Three economically dangerous electoral weapons
In an increasingly hostile social and political climate, the government has started to worry about the coming electoral events. These include the simultaneous and obligatory open primaries (PASO, Primarias Abiertas Simultaneas y Obligatorias) on September 12 and the midterm election on November 14.
The management of the pandemic by the government has been very poor so far, and according to recent surveys, this is the main source of popular dissatisfaction with Alberto Fernandez’s administration. The government failed to acquire the most effective vaccines (Pfizer and Moderna) as a consequence of having pursued the participation of local pharmaceutical firms in the production of the vaccines. This is probably the only important political decision that was not dictated by the vice president. The responsibility is clearly attributed to the president. Consequently, his power within the government coalition, which was already lower than that of the vice president, has weakened even more.
Half of the 14 million vaccines that have already arrived came from Russia (the Sputnik V); 4 million units of Sinopharm came from China, and less than 3 million are Astra Zeneca’s vaccines. The latter, which granted a local pharma company some participation in production, had been privileged by the government with a contract for 40 million units with a 60% advance payment, but due to difficulties in the production process, did not deliver at the originally committed pace.
Now, that Astra Zeneca is starting to speed up the delivery process, the government is trying to accelerate the vaccinations as a way to recapture the votes of those disillusioned supporters. But it is not clear that it will have a sufficient supply of vaccines, particularly of the second dose of the Russian Sputnik V, which has also been suffering production delays. So far, only 1 million units of the second dose have been delivered compared to more than 6 million units of the first dose. For this reason, only 8% of the population has received the two doses. This percentage compares poorly not only with that of the United States, which has completed vaccination for 45% of the population, but also with neighboring countries such as Chile (50%), Uruguay (41%), Mexico (12%) and Brazil (11%).
The politically weakened president will concentrate efforts to speed up the vaccination process, but the vice president has taken the initiative to induce the government to focus more on the electoral campaign than on the need to cope responsibly with economic and social problems. As a result, the government has decided to use three economically dangerous weapons that may help secure votes in the next election, but will aggravate the stagflationary crisis in the years to come.
The three weapons are: 1) to postpone negotiations with the IMF; 2) to accelerate the increase in government expenditure and favor adjustments in wages, salaries and pensions above the inflation rate; and 3) to accentuate the slowing down of the rate of devaluation of the peso in the official exchange rate market.
The decision to move policy action in this direction is reflected not only in the speeches of the vice president and her associates, but is also being admitted by the economic minister, for the first time in front of business leaders. He said that it is not the purpose of this government to reduce the size of the state and the tax pressure on the private sector. The downsizing of the state and the reduction of tax pressure are not only widely demanded by the business community but are also recommended by most professional economists arguing that stagnation is the consequence of the sharp increase in both. Government expenditure has increased from less than 30% of GDP around the year 2000 to more than 42% on average during the last decade, and tax pressure rose from 25% in the year 2000 to nearly 40% in 2021.
It is difficult to forecast the impact of this strategy on the November election outcome, but the economic forecast is clearer. It can be safely predicted that the stagflationary crisis will intensify in 2022 due to greater macroeconomic disequilibria and relative price distortions, and worsening expectations on inflation and growth. The possibility of an Extended Fund Facility (EFF) with the IMF before March 2022 will probably vanish, and the country will be unable to avoid going into arrears on the Paris Club and the IMF debt.
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