Andrés Neumeyer: "The independence of the BCRA could be the most important anti-inflationary policy of the last 30 years"

Andrés Neumeyer, professor of Economics at Torcuato Di Tella University and former Deputy General Manager of Economic Research at the Central Bank of the Republic of Argentina (BCRA), argues that the reform of the Organic Charter of the institution promoted by the Government could become one of the most significant transformations of Javier Milei's economic program and, in particular, a decisive tool to consolidate the reduction of inflation.{#p-1786238061359-9992}

"If you ask me what could be the most important anti-inflationary and monetary policy measure of the last 30 years, it might be what happens with the independence of the Central Bank," he stated in an interview with Ámbito.{#p-1786238092633-24667}

The CONICET researcher also defends that the monetary authority should prioritize price stability and questioned the assignment of the responsibility to promote employment. "It is false that greater independence of the Central Bank, even without having employment among its objectives, necessarily implies that the economy will perform worse," he argued.{#p-1786238178731-86320}

As an example, he mentioned the case of Paraguay, where, as he highlights, 60 years of low inflation and growth coexist. Below is the complete interview with this media outlet.{#p-1786238312774-8441}

Journalist: How do you see the Government in terms of economic program for this second part of the year?{#p-1786237748885-77693}

Andrés Neumeyer: I do not see a first or second part of the year. I believe that the Government assumed with very clear objectives: to fiscally order the Argentine State, to advance in a gradual deregulation process as society accepts it, and to carry out a program to contain inflation.{#p-1786236529332-11666}

And I think it is making progress in all these issues. In fiscal matters, much more than anyone would have expected; regarding deregulation, with the natural ups and downs of democracy; and, in terms of inflation, trying different things, but with a very clear direction, which is to lower inflation by issuing less and leveraging fiscal balance.{#p-1786236529332-81032}

Now they are embarked on this process of making the Central Bank independent, giving a clear mandate to its authorities, and then trusting that those authorities will design a good program to bring inflation down from 30% to 2% annually. And that will be a process.{#p-1786236529332-95852}

Q: Last week, in this same interview cycle, Bernardo Kosacoff suggested that we are at a good starting point, but that when one tries to think a step further and consider growth and development, the agenda becomes a bit more complex. What could we say about these boxes?{#p-1786236529332-2690}

A.N.: They are processes that take time. We cannot forget that, since 2011, Argentina's GDP has been stagnant and that, in per capita terms, it falls at the rate of population growth. To think that suddenly we will be rich and at the peak of growth seems a bit naive to me.{#p-1786236529332-32150}

And it is also naive to think that, with the society we have and the education system we have - considering that education is, to some extent, a very important factor in determining income distribution - we will change all of that quickly.{#p-1786236529332-65003}

Obviously, there are a lot of things to do. For example, to carry out a very aggressive educational policy, with very high-quality education in the most disadvantaged sectors of the country. It is an important issue, but it also represents an immense political challenge. Let’s think that this is a country where conducting standardized tests is a politically controversial issue. If even measuring where we stand in terms of education is controversial, imagine everything else.{#p-1786236529332-45122}

"Today we have much less investment since the reforms began than in the 90s" {#p-1786238368688-34685}

Q.: One might think that, in this process, planning and consensus are central. How do you evaluate the management in these two points to achieve those long-term objectives?{#p-1786236529332-28977}

A.N.: I don't know if consensus is feasible. It's very nice to say: "We all have to pull in the same direction," but there are many conflicts of interest. So, sometimes, a ruler has to do things that harm some for the benefit of others. Thinking that consensus can be achieved in everything also seems a bit naive to me.{#p-1786236529332-60166}

Then, with the history we have of frequently changing regulatory policy, it is also very difficult to think that this process can be quick. For example, we had ten years of certain fiscal discipline, monetary discipline, and deregulation, and a fairly successful growth process during the 90s, which later ended in a financial crisis.{#p-1786236529332-47766}

But there were financial crises in many of the countries that followed this type of reform. Chile had a huge crisis in 1982. Korea had enormous financial and political crises, but it did not change the entire system when it went through those crises. Brazil had the devaluation of 1999. Peru had countless political crises since it started with these reforms in the 90s and, nevertheless, maintained the course in a direction of, broadly speaking, fiscal order, confidence in resource allocation through the market, and an economy integrated into the world, both financially and commercially.{#p-1786236529332-38088}

