Importing no less important
I fGeorge Clooney has forever been telling us in recent years: “Nespresso – what else?”, his question has become increasingly less rhetorical in Argentina this year with a growing shortage of both capsules and machines since at least March – just one more example of the import squeeze reflecting the Central Bank’s shrinking dollar hoard. Born out of the need to answer that “What else?” question, import substitution was conceived as the cure but there is a case for saying that it is equally the disease. All the elements in this vicious circle stem from the same period. Rather than any extravagant nationalist fantasy of “living off our own” self-sufficiency, import substitution arose out of the simple evaporation of world trade in the Great Depression as from 1929. Shortly afterwards, the monetary side of the equation changed permanently when Argentina went off the gold standard for the last time in 1933, followed by the creation of the Central Bank in 1935. In short, monetary intervention coincided with interruption of the normal trade patterns.
Many turns of the screw since then with the latest coming this week and taking the form of the dollars available ahead of delivery of the imported merchandise being slashed by three-quarters from a million to US$250,000 while the daily import quota without an increasingly delayed special permission has been hacked down from US$50,000 to US$10,000. The government thus moves ever closer to placing trade on a crude “cash on delivery” basis, which would be a total non-starter – given Argentina’s dismal credit ratings, importers would be hard put to find suppliers willing to wait weeks or months while their goods are shipped here before collecting a cent, always assuming that there are not further capital controls. Since around 90 percent of Argentine manufactured products contain at least some imported input (virtually total in some cases like the Tierra del Fuego electronics assembly plants), this bottleneck threatens to strangle any further rebound from the pandemic plunge.
There is another side to this story which only serves to deepen the vicious circle – with the dwindling reserves restricting the release of foreign currency to industrial needs and a mounting energy bill, the temptation to play all kinds of tricks with import and export invoicing becomes overwhelming. The authorities react to this by tightening capital controls, which slows the inflow of inputs and production at a time when there is more money chasing goods than ever with all the trillions of pesos being printed. But that monetary laxity only depletes the Central Bank’s dollars to the tune of almost a billion last month in order to tame the exchange rate.
Such shortfalls go back to my earliest days at the Buenos Aires Herald newsroom in 1983 and indeed long predate them. Even Argentina’s golden years in the 1880-1930 half-century were not free from intermittent foreign currency shortages. These did not recur in the following two decades due to imports being minimised by the Great Depression of the 1930s and World War II, which was followed by payment of the massive British and other wartime debts. But by the drought year of 1949 that money had all been spent with Central Bank reserves falling from 27 to seven percent of Gross Domestic Product in just the first three years of Peronist government. A plunge on that scale was not to be repeated until the presidencies of Cristina Fernández de Kirchner when reserves slid from 15.6 to 3.6 percent of GDP between 2009 and 2015 but the intervening six decades had their ups and downs too numerous to detail here (mostly downs without the gluts of the post-war years or the commodity boom of this century’s first decade).
Precarious Central Bank reserves were a constant all these decades but were subsumed into the much bigger story of debt crises while a trade surplus in around three-quarters of those years meant that essential imports rarely suffered. But Cristina Fernández de Kirchner’s defiance of holdout creditors, funded by eating up 80 percent of Central Bank reserves in the last six years of her presidencies, changed all that with trade no longer independent from the consequences of monetary policy. By 2012 this had led to Domestic Trade Secretary Guillermo Moreno (he of the PASO primary vote of 0.96 percent in Buenos Aires Province last month) insisting on a dollar’s worth of exports for every greenback released for import purchases even though Argentina was running an 11-digit trade surplus at the time. This policy resulted in such extreme absurdities as Japan’s Nissan auto plant becoming major wine merchants while olive oil came to have some dealers as implausible as the Corleone clan.
However deranged Moreno’s policies, there have been bigger and more chronic follies in Argentina’s approach to trade. Perhaps the biggest of them is at the other end of the trade balance – namely export duties (here Argentina is not unique in the world, as commonly believed here, but probably nowhere else is this handicap for the main foreign currency earners accompanied by such a monstrous exchange rate differential in a double whammy), the subject of one of the first columns this year.
But at least everybody hails the importance of exports, if only for their dollar-spinning aspects, even those who do everything to hamper or even block them as with this year’s beef export ban (also the subject of this space when first introduced in May). Imports have no such luck – the mercantilist philosophy of maximising exports and minimising imports, which faded in most of the world from the start of the industrial revolution, is alive and well here with purchases abroad viewed as the negative side of the ledger when not equated with social injustice. There is an unwillingness to accept the simple truth that countries are more reluctant to buy from countries which do not buy from them. A big trade surplus and a small volume is rarely superior to the reverse because it translates into a smaller economy and slower growth.
Grim as current times are for importers, the future looks worse – not only will the priority of holding down the exchange rate for the next five weeks at least deprive them of dollars even for vital inputs but when the lid does come off with a major devaluation, imports will become that much more expensive.
