To contain inflation, President-elect Cristina Fernández de Kirchner is already pursuing a two-year "social pact" among government, business leaders and trade unions. The pact would cap wage claims and provide a stable environment for investment. However, the plan faces major challenges.

Record of failure

Mrs Fernández de Kirchner has suggested that her proposed social pact would resemble Spain's Moncloa pacts of 1977, which successfully stabilised the economy during Spain's transition to democracy. However, the Moncloa pacts sought to overcome a severe economic crisis. By contrast, Argentina is undergoing its fifth consecutive year of robust economic growth (with average annual rates of 8-9%), along with fiscal and external surpluses. The Argentinian version would also not include political parties, but only business and union leaders.

In any case, the Argentinian experience with social pacts is not encouraging. In the first half of the 1970s another Peronist government promoted a social pact between business and trade union leaders, based on price and salary freezes. It not only failed to stabilise the economy, it also triggered widespread shortages of goods and rising conflict in the labour market. The episode ended with a familiar story: rising inflation, a sharp devaluation and recession. Many analysts have suggested including fiscal and monetary targets in the social pact as a guarantee of stability, but no such commitment has been made so far.

A successful social pact would also depend on the convergence of interests between its two main actors: business, led by the Unión Industrial Argentina (UIA), the chamber of manufacturing producers, which is politically close to the government, and trade union bosses. However, this remains remote. According to business leaders, the social pact should include topics such as productivity, employment and competitiveness as well as prices and wages. Business would also like to see the creation of a state development bank, a controversial idea considering the previous failure of the state development bank, Banade, which went bust in the 1990s.

Hugo Moyano, leader of the powerful Confederación General del Trabajo (CGT), which groups the main trade unions, opposes including salary negotiations in the social pact, although this position may be intended to strengthen his negotiating hand. According to Mr Moyano, wages should rise by more than 20% in 2008, a figure far in excess of the official inflation rate and considered excessive by both businessmen and the government. The government will seek an annual salary rise of 12-14% for 2008-09, probably between two and four percentage points above the official inflation rate.

Credibility gap

Apart from the disparity of interests, another threat to the social pact is the poor credibility of official statistics. Widespread suspicion that the official inflation rate is heavily underestimated makes reaching a salary agreement extremely difficult. Restoring the credibility of official data will be a top priority for Martín Lousteau, the incoming economy minister. However, this will not be an easy task.

In Argentina, heterodox approaches to inflation have always failed. Most recently, price agreements enforced by the Kirchner administration have not been enough to head off an acceleration in inflation. If the social pact proposal reaches a dead end, there appears to be no "Plan B". The incoming government team will rely on gradual fiscal adjustment (mainly via rising taxes) to tame inflation. However, after nearly three years of double-digit inflation, this may not be enough to prevent a self-sustaining upward spiral of rising prices and rising price expectations. Should this prove to be the case, the government will have no choice but to implement more drastic adjustment measures, with damaging implications for its popularity and the sustainability of recent high economic growth rates.