[A-List] Argentina: price controls a success?

["Michael Keaney" <michael011@xxxxxxxxxxx>]

Price controls succeed in Argentina, for now
By Benedict Mander in Buenos Aires
Financial Times: March 3 2006

Argentina?s controversial policy of price controls is succeeding in
keeping inflation in check for now, according to figures released today
that are expected to show a decline in the monthly rate to about 0.8 per
cent.

However, economists warn that price controls alone cannot keep inflation
at bay forever.

In an interview with the FT, Martín Redrado, Argentina?s central bank
governor, said the threat posed by the country?s inflation rate ? one of
the highest in the world ? remained ?worrisome?.

After doubling over 2005 to reach 12.3 per cent, inflation is deemed the
principal obstacle to stabilising Argentina?s exceptional recovery from
its debt debacle four years ago.

Prices rose 1.3 per cent in January, and although the slowdown in
February is largely explained by seasonal factors, such as the end of
Argentina?s summer tourism season, both figures are below comparative
levels last year.

But in spite of warnings that price controls are only a short-term
measure treating the symptoms and not the causes of inflation, and that
fiscal and monetary policy should be tighter, Mr Redrado rejected
criticisms that interest rates ? which in real terms are at a negative 7
per cent ? are too low.

?In Argentina, the power of the interest rate channel to affect the real
economy is still limited, given the small size of the credit market,? Mr
Redrado argued, saying it accounted for only 10 per cent of GDP. In
developed countries credit levels can rival GDP. ?The exclusive use of a
contractive monetary policy would be both inefficient and distorting as
it would affect investment more than consumption,? he said.

Indeed, economists are also calling for a tighter fiscal policy. While
Argentina has achieved a primary fiscal surplus since its debt crisis, a
looser fiscal policy last year caused the surplus to shrink from 4.2 per
cent in 2004 to 3.2 per cent in 2005. It is argued that to control
inflation fiscal revenues need to be at least 3 per cent higher than
expenditure. But government spending rose in January.

?For the first time in Argentina?s economic history there is, more than
a consensus, almost unanimity among economists over the beneficial
effects that a tightening in fiscal policy would have,? said Javier
Alvaredo, a director of MVA Macroeconomia, a Buenos Aires-based economic
consultancy. ?But we should not think that by itself fiscal policy can
have the effects usually achieved with monetary policy.?

The government?s policy of maintaining a weak peso to boost exporters is
also feared to be aggravating inflation. Miguel Bein, an economist and a
former deputy finance minister, argues: ?The government ought to
strengthen the exchange rate, which would help to moderate inflation.?
He reckons there is certainly a margin for appreciation of around 5 per
cent to 2.90 pesos to the dollar, although the real value of the peso is
around 2.40 ? compared with 3.10 now.

The logical corollary to controlling rises in prices is to check rises
in wages, and some observers question the government?s commitment to
confronting the unions. Mr Bein warns: ?The government needs to control
the unions or there could be a strike war. The danger is that the fight
for higher wages will generate inflation. It?s a very delicate
situation.?

The government?s focus on price controls may help to allay inflation in
the short term ? and perhaps that will be enough to suit its purposes.

?The government don?t really believe in price controls, they?re just
good politicians,? argues Javier Gonzalez Fraga, a former governor of
the central bank.

He suggests the government may try to bring forward presidential
elections, due in October 2007, to March, thereby gaining maximum
political capital from economic momentum. ?How?? he asks. ?By allowing
the economy to continue growing above 8 per cent, and delaying the
inflationary impact through price and tariff ?monitoring?, while
maintaining an adaptive monetary policy and a strong fiscal surplus.?

But after three consecutive years of growth of about 9 per cent, which
investment levels have been unable to match, Argentina?s economy is very
close to running at full capacity ? if it is not already. Most analysts
agree that the economy is in danger of overheating if it does not shift
down a gear to a more sustainable 5-6 per cent.

Although investment has doubled in proportion to GDP since the crisis,
not enough has been invested in expanding capacity. Growing beyond
capacity, although politically expedient in the short term, may have
undesirable consequences in the longer term.


-- 
http://www.fastmail.fm - Access all of your messages and folders
                          wherever you are