We, on the other hand, started a process, had a crisis, and went in the opposite direction. Then we returned to the other side with Macri, again to the opposite with Alberto Fernández, and now we are doing the opposite again with Milei. But we do not know if Milei will win the 2027 election. And, if he wins in 2027, we also do not know what will happen in 2031. If Peronism wins in 2031, we do not know if it will maintain the reforms or if it will change them and go back.{#p-1786236529332-90575}

So, investment as a fraction of income is stagnant. If one compares with Convertibility, when it was criticized that there was not enough investment, today we have much less investment since these reforms began than there was in the 90s. I believe this has to do with these ups and downs.{#p-1786236529332-92130}

Q.: Assuming that the path is long, but that it is the right one, how do you convey this to voters ahead of 2027 and gain their support, knowing that challenges persist in terms of job quality and income? Is there any aspect of the economic program that the Government should relax to achieve, precisely, to remain in power for at least one more term?{#p-1786236529332-92299}

A.N.: I don't understand the question for the following reason: you are assuming that relaxing the program will make you win votes.{#p-1786236529332-36970}

One possible reading is that society, in 2023, rejected gradualism by choosing Milei. So, if Milei becomes Juntos por el Cambio, perhaps people will be disillusioned with Milei. But what I say is that the premise of your question is that if he becomes less radical, he will be voted for more. And it doesn't necessarily have to be that way.{#p-1786236529332-43485}

"Salaries in the informal sector have risen a lot and that represents about half of employment" {#p-1786238482412-45821}

Q: What I am asking is how to reconcile these long-term projections with the challenges we may encounter in the short term, which relate to the lack of a sustained recovery in income, the loss of job quality, and the decline of industry. Does this not condition the Government, which seeks to remain electorally competitive?**{#p-1786236529332-12644}

A.N.: I don't know if that's the case. For example, informal sector wages have risen significantly, and that represents about half of employment. Obviously, we are talking about an average: some may have improved more and others less. But if the changes are so large, the majority should be better off.{#p-1786236529332-94598}

Public sector wages have decreased. There is a lot of heterogeneity there, but almost everyone should be worse off. And in the formal private sector, since the average is more or less flat, with some loss but not too much, if one assumes a more or less normal distribution, approximately half should be better off and the other half worse off. So, there you have it, approximately three-quarters of workers would be better off.

{#p-1786282239689-46587}

Q: I understand that there are also economists who have made methodological observations when analyzing the rise in informal wages, but I reiterate the question: can Milei be competitive in 2027?**{#p-1786236529332-8773}

A.N.: The truth is, I don't know. If you look at the markets, the country risk is compressing, although it is true that there is also a jump in risk when looking at a bond that matures after the election. I don't have a magic wand, and for me, it is not clear.{#p-1786236529332-57311}

We would all like the Government to be able to do a lot of things. What I am not sure about is whether it has the tools to do them. Obviously, if the Government knew - or if any of us economists knew - how to quickly raise employment and wages in the next year and resolve all those problems, it would be fantastic. But it seems to me that we do not know how to do it.{#p-1786236529332-87242}

Q: This week the debate among economists about monetary and exchange rate policy returned. Has the tension between the dollar and interest rates reignited?**{#p-1786236529332-14446}

A.N.: It seems to me that the dollar is heavily discounted. The monetary base, in the last year, has hardly moved. Inflation peaked after the turbulence of the October elections and is now declining. In Buenos Aires City, it rose a little in the last data, but it seems to me that there is a gradual process in which inflation is decreasing. And, again, it is a process that takes time.{#p-1786236529332-25193}

If you ask me what could be the most important anti-inflationary and monetary policy measure of the last 30 years, it might be what happens with the independence of the Central Bank.{#p-1786236529332-34867}

Then, if the dollar is at $1,485, $1,495, or $1,510, it seems quite immaterial to me and depends a lot on random factors. What happens with the Strait of Hormuz and the price of oil, now that Argentina has a very important export of that product? What happens with the price of soy? Does it rain a little more or a little less?{#p-1786236529332-53581}

All those things affect the real exchange rate. So, to pretend to know whether to devalue by 2% or 5%, and to think that my opinion could be better than the aggregated information summarized in the market, seems a bit presumptuous to me.{#p-1786236529332-69216}

"It is natural for the dollar to rise if the market believes there may be a drastic change in policy" {#p-1786238615837-82402}

Q.: Historically, election years tend to generate tension in the exchange rate. Do you think the Government is strengthening its exchange rate and monetary policy to minimize that pressure?

