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Cablegate: Argentine Social Pacts: Goa Move to Expand Price/Wage

VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #2371/01 3541823
ZNR UUUUU ZZH
R 201823Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9943
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 002371

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL ELAB EINV AR
SUBJECT: Argentine Social Pacts: GoA Move to Expand Price/Wage
Controls?

Ref: (A) Buenos Aires 2372

(B) Buenos Aires 2271
(C) Buenos Aires 2251
(D) Buenos Aires 2112

This cable contains sensitive information - not for internet
distribution.

-------
Summary
-------

1. (SBU) The GoA is proposing negotiation of trilateral government,
industry, and labor "Social Pacts" in ten key industry and service
sectors to address public concern with rising inflation and provide
a stable platform for needed new investment. President Cristina
Fernandez de Kirchner (CFK) has been ambiguous in describing the
role the GoA will play in facilitating negotiation of these pacts.
Local analysts speculate she intends to use a Social Pact umbrella
to build on her husband's interventionist economic model, expanding
existing consumer basket price controls and capping wage claims for
a two- to three-year period based on official 2007 inflation
measures. But organized labor has already demanded wage increases
of over 20% in 2008, a figure far higher than the (widely
discredited) 2007 official 9% inflation rate. The government is
clearly hoping to avoid costly and disruptive labor turmoil, fueled
not only by inflation but also by labor union politics. Big
business rejects further price controls, since their real input
costs are rising faster than official inflation measures.
Argentina's last experiment with Social Pact wage/price controls in
the early 1970s resulted in widespread goods shortages, labor
conflict, rising inflation, a sharp devaluation, and recession.
Ultimately, the success of any modern-day Social Pact will depend on
the convergence of interests between big business and organized
labor. Any such convergence, particularly on wage negotiations,
will depend on the GoA's ability to restore the tarnished
credibility of official GoA inflation statistics. But even with
credible inflation measures, the macro-economic policy mix that
underpins Argentina's overheated growth rates will complicate GOA
efforts to control economy-wide inflation over the medium term.
Negotiating Social Pacts could be a costly distraction from the work
needed to avoid a hard economic landing.
End Summary

------------------------------------------
Social Pacts: Ambiguous Campaign Rhetoric
------------------------------------------

2. (SBU) During her election appeals to private sector and union
constituencies, President Cristina Fernandez de Kirchner (CFK)
hinted of plans to engineer a series of trilateral government,
industry, and labor "Social Pacts" to sustain hard-won economic
progress achieved over the years of post-crisis recovery. But
despite repeated requests for definition from media, chambers of
commerce and unions, CFK would not be drawn out during the campaign,
except to say that the pacts would entail "more than just prices and
wages." Later, in her December 10 inaugural address, CFK called her
Social Pact proposal a push to agree on broad sector goals, with
measurable and verifiable objectives that will include analyzing
sector-specific competitive challenges to "determine where
investment is needed and where technological innovation is
required." She left ambiguous just what the GoA role would be, but
did say that the GoA's role is neither to defend corporate
profitability nor to interfere in union conflicts (Ref A).

--------------------------------------------- -
Inflation: Public Concern, GoA Efforts to Cope
--------------------------------------------- -

3. (SBU) Though official INDEC (GoA statistics agency) data puts
annual inflation at around 9%, private estimates suggest that "real"
rates are currently in the 16-20% range. (Others, including Central
Bank experts, estimate true inflation somewhere between official and
independent estimates.) Strong post-election increases in food,
fuel, transport, health care and education prices have again raised
public concerns over inflation (Ref B), and widely reported
allegations that the GoA is manipulating CPI statistics to
under-report official inflation have called GoA credibility into
question (Ref D). Grasping for an appropriate response, GoA
officials have alternated between denying inflation is a significant
problem and declaring that current levels of (official) inflation
are "reasonable" and in any case a tolerable byproduct of
Argentina's rapid rates of GDP growth. CFK promised continued high
rates of economic growth during her campaign, and anti-inflation
economists and opposition politicians have repeatedly been impugned

by the GoA as seeking to cool the economy at the working class's
expense.

4. (SBU) Beyond the populist rhetoric, GoA moves to expand the GoA's
primary fiscal surplus (via recently increased export taxes) should
help cool inflationary pressures in 2008 (Ref C). But local and
international economists agree that moderate fiscal policy alone
will not serve to counterbalance the significant inflationary
impetus of the GoA's broadly expansionary monetary policy. The
Central Bank's accommodative monetary stance (managed via incomplete
sterilization of peso emissions to fund dollar reserve accumulation)
underpins (1) the GoA's commitment to maintain an undervalued peso
and linked trade surplus; and (2) the GoA's effort to boost domestic
investment and consumer spending via sustaining net negative real
interest rates. The result: an overheated economy and too many
pesos chasing relatively fixed supplies of goods and services. The
consequence: growing inflation and rising inflationary expectations,
an ominous development in a country with a long, painful history of
hyperinflation.

