Brazil and Latin America: Emerging Multinationals

Tweaking inflation indicators

Some months ago, many respected financial publications such as The Economist and The New York Times published that indicators provided by the government of Argentina were not reflecting the economic reality.

Indeed, the Trade Secretary not only was creative calculating their CPI but also froze artificially the price of key products. We have to note that products such as BigMac are non-official inflation indicators that are popular amongst economists; and hence, BigMac price was target of manipulation to prevent analysts to deduct the real inflation rate.

Recently, Mac Donald’s operations in Argentina have decided to increase its BicMac price from $21 to $26.5 pesos.

This 26% increase is directly correlated with the whopping inflation that Argentina is facing, and is a new tool to overcome information asymmetries. On the other hand, the downside of this correction is that we’ll not be able to enjoy a juicy burger at a discounted price.

By Esteve J. (for Emerging Multinationals – Lourdes Casanova)

Please find below the articles of “The Economist” and “The New York Times”.

The Economist

Don’t lie to me, Argentina

Why we are removing a figure from our indicators page

Feb 25th 2012 | from the print edition

There is one glaring exception. Since 2007 Argentina’s government has published inflation figures that almost nobody believes. These show prices as having risen by between 5% and 11% a year. Independent economists, provincial statistical offices and surveys of inflation expectations have all put the rate at more than double the official number (see article). The government has often granted unions pay rises of that order.

What seems to have started as a desire to avoid bad headlines in a country with a history of hyperinflation has led to the debasement of INDEC, once one of Latin America’s best statistical offices. Its premises are now plastered with posters supporting the president, Cristina Fernández de Kirchner. Independent-minded staff were replaced by self-described “Cristinistas”. In an extraordinary abuse of power by a democratic government, independent economists have been forced to stop publishing their own estimates of inflation by fines and threats of prosecution. Misreported prices have cheated holders of inflation-linked bonds out of billions of dollars.

We see no prospect of a speedy return to credible numbers. The trade secretary, Guillermo Moreno, who led the assault on INDEC, is still one of the president’s closest advisers. The IMF has “noted” that Argentina is failing in its obligation to provide it with reliable figures, and made recommendations and set deadlines for it to improve. However, when Argentina ignores it, the fund merely wrings its hands, laments the “absence of progress”—and feebly sets a new deadline.

In 2010 we added a precautionary footnote to our statistical tables. From this week, we have decided to drop INDEC’s figures entirely. We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors. For Argentine consumer-price data we will look instead to PriceStats, an inflation specialist, which produces figures for 19 countries that are published by State Street, a financial services firm. Had we switched to one of the provincial statistical offices still generating reliable figures, we fear it would have come under government pressure. One of the country’s best independent analysts made us a generous—and brave—offer of its data against legal advice and on condition that we conceal the source and lightly disguise the numbers. That might have generated confusion.

PriceStats is based in the United States, beyond the Argentine government’s reach. The oodles of online prices on which its index is based are tamper-proof. Argentina will no doubt say that it measures consumption by the rich rather than the poor, who may not shop online. But PriceStats’ methods are based on solid, peer-reviewed research and have proved an impressive match for (dependable) official figures in countries such as Brazil and Venezuela.

We hope that we can soon revert to an official consumer-price index for Argentina. That would require INDEC to be run by independent statisticians working unhindered. Until then, readers are better served by a credible unofficial figure than a bogus official one.

CORRECTION: This article originally described State Street as an "investment bank". A "financial services firm" is a more accurate description of what it does. This was changed on February 24th.

The New York Times

November 24, 2011, 11:22 AM

Argentina’s Big Mac Attack

By DANIEL POLITI

BUENOS AIRES — At a recently renovated mall in the upscale Recoleta neighborhood, the McDonald’s is immaculate. Everything is shiny and new. It is a large and airy space and the chain’s new green color scheme dominates, with unique touches that include funky lounge chairs.

