The leaders of Democracy

The Inflation and the Economic Growth

In the last years, the inflation issue has taken a secondary role inside the different economic analysis, that is, inside the governmental sources, as well as inside the opposition. This phenomenon can be explained by the reduction of the inflation rates: the inflation level seems surprisingly low for the Latin American context.

Between 1998 and 2002, the inflation rates dropped to one digit, and in 1999 a deflation case was registered. This happened before the dollarization project was implemented. Back then, the word was that the dollarization would help us reach even lower inflation rates. In the end, the dollarization does not seem to have a notable influence on the behavior of the inflation, because the inflation rates had already experimented a drastic reduction by the time the process was implemented. However, the fact is that behind the global figures of the inflation there is a reality showing us an endless list of increases on the basic products that the families need to subsist, as well as an economic system that goes through a slow growth phase.

The Consumer’s Price Index (IPC, in Spanish) is an indicator that, theoretically, allows us to have an idea about the behavior of the prices. However, as every theoretical construction, it also has its limitations to capture reality. That is why the main argument that will be discussed in this article is that the behavior of the IPC is no reflecting the highly inflationary tendency that affects those groups and those subgroups that are an elemental resource for the subsistence of the families with a low income: that is, food and housing. Additionally, some people sustain that, even if the inflationary pressures are accepted it is still necessary to discuss if this is the objective we want to reach.

As it has been mentioned before, the behavior of the inflation during the last years has been fair. For 2001, it only reached 1.4%, this means that a considerable reduction took place if we compare the percentages of 2000, when the inflation level reached 4.3%. During the present year, the tendency remains steady, and for last July, the annual inflation rate barely reached a 2.5%, while by November it reached approximately 1.4%. The way this looks, the inflation rate will not go beyond 3% by the end of the year.

Nevertheless, when you get to take a close look at the situation, you can realize that reality cannot be reduced to what the IPC suggests, since there are evidences that in some cases inflation goes beyond the indicators. It is interesting how food and housing are the percentages that keep growing in the general index of prices. While the index has increased by 67.7% from January 1992, to July 2002, the index of prices of food has increased by 75.2%, and the index of housing has increased by 93.7%, during the same period.

The situation turns even more critical if we observe some specific subgroups that have been suffering the effects of higher inflation rates (beyond the average). Among the subgroups of “seafood”, “fresh and canned fruits”, and “vegetables” –all included in the food group- it is evident that for the same period, the prices have increased by 74.4%, 197.3% and 302.8%, respectively. On the other hand, about the housing group, the prices of the subgroups “electricity and fuel”, and “utilities” have increased by 116.3% and 275.5%, respectively.

This is a revealing piece of information about the impact that the privatization of the distribution of the electricity and the telephone service has had over the homes. It is also important to consider that the increasing prices of certain services –the municipal cleaning, for example- has had an impact on the society. It is clear to see that all of the aforementioned subgroups have been subjected to an increasing inflation, which has a contrast with the general levels, and which shows that the panorama of the official figures is a partial vision of the problem.

Even if we accept that some families face higher inflation rates than those officially admitted, no one can deny the fact that the inflation process has experimented a series of reductions since the mid nineties. In part, this situation obeys to a decreasing growth rhythm of the added demand, at least in relation to those levels observed from the early to the mid nineties. What did have an influence on this matter were the control procedures over the monetary offer, implemented between 1996 and 1999 through the increases on the legal financial reserve rates. Later on, the financial reserve rates were reduced, and the interest rates fell, but the credit growth rates did not improve.

The reduction of the inflation rates also reflects the small growth of the added demand and the production. Parallel to the low inflation rates, the production has grown at a very slow pace, reaching only 1.8% for the year 2001.

The tendencies in the prices and the production are related, and those tendencies can make you wonder about the restrictions on the investments –especially in a context where the inflation is low and where the interest rates have been reduced-, and about the benefits that the low inflation rates bring along.

Without the intention to deny that the stability of the prices is a very important achievement, it is also necessary to mention that in certain occasions it is important to accept higher inflation rates in order to have access to higher growth and employment levels. The problem is how to choose one or the other option, considering its cost and its benefits. For example, the expansion of the monetary offer through a productive credit access program could generate a larger demand and a higher inflation level, but it could be compensated if it is well guided and if it promotes the exportable production and the employment. Obviously, there is also a scenery in which the credit is used for consumption, it quickly expands the demand, it generates inflation, and it is not compensated by the increase on the production and the employment. This was precisely one of the unleashed dynamics for the early nineties, when the economic growth obeyed to the boom of the credit for consumption and, therefore, it faded away as quickly as it came, causing an incredible increase on the debt levels and on the extraordinary levels of the financial system.

There is no doubt that the inflation issue is connected with other macroeconomic sectors, and it is not a very useful indicator if it is taken just by itself. It can be analyzed considering the limitations of the indicators and the rest of the monetary and the real variables. It has been already said that the inflation rates reveal average levels, that they do not apply to all of the prices, and that they do not involve a severe inflation that could affect some subgroups of the IPC –specially those affected by the privatization-. On the other hand, the fact that in El Salvador the inflation rates are kept on a lower level is not necessarily a sign of a good macroeconomic condition, because they are partially the result of a worn-out growth scheme based on consumption.

