Prices Rise 270% a Year : Old Foe Inflation Still Tormenting Weary Argentina

When metalworker Daniel Stanziola contracts to build a patio barbecue, he charges half the cost up front and the rest on delivery. But neither he nor the customer knows how much the balance will be.

An astute businessman, Stanziola knows the cost of the materials and the value of his time--today. What he cannot know is how much havoc inflation will wreak on his projections over the 30 days until he finishes the job and produces the final bill.

When despairing Argentines discuss their 18% inflation rate, they do not mean per year. They mean per month.

Three years after launching a bold economic plan lauded as a model for Latin America, Argentina is once again suffocating from inflation. Figured annually, prices are rising by about 270% a year. Inflation is engendering a nationwide malaise and discontent so severe that some analysts fear for Argentina’s latest experiment with democratic rule.

Some Optimism

“How can I plan ahead with this kind of inflation, how can I run a business?” asked Stanziola one day recently. “People are so afraid of inflation and have so little confidence that anyone who has money is buying dollars and speculating, instead of building or producing something.”

His suburban Buenos Aires workshop employs three people now, down from eight workers five years ago. He is doing about one-third the business he did then. An immigrant from Italy, Stanziola is making sure his 15-year-old son learns English, to give him the option of emigrating to the United States some day.

In recent weeks, however, Stanziola and the nation’s business leaders have managed to find reason for cautious optimism.

President Raul Alfonsin’s government has directly acknowledged the gravity of the economic nightmare and has resolved to opt for painful, long-range structural reforms, even at the risk of severe short-term hardship, in place of stop-gap measures that have merely aggravated growth-killing inflation.

Alfonsin admitted to the nation in a May Day speech: “I know that we face a worried and preoccupied nation. The past year has been one of tensions and conflicts. We all agree that we have an exhausted economic model that can no longer respond to the expectations and needs of our society.”

The president said his No. 1 priority was to reduce drastically the government budget deficit, which he called the principal cause of inflation. And that means an attack on the budget-busting government-owned companies, which alone incurred half the government deficit last year.

State-owned enterprises like the national coal company, steel plants, the oil company, the railroad and the phone company have repeatedly been granted subsidies and rate hikes instead of being forced to economize to make ends meet. Now, the government says, they must pay their own way. The 1988 budget provisions announced in late May call for cuts of $750 million, mostly from the budgets of state-owned companies.

The 1987 budget deficit, projected last year to be 3% of the gross domestic product, turned out to be 7.4% of GDP because the government failed to control actual spending. This year, Alfonsin vows that the deficit will shrink to 3.9% of GDP--not through increased taxes but through ruthless belt-tightening, including selling off or even closing the worst offenders among state-run businesses.

And in a country long averse to foreign investment, the government is courting overseas investment, with barely a whimper of protest from the nationalistic opposition Peronists and the trade unions. The Scandinavian airline, SAS, is buying 40% of Aerolineas Argentinas, the national airline; the Spanish phone company is buying a portion of the inept Argentine phone company, and Italians are seeking joint ventures.

Daily Hardships

The new attitude reflects an important change in thinking. In the past, Argentines tended to blame all their woes on the country’s $55-billion foreign debt. Now, while accepting that the debt is a heavy burden, the government says publicly that its own bloated inefficiency and its pampering of chronically uncompetitive industries are equally significant factors.

Day-to-day realities underscore the problems for Argentines. Letters to the editor complain of phones that go unrepaired for months. Newspapers announce scheduled power cuts in advance because of water shortages, but streams burble up from broken water mains under city streets. Mail sometimes arrives two months late.

Provincial government workers have fought with riot police in protests against government bonds issued in lieu of paychecks. Police, port workers and teachers have struck because their pay has eroded.

Ordinary citizens despair. The price of beef went up 13% in two days in late May. Fuel prices have risen to the point where the monthly minimum wage will buy about three tanks of gasoline. A taxi driver said with disgust, “Inflation in Argentina is a member of the family.”

In June, 1985, the government announced the Austral Plan, which was to set things right. In addition to creating a new currency, the austral, Alfonsin froze all prices and wages to stop inflation then estimated at more than 1,000% a year. The controls did bring inflation down sharply, to below 100% a year after a few months.

But even government supporters now concede that the basic fiscal and structural reforms necessary to complement the Austral Plan were never implemented.

‘Scourge of Inflation’

Eduardo Angeloz, the presidential candidate in next year’s election for Alfonsin’s political party, the Radical Civic Union, said the government did not accompany the plan with steps to free the private sector to become the engine of economic growth.

Angeloz told reporters that Argentina’s per-capita income in 1950 was equal to that of Italy and 35% greater than Japan’s. Now it is one-fifth that of Japan’s and a third that of Italy. A nation rich in resources with just 30 million people, he said, manages to export just $8.4 billion worth of goods a year, against $68 billion in exports for Holland, with half the population.

Angeloz, who knows that victory will elude him if inflation stays in double digits per month, said that for Argentina to grow, “we have to get rid of this scourge of inflation that corrodes every bit of confidence. . . . We need an intensive dose of private and foreign investment.”

To economic analysts, that tone reflects a new realism.

“The government has resorted to all sorts of tricks, like printing domestic bonds to get by, which raised interest rates and inflation,” said Enrique Garcia Mansilla, director of Banco Shaw, a major domestic bank. “That meant financial investment became more profitable and secure than production--and without the problems of red tape, unions and government barriers to doing business efficiently. Instead of buying furniture, people are buying dollars.

“Only if Argentina enters an era of rationalization and privatization will we move forward,” he said.

Economy ‘State-ized’

Arnaldo Musich, president of the Latin American Economic Investment Foundation, said inflation is feeding the black-market economy, estimated to total 35% to 40% of all economic activity. “Mattresses are full of dollars,” he said, and that money is not only escaping taxation but also staying out of job-creating production.

Musich takes heart, however, from Public Works Minister Rodolfo Terragno’s recent plan to allow foreign oil firms to extract oil from fields where the state oil company has failed to drill profitably. This kind of foreign risk venture would be “the first good, direct, open plan by this government toward the profound reforms that we need. The Argentine economy is so state-ized that private companies have played a satellite role, instead of serving as real entrepreneurs with their own initiative.”

The austral is depreciating against the dollar even faster than inflation, which should be a boon to investment and exports. One dollar bought less than one austral initially. Now a dollar buys more than seven australs at the official rate and nine on the black market.

Indeed, Argentina expects a trade surplus of more than $2 billion this year, up from a lowly $700 million in 1987. Argentine Exporters Chamber President Daniel Brunella said new rules simplifying export procedures should save exporters $61 million a year. He noted that it takes six months to get an export license in Argentina compared to 48 hours in Brazil.

Jose Carlos Jaime, a former central bank vice president and now an economic consultant, said the government must confront head-on the powerful lobbies that rely on state assistance. “This has been a closed economy for 40 years, with many suckling industries feeding off the state,” he said. “But now the state, the mother, is completely dry--skin and bones.”

The government has forsworn renewed price and wage controls, saying it will depend on the structural changes to reduce inflation to 8% or 9% a month by the end of the year.

For now, inflation hedging continues apace.

Domestic Commerce Secretary Ricardo Mazzorin said several companies notified him of protective 50% price increases in the final week of May. Mazzorin said ruefully: “Argentine companies have access to information, they have private analysts, and apparently they pay a lot of money to be told: “Just in case.”