12 April 2007

Macondo's inflation INDEKS

If you haven't heard of magic realism, you might be tempted to (and should probably) read some of the works of Gabriel García Márquez, or query Wikipedia, or ask an acquaintance with a PhD. Or you could read Argentine news!! Case in point: INDEC.

INDEC (sometimes spelled Indec, or lately, IndeK), is the official organization that performs all manners of statistical surveys, from the national census every ten years to the monthly inflation measurements.

Earlier this year I spoke about government intervention in the workings of INDEC. The Kirchner administration is extremely concerned with inflation, and has tackled it with aggressively heterodox policies, including price controls (they call them price-keeping agreements), negotiated/forced by Secretary of Interior Commerce Guillermo Moreno.

After an initial success, the price controls started to show problems. Many people don't know this, but the controls were only valid in the Greater Buenos Aires area — that's where most major producers, distributors and sellers are, that's where one third of the population of Argentina lives, and most importantly, that's where INDEC has always measured inflation. The inflation rate in "the interior" has been measured for some time now, though only in the largest metropolitan areas (like Córdoba, Rosario and Mendoza); it's published later, without fanfare, and doesn't interest anyone. The national government, sadly, lives for the headlines — the price controls were, since the very beginning, focused exclusively on the goal of showing smaller inflation figures in the headlines of the lead Buenos Aires newspapers.

When prices escape controls, inflation rises. At first the controls were widened and hardened. Kirchner accused big business of restricting offer to raise prices and collect extraordinary profits. Moreno sent teams of inspectors ("hounds") to check that those that had agreed with keeping prices stable were indeed doing so, and pressure those who weren't. It didn't work. For whatever reason (I'm not going to discuss that here) prices continued rising. Enraged, the government removed top officials of INDEC. New employees were appointed in key areas. Administrative workers and professionals in INDEC protested, told the press the government was manipulating the surveys and faking the numbers.

All this time it was obvious for all of us that this was all a farce. Circumstancially wrong statistical samples were not enough to explain the inflation rate. When tourism in February this year turned out to be cheaper (according to INDEC) than tourism in the same month of 2006, I commented on it humorously.

Now this was beginning to look like a bizarre confusion of make-believe and reality, or a reality where natural laws, logic and common sense are suspended — magic realism. But this month was the last stroke. First, INDEC announced the March inflation rate (0.7%) before the usual day, to avoid doing it on the same day as a protest organized by its employees. Then, INDEC's employees leaked the figure of inflation for the "basic food basket", i.e. the sample of food items used by INDEC: it was 3.6%, the largest since 2002. They warned that this was the "real" figure. Days later (yesterday), INDEC officially announced... hold your breath... deflation!

Deflation! INDEC wants us to believe that prices of the basic food basket have decreased by 0.2%!

I think I'll metaphorically slam the door on the way out of my mind.

7 comments:

  1. Who’ve thought that Kirchner was a George Orwell fan? That was my first thought yesterday when I read about the latest INDEC debacle. My second thought was that I knew what you would be blogging about today…

    Has “doublespeak” and “doublethink” entered the castellano argentino lexicon yet?

    Seriously, who do you think the target audience is for these manipulations? It can’t be most Argentines, because even for the most rabid Kirchnerite it flies in the face of reality. If it’s aimed at the global financial community, it’s clearly a ship that's foundered immediately upon launch. Sadly, the reports of financial analysts I have read report the accepted manipulation with hardly a comment, as if this is par for the course for an Argentine government.

    I know that the inflation-adjusted bonds will be impacted, but are there other financial implications? Are there any salaries or benefits (e.g. retirement pensions) indexed to the inflation rate?

    I’d wondered if the INDEC basket of goods and services would be impacted by the recent floods in Santa Fe, and was not surprised to learn from you that the principal inflation figures are from BsAs province. I was reading in Rosario3 that the price of some vegetables has skyrocketed in Rosario – I guess you’ll be having to walk even further to find the INDEC-priced lettuce!

    I’ve always amused by the term “interior” when applied to the country outside greater BA (where ONLY two-thirds of the population of Argentina lives …). It reminds me of how much of “black” Africa was referred to in the not-so-distant past. A place where you didn’t want to venture …


    “Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.” – George Orwell.

