Tariffs, price coordination and deficit: how does the inflation specialist working with Martín Guzmán think

Fernando Morra came to the cabinet of the Ministry of Economy in January 2021, following a series of changes to the organizational chart of the Hacienda Palace. For more than a year he has been Secretary of Economic Policy, considered a deputy minister of economics, and his academic specialty is studying processes of disinflation, as it was officially presented at the time of his disembarkation in the economic team.

The subject of inflationary processes was his postgraduate thesis after receiving him at the University of La Plata, also the alma mater of Martín Guzmán. His first job in academia was with Guzmán, as a research assistant, and professor in the Currency, Credits and Banks Chair of the UNLP. He has even maintained his work in that chair with the minister for a decade and a half.

Morra, a fan of San Lorenzo, started in public management in 2006, working at the Ministry of Economy in the time of Néstor Kirchner. It then passed to Banco Provincia and later to the government of the province of Buenos Aires during Daniel Scioli's administration. In the Buenos Aires administration he held various technical positions.

Guzmán's second in the ministry has had few public appearances since he came to the economic cabinet, although he is a regular participant in meetings with the private sector. Since Morra became Secretary of Economic Policy, Argentina's economy has accumulated inflation of 52.3% between February 2021 and last month.

His most renowned academic work is his master's thesis, published in 2014. It bears the name “Moderating moderate inflation”. The thesis director was Daniel Heymann, a renowned economist and who was also a professor of the current Minister of Economy and his ad honorem advisor already in the public service.

The objective of his work was to study “episodes where price growth is in an intermediate range, neither high enough to represent a severe disadvantage for economic activity nor so low as to be considered irrelevant”. In this case, it dealt with a group of 128 countries between 1960 and 2011. For that reason, the last decade of Argentine inflation is not contemplated.

“Moderate inflation states are considered to be those increases in the price level that range between 15% and 30% for more than 3 years,” says his thesis, and he also defined as “high-inflation states those situations where the economy has inflation of 30% for more than three consecutive years.” According to that definition, therefore, Argentina would qualify as a high-inflation economy.

The academic work identified 8 types of disinflation processes, among which Argentina has been in two in recent decades. First, among countries with low inflation, where the outflow of moderate inflation is erratic, including new peaks of moderate and high inflation, for the case of the national economy “during the 1960s and early 1970s, where although the exit of a long event of moderate inflation was towards levels of low inflation, which quickly reverted to a state of high inflation in which the country would remain until the early 1990s, Morra defined.

Secondly, in the category of countries that are currently (referring to 2011) in a state of moderate inflation. “In this case we found Argentina since 2007 and Venezuela since 1999,” he selected.

He later analyzes what the process of disinflation was like for some of the cases. “Out of a total of 106 countries, 57 (54%) emerged from moderate inflation situations in an orderly manner towards levels of low inflation, 33 (31%) transitions with brief reversals towards moderate and high inflation ranges, while 16 (15%) did so towards episodes of high inflation,” he compiled.

“Successful disinflation processes from moderate inflation lasted an average of 4 years, with an average disinflation of approximately 5.9% per year and a median of 4.7%. In general, this type of deflation can then be characterized as considerably slow transitions, at least when compared to stabilization events from high inflation,” said Morra.

“There are three cases where the outflow of moderate inflation took more than a decade, two of which are in Latin America (Colombia and Chile). In this case, it is possible to observe that both countries are among the longest-lasting moderate inflations as well as among the slowest transitions between the two states,” he continued.

For both cases, both in Colombia and Chile, Morra identified the independence of the Central Bank and the establishment of inflation targets two elements that were key in those economies to retrace the path of disinflation.

Among the crucial issues for reducing an inflation rate considered moderate, the inflation specialist Guzmán brought to the Ministry of Economy stressed that “it is natural that the correct determination of nominal anchors is a fundamental point in economies with moderate inflation, where the possibility of realizing a successful transition to low inflation will depend on the ability to coordinate the smooth evolution of a set of relative prices”.

Specifically, he spoke that “transitions from moderate inflation to low inflation therefore imply the challenge of replacing this source of resources (in previous reference to the inflation tax) with another or, alternatively, to incur a slowdown in expenditure growth over that of the sector's resources public,” he said regarding the reduction of the deficit.

He also assured in another tranche that a regulated price such as tariffs, something that the government should raise this year according to the program with the IMF, is also a decisive element. “In these cases it is possible for economies to maintain a set of regulated prices, a situation that makes the administration of the disinflation process even more complex: if they are carried out jointly, price deregulation may affect the initial conditions on which the disinflation process would be established, leading to a higher level of initial inflation”.

Regarding a classic option in Alberto Fernández's government menu such as the coordination of expectations, Morra assured in that paper that “the ability to coordinate expectations does not necessarily imply that it is necessarily carried out towards desirable states. An interesting historical case for Argentina was that of fuels, while adjustments in their prices acted as a sign of the willingness to adjust, triggering individuals' inflation expectations.”

Another aspect that Morra's study analyzes is how wages should “follow” inflation in a context of falling price rhythm. “Both economies (in reference to Chilean and Colombian economies) have a high degree of wage indexation related to past price variations,” he said.

“As detailed in the paper, this phenomenon of indexation means that real wage growth is directly related to the speed of disinflation. This phenomenon is one of the main reasons why deflations in situations of moderate inflation must necessarily be slow,” he warned. “An abrupt change in the rate of price growth coupled with a high indexation of wages to past inflation would lead to significant increases in real income capable of generating imbalances that would call into question the process of disinflation itself,” he concluded.

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