It is necessary to define and to implement a strategy to promote the economic growth through credit and investment programs sponsored by the financial sector –which plays a decisive role-, and the state. Therefore, it is necessary to see the productive sectors as a priority.

A matter of good faith?

The Honduran President, Ricardo Maduro, announced this week that the agreements that were reached with the International Monetary Fund (FMI, in Spanish), in order to reduce the external debt of his country, will not be connected with a privatization scheme. It would be necessary to examine some of the elements of the Honduran context to see if the suspicions about the President’s declarations are reasonable or not.

In the first place, it would be necessary to see what is the relation of Honduras with the FMI. Why did the meeting between the Honduran Government and the FMI take place, and what are the agreements that they reached? All of the Central American nations have an external debt and their main creditors are international organisms (such as the FMI and the World’s Bank), as well as the most economically powerful countries of the world (specially the United States and the European Union).

As difficult as it is to deal with the external debt, the economy of some countries allows them to deal with the pressure. There are other nations where the administration of that debt goes beyond the possibilities of the economic and the social structures. They are “The Poor Indebted Countries” (PPME, in Spanish), as the FMI calls them.

A considerable part of the African, the Asian, and the Latin American nations are part of that category. The FMI has created the so called initiative to “take care that the poor countries do not have to face an unsustainable debt”. In other words, it has created a series of measures to “assure an additional finance for the programs of the social sector”, granting more loans for sectors such as education and health –leaving the debts intact, since, as the FMI explains, with a cynical sincerity, “if the external debt of all of these countries were condoned, most of them would still depend on the external assistance”.

A key condition for a country to have access to the initiative of the FMI, in addition to an unsustainable external debt, is to have an actual disposition to obey the rules that the international financial organizations impose. The structural adjustment measures that these institutions recommend include a reduction on the expenses of the state. This turns into a budget cut for what the FMI calls “the social sector”, and into the privatization of the institutions and the assets of the state. This is what lies beneath the surface of the measures of austerity that the international organisms impose to the nations in debt.

How did Honduras follow –and particularly the present government- the recipes of the FMI? A recent measure was the so called “The law of the financial balance and the social protection”, approved on last May. This law turned into a reduction in the budget for education, health, and infrastructure.

As a counterpart, they increased the police and the military expenditure for the “zero tolerance” plan and some sectors, such as tourism enjoyed the tax exemptions. The “zero tolerance” plan, designed to face delinquency and corruption, was denounced by the organizations that defend the human rights. The “Casa Alianza” (Alliance House), a Non-Governmental Organization, reported a considerable number of murders of the children and the teenagers who live on the streets. The number of murders of this kind has increased since some 6000 military agents were send to patrol the streets of Honduras to fight against delinquency (See ADITAL, 10.03.02).

The Honduran social organizations have taken action against those measures; however, they have not been able to resolve the problem of the debt, to resolve the fiscal deficit, and to improve the life standards of the majority.

What is the FMI’s present assessment about Honduras? Let us take a look at the declarations of Thomas Dawson, the Director of International Relations of the FMI, about the last meeting with the Honduran government. The visit of a delegation from the FMI to Honduras, which took place from the 4th to the 15th of November of this year, had the intention to reach a number of agreements to continue with the aforementioned initiative.

However, the FMI found out that there have been not too many fiscal improvements. “Unfortunately –said Dawson in his statement to the press, which took place in Washington on December 5th -, the fiscal situation got worse during 2002, due to a continuous increase on the governmental budget, and to due to a weak tax revenue. The authorities are working to design a strategy to be able to face the fiscal situation through a social pact that includes the political parties, the unions, the private sector, and the civil society. A new mission could visit Honduras once on the fiscal strategy is completed”.

With this declarations it can be inferred that the FMI believes that the measures applied at Honduras, despite the mistakes, should be implemented with more severity.

Are there any reasons to suspect about the promises of Maduro, since his agreements with the FMI will involve future privatizations? There would be no significant reasons to believe that the Honduran President is not acting sincerely, just like other presidents who have intended to hide the privatizations under a number of “concessions”. This is not a matter of good or bad faith.

It would be convenient to consider a couple of aspects: the general policies encouraged by their government, and the conditions these policies are subjected to. It’s evident that the Maduro Administration has implemented neo-liberal policies: the reduction of the public expense, and the privatization of the companies that formerly belonged to the state. Another important element is those conditions: the strongest ones come from organisms like the FMI. If the FMI and the World’s Bank subject their loans to the implementation of budget cuts in the health and the education sectors (the famous austerity policies: to suspend or reduce the budget investments in those sectors that do not produce pecuniary profits). It would be unrealistic to expect that Honduras escapes form the rule, especially because of its disadvantageous social and economic situation.