Thu, Nov 28, 2013 - Page 9 News List

Argentina should look across the Andes for economic advice

There are many similarities between Chile and Argentina, but their differing approaches to setting economic policies have brought very different results

By Michael Boskin

Bachelet’s proposals for higher corporate taxes, increased welfare spending, greater government control over pensions and a re-examination of Chile’s participation in the TPP threaten to reverse much of this progress. However, if, once in office, she reverts to the more centrist policies of her previous term, Chile may maintain its economic momentum.

Argentina, by contrast, engages in serial, self-inflicted economic upheaval. With a population that is twice the size of Chile’s, newly discovered energy deposits and a vibrant capital city, Argentina has vast economic potential.

A century ago, it was one of the world’s wealthiest countries, with a standard of living on par with that of the US. Today, Argentina’s per capita income amounts to just 40 percent of the US’, and is considerably lower than Chile’s.

The spread between the official exchange rate and the black-market rate — the so-called “Dolar Blue” — now stands at 60 percent. Unsurprisingly, virtually every retailer in Buenos Aires quotes a dollar price and a peso price. This can be explained partly by high inflation, which independent analysts put at roughly 25 percent — more than double the official estimate of 10 percent. Since Kirchner replaced the lead inflation statistician at the National Statistics Institute in 2007, Argentina’s official inflation figures have been conspicuously lower than other estimates.

Chile’s inflation figures have been criticized, too, though to a much smaller extent, and Chile’s state statistics institute is far more independent of the government than Argentina’s.

Fernandez’s government bullies and nationalizes businesses, and pressures the central bank to use international reserves for debt payments. And Argentina’s major trade agreement, Mercosur, has fallen far short of its potential. Over the next five years, the IMF expects Argentina to experience weaker growth, higher inflation and more unemployment than Chile.

Fortunately, voters are increasingly turning against Fernandez’s government. In August, opposition candidates like Sergio Massa and Mauricio Macri attracted substantial electoral support with their business-friendly, anti-inflation campaigns, making them likely presidential candidates in 2015. Even if Fernandez does not cause too much damage in the interim, her successor will have to restore Argentina’s credibility at home and abroad, in order to prevent capital flight.

Can an Argentine president promote disinflation and retain voter support during a period of slower growth, or even recession? It happened in the US.

Former US president Ronald Reagan supported former US Federal Reserve chairman Paul Volcker’s disinflation, despite a deep recession, a temporary spike in unemployment and midterm election losses. The economy soon rebounded, and Reagan was re-elected. Price stability enabled a quarter-century of strong growth and low unemployment, interrupted by two brief, mild recessions — the best macroeconomic performance in US history.

One hopes that Argentina will learn from its western neighbor — and that a Bachelet administration in Chile will look across the Andes, recognize where its proposals risk taking the country, and change course before it is too late.

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