“And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Faulkner takes the title of his famous novel “The Sound and the Fury” from Macbeth’s soliloquy in Act 5, Scene 5 of William Shakespeare’s Macbeth. This novel has had an important and long-lasting influence on Latin American writers, especially on those who wrote about the authoritarian governments in the region. I took pleasure in reading Faulkner when I was young and suspect that part of this enjoyment had to do with his making the suffocating political environment of the seventies less oppressive. Since this literature is inextricably associated in my mind with authoritarian regimes and we now enjoy a democracy in Argentina, I feel rather strange nowadays because the words “sound and fury” keep coming to my mind every time I try to describe the current situation in Argentina. Why does the situation look like a tale told by an idiot? The short answer is: because Argentina is facing a complicated political (and macroeconomic) situation for the first time since the 2002 crisis within a context in which the country has been receiving very good news. In particular, for the past year, the country has benefited from a sizable and positive external shock that has contributed to increasing both the current account and the fiscal primary surplus. Furthermore, only six months ago, the power was transferred from one democratically-elected president to the next within a context of high expectations, a fact that has been the exception rather than the rule in Post-War Argentina. In addition, the newly-elected president is a woman, reflecting the continuous progress that women have been making in Argentine society. The country can proudly claim that a woman in office is a natural consequence of the fact that the proportion of women with university degrees has surpassed that of men. But, if the situation is like “a tale told by an idiot, full of sound and fury”, should we conclude that what we are observing signifies nothing? This does not seem to be the case. So, let us take a look behind the veil of sound and fury that has spilled out over the routes across the country. What are the challenges facing Argentina? These challenges have to do with four basic problems. The first and most urgent is the acceleration of inflation. In recent years, the economy has been experiencing increasing imbalances after a period of very high growth. Since 2007 was an electoral year, the government put off the adjustments and the disequilibria widened. A few facts will suffice to show that the inconsistencies are currently sizable: the inflation rate has accelerated and – the government’s creative statistics notwithstanding – it has now risen above 20 percent per year; within a context of increasing employment, nominal wage adjustments have also passed 20 percent. Since the nominal exchange rate is basically fixed, sooner than later the country will face a competitiveness problem. Inflation is also affecting the fiscal accounts. The continuous acceleration of inflation is endogenously increasing the value of the subsidies that the government allocates to transportation and the energy sector because the rising costs are not compensated with increases in the prices of energy consumption and transport services. The amount of subsidies to the private sector already represents 4 percent of GDP and is still rising. The second problem is related to the positive shock. The shock has increased the profitability of those tradable activities that have to do with natural resources in general and food production in particular. This means that the government should: coordinate investment in the basic infrastructure (roads, ports, and so on) that are necessary to exploit new opportunities and create a friendly investment climate in order to take full advantage of the beneficial situation. The third challenge also has to do with the external shock: relative prices are changing in favor of food products and this has deleterious effects on the poor. This is a serious issue in a country like Argentina in which a good proportion of the population borders on the poverty line; the proportion of poor people can easily increase if food prices increase substantially and this can be politically harmful to the government’s constituency. The fourth problem involves development policy. The positive shock to the terms of trade could create a Dutch disease-like situation that could discourage entrepreneurship and investment in the tradable sector. As is very well known, the tradable sector is critical to strengthening the process of self-discovery of new, dynamic activities. To protect self-discovery not only helps to enhance the productivity path but also contributes to diversifying exports and, therefore, to reducing the country’s vulnerability to terms of trade shocks. There is a structural shortage of policy instruments in the region to fight against a real exchange rate misalignment without jeopardizing the inflation target, as the cases of Chile and Brazil currently suggest. Argentina, nonetheless, faces an additional problem. Strengthening the incentives to invest in the tradable sector is a necessary but not sufficient condition; channels must also be available for the natural resources-related windfall profits to be allocated to those activities with the highest profitability, and Argentina’s financial intermediation structure is weak. These are the problems and they are far from new. But, on the basis of the political-cycle logic, in 2007 it could have been argued that it was rational to postpone the corrections until after the election. Following the same line of reasoning, at the beginning of 2008, with a clear majority in Congress, no opposition in sight, a strong newly-elected president, and the economy still growing fast, the timing looked perfect to introduce the corrections. In addition, the positive shock had, in fact, eased the need for fiscal adjustment. The policies, however, have either remained unchanged or changed in the wrong direction. As a result, the situation is somewhat perverse when assessed in light of the four main problems highlighted above. Let’s see. First problem: nothing is being done about inflation, beyond deteriorating the quality of the institutions that produce the data. Second problem: far from preserving the incentives to natural-resource activities and coordinating the creation of the infrastructure needed to export, the government has heavily increased taxes on exports and allocated budget resources discretionally, as is the case of the “high-speed train” project. Third problem: since the acceleration in inflation is largely fueled by food products, the absence of an anti-inflationary policy is primarily harming the poor. Of course, the government could design an “emergency” policy to protect the poor, but the authorities are already spending the available money to subsidize the consumption of the middle classes by freezing the prices of energy and other services. Fourth problem: far from preserving a competitive exchange rate for the industry and the tradable sector in general, the authorities are using the international reserves to reduce the nominal exchange rate while domestic costs are increasing by over 20 percent. Negative interest rates and the lack of confidence of the index used to update the value of government bonds are not helping to strengthen financial intermediation.
Doing just the opposite of what is needed is exactly what an idiot would do and, from this point of view, I am tempted to conclude that this was why “sound and fury” came to mind. But, as an economist, I just cannot assume that people are irrational. Hence, I prefer to broaden the focus and ask myself: Is the authorities’ main policy goal to maximize the impact of the current positive shock on development? If this is the case, the current policy stance is irrational; hence, the only way out of irrationality is to assume that the government has, de facto, an alternative goal. For example, to utilize the proceeds of the terms of trade shock to maximize its own political power. This makes sense: the government is fighting to keep control of tax resources that do not have to be shared with the provinces and, therefore, control a source of political leverage. This hypothesis has an intellectual advantage: it is not at odds with the perspective of economics as a science that the great economists, from Marx to Alchian, adopt concerning what economics is all about: establishing control over the return of productive resources. Alchian and Dempsetz (1973), for example, say, “It is more useful and nearer to the truth to view a social system as relying on techniques, rules, or customs to resolve conflicts that arise in the use of scarce resources rather than imagining that societies specify the particular uses to which resources will be put” (p. 16)
An additional advantage of this hypothesis is that it places Argentina’s conflicts within the broader picture of what is going on in the rest of the world. From Chile to Europe, from Russia to Bolivia, what we are witnessing is that the shocks to the demand and supply of natural resources are creating and fueling the conflicts over the definition of property rights. Shocks, especially when they are permanent, create and destroy wealth and, therefore, give rise to the need to create and destroy property rights. The political equilibria and the quality of the institutional setting usually have a crucial role concerning how much society will pay in terms of lost welfare to reach a consensus on a well-defined structure of property rights.
From this point of view, it seems that the most relevant problem that Argentina has to solve has to do with the political economy dimension: to reach a consensus on how to distribute the benefits of the shock without jeopardizing economic incentives that are key to developing the country. The opportunity to grow much faster than was the case in the last decades seems to lie there and common sense suggests that the lower political ambition and greed is, the higher the probability that everybody will benefit.
Alchian A. and H. Dempsetz (1973), “The Property Right Paradigm”, the Journal of Economic History, vol. 33, no. 1, pp. 16-27.
José María Fanelli