--------------------------------------------- ---------
Social Pacts: Segue to Expanded Economic Intervention?
--------------------------------------------- ---------

5. (SBU) Local analysts speculate that the CFK administration will
use a "Social Pact" umbrella to address inflation "the old fashioned
way," by building on Nestor Kirchner's interventionist economic
model, expanding existing consumer basket price controls and capping
wage claims to provide a supposedly stable platform for new
investment. It is generally assumed that CFK's Social Pacts will
aim to fix wage and price rises over a two- to three-year period
based on (discredited) official 2007 inflation measures. This will
be difficult: Hugo Moyano, leader of the powerful General Labor
Confederation (CGT), which groups the main trade unions, has
publicly opposed including salary negotiations in Social Pacts,
although this position may be intended to strengthen his negotiating
hand. According to Moyano, wages should rise by over 20% in 2008, a
figure far higher than the 2007 official projected 9% inflation rate
and one considered excessive by both businessmen and the GoA even if
it is closer to what is widely acknowledged to be the increase in
the cost of living. The GoA will likely seek an annual salary rise
of 12-14% for 2008-09, in the 3-5% range above the official
inflation rate.

6. (SBU) The day following CFK's inauguration, Moyano (who is in the
midst of an intense CGT power struggle) warned the government that
he would "jump to the opposition if workers' rights are not
respected." In an indication that the GOA takes this threat
seriously, ex-President Nestor Kirchner made a public appearance
with Moyano on December 19. Key factors here are labor politics. A
number of CGT union leaders are vying to replace Moyano as leader of
the CGT confederation and the rival CTA union grouping is trying to
win government recognition of its status as a union confederation
and to woo adherents from the CGT. This mix of labor politics could
generate much disruptive strike action: no doubt a factor in the
government's thinking.

7. (SBU) For its part, big business, led by the powerful Argentine
Industrial Union (UIA) has rejected any fixing of prices in Social
Pacts, saying that their real raw material and intermediate good
input costs are rising significantly faster than official inflation
measures. The UIA has also argued that, beyond prices and wages,
Social Pacts must incorporate relevant measures for productivity,
employment and competitiveness, a concept rejected by organized
labor. Some UIA members have also linked their support for Social
Pacts to the creation of a new state development bank that could
offer state-subsidized long term funding for investment in new
capacity. (Argentina's last long-term development bank, BANADES,
was liquidated in 1993 due to excessive loan delinquencies. It is
alleged that BANADES' lending criteria were based less on
conservative credit practices than on political favoritism and
patronage.) In her December 10 inaugural address, CFK fired warning
shots at both business and labor, saying she had not become
President just to defend business profits or to get caught up in
trade unions' in-fighting.

--------------------------------------------- -------
Social Pacts: Practical Realities, Aviation Exemplar
--------------------------------------------- -------

8. (SBU) Local media reports indicate the GoA is contemplating
approximately ten separate Social Pacts covering the key industry
and service sectors: Automobiles and auto parts; textiles and
clothing; hydrocarbons and minerals; agricultural cereals, processed
food and drink; meat and meat processing; chemicals; steel; and

tourism. Energy generation, transmission and distribution and
infrastructure (e.g. roads, water, sewage and other public service
concessions), sectors already operating with high levels of direct
government intervention, would continue to be managed through the
Planning Ministry.

9. (SBU) Within the GoA, there appears little understanding of just
what the nuts and bolts of negotiating social pacts within these
individual sectors will entail. In a November conversation with
American Chamber of Commerce directors, GoA Labor Minister Tomada
frankly admitted he had "no idea" of how sector-specific discussions
would be structured or what types of agreements would be developed
and signed.

10. (SBU) Some local analysts are looking to current GoA-supervised
union negotiations with the Spanish-majority owned airline
Aerolineas Argentinas for hints as to how the CFK administration
will go about negotiating other sector-specific Social Pacts.
Aerolineas is Argentina's flag carrier, a chronically strike-prone,
inefficient and loss-making airline in which the GoA holds a 5%
(soon to be 20%) golden share. Spanish majority investor Marsans is
seeking assurances of long-term management/labor peace as a
condition precedent to making substantial new investments in planes,
hangars, a training center and repair/maintenance centers. Media
reports that a draft multi-year Pact is being circulated under which
a committee to include the GoA Labor and Planning Ministries,
Aerolineas management, and the seven unions that work with
Aerolineas (pilots, technicians, navigators, crew, flight
attendants, ground personnel, etc.) will be formed. At this point,
however, contentious issues of government-regulated ticket prices,
union salaries and taxes have yet to be addressed.

