One by one: what are Cavallo’s measures to attack inflation

Former Minister of Economy domingo horse He warned that looking for the liquefaction of expenses and liabilities through a devaluation without structural changes in the Argentine economy will not serve to face the inflationary process that the country is facing.

“The reform of the State, privatizations, the elimination of distortionary taxes, the opening of the economy and the nominal anchoring of inflation expectations are essential for inflation to be definitively defeated in a period of two years”said Cavallo in a document published today on his personal blog.

Cavallo warned that if “it is trusted that the liquefaction of expenses and liabilities will do the job without those organizational changes of the economy being necessary, there will be no way to nominally anchor expectations and inflation will continue to plague the already very impoverished Argentine economy.” .

The former Carlos Menem official assessed that “A fiscal adjustment like the one that produced ‘twin surpluses’ from 2002, decided by the current government, would unleash hyperinflation.”

Cavallo warned that “if, because the Kirchner government does not do it, the new government decides to do it at the beginning of its term with the same methodology, its desire to stabilize will be frustrated.”

“What is needed is a reorganization of the economy and a fiscal adjustment like the one we did between 1990 and 1991,” he stressed.

And the fiscal adjustment?

The former head of the Palacio de Hacienda was opposed to the adjustment that several of his colleagues proclaim: “Practically all non-Kirchnerist economists and political leaders agree that in order to stabilize and grow again, a strong fiscal adjustment is needed to stop increasing the Central Bank’s indebtedness.”

“I maintain that if the fiscal adjustment is not carried out like the one implemented by the Menem government between 1989 and 1991, but rather tries to imitate the one carried out between 2002 and 2003, the economy will go into hyperinflation and after that it will not will find no monetary regime capable of defeating inflation in a presidential term,” he retorted.

Faced with this scenario, he proposed the following scenario: “The great difference between the two alternative strategies for fiscal adjustment lies in the tools used. An alternative is to use state reform, privatizations, and the opening of the economy. Another alternative consists of resorting to a strong “de-dollarizing” devaluation that liquefies debts, salaries and pensions, provides strong protection for import substitution and generates fiscal resources through agricultural, oil and mining withholdings”.

Cavallo affirmed that “the fiscal adjustment of the type that led to the ‘twin surpluses’ of 2002 is incompatible with a later stabilization plan because it supposes a generalized violation of contracts and property rights of those who saved and invested productively in the past and leaves relative prices much more misaligned than before, which in the search for their realignment will generate a very destabilizing distributive bid in an economy that will continue with high inflation and great inflationary inertia”.

Consequently, He exposed two extreme fiscal adjustment mechanisms:

1- The reform of the State with the elimination of the organisms, companies and sources of expenses that are not essential and that only serve to distribute benefits to political officials and members of corporations that for a long time managed to obtain perks and privileges; and

2 – A strong devaluation with its consequent inflationary jump and default of the external and internal debt to liquefy expenses and liabilities.

Faced with these alternatives, Cavallo maintained that the first one is adequate for the current state of the Argentine economy.