Saturday, January 12, 2008

The Peso Also Rises


In the 1970s and 1980s, the Southern Cone countries were the world champions of inflation. In the midst of political turmoil and economic mismanagement, Argentine prices often increased 50 percent per month. This created a scenario in which saving was pointless since, by month's end, their money would lose half its value. Instead, Argentine consumers quickly spent their salaries on essentials--food, for instance--and durables (automobiles, say, but even items such as refrigerators which held their relative value). When my wife and I got married in Argentina in 1981, we received 3.6 million pesos in cash and checks as wedding gifts (see the accompanying photo; as we were moving to California, we asked people to refrain from refrigerators to avoid baggage surcharges). This we quickly changed for about US$700, which seemed a lot of money at the time.

As the peso deteriorated and a black market for dollars developed, the handful of tourists not deterred by military dictatorship lived like kings. Civilian government returned in 1983, but manic price swings continued--while spending several months in Buenos Aires in 1985, I sent friends in California million-peso notes, which were by then worth less than a dollar, as Xmas gifts. Finally, in 1989, then President Carlos Menem pegged a new peso to the dollar and reasonable stability reigned for a decade-plus (though the currency peg created longer-term problems).

Chile, too, underwent hyperinflationary episodes and painful readjustments, both during and after the Salvador Allende years; in some cases professionals were earning just a few dollars per month. Leaving aside the issue of the Pinochet regime's ability to impose economic orthodoxy and repress labor unions, Chile has managed to avoid such crises since the mid-1980s, even after the return to civilian rule in 1989. Argentina, of course, has not been so fortunate, as the 2001-2 crash drove half the population into poverty. Under former President Néstor Kirchner and his successor/wife Cristina Fernández, the recovery has been impressive, but it's not been problem-free.

Is Inflation Back?
In both countries, one of those problems is inflation. In Argentina, after the peso collapse, the government froze bank accounts, along with many prices, but with annual GDP in the nine percent growth range, it's hard to resist pressures from both business (to liberate the market) and labor (to raise wages). I haven't time right now to address complex policy questions such as energy supplies and costs (which I've dealt with elsewhere on this blog), but for the moment it's enough to say that prices for many goods and service are rising (see, for instance, my separate entry on public transportation in Buenos Aires).

Prices are rising in Chile as well, but the cases are not exactly parallel. Chile, for instance, imports nearly all its fossil fuels, whose cost is about double that in Argentina (which has been self-sufficient until relatively recently). This has been a major contributor to a 2007 inflation rate of 7.8 percent--high by recent Chilean standards, but hardly hyperinflationary. The independent central bank anticipates a four percent figure for 2008.

Argentina's inflation rate is a controversial topic. The government publicly claims 8.5 percent for 2007, but has been accused of meddling in the ostensibly autonomous state statistics agency INDEC--much as the Republican Bush administration prevented the US Census Bureau from using advanced statistical techniques to arrive at city population figures that might have tilted redistricting in favor of the opposition Democrats. According to an article in today's Clarín, internal government documents use 14 percent as a base inflation figure for 2008.

Exchange Rates and Travelers
Meanwhile, in the travel and tourism sector, other factors are at work. In Argentina, the dollar is holding its own at about 3.1 pesos, though travelers with euros, pounds, and other strong currencies are gaining. With a relatively weak peso, Argentines are traveling outside their borders less frequently than in the past; instead, they're competing with foreign visitors at popular destinations such as Patagonia and Iguazú Falls, where the increased demand means higher local prices.

The Chilean peso, by contrast, is strong. Only a couple years ago, it was nearly 700 pesos to the dollar, but windfall copper prices have earned an abundance of dollars and the exchange rate has fallen below 500 pesos. Domestic inflation apart, this would mean price increases of more than 25 percent in dollar terms; in practice, it's not quite so extreme, but the trend is clear. Meanwhile, plenty of Chileans are traveling outside their own borders (in fact, they're among the pressures driving up prices in the Argentine tourism sector).

Neither of these trends necessarily means a return to the nightmarish 1980s, but they do mean that that neither country is the cheap destination that both were in the recent past. In general, for most travel and tourism services Chile is now dearer than Argentina. The gap, though, is not so great as it was a couple years ago.

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