    John [with a PhD :-)]

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  2. And I wonder if more and more ordinary folks like myself have noticed the knock-on effects of continuing inflation, and polarisation of wealth and poverty in this city...

    ..in the 2 years I've been here, I had seen the city of BA gradually coming back to life and business began to flourish once more, unemployment rate came down...and then recently I have started noticing younger men in their 20s and 30s sleeping on the streets. Various friends have had their car stolen,home or office broken into, the most serious being children held at knife point to gain entry into the property, etc.

    Until the government is willing to confront and tackle the truth, things are likely to get much worse before it gets better.

    p.s. I've been told someone had been posting anon. comment on ARG blogs and signing off as Miss Cupcake - if you suspect such things happening on yours, I would really appreciate you alerting me to confirm authenticity.

    All the best, Pablo.

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  3. Pablo,

    I don´t know if you keep getting any more hate mail but I for one think that you are doing a great job.

    I just linked your latest story to my blog.

    On a daily basis my wife and I are looking at costs for our company and I am continually having meetings with my clients about what to do with this inflation.

    Congratulations on a great blog!

    Saludos,

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  4. Mike14:59

    This torturing of statistics until they confess occurs in the US Consumer Price Index as well, making inflation in the US seem benign. Which it is not. It is easy to see that in the 2 years i have been travelling to BA prices have risen far more than the official numbers reflect. Wonder what it means for the longer term, both for expats and natives. Will fiat currencies explode in an inflationary collapse? Real problems are ahead, and solutions nowhere in sight.

    this is from Herald (secondhand to me)...

    IMF sees galloping inflation:
    The International Monetary Fund forecast yesterday that inflation in Argentina next year will be 12.7 percent, and will be "the beginning of galloping inflation."

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  5. "Doublespeak/think" are not in our lexicon. We use stronger words for what the INDEC is doing (being done). :) I don't understand the politician's mind. It's as if they were trying to make us angrier.

    Most of the economy is not indexed. There's a discussion going on and off about tieing (tying?) pension wages to salaries, I think. I believe indexation of anything based on inflation is actually illegal. But besides that, inflation is being used in paritarias (the annual negotiations between unions and employers) to argue for higher salaries, so it's also in the interest of big business to keep inflation down.

    What Miss Cupcake has seen in the last two years is the "boom" part of a boom-bust cycle that's been going on, up and down, since... well, ever. Things are infinitely better now than they were, say, in 2000. They'll get worse. How exactly, I can't say; in Argentina, 5 years is "very long term", and 10 years is practically an event horizon.

    FWIW the IMF doesn't know either... Let me think over the weekend and I'll do my own economic divination for you.

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  6. Mike23:03

    Pablo, very interested in your take on the ongoing economic situation in Argentina and what the future likely holds. Further research indicates the IMF projections are suspect and may be more political subterfuge than serious economic forecasting. Here is a link:

    http://www.cepr.net/documents/publications/imf_forecasting_2007_04.pdf

    and this excerpt:

    Conclusion
    The IMF's large and repeated errors in projecting GDP growth in Argentina since 1999 strongly
    suggest that these errors were politically driven. The large overestimates occurred during the
    country's 1998-2002 depression, when the IMF was lending billions of dollars to support policies
    that ultimately ended in an economic collapse. Similarly, the underestimates took place at a time
    when the IMF had an increasingly antagonistic relationship with the Argentine government, and
    opposed a number of its economic policies. It is worth noting that despite the IMF's pessimism
    about Argentina's recovery from the beginning, Argentina has now completed a five year economic
    expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for
    inflation) growth of 47 percent.
    As this paper shows, the IMF's public documents and statements regarding Argentina lend support
    to the idea that its errors were related to political considerations. The repeated underestimates of
    Venezuela's GDP growth raise further questions in this regard.
    The IMF’s economic projections, including those in its Spring and Fall World Economic Outlook,
    are widely disseminated and used throughout the world. There are generally taken to be based on
    sound methodology and economic analysis, and free from political influence. The forecast errors
    described in this paper raise serious questions as to whether this is always the case.

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  7. In the magical realism genre may I also recommend the Japanese author Haruki Murakami. I’ve really enjoyed everything of his that’s been translated into English. In addition, La Sombra del Viento (The Shadow of the Wind) by
    Carlos Ruiz Zafón is one of my favorite books.

    John

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