Disenchantment Grows Over Argentina’s Inflation Fight
Argentina’s love affair with its celebrated Austral Plan is over. The democratic government observed Saturday’s first anniversary of its shock treatment against runaway inflation under heavy assault.
The plan’s success in halting the extreme inflation is not disputed. But housewives who cheered that part of the plan complain now that there has been no improvement in living standards. And inflation has returned.
Critics on the left as well as the right charge that the Austral Plan has failed to correct the structural imbalances that cause inflation and that it has failed to provide the foundation for needed growth. They say the stability created by the Austral Plan is illusory.
A wave of strikes and slowdowns last week by economically pinched Argentines, ranging from farmers to power workers, climaxed Friday with a peaceful 24-hour nationwide strike by Peronist-led unions. The strikers waved posters charging that, under the Austral Plan, “the International Monetary Fund celebrates while the people suffer.” Their leaders termed the strike “massively successful” and said 85% of business activity in Argentina had been halted.
On the eve of the plan’s anniversary, President Raul Alfonsin hailed it as “a resounding success.” In response, labor leader Saul Ubaldini snapped: “They want to sell us a panacea that doesn’t exist.”
The Alfonsin government, citing the achievements of the plan--which has been widely praised abroad and copied in part by such other inflation-bedeviled countries as Peru and Brazil--chides its critics for being impatient and having short memories. The tough and necessary structural reform stage of the Austral Plan is just beginning, the government says.
Juan Sommer, the Treasury subsecretary dealing with Argentina’s $50-billion foreign debt, said: “You can’t do everything in one year. Economies do not run like clocks. The plan has built confidence, both inside and outside the country. There are those inside who now say the plan has lost its momentum, but the outside observers don’t see it, and it’s not true.”
The Austral Plan, which was announced without warning, froze prices and wages and, as a psychological gesture, scrapped the oft-devalued Argentine peso in favor of a new unit of currency called the austral. At the same time, the government promised to reduce its deficit and to stop printing new money.
Now, a year later, old peso notes are still in circulation but prices are expressed everywhere in australs. People have grown accustomed to the new and unexpectedly strong currency. The austral has weakened only fractionally from its original relative worth, about $1.20 in U.S. dollars.
Treasury Secretary Mario Brodersohn, the U.S.-educated technocrat who was one of the plan’s authors, told a recent visitor: “The Austral Plan has brought important advances. Inflation has fallen dramatically, economic activity is up in the industrial sector, we cut the government deficit without massive layoffs, we reached agreement with creditor banks and we won a new standby with the IMF.”
Making interest payments on the foreign debt, which was a quarterly cliffhanger before the Austral Plan, is now back-page news. Argentina paid $2.5 billion in interest last year, to bring its payments up to date. According to Brodersohn, this took 30% of the country’s export earnings.
Now Argentina is negotiating a new standby agreement with the IMF, against a background of sharp declines in what it gets for its agricultural exports. Revenue from these exports this year may be as much as $2 billion below 1984 levels.
Inflation, which rose at an annual rate of 1,700% in the first six months of 1985, dropped to 29% over the past year by Brodersohn’s accounting, which averages the cost of living with wholesale prices. On the other hand, the unions say that the cost of living has gone up 43.6% and that this is a more accurate reflection of the worker’s distress. They note that the cost of gasoline produced by the state’s money-losing oil company has risen to $2.10 a gallon.
The minimum wage, meanwhile, has risen more slowly--to $119 a month. Brodersohn says real wages are about where they were a year ago, but the unions say they have fallen more than 20%.
Brodersohn says the government has kept its promise not to issue new money to support public companies. But Alvaro Alsogaray, a conservative economist and opposition member of Congress, charges that the indirect emission of currency, by means of bank rediscounting, has produced a 200% increase in the money supply over the level of a year ago.
“The plan was a shock treatment that has lasted too long,” Alsogaray said. “It has been a failure in that the government did not effectively cut its deficit, did not generate new investment, and did not stop emitting currency. I see stagflation (simultaneous stagnation and inflation) in the coming months.”
The much-improved government deficit is now either around 3% of gross domestic product, as the government says, or around 5%, as the opposition says. Seeking to reduce the deficit at the lowest possible social cost, the government has declined to lay off workers in the bloated public sector and has relied on higher taxes and increased rates for state-provided gasoline, electric power and telephone service.
Economic stagnation with high inflation of the sort that Alsogaray and other economists foresee has been Argentina’s burden almost without relief for four decades. In real terms, salaries are 15% lower than they were in 1970. Last year, the economy shrank 4.4%. Now many private economists say the government’s announced goals of 4% growth and 28% inflation for 1986 are unrealistic.
Jorge Dominguez, a Peronist economist, said: “The Austral Plan has proved a lost opportunity. There have been no structural changes, public or private, and I don’t see any meaningful growth. The economy is getting smaller.”
In April, the government formally announced the second stage of the Austral Plan, which includes selling off some state enterprises and gradually relaxing the controls on wages and prices. A bill authorizing such selloffs is being prepared for Congress. In the meantime, authorized and unauthorized price increases and monthly increases in rates for government goods and services have brought back inflation. Current levels of around 4% a month are low by Argentine standards but nevertheless disconcerting in a country where there has been no appreciable inflation for nearly a year.
The public sector, where state enterprises from railroads to airlines lose money, is one of four key sectors earmarked for structural reform. Alfonsin, who, according to opinion polls, is more popular than his government or his Austral Plan, must tread warily in this area. Public sector unions are entrenched, militant and angry.
“We have a long way to go,” Brodersohn said dryly, “in promoting efficiency and adminstrative reform in the public enterprises.”
Argentina’s financial sector is also overdue for change, but bank unions have beaten off early government initiatives. Too many banks too heavily regulated mean high-priced loans, and this discourages investment. As they are presently structured, Argentine banks need interest of 2% a month just to cover operating costs.
Agriculture, which generates 70% of Argentina’s exports, is also earmarked for change. A succession of governments, needing money to fund the public sector, has imposed high taxes on agricultural exports. Last year these “retentions,” as they are called, totaled $1.5 billion, according to Alfonsin.
As an incentive to grumbling farmers, the Alfonsin government seeks, with the help of a $350-million World Bank loan, to substitute land taxes for export taxes. The farmers do not like that, either. They say the provinces heavily tax their land already.
Private Sector Targeted
The final area earmarked for modernization is the private sector. Because of high prices and poor quality, Argentina is able to export only about 5% of its industrial production. The government is offering export incentives and seeks new investment, but it has not yet won the confidence of investors wary of the populist underpinnings of Alfonsin’s Radical Party.
Enrique Szewach, the chief economist of a foundation for economic studies funded by private companies, said: “The Radicals governing today are lawyers who never had to meet a payroll. Government and the private sector are mutually suspicious.”
If the managers are suspicious of Alfonsin, the workers are openly defiant as the government digs in for a grueling second year of audacious but painful economic policies. The effects of those policies will weigh heavily on the future of Argentina’s young democracy.