This week’s developments in New York (obviously the agreement with the International Monetary Fund, far more than President Mauricio Macri’s turn at the United Nations General Assembly) have been a success on the external front by easing Argentina’s debt payments this year and next, but what about the internal front? Nor are the two fronts unrelated – thus the IMF agreement hinges on Congress passing the zero deficit 2019 budget (by no means as smooth as Macri led everybody in New York to understand), along with other policy conditions more under the control of the Executive branch.
To simplify the agreement into a single sentence (without denying the importance of the details, the place where the devil is said to lurk), the main thrust would seem to be granting Argentina US$7.1 billion more credit plus accelerated delivery, in return for new and bolder policies against currency volatility and inflation – the former via the managed float (between a 34-44-peso range rising three percent monthly for the rest of the year) and the latter by zero expansion of the money supply until mid-2019 (conveniently enough, until just before the final run-up to the elections).
This new float might or might not work – imposed by the IMF in order to prevent its loans from being frittered away in daily sales of Central Bank reserves (now only permitted beyond the range) to calm an insatiable demand for dollars, it has the virtue of countering the previous cycle of lengthy exchange rate freezes as an anchor against inflation inevitably ending in explosion, although it also makes devaluation permanent as well as progressive. Whither the 40.10 pesos per US dollar of the 2019 budget, one might also ask?
The monetary leg of the agreement is a more serious matter, affecting the internal front on a far broader scale than the relatively tiny dollar market. Here the IMF would seem to be applying that traditional housewife’s nostrum for the coughs and sneezes of their offspring (“Feed a cold and starve a fever”) to the Argentine economy – replacing the neo-Keynesian policies of most previous years with a monetary freeze. A new convertibility whereby if dollars are few and far between, then pesos must be equally scant to stabilise the economy. This is not a recipe which might or might not work – it guarantees short-term sacrifice just as surely as long-term success (at least if the experience of other countries is any guide). In combination with the high interest rates against inflation, this self-imposed inability to print money will ensure recession for many months to come. Recession in the short term but stability in the long, a necessary condition for continuous growth (just to give one example, Chile’s economy shrank 14.3 percent in 1982 due to a brutal application of orthodox economics but has hardly stopped since). Argentina’s often dramatic stop-go cycles have basically left it in the same place with half the per capita growth of other Latin American countries in the last seven decades, never mind the rest of the world – “Plus ça change, plus c’est la même chose,” as the French say.
But with up to seven percent inflation looming for this month, is there the neccessary social patience to endure the short term? And can a minority government resist such pressures in a crucial election year? A leading orthodox economist gives only a 30 percent chance of success. No wonder the day after the agreement President Macri seemed to find making his agenda the latest increase in poverty (bad but with the worst yet to come) less painful than spelling out the full implications of the IMF’s terms.