50 years, 46 projects and four subjects

With a logic similar to that of historians, the trio of economists sought to compile a database of economic programs developed to combat the processes of chronic hyperinflation over the past 50 years.

The effort is aligned with the triangle of “Learning the Past – Understanding the Present – ​​Creating the Future”. Austrian Peter Drucker – a keyword management– The only way to be more abstract and anticipate the future is to create it.

What economic future do we want to create? To the work being carried out by the Irish Technical Teams of the Mediterranean Foundation (on 27 June they will present details of their transformation plan to transform the economic regime), we must add, from another angle, the investigation carried out. Economists Martin Rapetti, Gabriel Palazzo and Joaquin Waldmann share work at the consultancy Equilibra and the Center for the Study of State and Society (CIDES).

The project was initially very ambitious: they wanted to create a global platform of hyperinflation and stabilization events, but there were difficulties in accessing all the information that would allow a deeper understanding of each episode.

At least for now, they focused only on what happened in Latin America between 1970 and 2020, where they analyzed 46 programs used in different countries. Over 20% per annum.

There are four key lessons that those who aspire to rule the country, who are detached from the day-to-day suffering of the people who are currently engaged in internal struggles (a large part of the ruling and opposition parties) should take note of. They will ask you for your vote.

It will be very difficult. The first point is a caveat, which obviously, no one wants to interfere with. Stabilizing the processes of chronic hyperinflation is not easy. In fact, the failure rate is high. In 30 cases the inflation could not be temporarily reduced, and in fewer than 10 examples there was an initial relaxation that did not last over time. So, the statistics are not favorable.

What is less true is that the longevity of the project depends not only on its design, but also on how much local and external conditions affect it at the time, luck or facing favorable international financial conditions or disruptive events during the stabilization process.

Zero kilometers. The success of positioning is tied to the sequence of initial conditions that, if not present, must be triggered. In essence, this means correcting the fundamental imbalances that affect inflationary dynamics, the pain of which usually entails costs directly proportional to the size of the distortions.

In most cases studied, that sequence is initiated by defining an anchor. For those who can, choose the exchange rate, and it is better to have some for it Stock Reserves and positive trade balance. Today, the central bank sits on two mountains of pesos (the monetary base and the larger one, the lelic ball) and holds very few dollars. And the trade balance, despite the import ban, remained in deficit till April.

In addition, the data show that an exchange rate anchor (“resets” with a devaluation) has better chances of initial or temporary success. Therefore, at these early stages, more fragments must be inserted.

Tax hygiene. This is one of those key pieces. It cannot be confirmed without ordering financial accounts. The ability to maintain a stable and reliable nominal anchor to changing expectations ultimately depends on the willingness to balance this dimension. All successful stabilization cases started the program with an average primary surplus of nearly 1.5% of gross domestic product (GDP). We are far from that benchmark and are filled with good intentions that fade when we realize the scale of the political and social costs.

Healthy external accounts. Chronic inflationary processes coincide with current account imbalances, foreign currency shortages and foreign currency debt. Projects that work often start with a positive checking account. At the end of 2022, Argentina had a surplus, but due to the phenomenon of a negative trade balance, it has certainly worsened and may have been lost so far this year. For this reason, global reintegration is necessary to increase and sustain export flows.