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Argentina, Japan and Macroeconomics

Why is inflation so stubbornly high in Argentina and low in Japan? In Argentina, consumer prices were 50% higher in February than a year earlier, the fastest increase since 1991. In Japan over the same period, inflation was less than 0.2%, equalling the lowest rate since 2016.

The inertia in both countries is puzzling. Inflation has stayed low in Japan despite a tight labour market (unemployment has remained at 2.5% or below for over a year) and high in Argentina despite a fast-shrinking economy: its GDP contracted by more than 6% year-on-year in the fourth quarter of 2018.

The two countries, of course, have long perplexed economists. In 1950 Argentina’s GDP per person was three times that of Japan, according to the Maddison Project database. The Eva Perón charitable foundation, run by the president’s wife, shipped 100 tonnes of relief supplies to the war-battered Japanese. Thousands of Japanese migrated in the opposite direction, creating a population of 23,000 Nipo-Argentinos by the end of the 1960s.

But Japan’s GDP per person eclipsed Argentina’s around 1970 and is now about twice as high, measured at purchasing-power parity. Its success and Argentina’s failure defied predictions. Simon Kuznets, who won the Nobel prize in economics in 1971 for his work on growth, put it best: there are four types of countries in the world—developed, undeveloped, Japan and Argentina.

Policymakers in both countries have tried hard to make them macroeconomically “normal”. After Shinzo Abe became Japan’s prime minister in 2012, the central bank promised to raise inflation to 2% in about two years by expanding its asset purchases. And after Mauricio Macri won Argentina’s presidency at the end of 2015, the central bank promised to raise interest rates enough to bring inflation down below 17% in 2017 and 12% in 2018.

In both cases, these new policy frameworks seemed to offer a break with the past. However, both governments have been forced to revisit their targets and their instruments for achieving them. When price pressures proved more stubborn than Argentina expected in 2017, the government relaxed its inflation targets to bring them closer in line with reality. But that led investors to lose faith in the authorities’ resolve to tackle rising prices. In Japan, many commentators think the central bank should lower its seemingly unreachable 2% inflation target to something more achievable. 

In both countries, workers demand that their pay keeps pace with the price pressures they feel, not the inflation the central bank promises. During the spring shunto (or wage offensive), Japan’s big companies and unions discuss wage deals that set a benchmark for other parts of the economy. Companies like Panasonic, Hitachi and Toshiba have this year offered increases in base pay of only 0.3%.

Argentina has a similar set of negotiations known as paritarias. Some economists expect them to yield wage increases of 30-35% this year, which will help keep inflation uncomfortably high. In parts of Argentina the school year, which begins in March, was delayed by striking teachers demanding salary increases to offset last year’s inflation and this year’s, whatever it turns out to be.

Argentina’s inflationary tendencies reflect its long struggle to live within its means. Argentina has recorded a deficit in its current account in 30 of the past 40 years. Japan, on the other hand, has run a surplus since 1981 and is now the world’s biggest net international creditor. 

Despite some signs of change, Japan’s corporations still hoard cash and other financial assets, rather than splashing out on the higher wages or dividends a rich economy can afford.

There are four types of countries in the world: developed, undeveloped—and economies in each of those two categories who think they are in the other.

From The Economist (Edited)

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The decline of first-class air travel

Emirates First-Class

Dubai is often called a “Disneyland for the rich”. At the city’s airport the three first-class lounges of Emirates, the United Arab Emirates’ flag-carrier, do not disappoint. Each one is as big as the terminal’s concourse, built to accommodate thousands of passengers. But every day only a hundred or so enter each first-class lounge.

The rows of hundreds of empty armchairs suggest that something is not quite right. Airlines are falling out of love with first class. And that is true even of Emirates, which sells far more first-class tickets than any other carrier (see chart 1).

The decline of first-class air travel seems at first glance surprising. Facilities onboard have never been so good. On its a380 superjumbos, Emirates first class provides in-flight showers. Moreover, the number of very rich people has risen sharply. Forbes, a magazine, estimates that the stock of billionaires has doubled to more than 2,100 over the past two decades. And the rest of the luxury-travel business is booming. Richard Clarke of Bernstein, a research firm, estimates that the number of luxury hotels in Asia could increase by as much as 168% over the next decade.

Even so, many analysts predict that first class will soon disappear. In America it is already almost extinct. Ten or so years ago almost all the many hundreds of long-haul aircraft based there offered first-class seating; now only about 20 do. Elsewhere on the majority of the most-travelled long-haul routes the number of first-class seats available has fallen sharply in the past decade (see chart 2).

When commercial aviation got going after the second world war there was only one class: first. Economy appeared in the 1950s. It was followed in the 1970s by business class and in the 1990s by premium economy, to fill the gap between business and cattle class.

Despite the proliferation of cheaper seats, airlines still make a lot of their money from the more expensive ones. High demand for flat beds on transatlantic flights is what has saved European flag-carriers such as British Airways, Air France and Lufthansa from going out of business.

On short-haul flights, the low-cost model has won. Most “first-class” passengers on these routes now sit in seats with the same legroom as economy passengers, albeit with an empty middle seat.

On longer routes, new seats that turned into fully flat beds were a game-changer. These were originally introduced by British Airways in first class in 1995, and much sought after. If travellers could sleep comfortably in the sky, they could save the cost of a hotel or, more importantly, a day’s working time. Some years later, in 2000 British Airways launched a similar seat in business, and most carriers have followed suit. That has weakened the case for flying first class. Most companies think a flat bed in business class is good enough for their employees.

Airlines that offer first class say they still do so for two main reasons. The first is to use upgrades from business class as an incentive for loyalty from both corporate and individual customers. But as the gap between business and first has narrowed, frequent flyers have begun to respond better to other incentives, such as access to lounges or to special hotlines.

The second reason for maintaining first class is also weakening because of the “halo effect” an airline creates by advertising first-class facilities.  Flyers begin to think economy on Emirates, say, is fancier than on other airlines by association with features in its first class, such as in-flight showers. This can be an effective marketing tool. For instance, Etihad, a rival to Emirates in the Gulf, has probably had more press coverage for its onboard first-class apartments called “The Residence”, of which it has only ten, than all its 30,000 other seats combined.

Why do some passengers still want to fly first rather than business? Privacy is one reason. Smaller cabins and walled-off seats make it easier for a celebrity to fly unnoticed.  Another is flexibility. First-class passengers want to sleep and eat when they choose, not on a timetable set by cabin crew, as often happens in business class.

Additionally, first- and business-class sales are threatened by private jets. These let executives avoid the wait for a scheduled flight. It is also much quicker to pass through security in a private-jet terminal than an airport. Moreover, executive jets are becoming cheaper in relative terms. New shared-ownership and ride-hailing services allow the cost of a private jet to be spread over many users.

Emirates lounge manager in Dubai sounds perplexed: “You need to do something different to make first class worth it.”

From The Economist (edited)