Orthodox Economists Question Anti-Inflation Dogma of Milei's Plan

Original source: AHORA PLAY
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While the government focuses on controlling inflation, a debate among economists suggests that an overly rigid stance could sacrifice growth and employment. What balance should Argentina seek to stabilize prices without deepening the recession?

Orthodox Economists Question Anti-Inflation Dogma of Milei's Plan

President Javier Milei's economic plan is facing criticism not only from sectors advocating expansionist policies but also from orthodox economists, according to a recent analysis. These experts suggest a more pragmatic approach, similar to the one adopted by Chile after 1985 under Hernán Büchi. That Chilean strategy prioritized economic growth and job creation, tolerating controlled inflation of around 25% annually, rather than an obsession with achieving single-digit rates.

This discussion emerges at a crucial moment for Argentina, where the current economic program, while having achieved a new inflationary regime, urgently needs to reactivate the economy and create jobs. The concern is heightened by eight consecutive months of job destruction. The Chilean example of a more gradual trade opening and capital controls during its period of economic success is presented as a reference for balancing inflation control with the urgent need for productive recovery.

"I find the current economic discussion interesting. The economic program is at a turning point, having achieved a new inflationary regime, but now, in addition to maintaining it and not returning to previous chaos, it quickly needs to get the economy running and generate employment."

▶ Watch this segment — 59:52

Sebastián Menescaldi Analyzes 3.4% Inflation and Warns About Exchange Rate Impact

Economist Sebastián Menescaldi analyzed the recent 3.4% inflation rate, attributing its acceleration to a combination of key factors. Among these, he highlighted “relative price shocks,” such as the 7% increase in meat prices, which contributed approximately 0.8 points to the index and reflected a delayed pass-through from wholesale prices. He also pointed to unfavorable seasonality in March, with a significant concentration of increases in education, and a readjustment of the dollar's pass-through effect.

Menescaldi warned that keeping the exchange rate “flat” or very low will generate a significant negative impact on the level of economic activity, suggesting that the government might need a pragmatic shift to tolerate slightly more inflation in exchange for boosting growth. He noted that there are already signs of monetary easing, such as a reduction in reserve requirements, seeking to inject liquidity and encourage credit, which would entail a cost to the anti-inflationary discourse but could lead to a gradual improvement in activity.

"If the focus remains on reducing inflation by maintaining a very low exchange rate, significant damage will be generated to the level of economic activity."

▶ Watch this segment — 1:06:50

Argentina Projects Current Account Surplus of $500 Million This Year

Economist Sebastián Menescaldi estimates that Argentina will achieve a current account surplus of $500 million this year, a figure that contrasts favorably with previous projections of a deficit. This improvement is primarily attributed to robust growth in exports of oil, minerals (such as gold and silver, with a 37% increase), and agricultural products, which are expected to remain stable instead of falling as previously anticipated. Furthermore, the economic recession and a shift in inventory accumulation patterns will help contain imports.

With a projected trade balance of around $20 billion, similar to last year's, the country strengthens its external position by generating foreign currency through its trade balance. This situation is crucial in a context where the International Monetary Fund (IMF) demands a primary fiscal surplus of 1.4% of GDP and an increase of at least $8 billion in net reserves, consolidating confidence in Argentina's ability to meet its financial commitments.

"We ended up with a current account surplus of $500 million. Before the [Ukraine] war, we anticipated a deficit of $1 billion."

▶ Watch this segment — 1:29:53

Robert Lucas and Milei: Rational Expectations Theory Against the 'Plan Platita'

President Javier Milei bases his rejection of a "plan platita" on Robert Lucas's theory of rational expectations, which posits that economic agents anticipate government policies. This anticipation nullifies the short-term effects of monetary expansion on the real economy, such as increases in production or employment, leading only to an acceleration of inflation without lasting improvements. According to Milei, this theory demonstrates that it is impossible to "trick people" with expansionary measures.

Paradoxically, the presenter points out that in developed economies, institutions like the U.S. Federal Reserve often employ discretionary monetary policies, which contradicts the rigidity of rational expectations in practice. However, in Argentina, the experience of multiple crises has sharpened agents' ability to anticipate, as observed in the immediate inflationary acceleration following the August 2023 devaluation. The current criticism of Milei's economic plan does not come from those seeking a "plan platita," but from orthodox economists who suggest liberalizing the exchange market and not sterilizing pesos to boost credit.

"In reality, you cannot trick people, especially not in Argentina. Immediately, all prices and wages increase, and there is no improvement in the real economy, as activity and employment return to the same state, but with much higher inflation."

▶ Watch this segment — 43:49

IMF Confirms 1.4% of GDP Fiscal Target and Financing Strategy for Argentina

The International Monetary Fund (IMF) has released details of its agreement with Argentina, setting a primary fiscal surplus target of 1.4% of Gross Domestic Product (GDP) for the country. This objective, according to the communiqué, will allow sufficient margin for the implementation of targeted social programs. Furthermore, the IMF sets a target to increase net reserves by at least $8 billion.

Argentina's financing strategy is presented as multifaceted, including the issuance of dollar bonds under local law, the sale of state assets through privatizations, Central Bank repo operations, and securing external loans, which could be backed by international financial institutions (IFIs). Despite the relevance of these announcements, the country risk remained stable, with a slight increase of 4 basis points, standing at 529 points, as markets had already anticipated the agreement and the communiqué revealed no significant new information.

"The IMF confirms that a primary fiscal surplus of 1.4% of GDP 'will provide sufficient space for targeted social programs.'"

▶ Watch this segment — 1:22:50

Registered Private Sector Employment in Argentina Falls for Eighth Consecutive Month

Registered wage employment in Argentina's private sector has experienced a concerning decline for eight consecutive months, raising alarms about the economic plan's impact on real activity. According to data from the Argentine Integrated Pension System (SIPA), the latest January record showed a net loss of 200,000 jobs in the formal private sector. This figure is a significant increase compared to the 105,000 jobs lost in November 2023, the month before the current government took office.

This downward trend in formal private employment, which began in May 2023, coincides with an acceleration of inflation. Although the government has driven the reduction of 77,000 public sector positions as part of its adjustment policy, the simultaneous contraction in both sectors, totaling 280,000 fewer jobs between the private and public sectors in the "Milei era," raises serious questions about the future of the labor market and the social implications of the economic strategy.

"The concern lies in the trend: the private sector has accumulated eight consecutive months of contraction in registered wage employment."

▶ Watch this segment — 12:30

Summarised from AHORA PLAY · 2:08:25. All credit belongs to the original creators. Streamed.News summarises publicly available video content.