Argentina 8-20: How the private sector sustains the state

PANAM POST – One of the great problems of Argentina, in economic terms, is that numbers do not close. Today there are approximately 8 million workers in the private sector who support 20 million people who receive a State check.

These people are composed of public employment (around 4 million workers taking into account a self-employed worker who works for the government), people receiving social plans (8.5 million) and retired (7 million). The situation reached a limit point, where few must support a great number of people and the number of those how support is shrinking every day.

Worst of all, everyone is complaining. The 8 million for the excessive taxes they have to pay and the 20 million, because the money is not enough. This needs to change.

For this to happen, there must be people included in the 20 million who migrate to the productive private sector. In other words, shrink the 20 and enlarge the 8. Also, it should be taken into account that there are 6 million people working in the informal market, who would also be optimal to join the registered private sector. The problem is that there are no incentives for this to happen.

It’s no coincidence that Argentina has been stuck for 7 years without achieving GDP growth per capita. And more serious is that, when conducting a historical analysis, the stagnation is structural in nature. What are the obstacles that prevent the private sector from attracting more people

In the first place, it is worth clarifying that the incentive for the private sector to grow is through a migration of public employment, of those people who receive social plans and, of course, of people who work in the informal work.

The fact that a person receives a social plan should be temporary since the goal of the social plan is to assist people until they can rejoin the labor market. However, it is only observed that social plans continue to increase after so many years.

This is just a sample of Argentina not doing its homework. Listing the obstacles that may exist when migrating to the private sector is a difficult task since there are many. We will try to show the most relevant ones.

One of the main problems is the high tax pressure that exists in Argentina, which already reaches 34% of GDP. This figure is much higher compared to neighboring countries such as Colombia (24.9%), Chile (23.3%) or Peru (18.7%). Why is the tax burden in Argentina high? Essentially because its public spending is also a record, hovering 46% of GDP.

Again, much higher than that of the neighboring countries mentioned, which on average have a consolidated public expenditure of 25%. Of course, it is cheaper to invest in the region than in Argentina since for the moment, they do not charge so many taxes.

On the other hand, labor costs are also very high, according to the report “Paying Taxes” prepared by the World Bank, Argentina pays in taxes on labor in proportion to earnings a rate of almost 30%, while neighboring countries charge lower taxes on labor: Colombia (18.6%), Peru (11.2%) and Chile (4%).

Additionally, Argentina has problems with the industry of labor lawsuits, which keeps growing. To understand this tragedy, in 2003, around 3,000 trials per year began. This figure increased to 130,600 labor lawsuits for 2017; that is, it multiplied by 43! In short, if an investor analyzes putting money in Argentina, the first thing he will observe is that he will be charged a record tax, if he decides to invest anyway, he will probably end with a labor trial.

Given this scenario, a kamikaze would invest in Argentina. The good news is that the government of Cambiemos Yes, he is very concerned about reversing, at least, the costs of litigation (labor lawsuits).

Logistical labor costs also deserve mention. According to “Paying Taxes” report of the World Bank, Argentina is very poorly positioned in the ranking to start a business (117th place out of 190). This is also evident in specific cases. For example, the cost of sending a container of lemons from Tucumán to Zárate (1,169 km) is US$ 3,600. However, if a country in the region wants to send the same container from Buenos Aires to Rotterdam (11,384 km), it costs US$ 2,000. There are more cases like the one mentioned.

Finally, Argentina’s low commercial opening also makes Argentina less competitive. We only have 5 free trade agreements, while Colombia has 10, Peru 16 and Chile 21. Following the rule, Argentina also has a task in this regard. Its commercial opening rate is only 21% of GDP, compared to an average rate of 37% of GDP in the region.

Argentina can and should begin to reverse the situation 8-20, but to achieve this it is extremely important that the structural problems mentioned above (among others) begin to be corrected. Economies grow when there is an investment, and all the data described above discourage investment.

Of all the dollars that entered the country since Macri took office, only 5% responds to Foreign Direct Investment (FDI). Only by correcting the structural problems will more FDI enter Argentina and that is the way to stop relying on international debt as a financing mechanism.


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