The Argentine peso’s open secret

Posted By on 13/06/2012

A funny thing started happening a few years ago in Argentina. Or maybe it’s not happening. That depends on who you believe.

In this issue the two sides are clear. One side is the government of Argentina, led by President Cristina Fernández de Kirchner. On the other side is the rest of the world.

The issue is whether Argentina’s official inflation rate is anywhere close to its real inflation rate. Since 2007, the Argentine government has claimed inflation has hovered at around 9 or 10 percent annually, spiking only ever as high as 11 or 12 percent. But since 2008, when independent observers inside and outside of Argentina began compiling their own careful statistics, most have seen good evidence that inflation has ranged between 15 and 27 percent. For the last two years, while the Argentine government has held firm to its claim of inflation between 9 and 11 percent, one independently published rate has never fallen lower than about 23 percent.

Why is this happening? The answer probably begins in 2001-2002, when Argentina’s economy collapsed and its government devalued its currency, the peso, to a third of its previous value overnight. After that, fear of a sustained economic disaster marked by high unemployment and widespread suffering gave the government political support for a range of expansionary policies. Some of those policies haven’t ended yet, even though the crisis days are almost a decade into the past now.

Ten years of pumping money into the economy has taken its toll on the peso, whose value is now much less than it was a few years ago. Fernández’s government knows this—but isn’t admitting it. And so now, for the better part of five years, according to everyone paying attention (except the Argentine government, of course), the government’s official statistics office has been giving the world fake numbers.

That office, INDEC, was once one of the most respected in Latin America. Its fall has come quickly. One sign of its deteriorated legitimacy came in February, when The Economist told readers it would no longer report inflation statistics from Argentina, since it could not trust the source. “We hope that we can soon revert to an official consumer-price index for Argentina,” the magazine wrote. “That would require INDEC to be run by independent statisticians working unhindered. Until then, readers are better served by a credible unofficial figure than a bogus official one.” The article claimed that INDEC offices now resemble a Fernández campaign office, and that independently operating employees, those who resisted the government’s efforts to cook the books, have been forced out and silenced by fines and prosecution. As a result, “We see no prospect of a speedy return to credible numbers.”

For many obvious reasons, this is terrible policy. On principle, it undermines the legitimacy of old and valuable institutions in Argentina, and hurts Argentina’s position in the world. Practically, it cheats many people—most of all, regular Argentines—out of money, and scares foreign investment away from the country. Eventually, the scheme will be punctured, and a new wave of pain will hit again, fast and hard.

The real data on inflation can be found, though it is difficult to acquire. (Companies and NGOs can not collect the necessary data as easily as a national government can—especially when the government is standing in their way.) But this is obviously too important—for international business, not to mention the tens of millions of people affected by it—for everyone in the world to ignore. Companies and international organizations will seek the truth with greater and greater strength, devoting more and more resources to definitively exposing the lie. Moreover, and in the meantime, the Argentine people are not stupid, and they know how much money buys how many goods. They are seeing themselves, in their pockets, what the reality is.

The Argentine goverment’s efforts have become comicly ham-handed and intrusive. Even McDonald’s Big Mac hamburger, whose prices around the world The Economist and others have used since the 1980s as a lighthearted, one-good curreny exchange rate, is caught up in the mess. All over Argentina, Big Macs cost far less than other McDonald’s hamburgers, likely the result of government pressure to keep the price low on that famous menu item. The government’s fear? The shame of seeing the truth exposed, even in hamburger prices. As a result, McDonald’s has all but removed the Big Mac from its menus in Argentina. Other burgers sell for a lot more.

And today, pretty much everything in Argentina sells for a lot more than it did last week.