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Sat Jan 30, 2016, 10:50 AM

Joseph Stiglitz and Martín Guzmán: Argentina’s Uncertain Prospects.

Last edited Sat Jan 30, 2016, 11:24 AM - Edit history (1)

Mauricio Macri’s election as Argentina’s president brought to an end 12 years of government led by Néstor and Cristina Fernández Kirchner. Macri’s administration inherits a delicate economy. If he is not careful, Argentina could face a balance-of-payments crisis, owing to deteriorating external conditions and macroeconomic mismanagement, especially since 2011.

Some aspects of Argentina’s economic situation, however, are highly desirable – not least its low debt-to-GDP ratio. As a result, Macri’s government faces a much less daunting task than the one confronting Kirchner in 2003, after a decade-long experiment with Washington Consensus policies (financial deregulation, trade liberalization, and privatization), together with the peso’s peg to the U.S. dollar, ended in disaster. When Kirchner took office, Argentina had just experienced its most severe economic crisis ever. Unemployment, inequality, poverty, and the national debt had all risen to record levels. Massive deindustrialization and deep weaknesses in its underfunded educational system did not bode well for the future.

Following devaluation and default in 2002, Argentina experienced a spectacular recovery. In a severely demand-constrained economy, the Kirchner government pursued policies that led to a massive reduction in unemployment, poverty, and inequality. A deep debt restructuring (including full repayment to the IMF, thereby increasing the government’s policy making autonomy) greatly contributed to the restoration of macroeconomic sustainability. In a favorable global environment, the more competitive exchange rate set the stage for reindustrialization, creating jobs for many who had been excluded from labor markets during the previous decade. As a result, from 2003 to 2011, GDP growth averaged more than 7% per year.

During Mrs. Kirchner’s presidency, the country navigated the global financial crisis with relative success. But, after 2011, instead of carefully designing macro and micro policies to favor a consistent increase in supply and demand, most policies fostered sustaining aggregate demand in a context that was no longer purely Keynesian. Demand grew, but supply didn’t keep up. Some sectors (particularly energy) experienced bottlenecks, causing inflation to accelerate (to over 20%). Her leadership brought about significant improvements in the lives of many, a more egalitarian income distribution, an economy close to full employment, and a much lower debt-to-GDP ratio. But the fiscal surplus she inherited from her predecessor Néstor Kirchner turned into a sizable deficit of 4% of GDP by her last year in office, and the erosion in the external balance (smaller trade surpluses) now threatens to reverse part of that progress.

Macri’s task is to address the external and fiscal imbalances and reduce inflation, without undoing what has been achieved. In its first weeks, his government eliminated or reduced taxes on commodity exports and abolished exchange controls, resulting in a sudden devaluation of around 35% against the dollar (from 9.80 to 14 pesos).

There are four key uncertainties: the pass-through to consumer prices of the removal of export taxes and exchange controls; the effects of this sudden devaluation; foreign investors’ response to the new environment; and access to “bridge” finance, which depends on a settlement with holdout creditors (the so-called vulture funds). The immediate winners are agricultural and other commodity exporters, who will receive much more for what they sell. If the devaluation does not cause significant inflationary pressures, it will boost competitiveness without decreasing real wages. But that seems to be wishful thinking. If higher prices for domestic goods previously subject to export taxes and higher import prices (as a result of devaluation) are passed on to consumers, real wages will fall, in which case workers are likely to demand larger pay increases, pushing up inflation.

The government’s initial actions are worrisome: In particular, the permanent cut in export taxes is a large transfer to the wealthy, at great cost to ordinary workers. Whatever the efficiency benefits, the distributive consequences and development implications cannot be ignored.

At: https://www.project-syndicate.org/commentary/macri-argentina-economic-uncertainty-by-joseph-e--stiglitz-and-martin-guzman-2016-01#9MpHODl0jI4r3w06.99
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Professor Stiglitz was very kind to give Macri's GOP-issued policies as much benefit of the doubt as he did, as they have indeed already led to the erosion of real wages of close to 10% in just two months and recession. http://www.democraticunderground.com/110847152

Macri's draconian cuts in public payrolls and subsidies - which led to 500% higher utility rates and a jump in unemployment from 6 to 10% - will save around $4 billion this year. But those savings are dwarfed by his $10 billion tax cut for big agro and the landowning elite (the very people that put him in office).

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