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Viewing cable 07BUENOSAIRES2371, Argentine Social Pacts: GoA Move to Expand Price/Wage

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Reference ID Created Released Classification Origin
07BUENOSAIRES2371 2007-12-20 18:23 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Buenos Aires
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. 
 
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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