Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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The Return of Inflation

by Shannon K. O'Neil
May 6, 2007

The one area of real triumph for market-oriented reforms in Latin America was inflation. Unlike the uneven record on poverty, inequality, and economic volatility, structural adjustment and austerity programs of the early 1990s ended high and hyper inflation. These programs brought the Latin American average from 235% per year in the early 1990s to less than 8% by the turn of the century. Low and steady inflation has been a crucial element for attracting both foreign and domestic investment, increasing economic production, and encouraging the economic growth of the last several years.

But heterdox economic policies – reminiscent of Sarney’s Brazil, Alfonsin’s Argentina, and Garcia’s Peru (the first time around) – have reemerged. In both Argentina and Venezuela, the Kirchner and Chavez governments are using wage and price controls on basic goods as key parts of economic policy. Venezuela has gone a step further to reintroduce public control and management of “key” industries, including telecommunications, oil, and now perhaps steel and the banking sector. These policies are bringing back worries of inflation and leading to shortages in basic goods.

Venezuela’s inflation for 2006 topped 17%, the highest in Latin America. Most expect it to surpass 20% this year. Argentina too has seen increasing inflation, from a negative rate in the late 1990s to 10% last year. As worrisome, Kirchner fired the head of the national statistics agency, INDEC, briefly replacing her with a more malleable political appointee until public clamor forced the promotion of a INDEC senior employee.

Shortages in these economies are as important, and hamper both consumer-led and manufacturing-led growth. A recent Wall Street journal article argues that Chavez’s threat to nationalize the steel and banking industries has as much to do with the issue of shortages as with nationalism. News articles, as well as personal conversations, show that shortages and economic bottlenecks are again appearing in Argentina. These mismatches are hampering growth, not to mention the quality of life of individuals within the country.

Poverty, inequality, and equal opportunity are key issues for the future of Latin American nations. Government programs to directly improve the health care, education, and resources of the poor are important and laudable. But, these governments should not overlook the dire effects of inflation on poverty and inequality. Inflation hits the poor the hardest. They are the ones least likely to receive compensatory pay raises, and are those unable to hedge their savings in indexed accounts or abroad. High inflation will wipe out any benefits of direct assistance programs, leaving individuals certainly no better off and most likely in a much worse situation. This means that as governments are designing programs for the poor, they need to include measures to keep inflation low, be that independent monetary policy, controlled deficits, and better financial regulation. Only with this combination will governments be able to truly help those at the bottom of the pyramid.

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