Argentina is witnessing an experiment: the first “libertarian” government in history. The country achieves this with an inflation rate of 150%, 40% poverty, 50% informality and a real wage that has fallen by more than 20 points on average since 2018. Inappropriate figures for a country with enormous economic and productivity potential, where high-profile development sectors such as bioeconomy, energy, mining, satellite industries and others exist alongside these figures.
Now that the election campaign is over and the new government has taken office, the first steps of this experiment were not new, but they were quite difficult. This week the new Minister of Economy, Luis Caputo, presented a classic orthodox economic program that innovates just two main axes: a 118% devaluation of the exchange rate and a budget proposal to reduce the budget and financial deficit to zero, supported by an increase in taxes and a very noticeable decrease in the public expenditure.
This program is intended to be the start of economic stabilization. What stabilizes an economy? Correct the relative prices that are lagging so that they can later “adjust” and reduce their growth rate. In this sense, the announcement corrects the exchange rate lag and announces a correction in energy prices and transport tariffs. As with any stabilization process, these corrections will have an inflationary effect at the beginning of the process. What is conspicuous by the absence is the correction of a price that has also been overdue in recent years: salary. Or rather, income in general. Income will be an “anchor” that gives tone and rhythm to stabilization.
The new government assumes that the correction of reactive prices, their inflationary effects and the loss of purchasing power of incomes will limit price increases. Goods and services will increase so much in the months of December, January and February that people simply can no longer afford them and therefore the price stops increasing. It was with this crudeness that the process was explained by the new Foreign Minister Diana Mondino, an economist by profession, in journalistic media and at the annual event of the Argentine Industrial Union, an institution that brings together the main industrial sectors.
This strategy is very harmful to the working and paid classes who live on their current income. In the context of an economy that has not grown since 2011 and whose distribution problems have worsened over the last decade, these policies, which reinforce the decline in income, will put very strong pressure on the daily lives of citizens. It will also be a challenge for the productive sector. Construction companies carrying out public works have already begun to announce layoffs, as have industrial companies selling on the domestic market (household appliances, furniture, among others).
In addition to the short-term inflationary effect of the measures, it is also important to note that income itself will fall in nominal terms due to the slowdown of the economy itself and the announced adjustment. For example, the expected reduction in pension spending, which accounts for 40% of total spending, will mean either a freeze or an increase in pensions below the inflation rate. Today, the minimum pension in Argentina is 90,000 Argentine pesos ($112), while the basic amount for an individual is 111,000.
While the average salary of formal employees is 400,000 pesos ($500), the basic basket of a four-person household (two adults and two children) reaches 345,000 pesos. If this process is not accompanied by salary negotiations, the economic and social indicators will deteriorate significantly.
Not only is the success of this policy not guaranteed, but if it manages to successfully reduce inflation within a year, the question inevitably arises: at what cost? At what level of unemployment, poverty and informality?
As a candidate, Javier Milei promised a strong economic adjustment that would fall on what he calls a “political caste,” in a definition that varies depending on the sympathies expressed by the current president. Everything indicates that this will not be the case. The impact of these corrections (which were necessary years ago but need to be calibrated with an application) will affect employees, pensioners and the self-employed. The question facing Argentine politics today is: How long will these populations survive? Not only those organized by unions, but also those whose prices will rise and whose incomes will fall, such as: B. Platform drivers, delivery couriers and independent trade workers.
Beyond the societal level, the success that this program can have in macroeconomic matters is also fascinating in terms of the variables it seeks to correct. For example, at this level of inflation and with the increase that will occur in the next three months, an exchange rate correction like the one that has taken place will become less competitive in the same southern summer. Harvesting of crops such as soybeans and corn begins in March and April. What will the liquidation of these agro-industrial exports look like if the exchange rate is again perceived to be in arrears? What impact could a renewed exchange rate correction have on accelerating inflation, the only anchor of which is income? The chances of falling into a vicious circle of correction, reduction and new correction are no less.
Many of these impressions are questions that need to be analyzed in the coming weeks to better fine-tune the scenarios. What lies ahead will be difficult, and the question that hangs over us is why more careful stabilization could not have happened sooner, without waiting for Argentina to be subjected to such a bizarre experiment, despite being such a country There is no room for risk and there is so much productive wealth to nurture and develop.
Leandro Mora Alfonsin He is an economist specializing in productive development. From 2019 to 2022 he was National Director for Regional and Sectoral Development at the Ministry of Industry. X: @lmoraalfonsin
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