2020 will not be 2003 and challenges the plans of Alberto Fernández

Boxer Mike Tyson used to say that everyone had a plan until he got the first pineapple. In the case of the presidential candidate
Alberto Fernandez, the plan seems to be based on the desire to recreate the conditions he encountered when he was chief of staff of
Nestor Kirchner in 2003. The question is how would he react if he badumed his duties? He would then see that the situation he is facing is very different from the situation at the time.

Although Alberto Fernández did not explain his
economic plan his statements and interviews and those of some of his economic advisers appear. First, I would look for a
depreciated weight in real terms it's a
expensive dollar. Secondly, he would seek to renegotiate public debt: he made statements on this issue that helped force Mauricio Macri's government to begin this process in recent days. By not denying that he would increase taxes on exports (withholding taxes), in his presentation at the meeting "Democracy and Development" organized by Clarín, he left the message implicit, but of course he will increase them. In the interview that Luis Majul made to America TV a week ago, he also specified that he would seek a socio-economic agreement and that it would reduce the cost of public services.

In one of his theses, when asked how inflation would fall, he raised the idea of ​​a big deal with the unions and men of the world. ;business. And he repeatedly mentioned high interest rates, which suggests that he would seek to reduce them.

That is to say, the Front of All candidate's plan seems to mix the traces of early Kirchner's government policy with elements of the stabilization plans of recent decades. The renegotiation of the public debt would enable it not to have to achieve such a high primary surplus, because of the reduction of the interest burden, or to turn to the market to refinance the maturity of its debt. The agreement with the International Monetary Fund (IMF) would also be renegotiated, factual process also initiated by the government this week.

To improve the fiscal situation, it is highly likely that they will put their hand in their pockets on the ground. Withholding taxes now rise to $ 3 or $ 4 per dollar exported for all products, with the exception of soybeans, which pay 18% more. When Nestor Kirchner was in government, the withholding tax was between 20% and 24% and he increased it in the range of 25% to 35%. A possible increase would give the next government additional resources of between 1% and 2% of GDP. As evidenced by the kirchnerist governments, an increase in tariffs would reduce inflation while considerably reducing investment in energy production and distribution. The economic and social agreement would be the basis on which they would try to reduce inflation. The tools could be lower wage adjustments and "agreements" so that employers do not raise prices.

This seems to be the plan, but the local and global reality facing the next administration will be very different from that of 2003. Rather than trying to elucidate how the economic policy dilemmas these differences would engender would be resolved, let's try to see which ones would be these problems.

For starters, the global economy at the end of 2019 will be very different from that of 2003. At that time, China had just joined the World Trade Organization (WTO) and was beginning to betray global economy, especially on the price of products such as soy. Growth in the global economy, which averaged 2.8% between 2000 and 2003, accelerated to 4.2% between 2004 and 2007. It has never been higher since then. In the last four years, it was still below 3%. The soybean price, measured in 2019 dollars, rose from US $ 223 per tonne in April 2001 to more than US $ 400 in early 2004. The sharp rise in commodity prices triggered a wave of investment in the United States. Latin supply of goods such as copper, iron and soy. Today, the global economy is slowing down and many fear that developed countries will enter recession. The trade war between Trump and China introduces great uncertainty and entrepreneurs, as always when uncertainty reigns, delay investment decisions. The dollar is strengthening against almost all the world's currencies. In this context, investor interest in Latin America is much lower, especially when many of their governments are maneuvering to overcome the imbalances left by populist governments. Commodity prices have not returned to the (depressed) levels of the late 1990s, but are falling. This is to say that it is difficult for the global economy to push the country to grow strongly, as was the case in 2003-2007. The country will have to find other sources to develop.

Another fundamental difference with 2003 is credibility. The beginning of a new debt restructuring will be a blow to the little credibility we have as a country. Unlike 2001, where default was considered inevitable given the high debt burden, a restructuring may now be considered self-inflicted. Argentina's public debt was sustainable if it followed a course of fiscal prudence, as stated in the latest IMF report on Argentina. In other words, this announced restructuring risks being seen as a problem of willingness and not of payment capacity, in the sense that it is not caused by its weight, but by a very weak political system that includes extreme and uncooperative elements. Given this perception, the government and businesses could hardly obtain financing under a future mandate from Fernández and, given the disruption of certain macroeconomic variables such as inflation and the rate of change, investment would likely continue to decline.

A Fernández government would also face difficult economic policy dilemmas. Fiscal policy would face serious dilemmas, even if the increase in source deductions provided temporary relief. Much of public spending, such as pensions and social plans, is indexed to inflation, so that the fiscal relief that leads to an acceleration of inflation would only be temporary.

What happened next? Will public rates go up to reduce the cost of subsidies? Some economic advisers of Fernández emphasize the priority that the development of Vaca Muerta would have. However, to maintain the incentive to exploit these deposits of oil and gas, the price of these products can not drop much in dollars, because Vaca Muerta is in competition with many other oil deposits in the world. In the same way, what will they do with the price of gasoline? After the depreciation of the peso, the liter of super should be worth about 59 pesos, against about 44 today.

Monetary policy would also face important dilemmas. After the devaluation of 2002, the rise in inflation was very tenuous, due to the strong recession and relatively strong currency demand after years of price stability. In this context, after the agreement reached with the IMF at the end of 2002 and the judicious work of Mario Blejer under the command of the Central Bank, the exchange rate remained stable around 3 pesos per dollar throughout Nestor's life. Kirchner.

This stability of the dollar has allowed the fall in interest rates and the recovery of the economy. Now things are different. The recent depreciation of our currency is already evolving at a price, and the demand for pesos is weak and unstable. In this context, an agreement with unions and businessmen can save time, but it will never solve the problem. Thus, the Central Bank would have several dilemmas. Will there be a desire to increase the interest rate to contain inflationary pressures or will it yield to the temptation to increase the amount of money?

In summary, we can already deduce something from the economic plan envisioned by the candidate Alberto Fernández. What we do not know is how he would react to the inevitable dilemmas he would face as part of his potential mandate, let alone how his heterogeneous government coalition would operate in an unfavorable context.

The author is an economist. PhD (University of Pennsylvania); he was chief economist for Latin America
Bank of the American Merril Lynch. Co-author of
Why do all governments fail? c / S. Berensztein