Price controls in Argentina are being renewed and extended until the end of 2007 in a bid to keep inflation at bay.
With many price freeze “agreements” expiring at the end of this year, President Néstor Kirchner this week started to meet business leaders – so far from supermarkets and wholesalers – to ensure stable prices leading up to presidential elections slated for October 2007.
The controversial policy was implemented at the end of 2005 when inflation doubled from the previous year’s level to 12.3 per cent. So far, the strategy has succeeded in checking the rise in inflation, which for the first nine months of 2006 reached 7.1 per cent and is on target to finish the year in single figures, according to some analysts’ estimates.
But Martin Redrado, the governor of the central bank, says Argentina’s fight against inflation is far from over. “I do worry that the fall in inflation expectations has plateaued [at around 9.7 per cent], so there is no room for complacency,” he told the FT. “This is a source of concern when looking at price stability in the long term.”
However, private sector economists persistently argue that the strategy of price controls to combat inflation is flawed. While they recognise that temporary price controls can help conquer inflation expectations in the short term – as was the case in Israel and Mexico in the late 1980s – they say that prolonged use of them is damaging in the longer term.
Roberto Lavagna, Argentina’s former economy minister who is expected to challenge Mr Kirchner in the forthcoming presidential elections, is strongly critical of the policy that was put in place shortly after he was ousted in November 2005.
In a recent interview with the FT, he estimated that the gap between official inflation figures – which track prices of a narrow basket of consumer goods – and inflation in the overall economy has widened from 1.3 per cent a year ago to around 4 per cent now, as a result of price controls.
Notwithstanding, Mr Redrado argues that “Argentina is still an economy in transition. It has not found its steady state, so there is a lot of misalignment in prices regarding their long term levels”.
But Mr Lavagna points out that price distortions are not the only problem price controls bring: “When one starts to implement price controls there may be great attractions, but afterwards there are grave consequences – as was the case with convertibility [which ended with Argentina’s financial collapse in 2001] – particularly on investment and employment.”
Edmund Phelps, who won the Nobel Prize for economics last week, echoed the ex-minister’s concern in an interview with the Argentine daily La Nacion, warning of the negative effects on investment and the disproportionate allocation of resources into unregulated sectors.
“There are no fixed rules, everything is done spontaneously, which is even worse than formal price controls,” says Mr Lavagna. “They simply call you up on the telephone. Businesses get calls at 6am asking them to lower the prices of their sausages.”
Anecdotes abound of the hard-nosed tactics of Guillermo Moreno, who since April has occupied the newly created position of domestic commerce secretary to oversee the price controls – which Mr Kirchner recently preferred to describe as a “process of [government] overseeing, orienting”. Nevertheless, business executives who have first hand experience of Mr Moreno’s coercive approach complain in private, although none will denounce their treatment in public for fear of retaliation.
Some businesses have attempted more creative ways of avoiding price controls. Last month, the Anglo-Dutch oil company Shell introduced a new product with a higher price rather than raising the price of existing products. But the new product was quickly withdrawn at the government’s request.
“Moreno is playing businesses at their own game,” says Eduardo Curia, a heterodox economist who advises the planning minister Julio De Vido, Mr Moreno’s superior.