July 24, 2008
An old Latin American curse that many thought had been defeated for good -- inflation -- is making a comeback in several countries, and it may soon translate into greater poverty, and more economic and political instability.
Before we get into whether this is an isolated phenomenon -- limited to populist governments such as Venezuela and Argentina -- or whether there is risk of contagion to the rest of the region, let's do a quick reality check.
Most countries in the region have taken effective anti-inflation measures over the past 10 years. In most cases, they have built impressive foreign reserves in their central banks and have resisted the age-old temptation of raising wages by printing more money.
BEYOND THEIR MEANS
But new inflation figures from international financial institutions and Wall Street firms are raising alarm bells. Not only are rising international oil and food prices and China's growing consumption habits pushing up domestic prices in many Latin American countries, but some of them are beginning to lie about their inflation rates, or once again spend beyond their means.
''Inflation is the biggest challenge facing Latin America right now,'' Anoop Singh, head of the IMF's Latin American department, told me in a telephone interview this week. ``Latin America has had a history of high inflation, and that is a reason to be especially careful now.''
According to the IMF, the region's inflation went from 5 percent in 2006 to 6.3 percent in 2007, and is projected to reach 8.1 percent in 2008. Inflation will reach 29 percent in Venezuela this year, 16 percent in Bolivia, 9.5 percent in Nicaragua and 9 percent in Argentina, IMF figures show.
Trouble is, these figures are based on these countries' official data, which in many cases are highly suspect.
If you ask any Argentine about the government's 9 percent inflation figure, you will most likely get a big laugh. Argentina's official inflation statistics institute, the INDEC, has cut the number of items included in the consumption basket from nearly 900 to about 400, tilting it toward goods and services that have suffered the smallest price increases. Virtually all serious economists say Argentina's real inflation rate will be closer to 25 percent this year.
(To be fair, the IMF's recent World Economic Outlook included a small print disclaimer on its Argentine inflation figures, saying that ``In Argentina most private sector analysts believe that actual inflation is considerably higher than reflected in official data.'')
In Venezuela, the government's 2008 inflation projections reflected by international institutions also seem wildly optimistic. According to government data reported by The Associated Press on Wednesday, the price of foodstuffs in Venezuela already rose by 19.3 percent during the first six months this year, while healthcare and transportation costs rose by 17 percent each over the same period.
Singh, of the IMF, says one of the greatest dangers to guard against in the region are wage increases.
''We don't want to get into a spiral where price shocks mean higher wages, and higher wages mean higher inflation,'' he said, adding that most countries are resisting such pressures.
Will the double-digit inflation seen in some countries extend to the rest of the region? Singh and several independent economists I talked to this week said most likely not. Brazil, Mexico, Chile, Colombia, Peru and other countries have learned their lessons from the past, and are taking sound measures -- such as raising interest rates and keeping a lid on spending -- to keep inflation in check.
''I don't see a contagion effect,'' says Ricardo López Murphy, a former Argentine economy minister and recent opposition presidential candidate. ``What you have here is some regimes that are compulsive liars. But I don't see that problem in Brazil, Mexico, Colombia, Peru or Uruguay.''
My opinion: I agree. But Latin America's economic growth is expected to slow down -- Goldman Sachs, the investment bank, is projecting regional growth to drop from 4.6 percent this year to 3.7 percent next year -- and more governments will be tempted to step up spending or tamper with their inflation figures, especially near election time.
There will not be a region-wide contagion effect, but the list of inflation-ridden countries is likely to grow. We have seen this movie many times before.