The mercantilist philosophy of maximising exports and minimising imports, which faded in most of the world from the start of the industrial revolution, is alive and well here with purchases abroad viewed as the negative side of the ledger when not equated with social injustice.
The technocrats in charge of the World Bank, the IMF and the like really want Argentina should be doing their best to scare the living daylights out of Alberto Fernández and his crew by warning them that at any moment the entire economy would go under, taking them with it.
According to the World Bank’s chief economist for Latin America and the Caribbean, the men and women who are in charge of Argentina need not worry about hyperinflation because there is no risk of her suffering a repeat of what happened when Raúl Alfonsín’s plans went awry and the local currency went into meltdown, pushing yet another segment of the population into poverty. For a hard-pressed government, public statements like the one released a few days ago must be more than welcome, but given the situation the country finds itself in, they are anything but helpful.
While Economy Minister Martín Guzmán is desperately trying to keep things under control, Kirchnerite grandees like Cristina Fernández de Kirchner and her son Máximo are doing their utmost to force him to open the floodgates so people can have more money in their pockets by mid-november when the polling booths reopen. The idea is that they will then express their gratitude by voting for the ruling coalition’s candidates, thereby letting it reverse the results of the primaries in which they got clobbered.
Thanks to the World Bank economist, the vice-president who thinks she runs the show and her boy, who gives orders to Peronist deputies in the Lower House, can now tell Guzmán that as printing more cash and doling it out to everyone within reach would be almost risk-free, there is no reason why he should not get the local Central Bank to do just that. Much as he dislikes what they have in mind, Guzmán knows that unless he appeases them he will soon be out of a job, though exactly why he wants to cling on to the one he has is unclear.
If the technocrats in charge of the World Bank, the International Monetary Fund and the like really want Argentina to stay afloat, they should be doing their best to scare the living daylights out of Alberto Fernández and his crew by warning them that, unless they are very careful, at any moment the cost of living could skyrocket and then the entire economy would go under, taking them with it. They certainly do not need to tell them they can increase public spending with impunity because, no matter how much freshly minted cash they come up with, nothing spectacularly bad will happen.
Unlike the IMF, the World Bank does not have much of an image problem in Argentina and therefore has no reason to go out of its way to persuade people that it is a model of loving kindness. This is what the IMF has been trying to do for some time now in the apparent belief that if politicians here praised it for becoming far more touchy-feely than in former years, they would be more willing to take its advice seriously. However, while going soft might help the IMF win the hearts of progressives in rich countries who get indignant when they see it putting pressure on governments like Argentina’s in an effort to make them get their act together, it is counter productive in places where the endlessly publicised “generosity” of members of the political establishment has had truly catastrophic consequences for much of the population.
Peronist, Radical and leftist politicians have grown accustomed to talking as though they were convinced that (for what might be described as humanitarian reasons) the world owes the country a living and it is monstrously unfair to expect it to pay back some of the huge sums of money it borrowed after they had promised to mend their ways. They are still at it, but while such rhetoric may play well enough with local supporters who are prone to stage mass demonstrations in which they can blame outsiders for the country’s economic plight, investors are unimpressed.
Argentine politicians are fond of telling creditors that the hardest hit by the austerity measures the IMF has little choice but to demand in exchange for the odd billion dollars in low-interest loans it has on offer are the enormous numbers of men and women who are already below the poverty line or soon will be, but the emotional blackmail they like applying is proving less effective than it once was in a world in which the Covid epidemic has had a devastating impact on what are, sometimes optimistically, regarded as developing economies. Far from ushering in a new age of international solidarity as some high-minded people imagined, the plague will in all probability bring about the reverse.
Most countries, including Argentina, are what their rulers have made of them. This is something many politicians, who are dead against linking specific causes with specific effects, are reluctant to understand. As far as they are concerned, saying that printing countless unbacked pesos is likely to lead to more inflation is reactionary nonsense, as is pointing out that, in the not so long run, a refusal to rein in government spending could do far more harm than even the fiercest austerity programme.
Do they really believe this sort of stuff? Apparently, they do. Providing them with arguments they find convincing are platoons of “militant” intellectuals who have contrived to persuade themselves and many others that mismanaging the economy is patriotic and that to be truly independent Argentina must free herself from the mathematical restraints weak-minded foreign politicians find intimidating. For these fervent enemies of what elsewhere is considered common sense, mass impoverishment has its merits because it proves that capitalism does not work.
This is where Argentina is today. The administration formally headed by Alberto is determined to keep on spending whatever money it can get its fingers on because the Kirchnerites who dominate it fear that, should they run out of cash, the power they wield would quickly slip away and they would no longer be able to provide Cristina with the protection she needs to stay out of jail. Giving the government aid and comfort so it can persist in its folly are spokespeople for prestigious institutions who downplay fears of hyperinflation. They should remember that their counterparts said much the same several decades ago before what for them was unthinkable actually happened. Presumably they too believed they were giving the country a dose of much-needed confidence that would enable it to overcome its difficulties and get moving again. Instead, they gave the government of the day an additional excuse to continue shilly-shallying, as it did until everything fell apart.