Lessons on how to be a Professional Economist in Latin America: Redrado's Anti-Political Battle

Martin Redrado was always an economist of great interest. In his first weeks in office I was lucky enough to see Mr. Redrado give a talk at the LSE on the many economic struggles faced by Argentina and Argentina’s central bank since 2001. A few key points were made at the beginning of his term as the governor of the bank. In good humour, he apologised for the chaos of previous bank policies and made the point that the bank had to claim some responsibility for failed policies of the past in order to be successful in the future. He also made it clear that slow growth and the de-politicisation of the bank is a crucial part of regaining Argentina’s stability and re-entrance into the global economy as a competitive nation. His last major point was that the models and transparency of the bank has to be beyond clear to investors in order to normalize the economy of South America’s second largest economic power.

Despite many years of modest surpluses in Argentina, the default in 2001 still has the effect of limiting access to international capital markets for Argentina. The fact that international investors do not have much faith in Argentina’s investment climate, and bondholders since 2005 refused to accept Argentina’s debt restructuring leaves President Kirchner limited avenues for finding extra revenues. While post 2002 resulted in Nestor and Cristina Kirchner being the only ones who wished to tackle Argentina’s debt crisis after a series of failed presidencies due to the collapse of the Peso. Despite economic gains post 2003 until the 2008 crisis, recent years and pressures have matted out the shine of their positive achievements. Battles with the opposition in Congress have left Kirchner with fewer options, as the opposition gained a majority in Congress last summer and economic troubles to the north have set not only Argentina, but all economies on a voyage to find extra funding. In an unwise and perhaps desperate move, Kirchner chose to challenge the one Che in power who has economic stability in mind, that of Central Bank governor Martin Redrado.

Today, Redrado has survived his ousting as bank governor by President Cristina Kirchner via a legal challenge last Friday. The Executive wished to transfer $6.6 billion of Argentina’s foreign currency reserves to service public debt, but with the Central Bank being legally independent from the Executive branch, Congressional support is needed in order to authorize the transfer of funds. Therefore when Redrado asked to study his legal options in the matter of a transfer issued by President Kirchner, Kirchner sought to remove him from his position. Legal quarrels however forced Kirchner to keep Redrado as governor as a judge in Argentina re-clarified his independent legal position as Central Bank governor where he remains today. Kirchner insists that opposition leaders in Congress seek to block the Presidency from addressing issues of national debt, but with the legal ruling restricting her and Redrado’s staunch statements claiming himself as a professional economist and not a politician, he might be the only one limiting small yet significant run on the Argentine Peso in this current political skirmish since the failures of 2001. A likely conclusion will be a compromise, where Kirchner calls in favours and taxes on other parts of the economy, with whatever is left, and Redrado gives her some reserves, albeit with a measured amount to maintain Argentina’s economic reputation and of course in a polite manner.

While Redrado fights to keep Argentina’s economy out of the negative spotlight, Venezuela’s economy has made world headlines with the devaluation of the Bolivar, Venezuela’s currency. Venezuela and Argentina often lead a fight in the region for Latin America’s highest inflation rate, while being two very different economies. Venezuela’s devaluation comes from several different factors, but the largest rationale for the move is in order to gain added revenues from Venezuela’s lucrative oil exports. Oil in Venezuela has become very much a part of the reserves for Presidential policies, even lending funds to Argentina, mind you at a higher rate now than in the past. The devaluation will likely give Chavez more money and political clout via added spending on his projects and give him a popular boost before legislative elections take place in September. Rates on essential food and medicine imports being set at a lower rate than non-essential goods is also part of the new exchange rate, officially being a two tier rate with a second higher rate being applied to imported good deemed as ‘non-essential’. A third tier rate might arise out of the black market however, as Venezuelan companies who are not favoured by the government’s social reforms will have a harder time getting US Dollars and turn to other means to keep afloat. With Venezuelans running out to buy consumer goods before the new exchange rates take effect, and security forces being ordered to enforce against any retail price hikes on any retailers who overcharge consumers, the image of any Latin American running to the streets to spend their soon to be devalued currency is not often one that gives confidence to many investors. Despite this, the long run impression of devaluations in Venezuela is seen as political, but not wholly unjustified as Venezuela is essentially an oil economy and has to address falling oil prices in many markets. Redrado no doubt wishes to keep Argentina’s reserves out of the political fray of local politics and not turn the Peso into a currency based on one commodity or one person’s political ambitions. While Venezuela’s economic policies are validly criticised for their inherently political motivations, Argentina does not have an oil cushion to soften any economic blows, and must rely on investor confidence in its reserves and creativity by the Kirchners in order to cover their end of the year 13 billion dollar debt payment.