Keith Srakocic/Associated Press

But reading the brightly lit menu behind the cash register, it appears that something missing: The Big Mac. McDonald’s signature sandwich is not prominently advertised. Down the hall toward the bathroom there is a price list that includes a picture of the Big Mac down near the bottom.

Why is McDonald’s downplaying the world’s most famous burger? Local media started to pick up on the discrepancy earlierthis year. And given the government’s penchant to intervene in the economy, critics immediately seized on the phenomenon as an example of a widespread plan to cook Argentina’s books by minimizing the country’s boiling inflation rate. A McDonald’s spokesman has said this isn’t so, insisting to the local dailyLa Nación that the issue was merely a marketing strategy, but consider these facts on the ground.

Those who order the sandwich will be taking advantage of a curious deal. While the other burger value-meals, which include fries and a soda, are priced from 32.50 pesos ($7.60) for the Quarter Pounder with Cheese to 42 pesos ($9.90) for the Angus Bacon, a Big Mac value meal is 21.90 pesos — a big difference. At 20 pesos, the individual Big Mac is at least 4.50 pesos cheaper than the list price of comparable options.

This is no isolated incident. In the middle-class Almagro neighborhood, the McDonald’s is certainly more downtrodden. The signs behind the register don’t shine as brightly as those in Recoleta, but the Big Mac is also kept far from the lights. And while the burgers and value meals cost a few pesos less than in the glitzy mall, the Big Mac prices are exactly the same.

The relatively inexpensive Big Mac has become an open secret in Argentina, spurred by media attention and discussions on social networks. It is being used as Exhibit A by government critics to explain how the government pressures businesses to keep certain prices frozen and manipulates economic statistics in its interest. There is widespread speculation that the government is trying to influence The Economist’s famous Big Mac Index, a “lighthearted” guide that compares burger prices across the globe to determine whether a currency is under- or over-valued.

If the government has indeed convinced the company to keep the price of the Big Mac down, while allowing others to rise, it would hardly be a unique situation in a country where price agreements have become common. In these cases, the government only cares about the price, not the products. And downplaying the Big Mac would seem to be McDonald’s way of selling as few as possible.

Argentina has one of the world’s fastest economic growth rates but that’s come hand-in-hand with one of the world’s highest inflation rates. Listening to the government though, things don’t seem so bad. The national statistics agency says the inflation for the 12 months through October was 9.7 percent. But private economists insist the real figure is more than double that number. Independent experts agree the widely discredited government statistics agency has been fudging consumer-price data for years for political gain and, to a lesser extent, to lower inflation-linked debt payments. Although no one really trusts the government’s consumer-price figures – even unions close to the administration push for salary hikes that closely mirror the private numbers – the government has fined, and even sued, economists who dare release their own estimates.

The 2011 Economist Big Mac Index showed that the Argentine peso is 19 percent overvalued, a number that soars to 101 percent when adjusted to G.D.P. per capita. Analyzing the data over the past 10 years, The Economistconcluded that “burgernomics does support claims that Argentina’s government is cooking the books” because “the gap between its average annual rate of burger inflation (19%) and its official rate (10%) is far bigger than in any other country.”

None of this seems to matter to voters, who reelected President Cristina Fernández de Kirchner by a historic margin last month. Yet the Big Mac differential has managed to capture the imagination of Argentines because it shines a light on the artificial distortions that exist within the economy, not to mention the government’s penchant for short-term solutions to long-term problems.

The president often laughs off those who warn the good times can’t last. Yet the way inflation has eroded the peso’s competitiveness is real. And no amount of price-fixing or data-cooking can hide that. It is just one of the many challenges Fernández will have to deal with as she gets ready to embark on a second term next month. But for now, the recently renovated Recoleta mall is an illustration of the resurgence the economy has enjoyed following its spectacular collapse 10 years ago. On a recent Sunday, close to midnight, the ritzy McDonald’s was packed, mostly with teenagers. Not a single one of them appeared to be eating a Big Mac.