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Latin America agenda: New year, old problems

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Argentina rushed through an official switch to daylight savings time at the end of December to try to head off power problems in 2008. The government says the switch is working, saving up to 175 MW of electricity a day.

But there were already blackouts in some Buenos Aires neighbourhoods as people gathered for dinner on New Year’s Eve. Things have only got worse since then.

Soaring temperatures and humidity have fuelled Argentines’ growing love affair with power guzzling air conditioning units – sales reached a record 1m in 2007 and they are flying off shelves this month even faster than in December.

Heightening the discomfort, a fault at a major water purification plant has sparked water shortages. In some part of the capital, residents blocked streets in protest at 36 hours without power or water. In another district, a forlorn sign on the door of an ice cream parlour read: ”Closed for lack of electricity.”

In other parts of the country, the situation was the same, including power cuts for half a million people in the northern province of Chaco amid suffocating heat of 40 degrees celcius.

Fuel prices, which the government is also keeping low, have been edging up because of shortages, especially of diesel. Argentine relies on natural gas imports from Bolivia, but the outlook there is grim. Bolivia is trumpeting what it says will be record investment in the energy sector this year, but has admitted that even so, it will struggle to meet its export commitments to Argentina.

All this is bad news for President Cristina Fernández, whose approach to the growing energy problem has so far been disappointingly lukewarm. Her appeals for responsible use of energy will continue to fall on deaf ears unless she finally hikes tariffs that have been frozen at artificially low rates for the past 9 years and comes up with a proper energy strategy to allow for investment across the sector needed to boost capacity and output.

Jude Webber

No respite for Argentine inflation

Argentina ’s inflation woes look set to continue this year. Data for 2007, expected at the start of next week, is likely to show prices rising by around 9 per cent, inside the official goal of 7 to 11 percent, though after a year of apparent government meddling in the national statistics agency, no one takes the figure seriously, and private estimates put the rate at around 20 percent.

Whatever the actual level is, Martín Lousteau, the new economy minister, says he’s not worried, and has admitted that there will be no real change to the trend this year. He has promised continued high public spending as the government guns for economic growth of up to 8 percent in 2008.

Still, two fifths of Argentina’s debt is linked to inflation and by some estimates, the manipulation of official data has meant a saving of $5.8 bn – close to what Argentina still owes its Paris Club creditors. A deal with the Paris Club had been touted as one of the first things President Cristina Fernández wanted to achieve, but officials now admit the issue is on the back burner and say the ball is in the Paris Club’s court.

The government is behind schedule on the introduction of a new US-style ”core inflation” index designed to draw a line under 2007 and restore the credibility to Argentina’s price statistics. It needs to act quickly, both to win back the trust in its economic management vital for a Paris Club deal, and to prepare for tough wage bargaining negotiations due in a couple of months, in which some union leaders are already demanding pay rises of 30 percent.

Jude Webber

Time travel

Visiting Caracas, the Venezuelan capital, is less of a trip back through time than it used to be. Taxi drivers are still plying their trade in ancient Chevrolet Caprices and Buick Centuries bought at the end of the last oil boom, but they are now joined on the crowded streets of Caracas by thousands of new cars. Expensive sport utility vehicles are a particular favourite among middle class Venezuelans desperate to find something into which to invest savings.

But when it comes to economic policy Venezuela still seems to be living in another age. Last week´s economic package is a straightforward retread of the kind of heterodox policy that proved so unsuccessful in many Latin American countries in the 1980s. Faced by steadily rising prices during that decade, Argentina, Brazil and several other governments opted to tackle the problem by adjusting expectations. They did that by launching new currencies and freezing prices. And that is more or less what Venezuelan policymakers have been trying to do. Admittedly, a system of price controls is under review after controls on long-life milk were lifted at the end of last year.

But the introduction last week of the Bolívar Fuerte – a new currency trading on the official market at 2.15 to the dollar rather than 2,150 – is an idea plucked straight out of the old textbooks. Rather than tackling the root causes of inflation – which in December reached 22.5 per cent year on year – by among other things controlling public spending and restoring business confidence, Venezuelan officials have opted for symbolic gestures. Needless to say, opposition economists think they are wrong. As Domingo Maza Zavala, whose term as a director of the central bank ended early in 2007, ”the strong bolivar is being born into an environment not only of monetary instability, but also exchange rate, financial, economic and social instability. That is not the best climate for its success.” Too true.

Richard Lapper

Biting the hand

Few economic policies are quite so short-sighted as taxes on flows of remittances sent by migrant workers. So Bolivia´s decision last week to remove a 1 per cent tax on payments of under $1,000 is welcome. The government should now go all the way and remove the tax from any remittances payments, irrespective of their size. The initial charge introduced in September was misguided and unfair. Bolivians are often paying taxes in the countries where they work in any case. The much-needed money they send back can help build houses or establish small businesses or fund education for their children. Governments should leave well alone. All the more so, when they claim to claim to represent the interest of the less well-off, and when their record of efficiency in public spending is as unimpressive as Bolivia´s. No other government in Latin America taxes remittances. Bolivia should come into line with regional practice.

Richard Lapper

Brazil´s mixed bag

At first glance, Brazil´s new package of spending cuts and revenue raising measures is welcome. The package – designed to cover the R$38bn shortfall left by the lapsing of the CPMF, a blanket tax on financial transactions – includes some R$20bn in spending cuts. If these are introduced it would be the first time since 2003 that the government has moved to cut spending by a significant amount. But the extra tax charges could carry a significant political cost. Some R$10bn is to be raised through increasing the tax rate on net profits of financial institutions and on certain financial transactions, including bank lending. That has angered opposition politicians who see it as violating an agreement not to impose new taxes to compensate for the loss of the CPMF. Renewal of the CPMF tax was voted down in the Senate after a bitter fight that culminated in a vote against the government on December 13. Opposition leaders from the Democrats, Social Democrats and left-wing PSOL (presumably upset by the spending cuts) are now threatening to make life tougher for ministers. And the government could well find negotiations over the 2008 budget more difficult than they expected.

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