In what appears to be a miraculous economic recovery after the 2002 crash, Argentina once more finds itself at an important crossroads. President Nestor Kirchner is content to play up his image as economic miracle-worker, though his critics (myself included) mostly believe that the country was in such bad shape in early 2002 that it was almost impossible not to experience some sort of growth.
The economic policies that Kirchner has been advocating have become particularly worrisome over the last few months. Last November, Kirchner forced Roberto Lavanga from his job as Minister of the Economy and replaced him with Felisa Miceli. Lavagna openly supported a rapprochement with the International Monetary Fund (IMF) and curbing inflation, two policy moves which voters - and thus Kirchner - disliked.
Then, in January, Kirchner announced that Argentina was going to pay off its debt to the IMF so that the nation would be able to regain control of its economy without the burden of foreign intervention.
More recently still, the Kirchner Administration has finally started working to control inflation - but it has chosen to do so in the most interventionist way possible - negotiating price freezes with major producers.
Inflation in Argentina over the last few years has been the byproduct of continuously increasing government spending (raising salaries, building public works, etc.). Moreover, Kirchner has been focused on keeping the peso locked at three pesos per one U.S. dollar. Keeping the peso low has the advantage of making prices for exports low and competitive, allegedly stimulating foreign investment and, to the great chagrin of many locals, encouraging tourism.
Despite the fact that inflation is partially driven by expectations, Kirchner's negotiated price freezes cannot be seen as a long-term solution. Kirchner and Miceli have managed to strong-arm accords with many important companies that encompass a wide array of consumer products, ranging from dairy goods to diapers. With few exceptions, most supermarkets and producers have eventually acquiesced.
Interestingly, meat producers have held out. Beef producers have an incentive to allow their prices to be determined freely because they can make a great profit exporting. Meanwhile, Argentina-made diapers, for example, do not exist on the international market, giving such an industry little leeway. Nevertheless, Kirchner has been unrelenting, and has threatened to raise taxes on meat exports in order to force the industry to focus on the domestic market. Kirchner has previously demonstrated his effectiveness from the bully pulpit when he called for a boycott of Shell gas stations when they raise their prices last year.
Similar plans have failed before. Richard Nixon imposed a 90-day price freeze in 1971 after several years of inflation ranging from four to six percent. Historical data does prove that inflation did drop modestly over the very short-run. Yet within the year, inflation started rising again, culminating with the 1974 oil embargo. Under Nixon, inflation began to rear its ugly head even before it was theoretically and legally supposed to return.
The simple fact is that legal or negotiated restraints on inflation are artificial. Once they expire, what is to prevent a nation's economy from reentering the vicious spiral of rising prices and wages?
In the short run, though, artificial inflation control will accomplish one thing: it wins votes. Even Nixon, bogged down by Watergate and Vietnam, saw some boosts in his poll numbers when the price freezes were perceived to be working. Kirchner, the perennial panderer, clearly has little else in mind.
The future of the country is disconcerting. What types of policy-making freedoms did Kirchner envision when he paid off the IMF? What is his administration capable of now that it has one spokesman, one goal, and no internal dissent?
It may be important to win elections, but the future of the country should not be put on the line. Argentina needs to be reminded of the market principles that have allowed it to grow, and the dogmatic beliefs that have caused its crash (such as the case of the fixed one peso-to-$1 exchange rate). Kirchner needs to worry about tackling both inflation and unemployment, an unenviable position. After several years of impressive growth it is about time for the country to begin to make some sacrifices for the future. If not, Argentina will simply be condemned to repeat its past.