--------------------------------------------- ---
Strained Comparison to Spain's 1977 Moncloa Pact
--------------------------------------------- ---

11. (SBU) In earlier statements, CFK suggested that proposed Social
Pacts would resemble Spain's 1977 Moncloa Pact, an accord designed
to stabilize the Spanish economy following Franco's death and during
the nation's transition to democracy. The comparison appears a
stretch. Prompted by a severe economic crisis, the Moncloa Pact was
an agreement among Spanish political parties that laid out a free
market consensus and made clear that state interference in the
economy would be the exception to the rule and largely limited to
social issues. In contrast, the proposed Argentine Social Pacts
come on the heels of five years of record economic growth and twin
fiscal and trade surpluses, and would be signed by the GoA
executive, labor unions and private sector companies and chambers.
CFK, who clearly is not interested in sharing any limelight with the
fractured political opposition, stopped referring to the Moncloa
Pact after pundits pointed out that it was essentially a political
agreement that had the buy-in of all major political parties.

--------------------------------------------- --------
Better Comparator: Argentina's Early 1970s Experiment
--------------------------------------------- --------

12. (SBU) A more relevant comparator would seem to be the 1973
National Accord Act ("Acta de Compromiso Nacional") signed between
the General Confederation of Labor (CGT) and the General Economic
Confederation (CGE, a business association) shortly before Juan
Domingo Peron assumed the presidency following his return from
exile. This pact was structured as a two-year agreement that, after
allowing some increase in public utility prices, froze prices of
most consumer goods and services. Wages and social benefits were
increased across the board and then frozen. The Act explicitly
prohibited firms from increasing prices to pass on increased labor
costs. The Central Bank was directed to provide below-market loans
to companies which sustained financial difficulties due to required
wage increases. Finally, a National Commission on Prices, Incomes,
and Standard of Living (CONAPRIN) was established with
representatives of the GoA, CGT and CGE to guarantee wage purchasing
power would not fall below levels prevailing when the pact was
signed in case prices (somehow) rose despite the freeze. CONAPRIN
was also tasked to monitor business costs and profits to regulate
any necessary modifications in wage and price controls, and to link
wage increases to productivity gains.

13. (SBU) Conditions under which this Social Pact experiment was
implemented were hardly auspicious: Argentina's then-small and
insular economy was coping with the fallout of extraordinary
international economic volatility (the first global energy crisis)
and domestic political instability (Peron's death and the assumption
of his wife, Isabel Martinez de Peron). Domestic fiscal and
monetary policies were dysfunctional: 78% of a 1973 fiscal deficit

that totaled a significant 5.2% of GDP and 88% of a larger 1974
fiscal deficit totaling 5.6% of GDP were financed by monetary
emissions. Predictably, the initiative failed to stabilize the
economy and resulted in widespread shortages of goods and labor
market conflicts. The episode ended with rising inflation, a sharp
devaluation, recession and a 1976 military coup.

14. (SBU) A number of local analysts also compare CFK's Social Pact
initiative with a series of sector-specific "Competitiveness Plans"
instituted in 2001 by President De la Rua's Minister of Economy,
Domingo Cavallo. While these competitiveness plans did not include
specific wage and price controls, they mandated intricate and
distortive sector-specific sets of company benefits and obligations,
including productivity requirements and linked tax exemptions. The
plan was considered so unworkably complex that the IMF required that
it be dismantled as a condition for its final 2003 program
agreement.

--------------------------
Comment: Lessons Learned?
--------------------------

15. (SBU) Social Pacts appear to be an attractive political
construct for the new President, who has promised to build social
cohesion and has a political need to address rising public concern
with inflation. Local analysts who support the GoA's heterodox
macro and micro policy prescriptions gamely suggest that including
fiscal and monetary targets in "new generation" Social Pacts will
help them avoid the fate of Argentina's earlier 1970s-era
experiment. Ultimately, the success of any modern-day Social Pact
will depend on the convergence of interests between business' UIA
and labor's CGT. Any such convergence, particularly on wage
negotiations, will in turn depend on the GoA's success in restoring
the tarnished credibility of official GoA statistics. New Economy
Minister Martin Lousteau is expected to attempt to improve INDEC's
statistical reporting gradually and in a way that doesn't confront
Internal Commerce Secretary (and price control czar) Guillermo
Moreno (if such a squaring of the circle is possible). But even
with the introduction by INDEC of a new, U.S.-based CPI calculation
methodology, this will not be an easy task. Following three years
of double-digit inflation, the fear is that Argentina has once again
entered a self-sustaining upward spiral of rising prices and rising
price expectations: a recent Di Tella University poll put 2008
inflationary expectations at the 22% level.

16. (SBU) And, even if the credibility of official GoA inflation
statistics is restored, the macro-economic policy base that
underpins Argentina's overheated growth rates will likely make it
increasingly difficult to control economy-wide inflation over the
medium term. Price controls -- here and elsewhere -- are cumbersome
mechanisms that encourage evasion and the development of black
markets. It is common wisdom in Buenos Aires that the longer a CFK
administration takes to apply more "conventional" remedies to
address Argentina's growing economic disequilibria, the more costly
-- economically and politically -- their correction will be. Social
Pacts could be an expensive distraction from the work needed to
avoid a hard economic landing.

WAYNE

© Scoop Media

 
 
 
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