cited the author of How to Win Friends and Influence People. The correct author is Dale Carnegie.

Follow Tony Leon on Twitter: @TonyLeonSA

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