A.N.: Among all the very economic factors I mentioned that determine the price of the dollar, one is politics. Therefore, as the market gets scared and thinks there might be a drastic change in policy, in the sense of abandoning fiscal and monetary discipline, it is very natural for the price of the dollar to rise.

In that scenario, it will be very difficult for the Government to contain it. They can sell dollars, raise interest rates, or contract the money supply, but it all depends on how strong the shock is and how its dynamics play out. For example, last October, with the $2 billion that the U.S. Treasury provided, it was possible to resolve the situation.

Q.: How many times can one appeal to U.S. assistance?

A.N.: I think we are back to the same point: giving too much power to the ruler, to political power, and to the Ministry of Economy. The Government cannot control everything that happens. So, if there is a political shock and society thinks it is heading in a direction contrary to economic stability, there is not much the Government can do.

There is something in society that says, "I want this" and thinks that the Government can necessarily do it. But, ultimately, they do the best they can.

"The Central Bank does not have the capacity to generate permanent employment."

Q.: Why, in a country like ours, which has a structural problem of lack of growth in registered employment, should the Central Bank's Organic Charter exclude the promotion of employment as one of its objectives?

A.N.: The Central Bank does not have the capacity to generate permanent employment. Therefore, giving it an objective that is very difficult to fulfill seems counterproductive to me.

The best way the Central Bank can contribute to employment is by ensuring price stability, so that people can focus on improving their businesses, investing, and producing.

There are many countries that have a dual mandate, with employment as one of their objectives, but that is something different. There are certain situations where the Central Bank can apply an expansive monetary policy and slightly increase employment. The problem is that afterwards, employment returns to the level it was at, and what remains is a higher price level. But that is a transitory effect, at a specific moment, and not a solution to a structural problem.

Q.: You also constantly highlight the importance of the independence of the Central Bank...

A.N.: Independence is very important because, naturally, conflicts will arise where the Government has fiscal gaps, faces elections, or needs resources and asks the Central Bank for them. In those cases, the authorities of the Central Bank must have the power to tell the Government: "This is not going to happen," because it could end up generating inflation.

In Paraguay, for example, the Central Bank has a lot of power to say no to the Executive Power, and the country has had one of the lowest and most stable inflations in Latin America for the last 60 years. At the same time, it is one of the countries that has grown the most.

Therefore, it is false that greater independence of the Central Bank, even without having employment among its objectives, necessarily implies that the economy will perform worse.

"Inflation acts as an unlegislated tax"

Q.: Reviewing history, do you believe that the consequences of the episode on December 28, 2017, would not have occurred if there had been an independent BCRA?

A.N.: I believe so. It’s what I mentioned earlier about the importance of maintaining the course. It could be that inflation, instead of reaching 10% or 5%, would have taken a couple more years, but probably the run against the peso that occurred four months after that conference would not have happened. And in the end, in seeking a short-term political advantage from the Casa Rosada, Macri ended up losing re-election.

Then, there are situations where the law may prove insufficient. In many countries, the independence of the Central Bank even has constitutional rank.

Moreover, there is a question of legal and distributive legitimacy. Inflation acts as an unlegislated tax. To create any tax, an institutional process must be followed that begins in the Chamber of Deputies. In contrast, with inflation, the board of the Central Bank can decide to issue money and transfer it to the Treasury, while the rest of society suffers a loss of capital on the pesos they hold, because the amount of money in circulation increases.

There lies a problem of democratic legitimacy of the inflationary tax. Furthermore, it is a regressive tax, as it affects more those who have fewer possibilities to part with pesos, less access to the financial system, and fewer tools to protect themselves from inflation.

That’s why I believe that the independence of the Central Bank is not only a matter of monetary policy: it is also a way to strengthen democracy.