Volume 43, Number 171,
October-December 2012
Argentina and Brazil:
Macroeconomic Challenges
Eduardo Bastian and Elena Soihet
A COMPARATIVE PERSPECTIVE OF THE MACROECONOMIC REGIMES ( ...continuation )

Figure 4. Consumer Price Index: Argentina and Brazil

Source: Prepared by the authors based on data from the Central Bank of Brazil and Mecon.

In this context, the problem is that the return of inflationary pressure creates a series of difficulties for the Argentinean economy, as the real exchange rate appreciates, which tends to provoke a drop in exports and a deterioration of the trade balance over time. Since 2007, there have been doubts in Argentina regarding the reliability of the price indices presented by the indec.31 If other alternative inflation estimates are correct, the Argentinean real exchange rate is already appreciating. In 2011, there was a certain consensus that Argentina was not suffering from currency lagging, but it was believed that if current inflation rates were maintained, this problem would soon arise, which would likely have a negative impact on the Argentinean trade balance.

The deterioration of the situation of foreign accounts is no different than what happened with public accounts. According to Cárdenas et al., removing the increases in income derived from nationalizing pension funds and extraordinary quasi-fiscal income transferred from the Central Bank in 2010, the primary surplus/gdp fell 5 percentage points in the last three years, and since 2009 the country has been registering primary deficits. Although this deficit is manageable, the authors highlight the speed of deterioration within the fiscal situation (Cárdenas et al., 2010: 44-5). In Argentina’s current situation, the scenario of twin surpluses seems to be a thing of the past.

Facing this situation, from the point of view of the Argentinean macroeconomic regime, the government should promote currency devaluation. However, because Argentina is growing today and has, it would seem, inflation of around 20-30% a year, devaluation would only cause further inflationary pressure. Increases in prices and salaries may mean that a nominal devaluation has little or no real effect, which would require another devaluation, setting off a currency-salary and salary-price spiral, where workers and businessmen would try to defend their own incomes.32 The result could be a sudden increase in inflation, in such a way that nominal devaluation would not even bring about real devaluation of the exchange rate. Moreover, in the face of a situation of growing inflation already on the order of 20-30%, there is always the risk of informal indexing. If this were to happen, it would cause greater difficulties for future anti-inflationary efforts. Because the unions are allied with the government, their demands for readjustments are generally not exaggerated, which has helped to prevent a greater increase in inflation today. However, it remains unclear what the unions’ attitude will be in the future if inflation accelerates.

31 According to Damill & Frenkel (2009), the Argentinean government sought to maintain the inflation rate at a single digit. Because the government had difficulties in reaching this goal in 2007, it resolved to control the index instead of effectively controlling inflation. As such, there were changes in how the indec calculated the IPC, and this began to vary much less than the inflation indices calculated by private consultants and statistical institutes from the provinces (Damill & Frenkel, 2009: 16-19). As such, it appears that losses in real salaries are underestimated, among other things, which results in salary adjustments lower than effective inflation, at least in the short term. Moreover, the indec inflation index is calculated based on the coefficient that is “used to adjust debt, mainly from obligations in pesos issued by the national government during the restructuring in 2005” (Damill & Frenkel, 2009: 20). In this way, as can be observed in Cárdenas et al., the indec’s underestimating of the inflation index reduces service to debt and has led some creditors — but not risk agencies — to view this fact as an implicit default (Cárdenas et al., 2010: 47).

32 Analyzing the German experience with hyperinflation in the 1920s, Joan Robinson observes this type of process. According to her, currency depreciation raised the cost of living and provoked salary claims. The highest salaries also increased costs and domestic income, in this way eliminating the effects of depreciation on stimulating exports and discouraging imports. In this way, each devaluation led to salary increases, which made the exchange rate fall and induced new currency devaluations that led to new salary increases (Robinson, 1938: 510). For a discussion of the mechanisms that propagate inflation, see Bastos (2001) and Câmara & Vernengo (2001).

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
The opinions expressed by authors do not necessarily reflect those of the editor of the publication.
Permission to reproduce all or part of the published texts is granted provided the source is cited in full including the web address.
Credits | Contact

The online journal Problemas del Desarrollo. Revista Latinoamericana de Economía corresponds to the printed edition of the same title with ISSN 0301-7036