Source:
IFIs Latin American Monitor
Thu Feb 22 2007
Argentina’s confrontation with international institutions has been brought back to the foreground. This time, controversy has arisen over the publication of a report by the World Trade Organisation, and over statements made by World Bank Vice-President for Latin America and the Caribbean, Pamela Cox, and IMF Deputy Managing Director, Murilo Portugal. On the government front, President Kirchner and Economy Minister Miceli are reacting firmly.
Argentina’s economic situation in early 2007 is strongly imbued with the political context, that is, the presidential elections to take place in October and the campaign that the government intends, by all means, to turn in its favour.
In this sense, the Economy Ministry has been implementing – almost systematically since early 2006 – a price control policy aimed at maintaining a low inflation level and indirectly holding social pressure back. This measure includes several commodities, public service fees and private health care (“pre-paid” plans), among others. This instrument is considered to be harmful in the medium and long-term by many Wall Street analysts and economists and has received successive direct and indirect criticism from international institutions.
At the end of January, John Veroneau, US Deputy Trade Representative, visited Argentina. While praising the country’s economic recovery before the local media, he did not miss the chance to criticise (although not explicitly) price controls applied by the government. As he stated, “our experience, and that of the rest of the world, show that price controls can often end up discouraging investments”.
Recently, controversy was sparked again by a WTO report on the Argentine economic and trade policy, which besides praising the country’s recovery in recent years, also reminds that said process remains at risk provided a number of pending issues are not dealt with, being among them, to encourage investments, prevent over-heating and, above all, to correct distortions in market prices. The institution suggested that the government should take steps to prevent the economy from overheating and warned about the fact that Argentina has registered a drop in investments.
From the World Bank, objections were expressed through statements made by the Vice-President of the institution for Latin America and the Caribbean, Pamela Cox. The official pointed out to the media, during her visit to the region – including Buenos Aires and Montevideo, among other destinations – that “Argentina still has a poverty rate that stands at 30 per cent, which is too high for a middle-income country”. Cox also asked for clear and stable rules to shape policies aimed at attracting investments.
IMF Deputy Managing Director, Murilo Portugal, a Brazilian national, spoke almost simultaneously in an interview that was published in the latest edition of Survey, an IMF magazine. Portugal highlighted that “price controls are more an exception than the rule”, and “they are not a lasting solution because they only repress inflation rather than eliminating it”. He stated that price controls “lead to a build-up of cost pressures, create inefficiencies in the use of economic resources and depress investment”, as opposed to just what happens when “institutional improvements in the framework for monetary policymaking” are encouraged, such as inflation targeting or greater independence for central banks.
Argentine reaction
At the opening of a public road, Argentina’s President Néstor Kirchner, referred to criticism made by international institutions. “Every time we paid attention to them, Argentina was stricken with sorrow, hunger, unemployment and oblivion”. The current poverty rates still registered in the country should be blamed on the programmes of those institutions, he stressed.
Economy Minister, Felisa Miceli, also addressed criticism at an act of inauguration of several public officers, which was attended by high-ranked public and private representatives. “We will neither leave the national industry unprotected nor cool down the economy”, she argued in response to the WTO that had questioned the rise in public spending. And she added: “We will continue along this path no matter what pressure is put upon us, since this is the path that has allowed us to find a way out of crisis and will allow us to overcome the challenges ahead of us”.
With respect to the WTO report, Miceli pointed out that “what fails to be said in today’s newspapers is that throughout the year we have defended domestic production at the WTO, playing an extremely active role together with other countries in the region, in order not to conclude the Doha Round with agreements that are harmful to us”.
Regarding Pamela Cox’s statement, the Minister replied by saying that the predictability of the Argentine economy is really conclusive.
Inflation management
In early February, great expectation arose regarding the release of the official figure reflecting the rise in cost of living during the first month of the year. Estimates foresaw a high index, notwithstanding the price control policy applied. However, the official figure showed a 1.1 per cent increase, which brought suspicion among private analysts, the press (both local and international) and the general public.
According to the follow-up on prices carried out by private surveys, the “real” inflation rate in January would have stood at 1.8 per cent, that is to say, 0.7 percentage points above the official figure. The difference, which would account for 0.3 percentage points in the area of tourism and 0.4 points in health care, was the basis used by economist for questioning the calculation of these two items by the office responsible for official figures: the National Institute of Statistics and Census (INDEC).
In early 2006, when inflation was estimated to be high, the government asked for the list of items measured by INDEC and established price agreements precisely for those items. Following a year of price controls, the cost-of-living official figures ended up standing at 10 per cent for the 12-month period.
Last January, the basic basket registered an increase of 2.6 per cent, being this rate more closely related to what can be perceived by the population in everyday life, since items included in the family basket represent the bulk of household expenditure. Therefore, real inflation is much closer to 2.6 than to 1.1 per cent; being well known that the lower the income, the larger the proportion thereof that is spent on basic products.
Finally, the impact of a rate over 2 per cent on inflation expectations, poverty and salary negotiations, together with a new and strong increase in public debt (adjusted by the Reference Stabilisation Ratio, CER, determined by inflation) led the government to raise the bet. As explained by Argenpress, the government asked INDEC to furnish a list including the thousands of businesses being surveyed so as to get to know the movement of prices and upon the refusal of a director of the institution, Graciela Bevacqua, the decision was to replace her in order to change the CPI methodology on the go and thus come up with a 1.1 per cent of inflation.
In this way, following the “intervention” in the CPI unit (dependent on INDEC) and without any explanation, the January CPI was released including “changes” in the way that prices in the areas of tourism, private health care and fruits and vegetables were measured. Furthermore, if these “changes” persist, it should be taken for granted that inflation in February will be very low due to seasonal reasons and owing to the fact that increases in private health care costs and other items will continue to be excluded from the calculation.
On the other hand, the subsidy item also registers interesting data. Energy subsidies this year will be approximately 72 per cent higher than last year’s. While in the case of transportation, this figure will amount approximately to a 90 per cent increase with regards to 2006.
Moderate fees financed by more subsidies, and a high political profile when it comes to fight prices continue to be the backbone of the anti-inflation strategy. This is a course of action that accumulates pressure from an economy that is growing strong and is about to engage in a salary discussion where demands for rises stand at about 20 per cent.
Changes to INDEC’s structure are still underway, since the government intends to prevent the controversy over official figures from sparking again in early March upon the release of February’s rate and also wants to avoid data leaks regarding methodological management. The government intends by all means to take this issue off the media (and political) agenda since it is not good to allow the feeling that official figures can be manipulated and thus have a negative influence on the value of inflation-adjusted bonds to grow.
It is worth pointing out that before this issue gained notoriety (both at local and international level), newspaper Página 12 had published an IMF letter in which the Fund believes that “Argentine authorities are interested in an independent international audit of their statistical system”. And therefore it maintains that “Argentine authorities should consider welcoming a mission of the IMF’s Statistics Department” that would undertake to prepare a re-evaluation of standards and codes.
As it is pointed out in the newspaper article, it remains unclear in the IMF document who within the government requested the “independent international audit” of the statistical system. But, whoever it was, and no matter how politically imbued the figures may be, it seems difficult to think nowadays, and taking into account the track-record of the institution within the region, that an IMF audit would give credibility and consistency to Argentine statistics. Probably, this is just another means used by the Fund to interfere in local politics.
Source: Clarín, Página 12, La Prensa and Argenpress
Related information:
Cooking the books: The government massages bad news
IMF Survey Issues
WTO Trade Policy Review – Press release
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