Sorry Sebastian, by my "this was all to be expected" referred to the eventual rise in inflation due to Kirchner's bandaid tactics -- holding the 3:1 when it should be around 2.10:1, using bullying tactics to force the farmers etc to sell their meat for low prices.
Financial consultants will tell you that the current rise in costs seen by the consumers in Argentina was expected to happen -- it was just surprising that K's managed to hold it off as long as he did.
From Economist December 2006:
The durability of economic recovery has surprised many. But is the government mortgaging the country's future?
IN DECEMBER five years ago, crowds of Argentines angry at years of deflation and recession took to the streets of Buenos Aires and ousted the president, Fernando de la Rúa. Amid chaotic scenes, three further presidents came and went in ten days, one of them declaring the biggest-ever sovereign debt default. In what a century ago was the world's seventh-richest country, the economy shrank by 15% in the year to March 2002, poverty rose from 38% to 56% and unemployment climbed to 21%.
To the surprise of many, recovery from this national catastrophe has been swift. Since the nadir in March 2002, Argentina's GDP has grown by 45%, an average of 8.6% a year. “You have to look back to the Argentine golden age to see this [rate of growth],” says Ricardo Delgado of Ecolatina, a consultancy. “No one was expecting it.”
The question, as it has been for the past four years, is how long the growth can continue. The debate has an ideological edge. Supporters of the fixed exchange-rate that brought growth and then collapse in the 1990s have poured scorn on the sustainability of the recovery. Fans of Néstor Kirchner, the president since 2003, like to claim that Argentina will continue to grow apace because it shrugged off the IMF's advice and is following “heterodox” policies.
Many economists in Argentina are now coming round to the view that the country can continue growing at a reasonable rate—partly because some of the policies are less “heterodox” than is claimed.
At a brutal cost, the collapse rebalanced the economy. A steep devaluation and the debt default turned deficits in the public finances and the current account into surpluses. Roberto Lavagna, the finance minister from 2002 to 2005, kept spending under control. The government relied mainly on monetary policy to boost demand. The central bank stopped the peso from appreciating, issuing pesos to buy up exporters' dollars. The government meets its fiscal targets partly by taxing farm exports, which are unusually profitable because of the artificially cheap peso and high world prices.
These policies have had the effect of supercharging growth. Their obvious drawback is inflation, which began to rise again in 2004 as spare capacity was used up (see chart). Mr Kirchner's response was to bully producers with “voluntary” price-freezes, outright price controls and export bans. Similar tactics caused several foreign investors, such as France's Suez and EDF, in privatised utilities to pack up and go.
Mr Kirchner's critics said these measures would halt investment. Anyway, they said, investment was of the wrong kind, in housing rather than factories. So far they have been wrong. Argentina does lack foreign investment. But its own smaller companies have moved quickly to expand capacity in response to demand. The boom in construction and tourism has created many new jobs. Overall, investment has almost doubled as a percentage of GDP since 2002, from 11% to 21.4%, enough to sustain growth of 4% a year. “Most people thought that security, credibility and structural reform were the key to attracting investment,” says Javier Alvaredo of MVAS Macroeconomía, a consultancy. “But it's actually profits.”
Some serious doubts remain. The biggest worry is energy. Because of the price controls Argentines pay less than half as much for energy as their neighbours in South America's southern cone, according to Daniel Montamat, a former energy secretary. In this industry, the arguments of Mr Kirchner's critics ring true. Consumption has risen but investment has collapsed. Argentina has depleted its gas reserves, from 15 years' worth of production to fewer than ten. Industry sources warn of blackouts in 2007 if weather conditions are unfavourable. Fear of blackouts has suppressed investment in energy-intensive businesses, such as steel, aluminium and petrochemicals.
Other bottlenecks will make it harder to sustain growth even at a more modest pace. The economy is still benefiting from private investment in infrastructure under Carlos Menem in the 1990s. Now roads are again becoming congested. There are some shortages of skilled workers, too.
After Mr Lavagna's sacking, fiscal policy has become looser. Provincial governments are already running a deficit. On the other hand, the central bank is quietly tightening monetary policy. Many assume that Mr Kirchner will relax price controls and allow the peso to appreciate after an election next October at which he is likely to seek a second term.
The risk is that inflation might then take off, unless the authorities act to slow the economy. But officials remain bullish. “What do we have beyond two more good years?” the foreign minister, Jorge Taiana, asks. “We have higher investment than ever before. We have an extended commodity boom. We have cancelled our debt. We have a favourable exchange rate. We have trade and budget surpluses. This growth can be sustained.” At what pace remains to be seen, but it has become harder to doubt the overall argument.
From Economist Feb 2006:
A history of hyperinflationary spirals makes price rises particularly sensitive in Argentina. Mr Kirchner has declared inflation control to be his priority for 2006. (Ms Miceli, who before taking over as economy minister dismissed concerns over inflation as “an argument to maintain low salaries”, has now recast herself as an inflation hawk.) So far, however, his strategy has consisted largely of a host of short-term price-freezing pacts with retailers and some suppliers. Typically, these have been extracted either by the carrot of implied government support in forthcoming labour negotiations or by the stick of threatened tax increases. But their primary role appears to be to contain short-term inflationary expectations while awaiting a promised return to fiscal austerity. “Kirchner seems to think that businesses raise prices just because they can unless someone tells them no, so he tells them no,” says Javier Alvaredo, an economic consultant.
Mr Kirchner has failed to use his sway over the central bank to support a meaningful increase in interest rates, which remain at a negative 7% in real terms. And he has turned the highly inflationary 3:1 peso-dollar exchange rate into a virtual trademark of his presidency. But until Argentina accepts positive real interest rates, prices will continue to rise.
By the way there's an interesting article from 2005 that talks about the worrisome future for energy here.
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RealBA -- I completely and utterly agree with you that Argentina has got to take some lesons from the Chileans -- a very hard task that none of them will want to undertake, but it would come with benefits. Argentina has huge natural resource potential, and the way this country is going right now it looks like the only way any of it's coming out of the ground is by selling off exploration contracts to foreign countries -- delivering a nice short term gain but giving up longterm investment potentials... Oh but we are in Argentina, where the attitude is take the easy quick pay off rather than the longterm investment that would have enduring value. It's the get rich while you can because who knows what will happen attitude that seems to impede any longterm growth in this country.
