Clouds gather again over the Pampas

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Argentina was fortunate in that its rebound from economic desperation six years ago occurred under the blessings of rising global commodity prices, a flexible blue-collar worker pool, and above all the undervaluation of its national currency, which made tax increases on exports tolerable (“Clouds gather again over the Pampas”, August 23rd).

Yet after growth peaked around 2005-2006, it was not wise for the government to engineer the inflation figure under new assumptions about consumers’ aversion to expensive goods, in effect arbitrarily blinding itself to emerging problems that ironically steered the country to economic recovery, namely inflation.

Throughout these past six years a cheap peso, wage increases, and low interest rates that stimulated capital development are now causing demand to exceed supply. While consumer prices have been steadily rising for the past few years, increasing wages and controlling prices invite more unnecessary inflation and decreases overall economic competitiveness.

To counter rising worries about economic growth, President Kirchner should increase interest rates, allow free competition in the energy market, and gradually strengthen the peso to let it float around the market exchange value. The downside to all this is that the growth rate will be lower than the 4-5% forecasted for 2009, but this would establish a good stepping stone for the country to attract more foreign investors, turn itself more competitive, and (hopefully) rid Argentine officials’ of their obsession with a lower-than-agreed-upon inflation figure.