Argentine economic plan: Raise spending, salaries

September 22, 2011 - 12:45 PM

BUENOS AIRES, Argentina (AP) — While the U.S. and Europe struggle to revive their economies by imposing austerity measures, South American leaders have generally done the opposite, spending their way to growth and the voters' acclaim.

Few have gone farther afield from the economic doctrines of Washington and Brussels than Argentina's President Cristina Fernandez, who proudly says that her government is doing more than any other in Latin America to improve the buying power of her citizens.

She raised what was already the highest minimum wage south of the U.S. border by another 25 percent this month. Then she increased welfare payments by 23 percent. Fernandez also has raised retiree pensions, brokered steep pay hikes for union workers and poured huge subsidies into energy and transportation.

"We are one of the countries with the best social protections for our children and for all of our population, which makes me very proud," Fernandez said as she decreed a $520 million expansion in direct child subsidies ahead of her expected re-election on Oct. 23.

The stimulus has goosed an economy already benefiting from soaring commodity prices. Argentine data released by the International Monetary Fund this week indicate that its gross domestic product is rising 8 percent this year, second only to China in a world where many leading economies have become stagnant.

But her government's largesse may be feeding inflation that is devouring the peso's value as quickly as it lands in Argentine pockets.

Officially, Argentina's annual inflation rate was 9.8 percent last month, but even government allies have given up trusting the numbers after politicians began intervening in the data collection in 2007. The IMF reprimanded Argentina in its global economic outlook this week, saying that until the data's quality is restored, it will supplement the government's figures with data from private consultants and Argentina's provincial governments. One such province, San Luis, reports inflation running at 26 percent, equal to Venezuela's.

In Washington, meanwhile, Democrats and Republicans alike have feared inflation far more than unemployment, even though some leading economists say government stimulus is needed to encourage consumer spending and save the economy. President Barack Obama's $447 billion stimulus plan would be more than offset by the $580 billion in social spending cuts he proposed Monday, on top of another $1 trillion in cuts he already signed.

IMF Managing Director Christine Lagarde also recommended austerity measures Wednesday to protect countries around the world from harder times to come, particularly nations such as Argentina that are enjoying high commodity prices that could drop in the future.

"The first priority is to build up 'self insurance' during the good times," Lagarde said during the IMF's annual meeting in Washington. "When growth is strong and external conditions are favorable, it makes sense to rein in deficits and shore up reserves. This builds a cushion for the bad times and especially for protecting the most vulnerable."

While Latin America's economies "have had a very successful decade, almost brilliant," in terms of growth, governments should now cut spending to defend against a global recession, the World Bank's chief economist, Augusto de la Torre, added in his annual report this week. Doing so could help end the self-inflicted boom-and-bust cycles that have afflicted the region for generations, he said.

No such cuts have been proposed by the Argentines, who argue that U.S. and European austerity measures are doomed to fail.

All macroeconomic meddling has its downsides: Mexico has worked hard to keep prices stable, even at the cost of slow growth. Brazil has hiked interest rates to slow price increases, only to attract even more inflationary foriegn investment that raises its currency and hurts exports. Chile's tightfisted control of its copper and gold profits has become a political liability amid growing social protests.

And Venezuela's economy is sputtering despite its vast oil reserves, with the slowest growth and highest inflation in Latin America under President Hugo Chavez's version of socialism.

Creating a more egalitarian society has been the mantra of Fernandez and her late husband and predecessor, Nestor Kirchner, since he began leading Argentina out of a disastrous economic collapse eight years ago. When it comes to the pesos workers take home each month, they have succeeded: Argentina's minimum wage has jumped tenfold while the Kirchners have led the country, to $550 a month, one of the highest base salaries in the world, while above-average wages have only grown fivefold, according to the Foundation for Latin American Investigations in Buenos Aires.

Argentina's legal base wage also covers many more workers than it did before, because the government has worked hard to reduce the size of its informal, non-taxpaying economy where legal minimums don't apply, to 34 percent this year, from 50 percent in 2003.

"This is the essence of the Kirchnerista model," said Nuria Susmel, an economist with the foundation. "But everything has its price: most people who earn more than the minimum have salaries that haven't grown as much."

And inflation keeps canceling out the gains: The government's 50-percent increase in child welfare payments since the program was created two years ago has been wiped out by 51 percent in accumulated inflation, according to San Luis' numbers.

Some experts have said debt-troubled Greece should apply "the Argentina strategy" to restore its economy: devalue its currency by leaving the euro, and allow inflation to quietly wipe out the value of salaries and social benefits.

"It's tempting from the political point of view, since it permits austerity measures without having to own up to it. It even leaves open the possibility of nominal increases in social spending," but the resulting short-term political benefits would be outweighed by the long-term damage to social progress, according to a study by the Institute for Argentine Social Development in Buenos Aires.

Argentina's government is so determined to fight perceptions of soaring inflation that it has fined consultancies 500,000 pesos ($123,000) for publishing price-rise figures it disputes, and most private economists have kept their numbers private since they landed in court.

However, the Fernandez-brokered minimum wage hike of 25 percent is her "tacit acceptance that inflation really is 25 percent," said Fiona Mackie, who tracks Latin American macroeconomics at the Economist Intelligence Unit in London.

"Historically, Argentina has been one of the richest countries in Latin America, and that's reflected in disposable income. You can buy more goods with your disposable income, and that's certainly true if you compare Argentina to Haiti," Mackie said. "But if you compare Argentina to itself, a few months earlier, it's also true that people have less buying power than they did previously. The people in Argentina are certainly noticing the inflation."